Morning Star 27062008

JUNE 27, 2008

Economy News

Equity

% Chg

4 Railways levy special supplementary charge on carriage of commodities such as coal, ores, minerals, and crude and petroleum products. While the rate of the charge would be 5% on coal, other items would attract 7% on the freight cost. (ET)

Indian Indices BSE Sensex

4 FDI inflows in April 2008 rose by 127% to $3.7 billion over the same month of the previous year. Manufacturing sector received 53 % of the total FDI. (ET)

Nifty BSE Banking BSE IT

4 In a move aimed at encouraging the fertilizer industry to raise their production outlay in the longer term, the government announced a concession scheme for decontrolled phosphatic and potassic (P&K) fertilizers. (ET) 4 Facing a steep rise in raw material and interest costs, pharmaceutical companies have sought an increase in prices of regulated medicines. (BS) 4 According to the Finance minister, Mr. P. Chidambaram, double-digit inflation is likely to continue for a few more weeks before government efforts kick in to ease the rate of price rise. (BL)

26 June 08

BSE Capital Goods BSE Oil & Gas NSE Midcap BSE

1.4

(11.4)

(10.0)

4,316 6,472 4,182

1.5 (0.1) 2.1

(11.2) (16.5) (6.0)

(10.7) (20.9) 16.8

10,887 9,677 5,575

0.8 2.8 (0.6)

(14.8) (9.6) (14.5)

(20.6) (4.8) (9.2)

1.0

(13.2)

(5.3)

Small-cap

7,129

World Indices Dow Jones

11,453

(3.0)

(8.7)

(6.9)

Nasdaq FTSE Nikkei

2,321 5,518 13,822

(3.3) (2.6) (0.1)

(6.4) (8.9) (2.7)

1.8 (3.5) 7.2

Hangseng

22,456

(0.8)

(9.5)

(3.1)

Value traded (Rs cr)

Corporate News 4 Sun Pharmaceutical Industries has decided to launch a hostile bid for Israel’s Taro Pharmaceutical Industries. Sun will offer to purchase all outstanding shares of Taro in the next few days at $7.75 a share, the rate that both the companies had agreed upon a year ago. (ET)

Net inflows (Rs cr)

4 Tata Steel, the largest steel maker in the country, registered an 11 per cent rise in standalone net profit to Rs 4,687 crore for the year ended March 31, 2008 as compared with Rs 4,222.15 crore in the previous year. Total income of the company shot up to Rs 13,2110.09 crore from Rs 25,650.45 crore. (BS) 4 Tulip Telecom, the leading enterprise communications service provider, posted a 88 per cent growth in net profit at Rs 187.1 crore in the financial year end March 31, 2008 as compared to Rs 99.71 crore in the corresponding period last year. (BS)

1 Mth 3 Mths

14,422

Cash BSE

4 Essar has pulled out of the race to acquire US steel maker Esmark after it was outpriced by Russian mining firm Severstal, ending a two-monthlong tussle. Severstal has launched a fresh offer of $19.25 a share, 25 cents higher than Essar’s renewed bid, and has signed a definitive merger agreement with Esmark. (ET)

1 Day

26 June 08

% Chg - Day

5,119

(0.7)

15,804 79,104

28.2 (2.3)

Cash NSE Derivatives

25 June 08

% Chg

(104) 325

(138) 54

(9,135) (25,049) 2,608 8,578

25 June 08

% Chg

FII Index Futures FII Index Options

20,059 13,816

(11.0) (36.5)

FII Stock Futures FII Stock Options

15,098 482

(17.6) (63.8)

FII Mutual

Fund

MTD

YTD

FII open interest (Rs cr)

Advances / Declines (BSE) 24 June 08 Advances Declines

A

B

S

94 111

1,027 753

265 170

1,386 1,034

56 42

1

52

9

62

2

Unchanged

Total % total

4 BHEL has bagged a Rs 506 crore contract for upgradation of 12 onshore Drilling rigs and supply of new rig equipment from ONGC. (BS)

Commodity 24 June 08

1 Day

4 Reliance Industries will begin oil and gas production from its prolific eastern offshore D6 block in the third quarter of 2008 calendar year, partner Niko Resources has said. Volumes will ramp up to a targeted rate of 2.8 billion cubic feet per day (80 million standard cubic meters per day) of gas within first year of production. Peak oil output is seen at 40,000 barrels per day (2 million tons per annum). (BS)

Crude (NYMEX) (US$/BBL) 1 3 9 . 0

(0.5)

7.9

29.2

3.5 2.3

0.7 (1.2)

(3.7) (6.6)

4 SBI and Union Bank have taken the lead among PSU banks to raise lending rates by 50 basis. SBI has increased its prime lending rate (PLR) to 12.75% from Friday while Union Bank has raised its rate to 13.25% from July 1. Union Bank on Thursday also raised deposit rates by 25-100 bps. (ET)

10 yr G-Sec yield % Re/US$

% Chg

Gold (US$/OZ) Silver (US$/OZ)

917.3 17.2

1 Mth 3 Mths

Debt / forex market 24 June 08

1 Day

8.92 42.71

8.98 42.74

1 Mth 3 Mths 8.13 42.73

7.77 40.14

Sensex 21,100 19,075 17,050 15,025

Source: ET = Economic Times, BS = Business Standard, FE = Financial Express, BL = Business Line, ToI: Times of India, BSE = Bombay Stock Exchange

13,000 Jun-07

Aug-07

Oct-07

Dec-07

Feb-08

Apr-08

Jun-08

MORNING STAR

June 27, 2008

GATI LTD

EVENT UPDATE Apurva Doshi [email protected] +91 22 6634 1366

PRICE : RS.80 TARGET PRICE : RS.120

RECOMMENDATION: BUY CONS. FY09E P/E: 16.6X

q Fuel price hikes to impact financials q Revise earning estimates downwards. q However continue to maintain BUY with reduced price target of Rs.120

(from Rs.150 earlier) q 50% upside potential form current levels

Fuel price hike to impact financials

Cons. summary table (Rs mn)* Year end June

FY07

FY08E

FY09E

Sales Growth (%) EBITDA

5,680 23.5 434

6,818 20.0 488

8,754 28.4 753

EBITDA margin (%) 7.6 Net profit 214 Net debt 1,420

7.2 258 885

8.6 451 1,434

EPS (Rs) Growth (%) DPS (Rs)

3.0 11.7 0.8

2.8 20.2 0.9

4.8 74.9 1.0

ROE (%) ROCE (%) EV/Sales (x)

12.3 10.0 1.6

9.2 10.0 1.2

11.2 13.0 1.0

EV/EBITDA (x) P/E (x) P/BV (x)

20.5 27.0 4.3

17.1 29.0 1.9

11.8 16.6 1.8

Source: Company, Kotak Securities - Private Client Research * Face Value Rs.2

n The recent fuel price hike would negatively impact the profitability of the

company. Almost 90% of the business comes form the institutional clients and balance 10% is the retail business. The company has already hiked the prices in its retail segment however price increases with the institutional clients is in process. n Though the company would pass on the price hikes with a lag we feel that due

to fierce competition it will not be able to pass on the complete hike in fuel costs. This would lead to lower operating margins then our expectations and thereby impact the overall profitability of the company going forward.

Air freight business to take some more time to stabilize - hit by rising ATF prices n Currently the company is operating two air freighters on the Delhi-Mumbai-

Bangalore route. The Delhi-Mumbai route has received good response and is operating optimal capacities. The third freighter has currently gone for some clearances and it will join the fleet in couple of weeks. The fourth freighter is expected to be commissioned by August 2008. n The ATF prices have risen sharply by around 20% in last one month and are

currently at Rs.76.6 per liter of ATF in Mumbai. ATF costs account for almost 50 - 60% of the total operational cost of running a cargo airline. Although the company is raising its prices we feel that due to stiff competition it will not be able to pass on the complete hike in fuel costs. This would lead to lower operating margins then our expectations and thereby impact the overall profitability of the airfreight business of the company going forward. n Also due to expansion of the airfreight operations the company is likely to incur

several start up expenses for ramping up the airfreight business. As and when the third and the fourth freighters are added, such expenses would shoot up. Thus we expect the company to report lower profitability then our earlier estimates.

Source: Company, Kotak Securities - Private Client Research

Kotak Securities - Private Client Research

Please see the disclaimer on the last page

FY09E

0 FY08E

0

FY07

1 FY04

2 FY09E

2

FY07

4

FY08E

3

FY06

6

FY05

4

FY04

8

FY03

5

FY02

10

FY06

Cons. EPS (Rs) - Face value Rs.2

FY05

Cons. Net sales (Rs bn)

Source: Company, Kotak Securities - Private Client Research

For Private Circulation

2

MORNING STAR

June 27, 2008

Change in estimates n Accommodating for lower then expected profitability due to fuel price hike

impact, start up costs of air freight business and expenses related to brand development we have revised our earning estimates for GATI. Change in Estimates (Rs mn) Old Revenues

Revised

FY08E

FY09E

FY08E

FY09E

6,818

8754

6,818

8,754

504

868

488

753

EBIDTA EBIDTA (%)

7.4

9.9

7.2

8.6

Profit

287

559

258

451

Equity

187

187

187

187

EPS (Rs.)

3.1

6.0

2.8

4.8

CEPS (Rs.)

4.5

7.9

4.2

6.7

Source: Kotak Securities - Private Client Research

n We now expect GATI to report revenues of Rs.6.8 bn, EBIDTA margin of 7.2%

and PAT of Rs.258 mn. This translates into lower EPS of Rs.2.8 as against our earlier estimate of Rs.3.1 for FY08E. n For FY09E, we now expect GATI to report revenues of Rs.8.7 bn, EBIDTA

margin of 8.6% and PAT of Rs.451 mn. This translates into lower EPS of Rs.4.8 as against our earlier estimate of Rs.6.0 for FY09E.

Valuation & Recommendation n Going forward we expect strong growth in revenues due to ramping up of the

airfreight business due to expected induction of the fourth air freighter by August 2008. Also GATI has inducted new vessel of 8150 DWT in Q3FY08. n Also the expenses related to start up of air freight business and brand

development would be significantly reduced in the following quarters. This would lead to increased revenues and profitability for the company going forward. n At Rs.80, the stock trades at 1.8x book value, 16.6x earnings and 11.9x cash

earnings based on FY09E. n We have also done a one-year forward rolling band analysis for GATI, which

revealed that currently the stock is trading at the lower end of the band of 15x45x one year forward earning estimates. This makes it very attractive at current levels. One year forward rolling PE band - Gati 250

Price

15x

25x

35x

45x

200 150 100

May-08

Jan-08

Mar-08

Nov-07

Jul-07

Sep-07

Mar-07

May-07

Jan-07

Nov-06

Sep-06

Jul-06

May-06

Jan-06

Mar-06

Nov-05

Jul-05

Sep-05

Mar-05

May-05

Jan-05

Nov-04

Sep-04

-

Jul-04

50

Source: Capitaline, Kotak Securities - Private Client Research

Kotak Securities - Private Client Research

Please see the disclaimer on the last page

For Private Circulation

3

MORNING STAR

June 27, 2008

n We remain positive on the growth prospects of GATI as we feel that it is ideally

poised to take advantage of the booming logistics sector in India with its express distribution, coastal shipping and air freight services. We recommend BUY on GATI with a revised price target of Rs.120 (50% upside)

n We continue to recommend BUY on GATI with revised price target of Rs.120

which provides 50% upside potential form current levels. n The price target is derived by assigning a multiple of 25x one year forward

earnings estimate of Rs.4.8 for FY09E which yields fair value of Rs.120 (Rs.150 earlier) for GATI. n We recommend BUY on GATI.

Kotak Securities - Private Client Research

Please see the disclaimer on the last page

For Private Circulation

4

MORNING STAR

June 27, 2008

NITIN FIRE PROTECTION LTD

RESULT UPDATE Apurva Doshi [email protected] +91 22 6634 1366

PRICE : RS.345 TARGET PRICE : RS.600

RECOMMENDATION: BUY CONS. FY09E P/E: 8.4X

q The Q4FY08 and FY08 results of NFPIL are slightly below our estimates both on revenues and profitability side q We maintain FY09 earning estimates q Recommend BUY with revised price target of Rs. 600 (from Rs. 650 earlier) q 74% upside potential from current levels Consolidated Q4FY08 results table - Nitin Fire Protection

Consolidated summary table Rs mn

FY07

FY08E

FY09E

Sales Growth (%)

1,005 46.9

1,324 31.7

3,982 200.7

EBITDA EBITDA margin (%) Net profit

168 16.7 100

254 19.2 194

808 20.3 516

Net debt EPS (Rs) Growth (%)

57 11.3 53.0

795 15.4 94.7

855 41.0 165.5

DPS (Rs) ROE (%) ROCE (%)

40.1 48.9

1.0 25.7 20.6

1.0 37.0 29.1

EV/Sales (x) EV/EBITDA (x) P/E (x)

4.4 26.3 30.7

3.9 20.2 22.4

1.3 6.4 8.4

P/BV (x)

12.7

3.7

2.6

Source: Company, Kotak Securities - Private Client Research

(Rs mn)

Q4FY08 Q4FY07 YoY(%) Q3FY08 QoQ(%)

Net Sales

FY08

FY07 YoY(%)

309

301

2.5

396

(22.0)

1,324

1,005

31.7

Incr. / dec. in stock

47

77

(38.1)

(38)

(226)

(22)

(10)

124.9

Raw materials

62

61

0.8

309

(80)

218

199

9.5

Pur. of traded goods

78

85

(8.3)

-

-

699

509

37.3

Staff cost

21

12

69.5

10

110

51

37

36.2

Other exp.

40

41

(2.8)

37

8

123

101

21.4

Total exp.

247

276

(10.3)

318

(22)

1,070

838

27.7

61

26

138.8

77

(20.5)

254

168

51.7

5

1

357.1

11

(54)

31

EBIDTA Other income Depreciation EBIT Interest

2 1,334.9

4

3

37.6

4

9

14

13

13.4

63

24

161.2

85

(26)

271

157

72.1

1

273

8

3

160.3

PBT

58

4

24

147.3

84

(30.4)

263

154

70.4

Tax & def tax

17

9

96.1

21

(18)

68

54

25.9

PAT

41

15

177.8

62

(34)

194

100

94.5

Minority Interest

0.3

(0.0)

-

-

0

0.1

62

(34.9)

NPAT Equity sh. o/s (mn)

0 1,034.4

41

15

12.6

8.9

174.9

12.6

194

100

12.6

8.9

94.3

Ratios Optg profit margin (%) 19.9 Raw Matls / Sales (%) Staff cost / Sales (5)

60.5

19.2

16.7

73.8

8.5

+11.4

19.5 68.7

+40

67.7

69.5

6.7

4.0

2.5

3.8

3.7

Other Exp. / Sales (%)

12.9

13.6

9.3

9.3

10.1

Tax / PBT %

29.7

37.4

25.3

26.0

35.2

EPS (Rs)

3.2

1.7

5.0

15.4

11.3

CEPS (Rs)

3.5

2.0

5.3

16.5

12.7

+2.5

Source: Company

n For Q4FY08 the company reported net sales of Rs.309 mn thereby registering

YoY growth rate of 2.5%. However sequentially there was de-growth of 22.0% as in Q4FY08 the company could not import cylinders from China due to heavy domestic demand in China for CNG cylinders. n For FY08 the revenues grew by 31.7% on YoY basis to Rs.1.3 bn. n For Q4FY08, the company reported EBIDTA of Rs.61 mn thereby registering

YoY growth rate of 138.8%. n The company reported higher EBIDTA margin of 19.9% in Q4FY08 as against

8.5% in Q4FY07. This is primarily due to decrease in raw materials to sales ratio from 73.8% in Q4FY07 to 60.5% in Q4FY08. Also the other expenditure to sales has declined from 13.6% in Q4FY07 to 12.9% in Q4FY08.

Kotak Securities - Private Client Research

Please see the disclaimer on the last page

For Private Circulation

5

MORNING STAR

June 27, 2008

n For FY08, the company reported higher EBIDTA margin of 19.2% up 2.5% on

YoY basis. n PBT for Q4FY08 stood at Rs.58 mn up 147.3% YoY basis. n PAT for Q4FY08 stood at Rs.41 mn up 174.9% YoY and down 34.9% on

sequential basis thereby translating into quarterly EPS of Rs3.2. and CEPS of Rs.3.5. n PAT for FY08 stood at Rs.194 mn up 94.3% on YoY basis thereby translating

into FY08 EPS of Rs.15.4 and CEPS of Rs.16.5.

CNG cylinders plant at Vizag has stabilized

Net sales (Rs mn)

n The company's five lakh CNG cylinders per annum manufacturing plant at Vizag

5,000 4,000

has commenced commercial production in the beginning of the April 2008 and has successfully stabilized its operations.

3,000

n Currently, it is operating at around 400-500 cylinders per day and is expected to

2,000

ramp up to 700-800 cylinders per day by August 2008. The company will further ramp up to 1000 cylinders per day by September 2008.

1,000

n NFPIL has already received export orders for supplying CNG cylinders of a mix of FY09E

FY08

FY07

FY06

FY05

-

Source: Company, Kotak Securities - Private Client Research

large and small diameter of Rs.1.1 bn (around 175,000 cylinders) to be executed by December 2008. The order contains around 40:60 mix of both large and small cylinders. Thus, there is clear revenue visibility for the company, going forward.

Strong growth in fire protection business The company's fire protection, safety and security business is doing well. The current thrust on infrastructure creation and increase in industrialization is expected to result in an increase in demand for the products of the company. NFPIL, with its excellent quality, knowledge, wide range of products and adherence to strict delivery schedules is ideally poised to take advantage of this opportunity.

Valuation and recommendation n The FY08 results represent numbers excluding cylinder-manufacturing business,

EPS (Rs)

as the plant commenced commercial production only in April 2008. This is expected to lead to robust sequential growth in terms of both revenues and profitability going forward.

50 40 30

n Post the recent sharp correction in stock price, due to the overall market

20

correction and concerns about stabilization of its cylinders manufacturing plant, the stock, at Rs.345, trades at 2.6x BV, 8.4x earnings and 6.9x cash earnings based on FY09E.

10 FY09E

FY08

FY07

FY06

FY05

0

Source: Company, Kotak Securities - Private Client Research

n We believe the current valuations are very attractive considering the clear

growth prospects of the company, going forward. This is due to the strong order book for its CNG cylinders business. This would lead to 99.0% CAGR in revenues and 129.8% CAGR in net profits from FY07 to FY09E. n We have also done a one-year forward rolling band analysis for NFPIL, which

revealed that currently the stock is trading at the lower end of the band of 8x20x one year forward earning estimates. This makes it very attractive at current levels.

Kotak Securities - Private Client Research

Please see the disclaimer on the last page

For Private Circulation

6

MORNING STAR

June 27, 2008

One year forward rolling band - NFPIL 1,000

Price

8x

12x

16x

Aug-07

Oct-07

Dec-07

Feb-08

20x

750

500 250 Jun-07

Apr-08

Jun-08

Source: Capitaline, Kotak Securities - Private Client Research

n We are changing our cost of equity assumptions in our valuation model on the

back of interest rate hikes and change in risk perception. We now use risk free rate of 8.0% and risk premium of 6.5%, WACC of 13.6% and terminal growth rate of 4.0%. We maintain our BUY recommendation on Nitin Fire with a revised price target of Rs.600 (74% upside)

Kotak Securities - Private Client Research

n Using revised assumptions and DCF method of valuation we arrive at revised

price target of Rs.600. (Rs.650 earlier) n We remain positive on the growth prospects of the company and continue to

recommend a BUY on Nitin Fire Protection with a revised price target of Rs.600 with 74% upside potential.

Please see the disclaimer on the last page

For Private Circulation

7

MORNING STAR

Bulk Deals

June 27, 2008

Trade details of bulk deals Date

Scrip name

Name of client

Buy/ Sell

Quantity Avg. price of shares (Rs)

26-Jun

Anjani Synth

Jitendra Harivansh Joshi

S

61,209

38.90

26-Jun

Anu Labs

Summit Communications Pvt Ltd

B

75,000

370.18

26-Jun

Bang

Acme Craft Pvt. Ltd

S

88,939

268.32

26-Jun

Bihar Spon I

Modi Rubber Ltd

S

434,796

14.46

26-Jun

Birla Cap

Shearson Inv and Trading Co Pvt Ltd B

3,000,000

5.85

26-Jun

Birla Cap

Birla Bombay Pvt Ltd

S

3,000,000

5.85

26-Jun

Ceekay Diaki

I S F Securities Ltd

B

54,125

60.56

26-Jun

Crazy Infote

Pratibha Vilas Kakade

B

425,376

4.15

26-Jun

Filat Fash

Jitendra Harivansh Joshi

B

45,000

28.50

26-Jun

Flap Prod Eq

Tilakraj Mehta

B

97,086

324.00

26-Jun

Flap Prod Eq

Ritu Kochar

S

97,086

324.00

26-Jun

Hexaware Ltd

Dali Limited

B

6,390,000

54.25

26-Jun

Hexaware Ltd

CLSA Mauritius Ltd

S

6,390,000

54.25

26-Jun

Koff Br Pict

Laxmi Cap Broking Pvt Ltd

S

51,659

24.50

26-Jun

Natraj Fin

Pari Stock Trading Pvt Ltd

B

83,000

48.35

26-Jun

Natraj Fin

Hemal Pradip Mehta

S

71,150

48.35

26-Jun

Niraj Cement

Dharmrajbhai Bhabhlubhai Wala

S

83,160

203.12

26-Jun

Rayban Sun O

Globe Capital Market Ltd

B

190,528

109.16

26-Jun

Shiva Cement

I S F Securities Ltd

B

619,540

8.89

26-Jun

Shri Bajrang

JDM Securities

B

55,298

27.00

26-Jun

Well Pack Pa

Samir Sureshbhai Shah HUF

B

22,210

23.11

Source: BSE

Kotak Securities - Private Client Research

Please see the disclaimer on the last page

For Private Circulation

8

MORNING STAR

June 27, 2008

Gainers & Losers

Nifty Gainers & Losers Price (Rs)

% change

Index points

Volume (mn)

2,240

4.9

25.0

9.5

Gainers Reliance Ind Wipro

483

6.3

7.0

1.6

1,785

2.2

3.6

2.2

Reliance Com

496

(2.5)

(4.4)

6.6

Bharti Airtel

769

(1.3)

(3.3)

4.1

NTPC

155

(1.0)

(2.1)

9.9

Infosys Tech Losers

Source: Bloomberg

Forthcoming events

Company/Market Date

Event

27-Jun

Bafna Pharmaceuticals hosts listing ceremony at BSE

30-Jun

Wyeth Ltd, Trent, India Cements earnings expected

1-Jul

Tata Consultancy Services holds shareholders meeting

2-Jul

Indo Rama holds shareholders meeting

10-Jul

Bajaj Auto holds shareholders meeting

11-Jul

Infosys Technologies earnings expected

16-Jul

HDFC, Power Finance Corporation earnings expected

17-Jul

Polaris Software earnings expected

Source: Bloomberg

Research Team Dipen Shah IT, Media, Telecom [email protected] +91 22 6634 1376

Awadhesh Garg Pharmaceuticals, Hotels [email protected] +91 22 6634 1406

Saurabh Agrawal Metals, Mining [email protected] +91 22 6634 1291

Siddharth Shah Telecom [email protected] +91 22 6634 1261

Sanjeev Zarbade Capital Goods, Engineering [email protected] +91 22 6634 1258

Apurva Doshi Logistics, Textiles, Mid Cap [email protected] +91 22 6634 1366

Saday Sinha Banking, Economy [email protected] +91 22 6634 1440

Shrikant Chouhan Technical analyst [email protected] +91 22 6621 6360

Teena Virmani Construction, Cement, Mid Cap [email protected] +91 22 6634 1237

Saurabh Gurnurkar IT, Media, Telecom [email protected] +91 22 6634 1273

Sarika Lohra NBFCs [email protected] +91 22 6634 1480

K. Kathirvelu Production [email protected] +91 22 6634 1557

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