For private Circulation Only.

FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
Kotak Institutional Equities Research
kotak.research@kotak.com
Mumbai: +91-22-4336-0000
Market largely factoring in a favorable outcome of elections
We note the limited upside to our 12-month fair valuations for most large-cap. stocks under our
coverage (see Exhibit 1) after the recent sharp run-up in stock prices of domestic cyclical and PSU
sectors. The rapid inflation in multiples largely reflects the markets rising confidence about (1) the
formation of a stable government post the 2014 national elections based on recent opinion polls
(see Exhibit 2) and (2) expectations of continuation of economic reforms.
Banking and PSU energy stocks offer large upside if economic reforms continue
The formation of a stable government and likely continuation of economic (fiscal, investment)
reforms may lead to the market taking a more favorable view of issues that have plagued the
banking (NPLs) and PSU energy (subsidies) sectors. The former may see re-rating of multiples while
the latter may see upgrades to earnings. The fair valuation band of the stocks in these sectors is
quite large. Banks and NBFCs have traded in a wide band of 12-month forward P/B multiples
(see Exhibit 3) while PSU energy companies earnings can jump sharply (see Exhibit 4) on lower net
under-recoveries arising from lower overall subsidies.
Earnings and economic recovery will likely be more muted
The composition of Indian stocks earnings (see Exhibit 5 for the Nifty-50 Index breakdown by
sectors) shows that Indian stocks earnings have low correlation with Indias GDP growth. In fact,
parts of the market may see downside risks from (1) a stronger INR versus our assumptions
(`63/US$ for FY2015E) and (2) weaker commodity prices. Also, the emergence of disturbing
weather patterns (see Exhibit 6) raises the prospects of (1) some damage to crops in the current
Rabi season and (2) weaker-than-normal monsoons that may hurt rural consumption demand.
Overall markets valuations meaningless; drivers for sectors are different and contradictory at times
Even though the markets valuations look reasonable (see Exhibits 7 and 8), we note that they are
largely meaningless in the context of (1) the wide disparity in valuations across sectors and
(2) different drivers for various sectors; a particular driver may be positive for some sectors while
being negative for some others. In fact, the outcome of the national elections, which is the biggest
driver of the market in the short and medium term, will have different and even opposite
implications for different sectors. This will be compounded by the movement in the INR
(appreciation or depreciation), which in turn will depend on the outcome of the elections.


Strategy.dot

Strategy
Portfolio
May 2014 scaled; FY2016 is far away. The reward-risk balance for the Indian stock
market is less favorable after the sharp run-up in prices of several domestic cyclical and
PSU stocks in the past two weeks. Current stock prices already discount FY2015E EPS for
most large-cap. stocks under our coverage. Earnings upgrades will largely depend on
favorable government action in a few sectors, which itself is predicated on a favorable
outcome of elections and continuation of economic reforms. We make a few changes
to our Model Portfolio to factor in the recent diverse movements in sectors and stocks.

INDIA
MARCH 19, 2014
UPDATE
BSE-30: 21,833


QUICK NUMBERS
Model Portfolio:
We are overweight
auto, banking
(private), energy,
technology and
telecom sectors
Banking and PSU
energy stocks offer
large upside if
economic reforms
continue
BSE-30 Index at
14.2X FY2015E free-
float EPS



Sanjeev Prasad
sanjeev.prasad@kotak.com
Mumbai: +91-22-4336-0830

Akhilesh Tilotia, CFA
akhilesh.tilotia@kotak.com
Mumbai: +91-22-4336-0897

Sunita Baldawa
sunita.baldawa@kotak.com
Mumbai: +91-22-4336-0896


India Strategy
2 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Exhibit 1: Limited upside in quality companies; large upside in companies that depend on government policy-related action
Valuation summary of BSE-30 Index stocks, March fiscal year-ends, 2013-15E
P/E (X) EV/EBITDA (X) Price Target price Upside Performance
2013 2014E 2015E 2013 2014E 2015E (Rs) (Rs) (%) 1-mo 3-mo 6-mo 1-Year
Bharat Heavy Electricals 7.0 12.4 18.4 4.6 9.7 11.7 190 110 (42) 26.2 16.9 42.1 2.3
Sun Pharmaceuticals 33.3 22.5 22.0 23.4 15.7 14.4 585 535 (9) (6.1) 0.4 4.9 39.5
Hindalco Industries 7.6 10.3 8.5 9.3 9.8 7.2 120 110 (8) 21.4 0.9 1.3 29.0
Hero Motocorp 19.9 20.6 15.7 16.0 14.4 10.7 2,114 2,050 (3) 8.7 1.5 3.6 28.5
HDFC Bank 26.1 20.4 16.5 738 720 (2) 10.2 13.2 8.1 16.9
HDFC 27.7 24.3 21.1 868 850 (2) 7.7 11.8 4.0 10.6
Hindustan Unilever 36.5 33.4 30.0 29.9 26.3 23.0 562 560 (0) 0.5 1.2 (17.1) 23.8
Tata Power 19.8 20.6 15.4 9.1 7.1 6.5 79 6.3 (8.1) (1.0) (16.0)
Larsen & Toubro 23.8 24.6 21.3 17.7 17.1 15.2 1,246 1,250 0 20.8 17.4 40.3 27.1
ITC 38.6 33.1 28.9 27.5 23.6 20.1 360 365 1 13.6 14.7 1.2 17.4
Maruti Suzuki 23.6 19.1 15.5 14.4 11.2 8.5 1,870 1,900 2 10.1 5.0 26.3 37.0
Axis Bank 12.5 10.9 10.3 1,386 1,440 4 18.8 10.2 21.5 4.8
Dr Reddy's Laboratories 29.1 21.7 19.2 19.4 14.9 13.1 2,801 2,950 5 5.0 13.7 17.8 55.8
State Bank of India 8.3 11.8 9.6 1,709 1,800 5 13.3 (1.3) (5.5) (22.5)
Oil & Natural Gas Corporation 10.7 10.2 8.4 4.5 4.7 3.7 314 340 8 12.3 14.7 4.9 1.3
Reliance Industries 13.9 13.1 11.4 9.1 9.2 7.2 903 990 10 11.2 5.7 1.4 9.5
Cipla 19.7 24.0 20.3 14.2 15.8 13.4 383 420 10 2.6 (4.2) (12.9) (0.2)
ICICI Bank 16.8 14.7 14.4 1,210 1,350 12 17.4 13.8 16.8 17.2
Wipro 21.9 17.4 14.6 15.4 11.8 9.3 545 610 12 (3.6) 3.0 15.5 40.9
Tata Steel 104.3 10.1 8.5 7.6 6.8 6.2 357 400 12 (4.6) (13.2) 14.8 5.0
GAIL (India) 10.0 10.0 9.8 6.7 6.8 6.0 360 410 14 (0.1) 7.0 9.7 11.3
Bharti Airtel 50.0 36.0 21.2 7.7 6.6 5.5 300 345 15 (0.9) (7.4) (15.4) 2.1
Infosys 19.8 17.7 14.7 14.3 11.7 9.5 3,272 3,800 16 (12.8) (6.8) 8.4 14.6
NTPC 9.3 8.8 9.4 8.0 7.9 8.1 116 135 16 (12.4) (14.1) (21.2) (18.9)
Tata Motors 12.5 8.6 7.0 6.4 4.3 3.8 384 450 17 (1.8) 4.0 10.1 36.5
TCS 28.6 21.1 17.5 21.5 15.0 12.4 2,039 2,400 18 (7.2) (2.0) 3.7 31.9
Sesa Sterlite 6.7 9.0 8.6 4.4 4.5 4.4 176 210 19 (5.5) (14.2) (5.3) 13.3
Bajaj Auto 19.1 17.3 14.7 14.1 13.3 11.7 2,009 2,400 19 10.3 5.9 (2.2) 9.4
Mahindra & Mahindra 15.6 15.4 13.8 10.7 10.9 9.6 980 1,200 22 3.9 4.4 13.0 11.7
Coal India 9.6 10.8 9.4 5.3 5.5 4.4 263 335 27 3.3 (6.4) (11.5) (11.7)
BSE-30 Index 18.3 16.4 14.2 10.0 9.0 7.7 21,833 23,500 8 5.4 5.4 5.7 14.9

Source: Company, Kotak Institutional Equities estimates

Exhibit 2: Opinion polls indicate a lead for NDA, though not enough to form a government
Various opinion polls over the last few months for the 2014 national elections
Pollster Seats Votes (%)
Date NDA UPA Others NDA UPA
NDTV 14/Mar/14 229 129 185
ABP News-Nielsen 22/Feb/14 236 92 215
Times Now-Cvoter 14/Feb/14 202 101 207 36 22
ABP News-Nielsen 23/Jan/14 226 101 216
India Today-Cvoter 23/Jan/14 207-217 98-108 223-233
CNN IBN-CSDS 23/Jan/14 211-231 107-127 204-225 36 28
Times Now-Cvoter 16/Oct/13 186 117 240
India Today-CVoter 15/Aug/13 155 137 251 32 28
TimesNow-CVoter 29/Jul/13 156 136 251
CNN IBN-The Hindu-CSDS 26/Jul/13 172-180 149-153 29 29
The Week 05/Jul/13 197 184 27 23
ABP-Nielsen 21/May/13 206 136 27 26
Headlines Today CVoter 21/May/13 220 155

Source: Media reports



Strategy India
KOTAK INSTITUTIONAL EQUITIES RESEARCH 3
Exhibit 3: Banks and NBFCs have traded in a wide band of 12-month forward P/B multiples
12-month rolling-forward P/B for banks and NBFCs under our coverage
0
1
2
3
4
5
6
7
8
2007 2008 2009 2010 2011 2012 2013 2014
AXSB BOB HDFC HDFCB ICICI IndusInd SBI

Notes:
(a) IndusInd Bank data is available from June 2009 onwards.
Source: FactSet, Kotak Institutional Equities

Exhibit 4: PSU energy companies' earnings can jump sharply on lower net under-recoveries arising
from lower overall subsidies
EPS estimates and fair valuation, March fiscal year-end, 2015E (Rs)
EPS (a) P/E Value of investments Fair value
(Rs) (X) (Rs) (Rs)
Current scenario
Downstream companies
BPCL 33 8 286 550
HPCL 22 8 132 310
IOCL 25 8 98 300
Upstream companies
Oil India 62 9 16 575
ONGC 37 9 9 340
Blue-sky scenario
Downstream companies
BPCL 49 7 286 630
HPCL 49 7 132 475
IOCL 35 7 98 341
Upstream companies
Oil India 145 8 16 1,172
ONGC 74 8 9 602
Notes:
(a) FY2015E EPS for oil companies adjusted for other income from investments valued separately.
(b) We value GAIL India based on SOTP of key business segments.

Source: Kotak Institutional Equities estimates



India Strategy
4 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Exhibit 5: Scope for upside surprises may be limited in FY2015E given composition of Indian stocks earnings
Break-up of earnings of Nifty-50 Index across sectors, March fiscal year-ends, 2012-15E
Incremental profits
Net profit (Rs bn) Contribution (%) 2014E 2015E
2012 2013 2014E 2015E 2012 2013 2014E 2015E (Rs bn) (%) (Rs bn) (%)
Automobiles 243 216 271 319 10 8 10 10 55 40 48 12
Banking 440 513 513 589 18 19 18 18 (0) (0) 76 19
Cement 74 82 57 68 3 3 2 2 (25) (19) 11 3
Consumers 97 117 135 155 4 4 5 5 18 13 20 5
Diversified 6 4 5 16 0 0 0 0 1 1 11 3
Energy 613 652 687 758 25 24 24 23 34 25 71 17
ONGC 281 251 264 320 11 9 9 10 13 10 56 14
Reliance Industries 200 210 222 257 8 8 8 8 12 9 35 8
Industrials 117 115 84 79 5 4 3 2 (30) (22) (5) (1)
Metals & Mining 347 385 355 395 14 14 13 12 (30) (22) 40 10
Coal India 147 173 154 176 6 6 5 5 (19) (14) 22 5
Pharmaceuticals 53 91 85 117 2 3 3 4 (6) (4) 32 8
Real Estate 12 7 8 12 1 0 0 0 0 0 4 1
Technology 270 335 435 514 11 12 15 16 100 73 79 19
Telecom 43 23 33 57 2 1 1 2 11 8 23 6
Utilities 133 155 163 164 5 6 6 5 8 6 1 0
Nifty-50 2,446 2,696 2,831 3,242 100 100 100 100 136 100 410 100
Nifty-50 change (%) 13.5 10.2 5.0 14.5
Nifty-50 ex-energy change (%) 12.6 11.5 5.0 15.8
Nifty-50 EPS (FF) 353 377 410 465

Source: Kotak Institutional Equities estimates

Exhibit 6: Weather patterns have now inched into El Nino phase
Trend in Southern Oscillation Index (X)
(30)
(20)
(10)
0
10
20
30
A
u
g
-
0
4
F
e
b
-
0
5
A
u
g
-
0
5
F
e
b
-
0
6
A
u
g
-
0
6
F
e
b
-
0
7
A
u
g
-
0
7
F
e
b
-
0
8
A
u
g
-
0
8
F
e
b
-
0
9
A
u
g
-
0
9
F
e
b
-
1
0
A
u
g
-
1
0
F
e
b
-
1
1
A
u
g
-
1
1
F
e
b
-
1
2
A
u
g
-
1
2
F
e
b
-
1
3
A
u
g
-
1
3
F
e
b
-
1
4
El Nino/La Nina Oscillations
La Nina Phase
El Nino Phase

Source: Bloomberg, Kotak Institutional Equities




Strategy India
KOTAK INSTITUTIONAL EQUITIES RESEARCH 5
Exhibit 7: The BSE-30 Index trades at 16.4X FY2014E EPS and 14.2X FY2015E EPS (free-float basis)
Valuation summary of BSE-30 sectors (free-float basis), March fiscal year-ends, 2013-15E
Mcap. Adj mcap. Adjusted net profit (Rs bn) Adjusted P/E (X)
(Rs bn) (Rs bn) 2013 2014E 2015E 2013 2014E 2015E
Automobiles 3,356 2,098 140 176 207 15.0 11.9 10.1
Banking 6,419 5,107 278 304 343 18.4 16.8 14.9
Consumers 4,089 2,437 63 73 85 38.6 33.2 28.8
Energy 5,793 2,312 197 207 240 11.8 11.2 9.6
Industrials 1,616 1,198 67 55 57 18.0 21.7 20.9
Metals & Mining 2,778 804 74 81 93 10.8 9.9 8.7
Pharmaceuticals 1,997 1,043 37 42 48 28.2 24.9 21.5
Technology 7,204 3,189 140 172 204 22.7 18.6 15.6
Telecom 1,198 359 7 10 17 52.6 36.0 21.2
Utilities 1,152 376 33 34 34 11.5 11.1 10.9
BSE-30 35,600 18,925 1,036 1,154 1,328 18.3 16.4 14.2
BSE-30 ex-Energy 29,808 16,613 839 947 1,088 19.8 17.5 15.3
BSE-30 ex-Energy, Com. 27,030 15,809 765 866 996 20.7 18.2 15.9

Source: Kotak Institutional Equities estimates

Exhibit 8: The Nifty-50 Index trades at 15.9X FY2014E EPS and 13.9X FY2015E EPS (free-float basis)
Valuation summary of Nifty-50 sectors (free-float basis), March fiscal year-ends, 2013-15E
Mcap. Adj. mcap. Adjusted net profit (Rs bn) Adjusted P/E (X)
(Rs bn) (Rs bn) 2013 2014E 2015E 2013 2014E 2015E
Automobiles 3,356 1,942 130 164 193 14.9 11.8 10.1
Banking 7,249 5,483 335 357 403 16.4 15.4 13.6
Cement 1,324 638 42 30 35 15.1 21.6 18.3
Consumers 4,581 2,626 67 78 90 39.1 33.7 29.3
Diversified 108 59 2 3 9 24.7 19.7 6.7
Energy 6,749 2,377 221 233 256 10.7 10.2 9.3
Industrials 1,616 1,162 64 53 56 18.2 21.8 20.9
Metals & Mining 3,545 993 100 101 113 10.0 9.9 8.8
Pharmaceuticals 2,568 1,269 46 46 59 27.8 27.9 21.4
Real Estate 310 77 2 2 3 42.4 40.0 26.0
Technology 6,961 3,015 136 167 196 22.2 18.0 15.4
Telecom 1,198 357 7 10 17 52.6 36.0 21.2
Utilities 1,687 535 45 47 49 11.8 11.3 10.9
Nifty-50 41,251 20,533 1,197 1,291 1,477 17.2 15.9 13.9
Nifty-50 (ex-enegy) 34,502 18,156 975 1,058 1,221 18.6 17.2 14.9

Source: Kotak Institutional Equities estimates
Changes to Model Portfolio
We have reduced weights on the following stocks(1) Bharti Infratel (nil versus 100 bps
position earlier), (2) Cipla (neutral versus 100 bps overweight earlier), (3) HDFC Bank (neutral
versus 100 bps overweight earlier), (4) ONGC (neutral versus 100 bps overweight earlier), (5)
TCS (100 bps underweight versus neutral earlier) and (6) TPWR (nil versus 75 bps overweight
earlier).
We have increased weights on (1) Coal India (100 bps overweight versus neutral earlier), (2)
Indian Oil Corp. (100 bps position versus nil earlier), (3) PWGR (100 bps overweight versus
nil earlier), (4) SBI (100 bps versus nil earlier) and (5) Wipro (100 bps overweight versus
neutral earlier). We have also added 50 bps to ICICI Bank (overweight by 150 bps now).
Exhibit 9 is our revised Model Portfolio.


India Strategy
6 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Exhibit 9: We are overweight auto, banking (private), energy, technology and telecom sectors
Kotak Institutional Equities Model Portfolio
19-Mar Weightage (%) Diff. 19-Mar Weightage (%) Diff.
Company Price (Rs) Rating BSE-30 KS reco. (bps) Company Price (Rs) Rating BSE-30 KS reco. (bps)
Bajaj Auto 2,009 BUY 1.5 2.5 100 Bharat Heavy Electricals 190 SELL 0.9 (86)
Hero Motocorp 2,114 REDUCE 1.4 1.4 Larsen & Toubro 1,246 ADD 5.5 6.5 100
Mahindra & Mahindra 980 BUY 2.2 3.2 100 Industrials/Construction 6.3 6.5 14
Maruti Suzuki 1,870 ADD 1.3 2.3 100
Motherson Sumi Systems 223 ADD 1.0 100 Coal India 263 BUY 0.9 1.9 100
Tata Motors 384 ADD 4.6 4.6 Hindalco Industries 120 REDUCE 0.9 (85)
Automobiles 11.1 15.1 400 Sesa Sterlite 176 ADD 1.2 (124)
Tata Steel 357 REDUCE 1.3 (128)
State Bank of India 1,709 ADD 2.7 1.0 (170) Metals & Mining 4.3 1.9 (237)
PSU Banking 2.7 1.0 (170)
Cipla 383 ADD 1.1 1.1
Axis Bank 1,386 ADD 2.4 3.4 100 Dr Reddy's Laboratories 2,801 BUY 1.9 2.6 75
HDFC 868 REDUCE 7.1 6.1 (100) Sun Pharmaceuticals 585 SELL 2.6 1.1 (150)
HDFC Bank 738 REDUCE 7.4 7.4 Pharmaceuticals 5.5 4.8 (75)
ICICI Bank 1,210 BUY 7.4 8.9 150
Pvt. Banking/Financing 24.3 25.8 150 Infosys 3,272 ADD 8.4 9.4 100
TCS 2,039 ADD 6.3 5.3 (100)
Hindustan Unilever 562 REDUCE 2.2 (225) Tech Mahindra 1,778 ADD 1.0 100
ITC 360 ADD 10.6 6.6 (400) Wipro 545 ADD 2.1 3.1 100
Consumers 12.9 6.6 (625) Technology 16.9 18.9 200
Bharat Petroleum 448 BUY 1.0 100 Bharti Airtel 300 ADD 1.9 2.6 75
GAIL (India) 360 ADD 1.0 1.0 Idea 137 BUY 0.8 75
Indian Oil Corporation 261 ADD 1.0 100 Telecom 1.9 3.4 150
Oil & Natural Gas Corporation 314 BUY 3.5 3.5
Oil India 487 BUY 1.0 100 NTPC 116 ADD 1.3 (126)
Reliance Industries 903 BUY 7.7 7.6 (9) Power Grid 102 BUY 1.0 100
Energy 12.2 15.1 291 Tata Power 79 NR 0.7 (72)
Utilities 2.0 1.0 (99)
Notes: BSE-30 100.0 100.0
(a) Weights are with respect to March 19, 2014 prices.

Source: Kotak Institutional Equities estimates



KOTAK INSTITUTIONAL EQUITIES RESEARCH 7
Disclosures

"I, Sanjeev Prasad, hereby certify that all of the views expressed in this report accurately reflect my personal views about the
subject company or companies and its or their securities. I also certify that no part of my compensation was, is or will be,
directly or indirectly, related to the specific recommendations or views expressed in this report."



Kotak Institutional Equities Research coverage universe
Distribution of ratings/investment banking relationships
Source: Kotak Institutional Equities As of December 31, 2013
Percentage of companies covered by Kotak Institutional
Equities, within the specified category.
Percentage of companies within each category for which
Kotak Institutional Equities and or its affiliates has provided
investment banking services within the previous 12 months.
* The above categories are defined as follows: Buy = We
expect this stock to deliver more than 15% returns over the
next 12 months; Add = We expect this stock to deliver
5-15% returns over the next 12 months; Reduce = We
expect this stock to deliver -5-+5% returns over the next
12 months; Sell = We expect this stock to deliver less than -
5% returns over the next 12 months. Our target prices are
also on a 12-month horizon basis. These ratings are used
illustratively to comply with applicable regulations. As of
31/12/2013 Kotak Institutional Equities Investment Research
had investment ratings on 162 equity securities.
14.2%
27.2%
39.5%
19.1%
4.3% 4.9%
0.0%
1.9%
0%
10%
20%
30%
40%
50%
60%
70%
BUY ADD REDUCE SELL


Ratings and other definitions/identifiers
Definitions of ratings
BUY. We expect this stock to deliver more than 15% returns over the next 12 months.
ADD. We expect this stock to deliver 5-15% returns over the next 12 months.
REDUCE. We expect this stock to deliver -5-+5% returns over the next 12 months.
SELL. We expect this stock to deliver <-5% returns over the next 12 months.
Our target prices are also on a 12-month horizon basis.
Other definitions
Coverage view. The coverage view represents each analysts overall fundamental outlook on the Sector. The coverage view will consist of one of the following
designations: Attractive, Neutral, Cautious.
Other ratings/identifiers
NR = Not Rated. The investment rating and target price, if any, have been suspended temporarily. Such suspension is in compliance with applicable
regulation(s) and/or Kotak Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic
transaction involving this company and in certain other circumstances.
CS = Coverage Suspended. Kotak Securities has suspended coverage of this company.
NC = Not Covered. Kotak Securities does not cover this company.
RS = Rating Suspended. Kotak Securities Research has suspended the investment rating and price target, if any, for this stock, because there is not a sufficient
fundamental basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock
and should not be relied upon.
NA = Not Available or Not Applicable. The information is not available for display or is not applicable.
NM = Not Meaningful. The information is not meaningful and is therefore excluded.










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