MORNING INSIGHT

July 22, 2011

22 JULY, 2011

Economy News
4 Food inflation fell to a 27-month low of 7.58% for the week ended July 9, down from 8.31% in the previous week (ET). 4 The government has said that it would not increase its borrowing in the first half (April-September) of the current financial year. It said it would meet its temporary cash requirements through short-term borrowings, if needed (BS).

Equity
21 Jul 11 Indian Indices SENSEX Index NIFTY Index BANKEX Index BSET Index BSETCG INDEX BSEOIL INDEX CNXMcap Index BSESMCAP INDEX World Indices Dow Jones Nasdaq FTSE NIKKEI HANGSENG 12,724 2,834 5,900 10,010 21,987 1.2 0.7 0.8 0.0 (0.1) 18,436 5,542 12,638 5,842 13,479 9,058 8,048 8,394 (0.4) (0.5) (1.0) 0.1 (0.1) (0.8) (0.7) (0.5)

% Chg 1 Day 1 Mth 3 Mths

5.0 5.0 5.7 1.8 4.6 3.3 5.5 7.5 5.1 6.2 2.2 4.9 1.9

(5.9) (5.8) (6.7) (5.9) (1.2) (12.1) (3.2) (5.5) 1.7 0.5 (2.0) 4.3 (7.7)

Corporate News
4 Suzlon Energy plans to buy out the balance 4.8% in Germanys REpower Systems for EUR 63 million to make it a fully-owned subsidiary. AE-Rotor Holding,a subsidiary of Suzlon Energy, has communicated its offer to buy the balance stake in REpower Systems at EUR 142.77 a share (ET). 4 Kirloskar Oil Engines Ltd. (KOEL) has entered into a license agreement with Daihatsu Diesel company, Japan for manufacturing and supply of diesel engines of Daihatsu design in India. The engines manufactured by KOEL under this agreement, will be in the range of 440KW to 2560 KW (BS). 4 Hindustan Zinc, a Vedanta Group company, reported a 67.8% growth in its net profit at Rs.14.9 bn for the quarter ended June 30,2011, riding on high zinc and silver prices (ET). 4 Hinduja Foundries Ltd got its shareholders' nod to raise around Rs 1.25 bn through rights issues. The proposed fund raising would support company's investment of Rs.700 mn this fiscal at its new facility in Sriperumbudur and to modernise its Ennore facility (BS). 4 Biocon Ltd will start international trials for oral insulin after entering into a partnership arrangement with a global pharmaceutical company. Presently, the company is conducting trials for the drug in India (BS). 4 Coal India (CIL) has said that it plans to invest about Rs.300 bn in augmenting its capacity over the next five years and in new mining projects, washeries, machinery and equipment (ET). 4 NHPC Ltd and the Orissa government owned Orissa Hydro Power Corporation (OHPC) will jointly implement three hydel projects in the state at an estimated cost of Rs.26 bn. The three projects are Sindol-I (100 MW), Sindol-II (100 MW) and Sindol-III (120 MW) and these are expected to be commissioned in 4-5 years (BS). 4 Nalco's Rs 100 bn project to set up a 310,000-tonne aluminium smelter and a 750-Mw power plant in Iran continues to languish due to unavailability of funds. The project was announced in 2007 and the total project cost then was Rs 80 bn (BS). 4 The Income Tax (I-T) department carried out search and survey operations on the Mumbai and Pune premises of IRB Infrastructure Developers Ltd on Thursday (Indian Express). 4 JSW Energy has said that its plan to expand Ratnagiri power plant by 3,200 Mw would be postponed till issues regarding imported coal were sorted. However, the plan for 1,200 MW of capacity would be commissioned on schedule (BS).

Value traded (Rs cr)

21 Jul 11 Cash BSE Cash NSE Derivatives 2,691 10,013 108,522 % Chg - Day (13.2) (11.5) (18.7)

Net inflows (Rs cr)

20 Jul 11 FII Mutual Fund (31) (17) % Chg (107.4) (84.3) MTD 6,954 274 YTD 9,007 3,499

FII open interest (Rs cr)

20 Jul 11 FII Index Futures FII Index Options FII Stock Futures FII Stock Options 12,167 43,431 32,991 1,167 % Chg (5.2) 0.1 0.9 0.2

Advances / Declines (BSE)

21 Jul 11 Advances Declines Unchanged A 59 143 0 B 886 1,293 106 S 239 206 21 Total % total 1,184 1,642 127 40 56 4

Commodity

% Chg
21 Jul 11 1 Day 1 Mth 3 Mths

Crude (NYMEX) (US$/BBL) 99.3 Gold (US$/OZ) 1,594.3 Silver (US$/OZ) 39.4

0.1 (0.0) (0.4)

4.0 2.3 7.1

(11.6) 5.5 (16.9)

Debt / forex market

21 Jul 11 1 Day 1 Mth 3 Mths 10 yr G-Sec yield % Re/US$ 8.27 44.53 8.28 44.46 8.22 44.85 8.06 44.37

Sensex
21,100 19,600 18,100 16,600 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11

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

July 22, 2011

RESULT UPDATE
Arun Agarwal arun.agarwal@kotak.com +91 22 6621 6143

HERO HONDA MOTORS (HH)

PRICE : RS.1785 TARGET PRICE : RS.1724 RECOMMENDATION: REDUCE FY12E P/E: 15.5X

q HH's 1QFY12 results were broadly in line with estimates with revenues and net profit coming as expected. q Higher other income and lower tax rate compensated for lower than expected EBITDA margins during the quarter. q Operationally the quarter was one of the weakest for the company. Future outlook on the margin front remains bleak as cost pressures are expected to keep margins subdued in FY12. q However, strong performance on the volume front has been the silver lining for HH in 1QFY12. Overall 2W demand continues to remain quite robust and HH is expected to outperform the industry growth in FY12 as against underperformance last year.
Summary table
(Rs mn) Sales FY10 FY11 FY12E

158,312 194,012 237,647 23 24,399 12.6 24,846 20,077 96.5 (13.6) 107.8 148 105.0 60.0 76.2 48,502 (6) 18.5 12.1 1.6 12.6 22 27,672 11.6 27,828 22,949 114.9 19.0 128.1 227 20.0 61.2 73.3 40,700 (6) 15.5 7.8 1.3 11.4

Growth (%) 28 EBITDA 27,350 EBITDA margin (%) 17.3 PBT Net profit EPS (Rs) Growth (%) CEPS (Rs) BV (Rs/share) 28,317 22,318 111.8 74.1 121.4 174

q Our FY12 estimates stand revised on account of 1.Increase in FY12 volume growth estimates 2.Reduction in our EBITDA margin assumption and 3.Upward revision in other income and lowering of tax rate estimates. Effectively our revised EPS now stands higher by 4% at Rs114.9 as against our earlier estimate of Rs.110.6. q We revise our target price upwards to Rs1,724 (from Rs1,550) on account of 1.increase in earnings estimates and 2.increase in our assigned PE multiple from 14x to 15x which is on back of better volume growth outlook and increase in FY12 earnings growth rate estimates. However, with 3% downside to our target price, we continue to rate the stock as REDUCE.
Quarterly performance
(Rs mn) Revenues Total expenditure RM consumed Employee cost Other expenses EBITDA EBITDA margin (%) Depreciation Interest cost Other Income PBT PBT margins (%) Tax Tax rate (%) Reported PAT PAT margins (%) Reported EPS (Rs) Volumes (nos) Net Realization (Rs) RM cost per vehicle (Rs)
Source: Company

Dividend / share (Rs) 110.0 ROE (%) 61.4 ROCE (%) 76.1 Net cash (debt) 54,495 NW Capital (Days) (7) P/E (x) 16.0 P/BV (x) EV/Sales (x) EV/EBITDA (x) 10.3 1.9 11.0

1QFY12 56,833 50,427 42,448 1,645 6,334 6,407 11.3 627 (32) 884 6,696 11.8 1,117 16.7 5,579 9.8 27.9 1,529,577 36,858 27,751

1QFY11 42,966 36,941 30,594 1,450 4,897 6,025 14.0 483 (27) 534 6,103 14.2 1,187 19.4 4,917 11.4 24.6 1,234,039 34,558 24,791

YoY (%) 32.3 36.5 38.7 13.5 29.3 6.3 29.8 19.9 65.5 9.7 (5.9) 13.5 13.5 23.9 6.7 11.9

4QFY11 53,909 47,381 39,269 1,680 6,432 6,528 12.1 603 81 743 6,588 12.2 1,572 23.9 5,016 9.3 25.1 1,454,431 36,791 26,999

QoQ (%) 5.4 6.4 8.1 (2.1) (1.5) (1.9) 4.0 18.9 1.6 (28.9) 11.2 11.2 5.2 0.2 2.8

Source: Company, Kotak Securities - Private Client Research

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July 22, 2011

Strong volume growth during the quarter pushes revenues up by 32.3%

n HH posted a strong revenue growth of 32.3% YoY at Rs56,833mn which was in line with our expectation of Rs57,000mn. n Revenues grew on back of strong 24% jump in volumes and 7% uptick in realizations. n Sequentially 5% volumes growth helped revenues increase by similar proportion while realizations remained flat. n YTD growth in the 2W industry has surpassed our expectations. HH has emerged strongly in FY12 (YTD) after lagging industry growth rate in FY11. Taking into account the above mentioned factors, we raise HH's FY12 volume growth rate estimate from 14% to 18%. Our revised FY12 volume estimate for HH stands at 6.35mn units.

Weak operational performance continues for the company

n HH's operating performance has been weak over the past few quarters and the same continued into 1QFY12. n EBITDA for the quarter stood at Rs6,407mn. On a 32% YoY revenue growth, the company reported YoY EBITDA growth of mere 6.3%. Sequentially there was a 2% fall in EBITDA. n EBITDA margin for the quarter were at 11.3% versus 14% in 1QFY11 and 12.1% in 4QFY11. n Raw material to sales percentage of 75.3 was highest on a quarterly basis in the past many years. n Management believes that there is marginal softening in the commodity prices and expects it to come down further during the year. n However, despite that we expect pressure on margin to persist because of couple of reasons. Firstly, company will be spending on rebranding exercise over the next 2 quarters which will have a negative bearing on the margins. Secondly, R&D expenses which historically has been between 0.2-0.3 percent of turnover for the company is expected to increase to 1-1.2% of the turnover in FY12. n Given company's poor performance on the margin front and bleak margin improvement outlook, we lower our FY12 EBITDA margin estimate from 12.5% to 11.6%.

Higher other income and low tax rate lead to in line PAT
n Despite lower than expected operating performance net profit for the quarter at Rs5,579mn came in line with our estimated net profit of Rs5,644mn on back of higher other income and lower tax rate. n Net profit during the quarter grew by 13.5% YoY and 11.2% QoQ. n Other income stood at Rs884mn, 66% higher YoY and 19% higher QoQ. Company stated that yields on the investments made by the company remained high. However going ahead we expect other income to come down from 1QFY12 levels as 1. Dividend payout will lead to reduction in treasury income 2.Management has indicated towards slight softening in the investment yield and 3. Cash would start flowing for the construction of the new plant probably in 2HFY12. n Tax rate for the quarter stood at 16.7% and the management indicated it be around 17% in FY12. n We have increased our other income estimates to factor in higher than expected other income in 1QFY12 and also to factor in increased yields. We have lowered our FY12 effective tax rate assumption in line with the management guidance.

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July 22, 2011

Conference call highlights

n Management sales volume guidance for FY12 stands at 6mn plus units. n Company expects raw material prices to soften in 2HFY12. n Company took a price hike of Rs500-Rs750 on various models on 24th June 2011. n HH production capacity stands at 6.15mn units which the company expects to take it to 6.4-6.5mn units by the end of FY12 through minor investments at the existing plants. Current capacity at the Haridwar plant stands at 2.25mn units per annum. n Company is contemplating site for their new plant and will announce the same shortly. New plant will take around 10-12months from the date of announcement to get ready for commercial production. n HH expects to invest ~Rs8-9bn towards capex in FY12 of which a majority will be for setting up a new greenfield unit. n Inventory at the dealers level are currently below norms set for them. n Share of rural sales has increased from 38% to 45% during the quarter. n Management expects scaling up of exports will take some time.

Change in FY12 estimates

n We have increased our FY12 volume growth rate assumption from 14% to 18%. Our revised sales volume estimate for FY12 stands at 6.35mn. n We have lowered our EBITDA margin estimates from 12.5% to 11.6%. n We have revised our other income estimates higher and lowered the effective tax rate assumption to 17% in line with management guidance. n Effectively our net profit estimates gets revised upward by 4% to Rs22,949mn.
Earnings estimates FY12
(Rs mn) Volumes (mn units) Revenues EBITDA margin (%) Net profit EPS (Rs) Old 6.1 228,150 12.5 22,091 110.6 New 6.4 237,647 11.6 22,949 114.9 % change 4.0 4.2 3.9 3.9

Source: Kotak Securities - Private Client Research

Valuation
We recommend REDUCE on Hero Honda Motors with a price target of Rs.1724

n 2W volume outlook remains healthy and we expect HH to outperform the industry growth rate in FY12 n However pressure on operating margin is expected to continue for the company in the coming quarters. n We revise our target price upwards to Rs1,724 (from Rs1,550) on account of 1.increase in earnings estimates and 2.increase in our assigned PE multiple from 14x to 15x which is on back of better volume growth outlook and increase in FY12 earnings growth rate estimates. However, with 3% downside to our target price, we continue to rate the stock as REDUCE.

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MORNING INSIGHT

July 22, 2011

RESULT UPDATE
Ritwik Rai ritwik.rai@kotak.com +91 22 6621 6310

ZEE ENTERTAINMENT ENTERPRISES

PRICE : RS.131 TARGET PRICE : RS.112 RECOMMENDATION: SELL FY12E P/E: 22.4X

ZEEL has reported weak 1QFY12 results, with EBITDA 24% below our expectations. Placing the results together with weakening competitive position of some of ZEEL's key entertainment channels, we believe the poor performance of the company may carry on in the coming quarters. We cut our estimates 12%/ 8% for FY12E/ FY13E EPS, and cut our fair value assessment to Rs 112 (earlier Rs.127). The welcome that the market has extended to these results is a mystery to us (ZEEL was up 5.4% in yesterday's trade). We see the same as an exit opportunity, and urge investors to SELL (downgrade from REDUCE). n Zee Entertainment reported the following headline numbers: Revenues Rs 6.9Bn, EBITDA Rs 1.5 Bn, and PAT Rs 1.3 Bn. Reported financials are below our estimates, as well as consensus estimates, both on the top-line and the bottomline.
Summary table
(Rs mn) Sales FY11 30,136 FY12E 31,099 3.2 7,387 23.8 8,165 5,715 5.9 (5.6) 6.2 34.5 2.2 17.7 18.0 4,222 166 22.4 3.8 3.5 14.8 FY13E 34,589 11.2 8,259 23.9 8,951 5,997 6.2 4.9 6.5 38.0 2.4 16.9 17.2 5,949 166 21.4 3.4 3.1 13.0

Growth (%) 37.0 EBITDA 8,266 EBITDA margin (%) 27.4 PBT Net profit EPS (Rs) Growth (%) CEPS (Rs) BV (Rs/share) 8,922 6,055 6.2 1.4 6.3 31.5

n Inside financials: The company reported advertising revenues Rs 3.8Bn (+0% y/ y) and subscription revenues Rs 3.0Bn (-2%, q/q). The extent of weakening in advertising revenues is the key surprise, even as the company had guided for lower expectations in 1QFY12. Analogue and international revenues have been soft, DTH has registered robust growth on the back of rising subs, as well as improving yields. Costs have been well controlled, with SG&A expenses being key positive surprise (despite re-launch expenses). n Competitive Position of Key Properties Weakening: The financials need viewing in the context of the competitive risks that Zee Entertainment faces. We find the recent ascent of Sony in the Hindi GEC space as a significant risk in Zee Entertainment. We also note that Zee Marathi, which was until recently the clear #1 Marathi channel, has been displaced by Star and now competes for #2 position with ETV. n Hopes of higher revenues need balancing against a rapidly changing competitive scenario: While the distribution alliance with Star is a positive, we believe that the same needs balancing against media reports that: 1/ four leading cable operators may merge in order to maintain industry bargaining power against broadcasters, 2/ Sony-Viacom 18 may be involved in an alliance to counter the Star-Zee alliance, and 3/ Sony may acquire Ushodaya Enterprises' ETV, which may alter the scales in negotiations with MSOs. We also tend to think that the management did not sound certain about higher subscription revenues post the alliance. n Cutting EPS/ Fair Value Assessment, Downgrade to SELL: Following the reduction in our estimates, we see FY12E/ FY13E EPS at Rs 5.9/ Rs 6.2. Based on long - term changes made to our projections, along with the cuts above, we estimate the fair value of Zee Entertainment stock at Rs 112/ share (DCF valuation). Given significant decline over medium - term fair value assessment, we downgrade Zee Entertainment to SELL. We set our March 2012 price target at Rs 112 (implied PER: 19.5x PERFY12E). We note that the buyback, set to commence July 27th, is perhaps the reason why the street has shrugged off the weak 1QFY12 results; we see this as an exit opportunity. n Risks: 1/ Significant improvement in competitive position of ZEEL channels, 2/ higher than expected benefits from distribution alliance with Star, 3/ Higher than expected industry adex growth.

Dividend / share (Rs) 2.0 ROE (%) 17.5 ROCE (%) 18.1 Net cash (debt) NW Capital (Days) P/E (x) P/BV (x) EV/Sales (x) EV/EBITDA (x) 3,841 138 21.2 4.2 3.6 13.3

Source: Company, Kotak Securities - Private Client Research

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July 22, 2011

Result Highlights
(Rs mn) Revenues: - Advertising Revenues - Subscription Revenues - Domestic Subn. -Analogue Cable -DTH - International Subn. -Other Revenues Expenses - Content and Programming - SG&A Expenses - Employee Expenses EBITDA Margin (%) Depreciation and Amortization EBIT Interest Expenses Other Income PBT Exceptional Items Provision for Taxes Effective Tax Rate (%) PAT before Minority Interest
Source: Company

1QFY12 6,983 3,787 3,051 2,075 968 1,107 976 145 5,423 3,423 1,253 747 1,560.4 22.35 89 1,472 30.4 255 1,696 0 394.2 23.2 1,302

1QFY11 % chg, y/y 6,770 3,769 2,614 1,604 894 710 883 387 4,900 3,050 1,252 597 1,870.3 27.63 62 1,808 50.7 126 1,884 290.6 673.2 35.7 1,501 43 -19 -40 102 -10 -100 -41 -35 -13 3 0 17 29 8 56 11 -63 11 12 0 25 -17

4QFY11 % chg, q/q 7,980 4,797 3,107 2,023 1,039 984 1,084 76 5,711 3,730 1,156 825 2,268 28.43 68 2,201 23 228 2,406 -131 356 14.8 1,918 31 -33 32 12 -30 -100 11 57 -32 -12 -21 -2 3 -7 13 -10 90 -5 -8 8 -9 -31

n ZEEL's 1QFY12 results are well below our expectations. Revenues grew merely 3% , and EBITDA declined 17% y/y . Advertising revenues, flat y/y, were the primary surprise in the top-line, while subscription revenues belied hopes that the strong growth in 4QFY11 could be sustained. International subscription revenues fell 10% q/q, while domestic analogue revenues declined 7% q/q. DTH revenues, which grew 13% q/q, were the only positive in a highly disappointing topline. n Advertising revenues, in the management's assessment, have been impacted negatively due to poor advertising environment. While cricket season has played its part, sharp weakness has come in in May-June period. The weakness has continued into July. Key categories witnessing slowdown include FMCG, BFSI, autos, and telecom. n Expenses were managed better than our expectation, with declines in content expenses (q/q), and flat SG&A expenses (y/y). SG&A expenses in the quarter include a one-time expensing of marketing and rebranding expenses (Rs 210mn) incurred by ZEEL in the quarter, and certain pre-operating expenses related with new media business of the company. Employee expenses have risen strongly, and management has indicated that these do not contain one-offs. The company reported margins of 22.3% - weakest in 9 quarters. Excluding sports, EBITDA margins came in at 35%. n Other line items were broadly in line with our expectations, with the exception of tax provisioning - with effective tax rate of 23.2%. Tax provisioning is lower on account of losses incurred by Ten Cricket. Management has guided for 31% effective tax rate for the year.

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July 22, 2011

n Among other highlights: 1/the management has revised guidance for advertising growth for the year to single digits from earlier guidance of 12% growth, 2/ management continues to be committed to reducing losses from sports business and break-even in FY13. Guidance for FY12 losses has been maintained at Rs 1Bn, 3/ the management has re-iterated commitment to higher programming hours on key channels, and investment behind channels' content, 4/ management seemed hesitant, in our opinion, to commit to growth in analogue revenues, even following the alliance with Star India for distribution; even as they stated that the benefits shall start to flow in after 2-3 quarters.

Outlook
The weak results, along with recent developments in the space, force a review of our investment thesis on ZEEL. n Weak advertising revenues may be sustained in the coming quarters: This quarter has seen weak growth, resulting both from weak performance of the sports business, as also otherwise (assuming 50% of the sports revenues are advertising, advertising revenue growth would still be broadly flat y/y). Given weakening outlook in FMCG advertising, there is little scope for strong industry growth among GECs (as per industry discussions, FMCG advertising accounts for ~50% of total advertising on television). Further, Zee TV has been seeing a weakening competitive position in the Hindi GEC space in recent weeks. n We find the following facts about the competitive position of Zee TV noteworthy: 1/ With a gap of just 3 GRPs, Sony is fast becoming a significant competitor to Zee TV for the # 3 slot. In a period of one year, Zee TV has declined from being a challenger to Star/ Colors for the #1/#2 position, to being a likely #4 player in the space, 2/ Notable fact about Sony's recent success if the success of Bade Achhe Lagte Hain, the current #7 program in the Hindi GECs as this could be the first serious success of Sony in the fiction space after CID. Fiction properties have the advantage of greater stability, as well as possibilities of greater amount of sampling, 3/ Sony's ratings, we believe are likely to improve further upon the commencement of fourth season of Kaun Banga Crorepati, 4/ SAB TV, the other Hindi GEC from Multi Screen Media's stable, has developed a significant presence and is adding high quality inventory to the industry, thereby raising supply and placing pressure on pricing, 5/ ZEEL has rapidly lost competitive ground in the Marathi GEC space, and is currently competing with ETV Marathi for the #3 slot. On the positive side, Zee Bangla has regained the #1 position in the West Bengal market. n The above are significant, for the fact that they have a bearing on the business model of ZEEL. The company has had a stable business model, derived from its long-standing position in the pay markets, in India and abroad. ZEEL now faces a situation where: 1/ its Hindi GEC is close to being #4, the lowest in a few years of operation, 2/ nearly all its markets, including regional ones are fairly contested markets. n ZEEL brings in 40% from subscription and 58% from advertising revenues (FY12E). We have argued in the past that two of its subscription sub-streams: international revenues and domestic analogue revenues, are likely to be impacted negatively, given lack of growth and rising competition (from IBN18, and now, Sony). We believe ZEEL has a ~60% share in subscription revenues in overseas markets (ZEEL/ total amounts paid to Indian channels as subscription revenues), and has a significant domestic analogue subscription stream. We believe Sony has a weaker position in analogue stream in India, while Colors (Viacom 18) has less than 10% revenues coming from the subscription stream. There is therefore a case for Sony and Colors to earn higher subscription revenues from these streams, and these efforts could affect ZEEL negatively

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n Our thesis on weak growth in two of the three sub-streams in subscription revenues is maintained: We are unsure of whether the distribution agreement with Star can bring any benefits to ZEEL, once one takes into account the declining competitive positioning of key channels of the company. n We note that Zee Turner and Star Den Media Services have recently come together to form a 50:50 JV, "Mediapro Enterprises" that will attempt to appropriate higher subscription revenues from cable operators and perhaps reduce carriage fees payments to MSOs. While this is itself a positive, a few factors need note: 1/ media reports suggest that significant re-alignments could be under way, both at the broadcasters (The One Alliance and Sun-18 coming together, for a similar alliance), and at the cable operators end (four leading operators are said to be considering a merger to counter the bargaining power of broadcasters), 2/ Alliances aside, we find it difficult to see how ZEEL may be able to improve its share of revenues while market share trends are negative, and certain broadcasters (IBN18, for example) do not get subscription revenues that are in line with their GEC viewership. We believe IBN18 gains in analogue subscription revenues, if they were to happen, are likely to come at Zee Entertainment's cost. If Hindi markets are the prime determinants of analogue subscription revenues, and Hindi markets have a case where IBN18 makes poor revenues, Sony is on an uptrend, and Star is #1, we believe only Zee can lose. n Losses from sports business to sustain; the losses borne are critical to the subscription revenues and the stability of ZEEL's revenue stream: On losses from sports, we tend to believe that the losses from sports are a necessary evil - for they provide strength to the ZEEL bouquet. Losses from sports emanate from high prices of broadcasting rights. In an environment of rising competition in the entertainment channels, we find it difficult to see how ZEEL can reduce losses from sports business without affecting the subscription revenues. Therefore, we do not (against management guidance) account for breakeven of the sports business in FY13. n As a result of the discussion, we therefore continue to see weak growth in subscription revenues from ZEEL. Moreover, we see softer advertising growth in FY12 as a result of weakening economic environment as well as loss of competitive position, and we do not see the FY12 base being altered substantially (for advertising revenues), in so long as ZEEL's competitive position remains constant (as has been the case in the past few weeks). We cut our FY12/ FY13 estimates sharply downward, the summary of which is provided below:
Estimates Revision
(Rs mn) Revenues EBITDA Margin (%) PAT EPS Revised Estimates FY12E FY13E 31099 7387 23.8 5797 5.9 34589 8259 23.9 6037 6.2 Prior Estimates FY12E FY13E 32416 8573 26.4 6391 6.5 36050 9581 26.6 6391 6.5 Change (%) FY12E FY13E -4.1 -13.8 -2.69 ppt -9.3 -9.3 -4.1 -13.8 -2.70 ppt -5.5 -5.6

Source: Kotak Securities - Private Client Research

We downgrade Zee Entertainment to SELL with a price target of Rs.112

We note that our revenue estimates are reduced ~4% largely on account of advertising revenue growth assumptions, which have been trimmed to 7% from 14%. Low advertising revenues, along with continued assumptions of rising content expenses (rise in programming hours) in the coming quarters, and higher employee expenses, lead to a decline of ~14% in EBITDA. Declines in PAT are moderated on account of lower assumption for effective tax rate for the year (FY12, 31% versus 32% in prior estimates).

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July 22, 2011

Valuation
We value ZEEL on DCF basis. Key assumptions in our DCF valuation are provided below:
DCF Valuation
2012E Revenues EBITDA EBITDA Margin EBIT NOPLAT Add: Non-Cash Charges Gross Cash Flows Changes in Working Capital Net Operating Cash Flows Capex Free Cash Flows Discounted Cash Flows Assumptions: WACC Perpetual Growth Rate Computation of Value: PV (2012-21) Terminal Value PV - Terminal Value Enterprise Value Net Debt/ (Cash) Value, Equity (FY12E) Value/ Share (FY12E) 30,981 220,997 67,453 98,435 (11,387) 109,821 112 10% 61% 12.6% 7.0% % Value 28% 31,099 7,387 24% 7,054 4,938 334 5,271 (2,654) 2,617 -101 2,517 2,235 2013E 34,589 8,259 24% 7,909 5,299 350 5,649 (1,803) 3,846 -500 3,346 2,639 2014E 38,233 9,152 24% 8,786 5,887 366 6,253 (1,894) 4,359 -500 3,859 2,703 2015E 42,595 10,943 26% 10,560 7,075 383 7,458 (2,244) 5,213 -500 4,713 2,932 2016E 47,115 12,382 26% 11,983 8,029 399 8,428 (2,342) 6,086 -500 5,586 3,086 2017E 51,974 14,500 28% 14,084 9,437 415 9,852 (2,660) 7,192 -550 6,642 3,259 2018E 57,408 17,061 30% 16,630 11,142 431 11,573 (3,178) 8,395 -605 7,790 3,394 2019E 62,755 19,312 31% 18,864 12,639 448 13,087 (3,259) 9,828 -665 9,162 3,546 2020E 68,686 21,988 32% 21,524 14,421 464 14,885 (3,566) 11,319 -732 10,587 3,639 2021E 74,466 24,117 32% 23,636 15,836 480 16,317 (3,886) 12,431 -805 11,625 3,548

Source: Kotak Securities - Private Client Research

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July 22, 2011

Profit Model
(Rs mn) Revenues: -o/w Advertising -o/w Subscription -o/w Other Growth, Revenues Operating Expenses: -o/w Progrmmg. and Brdcasting Exp. -o/w Personnel Expenses -o/w SG&A Expenses - fo/w Administrative & Other Exp. -fo/w Selling and Distribution Exp. Growth, Operating Expenses (%) EBITDA Margin (%) Depreciation and Amortization EBIT Interest Expenses EBT Other Income PBT Provision for Tax Effective Tax Rate (%) PAT (Net Income) Net Margin (%) Growth, Net Income (%) Associate Income/ Minority Interest Exceptional Items Reported PAT Normalized PAT Shares O/S Reported EPS Normalized EPS
Source: Kotak Securities - Private Client Research

2010 21,998 10,670 9,869 1,459 1.0% 15,863 9,452 1,963 4,448 2,113 2,335 -0.1 6,135 27.9 285 5,849 331 5,518 1,220 6,738 572 8.5 6,165 28.0 18.1 -179 6,344 6,165 978 6.5 6.3

2011E 30,136 17,010 11,259 1,866 37.0% 21,869 14,369 2,738 4,762 1,896 2,866 7.1 8,266 27.4 288 7,978 104 7,874 851 8,725 2,671 30.6 6,055 20.1 -1.8 -118 197 6,369 6,055 978 6.5 6.2

2012E 31,099 18,181 12,282 635 3.2% 23,711 15,700 2,954 5,057 2,048 3,009 6.2 7,387 23.8 334 7,054 121 6,933 1,232 8,165 2,449 30.0 5,715 18.4 -5.6 -82 0 5,797 5,797 978 5.9 5.9

2013E 34,589 20,521 13,401 667 11.2% 26,330 17,499 3,249 5,582 2,212 3,370 10.4 8,259 23.9 350 7,909 122 7,787 1,164 8,951 2,954 33.0 5,997 17.3 4.9 -40 0 6,037 6,037 978 6.2 6.2

2014E 38,233 23,165 14,367 700 10.5% 29,081 19,579 3,574 5,927 2,388 3,539 6.2 9,152 23.9 366 8,786 2 8,784 780 9,564 3,156 33.0 6,408 16.8 6.8 -40 0 6,448 6,448 978 6.6 6.6

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MORNING INSIGHT

July 22, 2011

FINANCIALS: ZEE ENTERTAINMENT ENTERPRISES

Profit and Loss Statement (Rs mn)
(Year-end March) Revenues % change yoy EBITDA % change yoy Depreciation EBIT % change yoy Net Interest Earnings Before Tax % change yoy Tax as % of EBT Net Income % change yoy Shares outstanding (m) EPS (Rs) DPS (Rs) CEPS(Rs) BVPS(Rs) FY10 21,998 1.0 6,135 11.9 285 5,849 13.1 (804) 6,738 24.1 572 8.5 6,165 18.1 978 6.1 2.0 6.4 39.1 FY11 30,136 37.0 8,266 34.7 288 7,978 36.4 (259) 8,922 32.4 2,671 29.9 6,252 1.4 978 6.4 2.0 6.4 31.5 FY12E 31,099 3.2 7,387 -10.6 334 7,054 -11.6 (889) 8,165 -8.5 2,449 30.0 5,715 -8.6 978 5.9 2.2 6.3 34.5 FY13E 34,589 11.2 8,259 11.8 350 7,909 12.1 (748) 8,951 9.6 2,954 33.0 5,997 4.9 978 6.2 2.4 6.5 38.0

Balance sheet (Rs mn)

(Year-end March) FY10 FY11 978 29,970 30,948 17 17 (119) (192) 7,801 38,454 8,464 6,964 5,396 8,955 3,858 4,818 23,026 38,454 FY12E 489 33,382 33,871 17 17 (119) (192) 6,816 40,393 8,231 6,964 5,538 9,202 4,239 6,220 25,199 40,393 FY13E 489 36,847 37,336 17 17 (119) (192) 7,581 44,623 8,381 6,964 6,160 10,235 5,966 6,918 29,278 44,623 Shareholder's Equity 489 Reserves 37,811 Net worth 38,300 Secured Loans 1,195 Unsecured loans Total Loans 1,195 Minority Interest (22) Net Deferred tax liability (133) Current Liabilities 7,840 Total Liability 47,180

Net Fixed Assets 19,588 Goodwill Investments 3,203 Inventory 4,713 Debtors 7,488 Cash&Bank balances 5,864 Loans & Advances 6,325 Other Current Assets Current Assets 24,389 Miscelleanous Expenses Total Assets 47,180

Source: Company, Kotak Securities - Private Client Research

Source: Company, Kotak Securities - Private Client Research

Cash Flow Statement (Rs mn)

(Year-end March) Pre-Tax Profit Depreciation Change in WC Cash Taxes Paid Operating cash flow Change in Investments Capex Investmt cash flow Equity Raised Debt Raised Other Financing CFs Financial cash flow Other adjustments Change in Cash Opening Cash Closing Cash FY10 6,738 285 7,514 (1,355) 13,182 (1,932) (1,781) (3,712) 1,333 (4,562) (2,180) (5,410) (122) 3,938 1,926 5,864 FY11 8,922 288 (515) (2,477) 6,218 (3,761) 281 (3,480) (1,363) (1,178) (2,068) (4,610) (135) (2,007) 5,864 3,858 FY12E 8,165 334 (2,654) (2,449) 3,395 (101) (101) (489) (2,342) (2,832) (81) 382 3,858 4,239 FY13E 8,951 350 (1,803) (2,954) 4,544 (500) (500) (0) (2,278) (2,278) (40) 1,727 4,239 5,966

Ratio Analysis
(Year-end March) FY10 FY11 27.4 26.5 21.1 3.4 108.5 2.1 n/a -3.4 17.9 20.4 18.1 3.6 13.3 20.8 FY12E 23.8 22.7 18.6 -6.1 108.0 3.7 n/a -3.7 18.0 21.2 18.0 3.5 14.8 22.1 FY13E 23.9 22.9 17.5 4.1 108.0 4.2 n/a -5.2 17.0 20.8 17.2 3.1 13.0 21.2 Margins and Growth: EBITDA margin (%) 27.9 EBIT margin (%) 26.6 Net profit margin (%) 27.1 Adjusted EPS growth (%) -0.4 Balance Sheet Ratios: Receivables (days) 124.2 Fixed Assets Turnover 1.2 Interest coverage (x) n/a Debt/ equity ratio -4.1 Return Ratios: ROE (%) 16.3 ROIC 15.0 ROCE (%) 16.0 Multiples: EV/ Sales 5.0 EV/EBITDA 17.8 Price to earnings (P/E) 21.5

Source: Company, Kotak Securities - Private Client Research

Source: Company, Kotak Securities - Private Client Research

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July 22, 2011

Bulk deals

Trade details of bulk deals

Date Scrip name Name of client Buy/ Sell S S S B B B S S B S B S B B B S B S B B S B S B B S S S B B B S B S B S B S S Quantity of shares 50,000 81,675 62,000 100,001 51,521 36,138 38,400 38,520 300,000 34,000 110,808 100,000 100,000 50,000 175,000 75,000 90,000 20,000 27,700 32,342 35,600 35,142 485,000 13,640 25,000 3,121,159 3,119,403 20,910 350,000 19,855 18,935 56,003 56,395 87,261 87,261 750,000 1,009,575 103,362 87,429 140,000 Avg. price (Rs) 16.3 24.1 8.6 5.6 5.4 5.5 5.6 5.5 25.1 10.2 133.0 204.9 200.5 72.8 302.4 301.0 301.8 82.0 82.0 12.2 12.2 12.2 21.7 105.5 89.6 128.5 128.5 8.7 28.7 36.5 37.4 10.0 10.0 573.0 573.0 4.4 4.4 8.3 8.3 15.8

21-Jul 21-Jul 21-Jul 21-Jul 21-Jul 21-Jul 21-Jul 21-Jul 21-Jul 21-Jul 21-Jul 21-Jul 21-Jul 21-Jul 21-Jul 21-Jul 21-Jul 21-Jul 21-Jul 21-Jul 21-Jul 21-Jul 21-Jul 21-Jul 21-Jul 21-Jul 21-Jul 21-Jul 21-Jul 21-Jul 21-Jul 21-Jul 21-Jul 21-Jul 21-Jul 21-Jul 21-Jul 21-Jul 21-Jul 21-Jul

Arvind Intl-$ BB Realty BCC Fuba Bgil Films Bgil Films Bgil Films Bgil Films Bgil Films Bhoruka Alum BMB Music BS Transcomm Clarus Finance Clarus Finance Dhvanil Chem Fineotex Chem Fineotex Chem Fineotex Chem Gflfin Gflfin Indergiri Fin Indergiri Fin Indergiri Fin Indowind Ener Innovative Tech Kanchan Intl

Bhavik Vastupal Shah Ashu Bhandari Mahavirsingh N Chauhan Sri Mohd Rashid Vardhman Investment Rapid Credit & Holdings Pvt Ltd Touchline Securities Pvt Ltd Vardhman Investment Vinay Jain Mukund Motor Parts Pvt Ltd Anmol Finpro Pvt Ltd Manish Jainarayan Karwa(Huf) Anjaniyasoda Madhavi Perla Mukund Motor Parts Pvt Ltd Aarken Advisors Pvt Ltd Jalan Cement Works Ltd Abhijai Investment Meenakshi Vinod Gada Renu Aggarwal Babita Mittal Hemant Kumar Dembla Syndicate Nirman Pvt Ltd Parineeta Anoop Chaudhari Mahendra Sukhalal Kumbhare

Sukhy Commercial & Trading Pvt Ltd S

Network18 Media Citigroup Global Mkts Mauritius Network18 Media Haresh Ram Chawla Oscar Global Parsharti Inv Parsharti Inv Sampre Nutr Sampre Nutr Sandur Mang Sandur Mang Tatia Global Tatia Global Tokyo Finance Tokyo Finance Mahavirsingh N Chauhan Dharmesh Jayeshkumar Soni Dhaval Satishkumar Agrawal Raj Kumar Lohia Rahul Balpande Euro Industrial Enterprises Pvt Ltd Sandur Sales And Services Pvt Ltd Sohit Infrabuild Pvt Ltd Primus Real Estates Pvt Ltd Priti Haresh Shah Mahavirsingh N Chauhan Paramount Print Munjal S Mehta

Vjil Consulting-$ Venkat Rao Jalagam

Source: BSE

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MORNING INSIGHT

July 22, 2011

Gainers & Losers

Nifty Gainers & Losers

Price (Rs) Gainers Infosys Ltd ITC Ltd Tata Motors Losers Reliance Ind HDFC Bank L&T
Source: Bloomberg

chg (%) 0.6 0.7 0.8 (1.8) (1.4) (0.7)

Index points 2.5 2.4 1.0 (8.6) (4.1) (2.3)

Volume (mn) 0.7 4.9 1.3 1.8 3.2 1.4

2,768 207 977 861 496 1,790

Forthcoming events

Company/Market
Date 21-Jul Event Biocon, Container Corp, DB Corp, Esab India, Hero Honda, Hindustan Zinc, Indiab Power, JSW Energy, Kotak Mahindra Bank, Sesa Goa, Yes Bank, Zee Entert, Zensar Tech earnings expected Allahabad Bank, Axis Bank, Colgate Palmolive, Indiabulls Real Est, Ispat Ind, Jet Air India, Mirc Elect, NIIT, Praj Ind, Thermax, Union Bank earnings expected Balrampur Chini, Gateway Distriparks, Godrej Cons, Kirloskar Bros, Selan Exp, TVS Electronics, TRF earnings expected

22-Jul 23-Jul

Source: Bloomberg

Research Team
Dipen Shah IT, Media dipen.shah@kotak.com +91 22 6621 6301 Sanjeev Zarbade Capital Goods, Engineering sanjeev.zarbade@kotak.com +91 22 6621 6305 Teena Virmani Construction, Cement, Mid Cap teena.virmani@kotak.com +91 22 6621 6302 Saurabh Agrawal Metals, Mining agrawal.saurabh@kotak.com +91 22 6621 6309 Saday Sinha Banking, Economy saday.sinha@kotak.com +91 22 6621 6312 Arun Agarwal Automobiles arun.agarwal@kotak.com +91 22 6621 6143 Ruchir Khare Capital Goods, Engineering ruchir.khare@kotak.com +91 22 6621 6448 Ritwik Rai FMCG, Media ritwik.rai@kotak.com +91 22 6621 6310 Sumit Pokharna Oil and Gas sumit.pokharna@kotak.com +91 22 6621 6313 Amit Agarwal Logistics, Transportation agarwal.amit@kotak.com +91 22 6621 6222 Jayesh Kumar Economy kumar.jayesh@kotak.com +91 22 6652 9172 Shrikant Chouhan Technical analyst shrikant.chouhan@kotak.com +91 22 6621 6360 K. Kathirvelu Production k.kathirvelu@kotak.com +91 22 6621 6311

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