Kotak Research - India Daily: Updates

What's Inside
Reliance Industries: Likely conversion of extant refinery to EOU to result in lower taxation
# Refinery converted to EOU but development not confirmed by management
# Raised FY2008E and FY2009E EPS to reflect lower tax
# Not much impact on SOTP valuation; higher cash balance
VSNL: Near term catalysts present a good buying opportunity
# Flag listing will likely establish a valuation benchmark for TGN
# Real estate de-merger timing remains uncertain but some progress apparently
# Retain OP with SOTP-based target price of Rs560
BPCL: Issue of oil bonds of Rs50 bn for 4QFY07 is a positive for earnings and sentiment
# Government to give Rs49.7 bn of oil bonds in 4QFY07; Rs241 bn total for FY2007
# Fine-tuned estimates and gained more confidence in earnings estimates
# Valuations are attractive given certain amount of assurance on earnings
Banks/Financial Institutions: Fear of further CRR/interest rate hikes could lead to fall in banking and finance stocks
# RBI raises CRR, banks will likely increase PLR by 50bps
# Banking valuations are attractive, but stocks unlikely to perform till end of tightening period
# Sensitivity analysis shows some banks already factoring in significant NPLs
Economy: India's interest rate outlook: RBI takes unnecessary risks with the India story
# RBI hikes CRR by 50bps, repo rate by 25bps, cuts interest on CRR by 50bps
# Excessive monetary tightening a risk: CRR last increased by 150bps 20 years ago
# Futile against supply shocks; base effects, rabi crop to cut inflation in 1QFY08E
# Lending rates to increase by 100 bps ' 50 bps earlier ' in FY2008, impact growth
# Retain March 2007 10-year yield forecast at 7.5%; near-term 8.2% (from 8.1%)
# Rupee forecast at Rs44/USD FY2008E: weaker US Dollar vs forex intervention
Economy: India's December 2006 External Debt: Growing interest rate differential, project finance gap
# External debt at US$ 142.7 bn as at end-December 2006; 16.3% of GDP FY2007E
# Indicators of sustainability remain in control
# Interest rate differential, domestic project financing gap enlarging external debt
# 70%+ FII equity investment /foreign exchange reserves
Economy: India's April 2006 - February 2007 fiscal deficit: Well on track
# Center's April 2006 - February 2007 gross fiscal deficit at 80.0 % of budget estimates
# Government well on track to FY2007E 3.7% of GDP fiscal deficit
# Substantial US$ 17.3 bn government surplus with the RBI.
#
Economy: India's Apr-Dec 2006 balance of payments: On firm footing
# Current account deficit US$11.8 bn; sustainable 1.2% of GDP FY07E, 1% FY08E
# Invisibles strong support, BPO scaling up: US slowdown to impact momentum
# Interest rate differential, domestic project financing gap enlarging ECBs
# Rising FDI; US$ 8 bn FY2008E FII inflow assuming market consolidation
# US$ 20 bn FY08E RBI forex intervention likely to ensure domestic liquidity
# Rupee forecast at Rs44/USD FY2008E: weaker US Dollar vs forex intervention
Property: Rising interest will likely affect housing affordability in our view
# Increase in interest rates to have lesser impact on commercial, retail properties

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