India Telecom, Punj LLoyd,Zee, Jet Airways, India Economy

Kotak on Indian Telecom Companies

• Valuations at severe risk if pricing continues to decline
• Recent tariff cuts may be a precursor to further price reductions
• High industry profitability and returns leaves scope for significant price reduction
• Pricing issue perhaps lost in restructuring euphoria, M&A-related speculation

We note that valuations of Indian wireless stocks are highly vulnerable to price declines
and see the recent decline in wireless pricing as a precursor to more aggressive price
competition. In our view, the super-normal profitability and returns of the wireless industryoffer ample scope for further reductions in tariffs. We believe Idea Cellular may be most vulnerable in the emerging environment

Kotak on Punj LLoyd

Punj lloyd has reported standalone revenues for full year of Rs22.4 bn (up 64% yoy) and PAT of Rs616 mn (up 75% yoy) while EBITDA margin has declined 100 bps to 8.3%. On a consolidated basis Punj Lloyd has reported full year revenues of Rs51.2 bn and PAT of Rs1.96 bn while Sembawang has contributed revenues of Rs21.5 bn and PAT of Rs286 mn. Order inflows are exceptionally strong led by stronger pre-qualifications and the order backlog stands at Rs159 bn at the end of FY2007. We have revised our FY2008E and FY2009E EPS estimate to Rs10.7 and Rs14.7 versus Rs10.9 and Rs14.5 earlier based on (a) consolidation of Sembawang, (b) full dilution of FCCB issue, (c) higher capital expenditure and debt levels, (d) lower margins for the stand alone company. We revise our target price to Rs239 per share (from Rs182/share earlier) as we roll our target price to March 09 basis. Maintain inline rating as we await clarity on working capital, equity dilution, likely margins in the conference call.

Kotak on Zee Entertainment Enterprises

We see ZEEL's decision to abandon its telecast contract with BCCI for matches in neutral venues as a modest positive for ZEEL's DCF valuation but a large positive for FY2008EFY2011E earnings. We are not sure whether ZEEL can unilaterally abandon the contract without any legal and financial impact. We have modified our model to assume that it is able to do so successfully. However, this has little impact on cash flows and our 12-month forward DCF valuation, which increases to Rs215 from Rs210 previously; we model savings of net undiscounted cash flow over the next four years of Rs4 bn (Rs9/share). However, our EPS estimate for FY2008E, FY2009E, FY2010E and FY2011E has increased to Rs8.6, Rs11.3, Rs13.9 and Rs16.5, respectively, versus Rs7.6, Rs9.9, Rs12.1 and Rs11.6, respectively, previously. Key upside risk to our target price is continued hugely positive sentiment for media sector.

Kotak on Jet Airways

The UB group, operator of Kingfisher Airlines, will buy 26% stake in Air Deccan through
preferential allotment, paying Rs155 per share for 35 mn shares. It will make an open offer to buy a further 20% stake from the public, as per SEBI guidelines. This alliance continues the consolidation trend in the aviation industry. We view this structural change in the industry as necessary for making it profitable - rationalization of competition, higher yields and cost savings. Hence, in our view it will have a positive impact on all players, including Jet Airways. The combine may potentially realize cost savings from synergies in ground handling, aircraft maintenance and route rationalization. However possible gains may be limited as independent characters of both the airlines will be maintained. We maintain our Underperform rating on Jet Airways with the price target of Rs400 as our concerns on stiff competition in the domestic sector, losses on international operations and high fuel costs in the medium term remain.

Kotak on Shriram Transport Finance

Post the management call, we rollover our target price to Rs180 (based on FY2009) from Rs155 (based on FY2008) and tweak our earnings estimates by (0.2%) for FY2008 and (3%) for FY2009 to factor the following: (a) marginally lower asset growth and NIMs, (b) higher income from securitized assets, (b) higher NPL write-off / provisions and (c) lower operating expenses. STFC has discussed some of its new initiatives. However, we do not expect these initiatives to materially impact its earnings. The stock trades at 2.1X PBR FY2009 and we believe that despite lower growth expectations, the stock continues to provide value to investors given its high profitablility.

Kotak on Indian Economy

We expect the Indian economy to softland in FY2008E to an 8.2% real GDP growth rate (and 5% inflation) . 9.4% FY2007E real GDP growth rate was broadly in alignment with case of sexpectations. Exhibit 2 demonstrates the dominance of consumption strengthening the India story case in fact og an nrtr. Critical to our softlanding scenario is a normal monsoon that permits monetary policy to top at a reasonably neutral interest rate regime perhaps with a 50bp CRR hike. Even with no further RBI action, real lending rates ‘ currently 7.25% - will likely close in on the 7.8% potential real GDP growth rate on the back of a persistent credit gap . Excessive monetary tightening remains a key risk, especially in case of an inclement monsoon. Unlike
his predecessor, Jalan, who used to resolutely ignore agro supply shocks, Governor Reddy has panicked into frentic tightening at ‘ and actually slightly past - the peak of both the episodes of supply-shock driven inflation - mid-2004 and 2HFY07 - during his tenure

The Center's FY07 gross fiscal deficit (GFD) improved to 3.5% of GDP from 4.1% last year (Exhibit 1). We expect the Center to better its FY08E GFD target of 3.3% of GDP. This is because the underlying nominal GDP growth assumption of 11% is far more conservative than our 13.2%. The Center is clearly well on track to achieve a GFD of 3.0% of GDP by FY2009 in alignment with the Fiscal Responsibility and Budget Management Act, 2003. The Center sometimes borrows ways and means advances from the RBI around this time before its borrowing program fully takes off. By May 18, it had nevertheless vacated occasional drawals from the RBI. States continue to park Rs287 bn/ US$ 7 bn in intermediate 14-day Treasury Bills suggesting an improvement in state finances as well.States actually hold Rs620 bn in all categories of Treasury Bills.