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The countrys merchandise exports rose for the third straight month toUS$14.3bn in January, up 11.5% from US$12.9bn last year, while importssurged 35.5% to US$24.7bn from US$18.2bn thus expanding trade deficitto US$10.4bn. (BS)

Karnataka will purchase 1,000MW power from the private producers at acost of Rs3.2bn to meet the demand-supply situation in the state duringthe month of March. (BS)

Tamil Nadu Chief Minister said that it plans to announce an attractivetextile policy soon to attract more investments and increase employmentopportunities in textile sector there. (BS)

Industrial power users in Andhra Pradesh are now faced with severepower shortage and are forced to contend with one day power holiday andfour-hour cut during peak hours in the week days. (BL)

Consequent to pick up in demand, cement companies across regions havehiked prices by Rs5-7/50kg bag for the third consecutive month. (BL)

CERCs draft regulation on Sharing of inter-State transmission of chargesand losses' stipulates that solar-based generation would be allowed zerotransmission access charge for use of inter-State transmission systems.

(BL)

The government collected 70% of its total tax revenue target for 2009-10between April 2009 and January 2010, and will have to meet a shortfall ofRs 1,400bn in the remaining two months of the fiscal. (ET)

Economy Front Page

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[email protected]

Economics

2

On the expenditure side too, growth was ~6%, with government

consumption actually declining 10% (mainly because of the PayCommission arrears effect, in our view). Excluding governmentconsumption, growth looks strong at 8.5%, but note that this is

largely due to a favourable basein the year-ago quarter, GDPgrowth excluding government expenditure had declined 2.4%.

Private consumption accelerated in nominal terms to a three-quarterhigh of 11%. Thus, the entire deceleration in real terms during 3Q isattributable to higher inflation. However, the implied private

consumption deflator at ~7.5% is much lower than any of the CPIs,which are running ~15%.

Figure 3: Divergent trends in real and nominal private consumption expenditure

0%

2%

4%

6%

8%

10%

12%

14%

16%

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

2007-08 2008-09 2009-10

Nominal PFCE Real PFCE PFCE Def lator YoY %

Source: CSO, IIFL Research

There were no signs of a sustained pick-up in the investment cycle.While headline growth in gross fixed capital formation (12.3% innominal terms) was almost twice as much as in 2Q, the entireacceleration is attributable to the favourable base. Gross fixedcapital formation has grown in line or below nominal GDP growth forthe eighth consecutive quarter. In contrast during FY06-08, GFCFhad grown on average 5ppt faster than nominal GDP quarter afterquarter.

Figure 4: Gross fixed capital formation growth remains slugg ish

0

5

10

15

20

25

1QFY06

2QFY06

3QFY06

4QFY06

1QFY07

2QFY07

3QFY07

4QFY07

1QFY08

2QFY08

3QFY08

4QFY08

1QFY09

2QFY09

3QFY09

4QFY09

1QFY10

2QFY10

3QFY10

Nominal GDP grow th GFCF grow thYoY%

Capex upcycle

Capex dow ncycle

Source: CSO, IIFL Research. in nominal terms

Figure 5: Contribution to incremental growth

Sectoral GDP 2QFY10 3QFY10

Agriculture 1% -9%

Industry 31% 51%

- Mining 3% 4%

- Manufacturing 19% 35%

- Electricity, gas and water supply 2% 2%

- Construction 7% 11%

Services 68% 58%

- Trade, hotels, transport, communication 29% 42%

- Financing, insurance, real estate, business services 17% 21%

- Community, social and personal services 22% -5%

Total 100% 100%Expend itu re side 2QFY10 3QFY10

Pvt consumption 49% 36%

Govt consumption 37% -24%

Gross fixed capital formation 38% 47%

Inventories & Valuables -14% -18%

Net exports -13% 31%

Discrepancies 4% 28%

Total 100% 100%

Source: CSO, IIFL Research

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Central Bank of India ADD

[email protected]

Company snapshot

BackgroundCentral Bank of India was established in 1911 by Sir SorabjiPochkhanawala, and was subsequently nationalised in 1969. Today, it istenth-largest state-owned bank in India, and has the third-largestbranch network amongst all banks. It has over 3,500 branches spreadacross 27 states and has a total customer base of 25 million accountholders. The banks shares were publicly listed during FY08.Government of India still holds over 80% stake in the bank.

CBoI has largely been a lender to large and mid-sized corporations,which account for over 65% of all the banks outstanding loans.

Loan book break-up as of 3QFY10

Agricult

ure

(15%)

Large

and mid

corporat

es

(65%)

SME

(10%)

Retail

(10%)

Shareholding pattern as of Dec 2009

FII

(5%)

GoI

(80%)

Others

(6%)

DII

(9%)

CBoIs loan book registered a CAGR of 32% from FY06 to FY09 andprofits grew by 30% annualised over the same period. However, therewas no growth in NII, as NIMs contracted materially. The margincontraction was due to the banks over-reliance on bulk deposits andcredit for growth, which in turn enabled corporate clients to extractbargains on both the credit and deposit side. Also, the bank had beenlagging its peers in terms of use of technology and proportion of retail

and SME assets. Over the past year, new top management has beenbrought in, and this team is implementing a new strategy for the bank.

Key management personnel

Name Designation Comments

S Sridhar CMD Appointed in March 2009. Prior to joining CBoI he served as theCMD of National Housing Bank. He has also served as the ED ofExim Bank.

Ramnath Pradeep ED Appointed in Dec 2008. Prior to this he served as a GM at DenaBank where he was in charge of risk management, cardsmanagement and implementation of all delivery channels.

Arun Kaul ED Appointed in April 2009. Prior to this he served as the CGM ofPunjab National Bank

Source: IIFL Research

Loan book comparison as of 3QFY10CBoI is one of the largest lenders in India

1,793 1,704 1,5621,228 1,196

6,072

911 8481,0650

1000

2000

3000

4000

5000

6000

7000

SBI ICICI

Bank

PNB BoB BoI HDFC

Bank

Union CBoI Axis

Bank

(Rs bn)

Source: Companies, IIFL Research

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3


[email protected]

Turning around

Profit growth picking up: PAT grew at 30% annualised from FY06 toFY09. However, this was largely on account of 94% profit growth inFY07. NII was flat over FY06-FY09, despite 32% CAGR in loans, becauseof 180bps contraction in NIMs over this period. Profit grew 75% YoY in9MFY10 and we expect full-year profit to grow by 110%, driven by bothNII and other income, and further aided by lower credit charges.

Figure 1: Net profitwe expect stable growth ahead, after robust growth in FY10

4,980 5,712

12,024

14,313

18,003

5,502

110.5

19.0 25.8

10.5

3.8

93.5

2000

6000

10000

14000

18000

22000

FY07 FY08 FY09 FY10ii FY11ii FY12ii

0.0

20.0

40.0

60.0

80.0

100.0

120.0

Net profit YoY profit grow th (RHS)

(Rs m) (%)

Source: Company, IIFL Research

RoA has been low at around 0.5% over FY06-FY09, while RoE rangedfrom 9% to 20% during this period. RoE was higher than RoA becausethe banks depressed equity base kept leverage high. On the back ofimproved profitability and no capital-raising plans, we expect RoE toimprove and to remain over 25% over the next two years.

Figure 2: ROE trendwe expect nearly 30% ROE in FY10ii and FY11ii

9.1

18.317.1 15.3

29.5 29.3

5.0

10.0

15.0

20.0

25.0

30.0

35.0

FY06 FY07 FY08 FY09 FY10ii FY11ii

(%)


Figure 3: ROA trendimprovements visible in FY10; trend to continue

0.4

0.6

0.50.4

0.8 0.8

0.0

0.2

0.4

0.6

0.8

1.0


(%)


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4


[email protected]

Lender to large corporations: Large corporations have historically

(FY06-FY09) accounted for 6570% of CBoIs loan book. Over thisperiod, agriculture accounted for 15-18% of the loan book, retail for1011%, and SMEs for the rest. Infrastructure was another strongdriver, with its share rising from 11% of the loan book in FY07 to 17%in FY09. On the other hand, the share of retail remains very low, inspite of the bank having the third largest branch network in the country,with over 3,500 branches.

Large corporations continue to remain a focus area, with CBoI having set

up a new vertical to facilitate faster disbursal of loans to this segment.With a quicker turnaround time for loan sanctions, management expectsto regain some pricing power in consortium lending, where it previouslyused to be amongst the laggards to join. In addition, management hasundertaken similar practices for SMEs as well, and is looking to increasetheir share in the loan book. Although the bank could do with a highershare of retail assets, this would take time, and the bank is unlikely to beable to make meaningful headway in this over the next 1-2 years. Weexpect the loan book mix to remain largely unchanged, as large

corporates continue to be the banks main focus.

Figure 4: Loan book break-up as of 3QFY10

Retail

(10%)

SME

(10%)

Large and mid

corporates

(65%)

Agriculture

(15%)


Loan growth to be in line with system in FY11 and FY12: CBoIs

loan growth has been robust, at 32% annualised over FY06-FY09.Growth was well above the system rates in FY07 (38%) and FY08(41%), and was in line with the system growth rate in FY09 (17%).However, in 9MFY10, loan growth for the corporate segment was weak,because of the tepid economic environment. Although advances in3QFY10 grew 12% YoY, the YTD growth rate was only 5%. Withmanagement being preoccupied with improving profitability, we expectloan growth this year to trail system growth rate.

Figure 5: Loan growth t rend (YoY) to remain in line with system

37.4 38.240.9

17.1

10.0

18.0

0.0

10.0

20.0

30.0

40.0

50.0


(%)


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5


[email protected]

Deposit growth robust, but CASA slipping: Deposits grew at 25%

annualised between FY06-FY09, below the 31% CAGR in loan growth.This helped the bank increase its loan-to-deposit ratio from 56% inFY06 to 65% in FY09. This has since fallen back to 58% in 3QFY10,because of the tepid loan growth. We expect the loan-to-deposit ratio toremain near current levels.

CASA share in deposits was 47% in FY06, and has since fallen to 33% inFY09, and 30% in 3QFY10. Although management was able to growCASA deposits at 12% annualised during FY06-FY09, term deposits

registered 35% CAGRleading to a fall in the CASA ratio and acorresponding rise in cost of funds. Earlier, the banks focus had beenon funding growth through bulk deposits and bulk credit. However, thenew management has changed that approach and is once againfocussing on garnering CASA deposits. This renewed focus along withthe maturity of considerable amounts of bulk deposits, should aid inshoring up the CASA ratio towards 3540%.

Figure 6: Deposit growth trend (YoY) to remain robust

9.4

24.5

33.3

19.019.0

17.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0


(%)


Figure 7: CASA trend on a revival path

46.8

42.1

36.133.4

32.0

34.0

25.0

35.0

45.0

55.0


(%)


Figure 8: CASA ratio fo r major banks as of 3QFY10

45.6

42.9

39.6 39.5

36.1

51.7

32.3

29.933.0

25.0

35.0

45.0

55.0

HDFC

Bank

Axis

Bank

SBI ICICI

Bank

PNB BoB BoI Union CBoI

(%)


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6


[email protected]

Figure 9: Loan-to-deposit ratioto stabilise at current levels

56.4

62.6

66.2 65.1

60.260.7

50.0

52.0

54.0

56.0

58.0

60.0

62.0

64.0

66.0

68.0


(%)


NIMs to expand: NIMs declined from 3.5% in FY06 to 1.7% in FY09.

This was due to the 220bps increase in cost of funds during this period(FY06-FY09), along with a 130bps decline in investment yield. While theyield on advances did increase by 180bps, it wasnt enough tocompensate for the rise in cost of funds and fall in investment yield.

The margin compression was primarily on account of the banks focuson bulk deposits and credit, which drove up the cost of funds andpressurised yield on advances. The bank was earlier a laggard in joiningconsortiums for lending to large corporations. This put pressure on thebanks yields, since corporate clients were able to squeeze out bargains.Although the bank continues to be primarily a large corporate lender,recent initiatives taken by the managementsuch as developingverticals, especially to service large corporate loansshould help thebank gain back some of the lost pricing power. This, along with the factthat Rs200bn worth of bulk deposits are due to mature this quarter anda further Rs180bn to mature over the next year, should aid in improvingNIMs. Our current forecasts assume a moderate NIM expansion from

hereon to 2.1% over FY11 and further to 2.2% in FY12.

Figure 10: NIM trendexpected to improve from hereon

3.5

3.1

2.2

1.71.8

2.1

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0


(%)


Figure 11: NIM comparisoncurrently lowest amongst major banks

4.03.8

3.13.0

2.8

4.3

2.6

2.0

2.7

1.5

2.5

3.5

4.5

HDFC

Bank

Axis

Bank

PNB BoI BoB SBI Union ICICI

Bank

CBoI

(%)


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7


[email protected]

Capital adequacy remains a concern: Total CRAR was at 12.6% at end-

3QFY10, with Tier-I capital at 7.1%. RBI requires minimum Tier-I capital of6% and total CRAR of 9%. Out of Rs13.2bn worth of paid-up equity capitalas at end-FY09, only Rs4bn was from equity shares, with the balanceRs9.2bn coming from perpetual non-cumulative preference shares.

Government of India holds 80% stake in the bank, and has announcedplans to recapitalise CBoI along with other public sector banks (PSBs)using the US$2bn provided by World Bank. A further Rs165bn wasallocated in the FY11 budget towards recapitalising PSBs with a Tier-I

ratio below 8%. However, recent news articles have reported that thegovernment might look at selling stakes in PSBs to LIC and GIC and usethose funds to capitalise banks. Further clarity on the issue is awaited.Meanwhile, the low Tier-I capital could potentially impede the bank fromgrowing its loan book at rates ahead of system.

Figure 12: Capital adequacy Tier I component has historically been low

11.010.4 10.4

13.1

12.111.5

7.2

6.3

5.4

7.06.5 6.5

4.0

6.0

8.0

10.0

12.0

14.0


Total CRAR Tier-I

(%)


Figure 13: Tier-I CAR was the lowest amongst major banks as at end-3QFY10

13.8

11.8

9.7 9.4 9.3

14.2

8.7

7.1

9.3

5.0

7.0

9.0

11.0

13.0

15.0

ICICI

Bank

HDFC

Bank

Axis

Bank

SBI BoI BoB PNB Union CBoI

(%)


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8


[email protected]

Steady improvement in asset quality: Asset quality has steadily

improved from FY06 onwards, with gross NPA ratio declining by 420bpssince end-FY06 to 2.7% at end-FY09. Over this period, gross NPAsdeclined by 10% to Rs23.5bn at end-FY09. Net NPAs over the sameperiod rose 9% to Rs10.6bn at end FY09. Net NPA ratio declined by135bps to 1.24%. Over 9MFY09, gross NPAs have risen by 7% toRs24.8bn and net NPAs declined by 38%, taking the gross and net NPAratio to 2.7% and 0.7% respectively.

Provisioning charges as % of average loans have remained in the

range 0.4-0.6%. NPA coverage ratio has ranged between a high of67% in FY07 and a low of 55% in FY09. By end-3QFY10, the coverageratio had improved to 73%, above the mandatory requirement of 70%coverage set by RBI, which needs to be complied with by Sep 2010.

Figure 14: Gross and net NPA trend significant improvement

6.9

4.8

3.2 2.72.7

2.32.6

1.71.5 1.2

0.8 0.7

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0


Gross NPA ratio (%) Net NPA ratio (%)

(%)


Restructured assets as a % of outstanding loans were at 4% at end-FY09. Incremental restructuring has been slowing down over 9MFY09,with only Rs100m worth of assets restructured during 3QFY10. Totalamount of restructured assets were 4.2% of outstanding loans as at end-

3QFY10. So far, there have been negligible slippages in restructuredassets, and management expects asset quality to remain steady.

Figure 15: Outstanding restructured assets as a % of total loans

6.2

5.6

4.4 4.3 4.2

3.1 3.02.7

0.4

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

PNB BoI Union SBI CBoI BoB ICICI Axis HDFC

Bank

(%)


Figure 16: NPA coverage ratio to remain around the RBI-mandated 70%

62.967.3

58.8 54.8

69.9 69.8

30.0

60.0

90.0


(%)


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9


[email protected]

Investments have increased of late: The banks investment book

registered 15% CAGR over FY06-FY09. Investments in governmentsecurities constituted 29% of deposits as at end-FY09. However, over9MFY10, owing to slow loan growth and high deposit growth,investments grew 46% YoY in 3QFY10, against YoY deposit growth of31% and loan growth of 12%. As of 3QFY10, SLR investmentsamounted to 28% of deposits. Of these, around Rs148bn worth ofinvestments or 30% of SLR investments, were held in the AFS category.

Contribution of other income has improved: Share of non-interest

income in other income has been on a rising trend, increasing from 18%in FY06 to 26% in FY08 and 32% in FY09. Core fee income registered16% CAGR over FY06-FY09. The bank was earlier charging processingfees below the industry standard, but this has now been corrected. Thisshould enable to bank to post robust growth in other income for FY10.Over the past two years, the bank has already caught up with theaverage for other PSBs on this front. We expect contribution of otherincome to remain robust going forward as well.

Figure 17: Non-interest income as a % of total income improving trend

18.2

16.1

26.2

32.4 34.9

26.4

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0


(%)


Figure 18: CBoI has caught up with the average for other PSBs over the past two years

Other inc ome as % of total income FY08 FY09 FY10ii

SBI 33.8 37.8 37.3

PNB 26.5 29.3 26.8

BoB 34.4 35.0 31.7

BoI 33.4 35.7 29.9

Union Bank 29.5 28.0 34.3

Average 31.5 33.2 32.0

CBoI 26.2 32.4 34.9

Source: Companies. IIFL Research

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10


[email protected]

Cost/income ratio improving: The cost/income ratio declined from

59% in FY06 to 56% in FY09 and we expect it to fall below 50% inFY10. The bank currently has employee strength of 35,543. Thisnumber has been stable over the past few years, since CBoI hasntactively recruited new staff. Going forward, over 2,000 employees areslated to retire each year, for the next few years. They will be replacedby fewer and better qualified junior level employees, which should aid infurther improvement in cost/income ratio.

Cost/income ratio was already down to 46% in 3QFY10. This is comparablewith other PSBs and a further improvement from here would place thebank in good stead. We expect cost/income ratio to average near 49% forFY10 and to improve subsequently to 46% in FY11 and 44% in FY12.

Figure 19: Cost/income ratio set to improve further

59.0

57.157.9 56.4

49.2

46.2

35.0

40.0

45.0

50.0

55.0

60.0

65.0


(%)


Figure 10: Cost/income ratio comparison as of 3QFY10

47.246.2

45.344.1

41.2

52.3

40.2

36.5

40.6

25.0

35.0

45.0

55.0

SBI HDFC

Bank

CBoI BoI BoB Axis

Bank

PNB Union ICICI

Bank

(%)


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11


[email protected]

Branch and ATM networklagging in technology: CBoI had 3,559

branches as at end-3QFY10, the third-largest branch network among allbanks. Only around 400 branches were added over the last three years.We expect the number of branches to remain near these levels, sincemanagement needs to first improve branch productivity before going forfurther expansion, if needed. Over 64% of the banks branches are inrural and semi-urban areas, with the presence in rural areas beingparticularly strong (over 38% of branches). Apart from domesticbranches, the bank also plans to open offshore branches in Bahrain andHong Kong, and has applied to RBI for permission.

CBoI significantly lags its peers on the technology front. It hasimplemented CBS only across 1223 branches, i.e. only across 34% of itsbranches, while other large public sector banks have completed 100%CBS implementation. The bank was able to implement CBS across only21 branches in 9MFY10. However, management now expects tocomplete CBS implementation across all branches by end-FY11.

Also, CBoI has only 400 ATMs and hasnt added any new ATMs over9MFY10. Management is now looking to install 100 ATMs in 4QFY10 andto install a further 400 ATMs in FY11.

Subsidiaries in good health: CBoI has a 35% stake in 8 rural regionalbanks (RRBs). Cumulatively, the 8 RRBs had over 1700 branches,Rs126bn worth of deposits and Rs50bn worth of advances. These banksmade a profit of Rs2bn in FY09, almost double the amount made inFY08. Apart from the RRBs, the bank also holds a 20% stake in Indo

Zambia Bank Ltd along with the Government of Zambia, Bank of Barodaand Bank of India.

CBoI also owns a 59% stake in Centbank Home Finance Ltd. Net profitfor the same has been on a declining trend, falling from Rs62m in FY06to Rs32mn in FY09. The loan book portfolio was Rs2.6bn at end FY09,and CAR was 21%. However, the company had NPAs to the tune ofRs450mn. Overall, the subsidiaries remain in good shape.

Figure 21: No. of branches comparison CBoI has the third largest network

11540

4894

3559287630503111

2000

3000

4000

5000

6000

7000

8000

9000

10000

11000

12000

SBI PNB CBoI BoI BoB Union


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Tata Power ADD

[email protected]

Figure 1: Consolidated pro fits have fallen 82% YoY

(Rs m) 3QFY09 2QFY10 3QFY10 % YoY % QoQNet Sales 45,979 45,612 43,130 -6% -5%

Material costs 25,969 25,547 22,917 -12% -10%

Personnel Costs 1,380 2,484 1,848 34% -26%

Other overheads 8,593 8,280 9,213 7% 11%

EBIDTA 10,038 9,301 9,153 -9% -2%

EBIDTA Margin 22% 20% 21% Depreciation 1,618 2,242 2,208 36% -2%

Interest 2,012 1,877 1,853 -8% -1%Other income 743 964 659 -11% -32%

PBT 7,151 6,145 5,751 -20% -6%

Tax 1,688 2,544 265 -84% -90%

Adjusted PAT 5,463 3,601 5,486 0% 52%

Adj. PAT Margi n 12% 8% 13% 7% 61%

Minority/share in associates 272 (86) 542

Consolidated PAT 5,192 3,687 4,945 -5% 34%

Statutory appropriations (140) (10) (60) Extra ordinary (expense)/income - - (3,959)

Reported PAT 5,052 3,677 926 -82% -75%


Figure 2: Share of power revenues remained strong at 67%

(Rs m) 3QFY09 2QFY10 3QFY10 % YoY % QoQ

Power Business 29,806 31,986 29,094 -2% -9%

Coal 14,568 11,308 12,593 -14% 11%

Others 2,278 2,498 1,904 -16% -24%

Total 46,651 45,792 43,591 -7% -5%


Figure 3: Weak coal performance has brought dow n share of coal PBIT to 30%

(Rs m) 3QFY09 2QFY10 3QFY10 % YoY % QoQ

Power Business 3,102 4,229 5,155 66% 22%

Coal 5,746 3,404 2,247 -61% -34%

Others 136 283 (3,884) Nm Nm

Total 8,984 7,916 3,518 -61% -56%


Lower fuel costs (pass-through item) led to flatsales

Higher depreciation largelydue to commissioning of

new units

Tax write-back in coal SPVsdue to write-off of deferred

stripping costs

Strong performance ingeneration business and

power subsidiaries

Higher sales volumes fromcoal mines + higher

exchange rate offset bylower realisation

3QFY10 EO items (Rs m)

Deferred stripping costs 3,509

Contractor settlement

charges

450

Total 3,959

Coal EBIT adjusted fordeferred stripping costcharge and settlement

charges for mining

contractor

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3

Tata Power ADD

[email protected]

Figure 4: Coal production has been gradually improving over the last few quarters

0

2

4

6

8

10

12

14

16

18

1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10

(m tonnes)


Figure 5: However, realisations have remained weak YoY

0

1020

30

40

50

60

70

80

90

1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10

(US$/ tonne)


Key takeaways from the conference call Charged Rs3.5bn on account of deferred stripping costs:

During the quarter, TPC charged Rs3.5bn towards deferred strippingcosts. This was based on a detailed analysis of mine characteristicsand possible growth in production if coal prices remain firm. Thereport suggested an increase in the average strip ratio to supportproduction growth, in light of strong coal prices. TPC has therefore

adjusted the deferred stripping cost (which is the difference betweennormative strip and actual strip ratio) on retrospective basis, andtaken a charge for these costs during the quarter. Out of this one-offcharge, approximately 80% relates to a period before FY10, starting2HFY08. The management highlighted that impact of higher stripratio was US$1.48/tonne, and mentioned that it could possibly offsetit through operational synergies. Given the outlook on firm coalprices and higher strip ratio, TPC has indicated conversion of certainresources into reserves, though it has not disclosed the extent of

such accretion in reserves.

What are deferred stripping costs? Stripping cost of top soil is divided into (i) initial stripping of

the top soil to open the mining area before production starts;and ii) additional stripping during the production activity.

The initial stripping costs are part of deferred developmentcost, while the additional stripping costs are charged toproduction cost as long as the stripping ratio is close to or lessthan the average estimated stripping ratio.

However, when the actual ratio is significantly higher than the

estimated average ratio, the excess stripping costs are to bedeferred and recorded as deferred stripping costs.

These deferred stripping costs are expensed as productioncosts in periods where the actual ratio is significantly lowerthan the estimated average ratio.

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4

Tata Power ADD

[email protected]

Figure 6: Almost 80% of the one-off expenses pertain to prior period

Related to

1HFY10

(15%)

Related to priorperiods

(80%)

Related to current

quarter

(5%)

Source: Company

Figure 7: Proven reserves as of Sept-09 could see an inc rease post recent review

Location

Concession

owner

Date of

concession End date

Proven

reserve

Cumulative

production

Balance of

provenreserve

(m tonnes)

Senakin Arutmin 1-Oct-89 30-Sep-19 99.9 89.6 10.3

Satui Arutmin 1-Oct-89 30-Sep-19 109.8 70.0 39.8

Mulia/Asam Asam

Arutmin 1-Oct-89 30-Sep-19 274.5 24.3 250.2

Batulicin Arutmin 1-Oct-89 30-Sep-19 22.6 12.7 9.9

Pulau Laut Arutmin 1-Oct-89 30-Sep-19 14.5 - 14.5

Sarongga Arutmin 1-Oct-89 30-Sep-19 88.5 - 88.5Sangatta KPC 5-Aug-91 5-Aug-21 1,962.9 350.4 1,612.5

Total 2,572.7 547.0 2,025.7

Source: Bumi website, IIFL Research

Expecting regulatory approval on production ramp-up by2HFY11: TPC said that the two coal minesKPC and Arutminhavesubmitted expansion plans to the regulator, and the companyexpects approvals by 2HFY11. Under the proposed expansion, coal

production would scale up from the current 60mtpa to 75mtpa by

FY11 and ~100m tonnes thereafter. It further said that the two coalmines would hire ancillary equipment on lease from an SPV thatwould be set jointly by TPC and Bumi Resources.

Figure 8: Expected ramp-up in coal production

0

20

40

60

80

100

120

FY08 FY09 FY10ii FY11ii Beyond FY11ii

(m tonne)

Source: Company

TPC has provided for part liability in tax evasion case:Indonesian tax authorities have demanded US$116m from the KPCand Arutmin mines, and have also demanded interest on delayedpayment. TPC said that in FY09, it provided US$40m towardsinterest on delayed payment charges, and has not provided for thepenalty that may arise.

Company is confident it can complete key projects on time:The management indicated that its key projects, 4GW Mundra UMPPand 1GW Maithon, are progressing well and are 42% and 63%complete respectively. It expects these projects to commission ontimeMaithon by FY11, and UMPP in phases starting FY12. TPC alsohighlighted that the proposed 2GW Coastal Maharashtra project islikely to start soon, as public hearing has been completedsuccessfully. It has also completed the DPR for the 525MW captive

unit for Corus, a subsidiary of its group company Tata Steel.

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2

Patni Computer Systems BUY

[email protected]

Boost from new management

Patnis growth in the years before the slowdown set in trailed that of itspeers, but the company is set for among the fastest rates of growth inCY10. The key reason is the various senior management appointments(including its first non-promoter CEO) and an increasing skew towardsmulti-service deals.

Patni used the slowdown to bring in changes to its delivery structure,while continuing to invest in its front-end sales force. By 4QCY09, itsdevelopment-related costs (COGS) fell by ~15% YoY, while S&M

expenses increased YoY.

In addition, the recent trend towards multi-services deals, whileaffecting other mid-cap vendors, benefits relatively larger players likePatni. Management also cited optimism on certain deal wins that arelikely to be among the largest in the companys history.

Figure 1: Patni has registered among the best revenue growth rates during FY10

1.6%2.5%

4.7%

16.8%

3.1%

1.0%

8.5%

5.2%

1.0%1.9% 1.7%

0.9%

3.5% 3.3%1.8%

20%

15%

10%

5%

0%

5%

10%

Q1FY10 Q2FY10 Q3FY10

Infotech KPIT Mindtree Hexaware PatniQoQ

revenues

(US$)


Acquisitions on the cards

Patnis cash flow generation has been very strong: as at end-4QCY09,its cash balances improved by ~50% YoY. Now, 35% of its market capis in cash. With a history of stock buybacks to use excess cashresources, this option too remains open to management. We alsobelieve management is likely to use the cash for any potentialacquisitions (including captives and assets of clients). Constrained forcash, many MNC firms have been trying to monetise their non-core ITassets (captives, IT departments etc.). Recent deals include TCS andWipros acquisitions of Citigroups captives in India; Mphasiss

acquisition of AIGs captive; mid-cap vendors like MindTree, HCL Techand Infinite Computers acquisitions of Kyocera, Xerox and Motorolascaptives/assets respectively.

Figure 2: Cash fl ow generation at Patni has been very st rong

279

305297

348

380

439

250

270

290

310

330

350

370

390

410

430

450

3Q08 4Q08 1Q09 2Q09 3Q09 4Q09

Cashandequivalents(US$m)


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3


[email protected]

Figure 3: Despite having amongst the strongest growth among the mid-cap ITservices vendors under our coverage, Patnis valuations are among the cheapest

(even without adjusting for cash)

TechM

Patni

Mindtree*

3i

Infotech*

KPIT**

Hexaware

5

6

7

8

9

10

11

12

13

10.0% 5.0% 0.0% 5.0% 10.0% 15.0%

1yearforwardPER

YoYEBITDAgrowth FY1012average


Figure 4: Given the cheap valuations and robust growth outlook, we see a strongcase for re-rating of Patni

5

0

5

10

15

20

25

Jan06

Mar06

May06

Jul06

Sep06

Nov06

Jan07

Mar07

May07

Jul07

Sep07

Nov07

Jan08

Mar08

May08

Jul08

Sep08

Nov08

Jan09

Mar09

May09

Jul09

Sep09

Nov09

Jan10

Mar10

Valuations(1yearforwardcorePER*)

Marketcapitalizationwaslessthan

thecompany'scashbalances


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5


[email protected]

Financial summary

Income statement summary (Rs m)Y/e 31 Dec CY08A CY09A CY10ii CY11ii CY12ii

Revenue 31,173 31,620 34,668 40,000 45,696

EBITDA 5,379 6,032 6,486 7,456 8,515

EBIT 4,237 5,250 5,628 6,504 7,534

Interest income 879 1,080 1,012 1,163 1,349

Exceptional items 833 1,048 0 0 0

Others items -807 -488 47 0 0

Profit before tax 5,142 6,889 6,687 7,666 8,883

Tax expense -762 -1,071 -1,271 -1,968 -2,157

Net Profi t 4,380 5,818 5,416 5,698 6,726

Cashflow summary (Rs m)

Y/e 31 Dec CY08A CY09A CY10ii CY11ii CY12ii

Profit before tax 4,237 5,250 5,628 6,504 7,534

Depreciation & Amortization 1,141 782 858 952 981

Tax paid -762 -1,071 -1,271 -1,968 -2,157Working capital change 2,518 1,209 212 371 396

Operating Cash-flow 7,338 7,217 5,427 5,859 6,754

Capital expenditure -1,810 -2,000 -2,500 -3,000 -3,000

Free cash flow 5,529 5,217 2,927 2,859 3,754

Debt financing/disposal 87 116 108 114 134

Dividends paid -525 -698 -650 -683 -807

Net change in Cash & cash equivalents 2,347 5,227 3,445 3,451 4,430

Source: Company data, IIFL Research

Balance sheet summary (Rs m)Y/e 31 Dec CY08A CY09A CY10ii CY11ii CY12ii

Cash & cash equivalents 14,703 19,814 23,151 26,488 30,784

Sundry debtors 8,366 7,934 8,698 10,036 11,465

Fixed assets 8,986 10,203 11,845 13,893 15,913

Intangible assets 4,907 4,907 4,907 4,907 4,907

Other assets 945 945 945 945 945

Total assets 37,908 43,804 49,547 56,271 64,015

Sundry creditors 6,328 7,061 7,741 8,932 10,204

Other current liabilities 3,161 3,205 3,501 4,019 4,572

Long-term debt/Convertibles 18 18 18 18 18

Networth 28,401 33,521 38,288 43,303 49,222

Total liabiliti es & equity 37,908 43,804 49,547 56,271 64,015

Ratio Analysi s

Y/e 31 Dec CY08A CY09A CY10ii CY11ii CY12ii

Sales growth (%) 15.8 1.4 9.6 15.4 14.2Core EBITDA growth (%) 1.7 12.1 7.5 15.0 14.2

Core EBIT growth (%) -1.5 23.9 7.2 15.6 15.8

Core EBITDA margin (%) 17.3 19.1 18.7 18.6 18.6

Core EBIT margin (%) 13.6 16.6 16.2 16.3 16.5

Net profit margin (%) 11.4 15.1 15.6 14.2 14.7

Dividend payout ratio (%) 12.0 12.0 12.0 12.0 12.0

Tax rate (%) 14.8 15.6 19.0 25.7 24.3

Net Debt/Equity (%)51.8 59.2 60.5 61.2 62.6

Return on Equity (%) 15.7 18.8 15.1 14.0 14.5

Return on Assets (%) 9.8 11.7 11.6 10.8 11.2

Source: Company data, IIFL Research

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Enterprising India

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Enterprising India

[email protected] 4

international market will be where some of the new drivers will comefrom.

Fig 3: Zee has constantly re-invented its popular property Sa Re Ga Ma Pa


Coming to cricket, what future do you foresee for ICL?

I believe that the only defeat is in ceasing to try. We have gone to courtregarding the ICL case and have a strong case. Im quite confident thatICL will make a comeback.

Do you think that over the past 20 years the businessenvironment has become more conducive for an entrepreneur?

The challenges are different today. When I set up Essel Packaging,regulation used to be the key challenge. Today, regulation is hardly achallenge and the main hurdle for an entrepreneur is capital availability.Banking rules and regulations are much stricter when it comes topromoter funding.

What is the high point of your career and was there a pointwhen you felt really low and wanted to get away from it all?

The high point was actually something rather small. When we shippedour first consignment of rice, we were told that we needed an expert to

complete the documentation needed at the bank for the letter of credit.The document would be running into a number of pages and was tohave a number of conditions. We had no experience of this kind of work.However, I worked with my assistant and we completed all therequirements. Next day at the bank there were only a couple ofmistakes pointed out and the process was completed smoothly. Theseare the small things that stick with you.

I have never felt so low as to want to quit the business. I felt low when

my name was dragged into the stock market scandal when I was notinvolved at all and was just trying to help someone.

What is the key to success as an entrepreneur?I would advise anybody trying to set up a venture that he or she has toeat, sleep, and drink it. Passion is the key.

Do you see yourself being able to move away from the business?

Actually I want that and have almost reached there. The team is taking

proper shape and before I exit completely I will make sure that theorganisation retains sufficiently talented people. Im actually graduallyassuming the role of an HR person and a mentor rather than chairmanof the company, and in the next two years I see myself doing that.

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Events calendar March 2010

Monday Tuesday Wednesday Thursday Friday Saturday1 2 3 4 5 6

Jan Exports 11.5%Jan Imports 35.5%

8 9 10 11 12 13

Jan IIP

15 16 17 18 19 20

Jan WPI

22 23 24 25 26 27

29 30 31

Black: Quarterly results, Blue: Economic data, Red: India Holiday.

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EventsJan-Mar 10

Apr-Jun 10 Jul-Sep 10Economics / Politics State Elections in Bihar and Jharkhand

RBIs Monetary Policy meeting (end Jan) 2009-10 Union Budget and Railways Budget

(end Feb)

3QFY09 Quarterly GDP on 26th Feb, 2010

RBIs Monetary Policy meeting (end Apr)

Auto Tata Motors Nano plant at Sanand to startoperations

Cement NCL Industries 1.5 mtpa AP plant to start(Feb) Zuari Cements 2.4 AP mtpaplant to start

(Feb)

Ambuja Cement 1.5 mtpa Nalagarh plantto start (Mar)

JP Associates 3.0 mtpa HP plant to start(Feb)

Jaya Jyoti 2mtpa AP plant to start (Feb)

Prism Cements 3 mtpa plant to start (Apr) ACC 3 mtpa Wadi, Kar plant to start (Jun) Shree cements 1.5mtpa plant in Rasto start (Sep)

India Cements 1.5mtpa plant inRajasthan to start (Sep)

Hotels Indian Hotels: Property opening atYeshwantpur, Bangalore (331 rooms) (Feb)

Indian Hotels: Opening of Vivanta by Taj,at Bekal, Kerala (72 rooms) (Mar)

Hotel Leela: Launch of the 290 roomproperty in Delhi (Chanakyapuri) (Jul)

Metals Sterlite: First phase of 2,400MW powerplant will commence operation

JSW Steel: Commissioning of 3.5mntpa hotstrip mill (Mar)

Sterlite: 2nd phase of 2400mw willcommence operation

Sterlite: 3rd phase of 2400mw willcommence operation

Pharma Dr Reddys: Potential USFDA approval forfondaparinux

Sun Pharma: Potential US FDA approvaland launch of generic Effexor XR in US

Biocon: data from oral insulin study in India Ranbaxy: Launch of generic Flomax in US,

under exclusivity

Ranbaxy: CY09 results on 25 Feb 10 Glaxo Pharma: CY09 results on 15 Feb 10

Sun Pharma: Resumption of sales of Caracoproducts from alternate manufacturing

facilities in US / India

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EventsJan-Mar 10

Apr-Jun 10 Jul-Sep 10Real Estate HDIL - QIP fund raising

DLF to list DAL in Singapore (Mar) Peninsula land QIP fund raising DLF to sell wind energy business Puravankara Projects Capital raising by

its subsidiary Provident Housing &

Infrastructure Ltd to fund its mass housingproject

Telecom License fee cut may happen (Feb) Indus Towers expected to receive towers

from Bharti, Vodafone and Idea and thusmerger of tower subsidiaries into Induscompleted

Tata DoCoMo likely to complete Pan-IndiaReach

Unitech, Systema expected to launch morecircles

TRAI to make spectrum, M&Arecommendations

MNP in metros and 4 other circles expected tobe implemented

Idea Spice merger expected to getcompleted

Utilities KSK - First unit of 135MW of Wardha Waroraplant (Feb-Mar)

KSK Energy to commission 135 MW of V. S.Lignite (Feb-Mar)

NTPCs Sipat-I Unit 1 (660MW), Korba-III(500MW) to commission (Jun)

KSK - Balance 3 units of 135MW of WardhaWarora plant unit II / III / IV (Apr / Jul /

Nov)

JSPL - First 135 MW unit of 540MW plant atChhattisgarh (Apr)

JSPL - Second 135 MW unit of 540MWplant at Chhattisgarh (Jul / Aug)

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t Fp 20100303

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