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NEWS:

 Kingfisher still in F&O curb KFA.

 JSPL board okays Jindal Power’s IPO plans; to raise Rs 10000 cr via IPO JSPL.
 DE Shaw sells 36% in DAL for $500 million to promoters of DLF.
 Textile ministry has asked the finance ministry for fresh Rs. 1500 cr amount for the textile sector Textile.
 Aircel 14,000 Tower sale process in final lap; deal closure expected in 4-6 weeks.
 Estimated value at $1.6 billion-$2 billion.
 GTL Infra & Bharti Infratel aggressively pursuing bids Telecom.
 The Indian's Bank Association to introduce a uniform rates for old & new home loans on floating rates Real
Estate.
 ONGC plans to float new subsidiaries to tap the growing market of drilling, construction & logistics
services consumed.

LIFE INSURANCE NEWS:

 Life insurance heading towards profitability.

 New business premium dips (YTD) on back of moderation in ULIP sales.
 Life insurance sector remained affected by emaciated risk appetite at the retail level, resulting in moderation
in demand for new ULIPs. The impact was felt more by private insurers as they started consolidating their
distribution infrastructure, to align operating efficiencies to long-term operating assumptions. New business
volumes for private insurers remained weak during H1FY10 with WNRP (individual) declining 15% Y-o-Y.
Consequently, sector WNRP contracted 3% even though LIC positively surprised with 16% Y-o-Y growth.
Amongst large private sector insurers, only SBI (+13%) and Tata AIG (+4%) reported WNRP growth,
whereas ICICI Pru (-36%), Bajaj Allianz (-38%), and Kotak OM (-42%) witnessed a significant drop in
WNRP.
 Distribution strategy to undergo a change. The massive expansion drive appears to have come to a halt for
now, with focus shifting to channel productivity and carving out new distribution relationship. Large
insurers (ICICI Pru, SBI, HDFC Std, Kotak OM) either maintained or reduced the number of agents and
branches, while Reliance intends to add another 70 branches and Birla Sun is set to add 30-40k agents by
year end. Discussions related to Swarup Committee recommendations and open architecture enfolded
H1FY10. We believe, a move towards open architecture can result in shift of bargaining power in favour of
banks even though it would put all insurers on same platform (with respect to distribution), and Swarup
Committee recommendations are clearly ahead of time and present significant risk to insurers’ business
model. Capital consumption to be lower due to expense control and high FMC.
 Large private insurers witnessed drop in capital infusion in H1FY10 as income from fund management
charges soared, coupled with controlled expenses and strong renewal premium build up, resulting in lower
accounting losses and hence capital requirements. We expect the trend to continue through the year. As per
our estimates, superior equity market performance coupled with strong premium inflows drove policyholder
AUM of private insurers by ~60% YTD and ~80% Y-o-Y. However, private insurers’ asset base remains
highly skewed in favour of linked assets (>80%) with high equity exposure (>50%). Further, we believe,
strong focus on cost rationalization is an extremely positive trend, as it enhances insurers’ ability to realise
reported embedded value and generate value from future business.
 Outlook and valuations - With continuing focus on rationalisation of sales force and infrastructural
 consolidation, private insurers are likely to record weak new business volumes in H2FY10. We revise our new
business estimates for the private insurers for FY10E from 10% growth to 2% decline (implying 10% Y-o-Y
growth in H2FY10). As per our estimates, realizable NBAP margins are likely to be in 13-16% range for
individual business. We still see excessive optimism on new business volumes, cost management and persistency
as key risks to reported margins. Reported NBAP margins may drop in Q4FY10 as new products conforming to
IRDA guidelines are launched. We expect realizable margins to remain stable over FY11-12; and expect price
wars to bring down margins once the insurers achieve accounting break-even releasing the capital pressure.

STOCK OF THE WEEK

Hero Honda Target: Rs 1,830

Rating: Hold
Risk: High

Hero Honda – Strong volumes continue despite weak monsoons HH has displayed strong, sustained momentum
over April-November ’09, clocking a 21% YoY growth in volumes. Our discussions with the management of
various two-wheeler manufacturers indicate that demand remains robust even after the festive season and is
expected to remain so in the months to come. The HH management has indicated that it has more than six new
launches (a mix of fresh models and some variants of existing ones) lined up for the next few months. This would
continue to generate volume momentum in spite of increasing competition. Importantly, the weak monsoons have
not unduly affected rural demand. Production from the company’s Uttaranchal plant, which attracts fiscal benefits,
is expected to be higher than our initial estimates as the capacity ramp-up progressed at a rapid pace. HH is set to
produce 1.35mn units (30.5% of volumes) in FY10 and 1.8mn units (36.6% of volumes) in FY11 from the
Uttaranchal plant. We thus expect EBITDA margins to be slightly higher with a lower effective tax rate than earlier
estimated. We now factor in a tax rate of ~22% against ~25% earlier.In view of the marginal impact of the weak
monsoons, we have increased our volume estimate for FY10 to 4.43mn units, a growth of 19.1% YoY. Considering
the strong and sustained demand across geographies, we raise our FY11 volume growth estimate to 8%. Higher
production from Uttaranchal will be a further boost to the bottomline, in the form of better margins and more
importantly, a lower tax rate. We raise our EPS estimates for FY10 by 6% to Rs 102.5 and for FY11 by 10% to Rs
114.4. We continue to value HH at 16x FY11E EPS, arriving at a target price of Rs 1,830. The stock is currently
trading at 16.4x FY10E and 14.7x its FY11E earnings. We believe that strong cash flows, a clean balance sheet, a
strong rural presence and healthy brand equity make HH a strong choice for investors who seek defensive plays. At
our target price, the stock would yield a return of ~9% – we maintain HOLD.