10 STOCKS FOR A PROFITABLE 2011

8/7/2019 10 STOCKS FOR A PROFITABLE 2011

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Ventura Securities Limited www.ventura1.com Pg 1

Tuesday, January 12Tuesday, January 12Tuesday, January 12Tuesday, January 12, 2010, 2010, 2010, 2010

10 STOCKS

FOR A

PROFITABLE 2011


2/12


After poor showing in previous years, aided by price cuts and increased A&D expenses HUL has witnessed

double digit growth in the first two quarters of the current fiscal. In addition buying efficiencies and costsaving programmes have helped the company contain the cost of goods sold (COGs) to 20 bps inspite of theinflationary spiral in input costs. With the strong GDP growth expected to continue over the next few yearsand the vibrant rural economy, we expect HUL to sustain the current volume growth along withrationalization of A&D expenses.

Led by its innovation and product development capabilities the company is exploring emerging opportunitiesin fast growing segments such as personal products and foods business. Brand extensions of products

launched under Dove, Knorr, Pureit and AXE brands are gaining traction while repositioning efforts of keybrands such as Rin, Lifebuoy and OK are helping regaining lost sheen.

In anticipation of growing demand from rural sector, the company has launched Shaktimaan scheme toincrease its direct presence in rural India to 750000 stores from the current 2,50,000 stores in FY10. Thisshould significantly enhance HULs rural reach and penetration.

(Rs in crore)

Year Revenues PAT EPS (Rs) PE (x) ROE (%) ROCE (%)Divd Yield

(%)

FY09 20501.1 2504.5 11.4 27.3 137.3 146.0 3.1

FY10 17764.3 2105.6 9.6 32.5 87.8 103.6 2.7

H1FY11 9474.8 1099.3 5.0 30.9* NA NA NA

* Calculated on TTM basis

Vast untapped potential in rural market and new product launches makes it an attractive play.

Hindustan Unilever Ltd.Personal products [CMP Rs 312, M Cap Rs 68147 Cr TTM P/E: 30.9x]


3/12


In order to meet the burgeoning demand from textiles and apparels (with a CAGR of 6.3% till 2020), AlokIndustries Limited (AIL) has earmarked a sum of Rs 8000 for capital expansion across all the product lines. Ofthis, AIL has already spent Rs 7000 cr during the past few years and plans to spend the balance Rs 1000 cr

over the next 2 years. AILs Polyester manufacturing capacity which has been doubled to 400000 TPA isexpected to commence production in Q4FY11. Along with this, the terry towel, apparel and DTY capacitieshare being expanded by 196%, 37% and 100% to 20,000 TPA, 25,000 TPA and 2,50,000 TPA in span of next2 years. The full impact of which is expected to be felt in FY13.

AIL intends to lower its existing debt through monetization of real estate projects and increased cash flowfrom operations. Monetization of real estate projects will yield ~ Rs 2200 crore of cash flow over the nextcouple of years. Operating margins are also set to improve on account of better product mix and enhance inprofitability of retail business. As a result of better operating margins and lower interest cost, Net Debt/Equityratio is expected to come down 1.3 by FY13 from the current 2.5x.

We expect the companys revenues to grow at CAGR of 34% to Rs 8000 crore by FY201. Strong operatingperformance, healthy return ratios, and positive cash flows along with timely execution of capex plans makesAlok a compelling buy at CMP of Rs 28.

(Rs in crore)


(%)

FY09 2976.9 96.2 9.4 3.0 13.0 8.4 6.0

FY10 4311.1 127.4 3.1 9.0 11.5 9.4 1.1

H1FY11 2550.5 126.3 1.6 8.5* NA NA NA


Alok Industries Ltd.Textiles [CMP Rs 28, M Cap Rs 2201 Cr, TTM P/E: 8.5x]Capacity expansions to drive volume growth.


4/12


The infrastructure spends on geosynthetics is at an inflexion point and should grow significantly. The geo

synthetics (Rs 86.6 crore revenues) and other fibers business (Rs 37.4 crore revenues) which contributes~27% to the total turnover is expected to grow at a CAGR of 18.5% to Rs 754.6 crore by FY2013 on the backof improved order book from applications for coastal protection, lining of reservoirs, water canals and land-fills for hazardous wastes, boulder nets for rock fall protection, reinforced soil walls for road projects andground improvement using PVDs and Geotextiles.

The synthetics cordage business (revenues Rs 329.7 crore), mainstay of its operations is expected to grow ata CAGR of 10% over the period FY2010-2013 to ~ Rs 446.8 crore. Recently, GWR has forayed into the

manufacture of nets for agriculture produce and the benefits of its usage and the element of farm subsidyshould help improve revenues from agriculture net segment.

GWR quotes at a significant discount of 14.9% to its book value of Rs 91 besides having an attractivedividend yield of 3.2. Besides this the stocks compelling valuation of 5.4x of its FY2012E earnings makes it agood growth stock to own.

(Rs in crore)

Year Revenues PAT EPS (Rs) PE (x) ROE (%) ROCE (%) Divd Yield(%)

FY09 437.3 16.2 6.8 11.3 8.4 10.5 7.5

FY10 448.7 19.4 8.2 9.4 9.2 12.0 4.2

H1FY11 246.4 12.0 5.0 8.4* NA NA NA


Garware Wall Ropes Ltd.Textiles [CMP Rs 77, M Cap Rs 183, TTM P/E: 8.4x]Infrastructure growth story with attractive valuations and dividend yield.


5/12


Rising disposable incomes, booming real estate and easier financing options should help the consumerdurables sector grow at a rate of 17-18% over the next 5 years. Mirc Electronics Ltd.(MEL), a well entrenchedplayer should be one of the big beneficiaries with its strong brand Onida, diverse product range and pan Indiadistribution reach.

The commissioning of the fourth manufacturing facility, new product launches in the high growth segments(mobiles, LCDs, ACs and CTVs etc), aggressive brand development and promotion and strengthening of itsdistribution channel should aid MEL grow its revenues at a CAGR of 20-25% over the next couple of years. Toestablish its presence in the rural economy MEL has launched a new exclusive brand IGO which is rapidly

gaining market share.

MEL is looking to set up its fifth manufacturing facility by 2013 at a capital cost of Rs 75-100 crore. It alsoplans to open 10-12 exclusive stores for its Onida & IGO branded products. The operating margins areexpected to sustain owing to healthy domestic demand, efficient working capital management andimplementation of cost reduction measures.

(Rs in crore)


(%)

FY08 1449.2 8.0 1.1 22.6 3.3 8.3 4.5

FY09 1526.7 20.0 1.4 17.9 8.2 9.9 5.8

H1FY10 890.4 11.7 0.8 30.6* NA NA NA


Capacity expansion and demand for consumer electronics roducts makes Mirc a very attractive play.

Mirc Electronics Ltd.Consumer Elec [CMP Rs 25, M Cap Rs. 348 Cr, TTM P/E: 30.6x]


6/12


BF Utilities Ltd. (BFUL), a part of USD 2.4 billion Kalyani Group, is one of the largest infrastructure developers

in India & currently accommodates three projects under its umbrella consisting of Nandi InfrastructureCorridor Enterprise (NICE)-Bangalore Mysore Infrastructure Project (BMIC), Hubli-Dharwad Road Project andWind Power Assets.

NICE is the parent body for the execution of the BMIC Project which consists of development of 5 townshipsalong the Bangalore-Mysore Expressway & a 99 km toll road, on which the work has already started. NandiEconomic Corridor Enterprise (NECE) is an SPV promoted by NICE to execute a part of the section whichconsists of a 62 km toll road (88% of work is completed) and a development of 1,732 acres of township. Forthe township development BF Utilities has acquired a total land bank of 7290 acres, of which NECE hascontrol over 6,173 acres with the balance being in the domain of NICE. The company recently concluded thesale of minority stake of Rs. 500 crore through the FDI route in NECE to augment resources required for partfinancing the project cost required for implementation of phase I of the BMIC Project.

Hubli-Dharwad 30km bypass road project is already completed and operational since 9 years and even on adiscount rate, the current toll collection augurs around Rs. 22 crore p.a. With a traffic growth of 11.5% CAGRand a toll collection growth of 14.2% CAGR for past 5 years the company is auguring well. It is also planningto escalate the toll rates, with an inflation adjustment, at 10% p.a.

(Rs in crore)


(%)

FY08 723.4 87.4 32.7 28.1 12.7 14.4 0.3

FY09 41.5 -35.6 -4.2 - -8.6 0.5 0.0

H1FY10 13.6 3.1 0.2 5278.7* NA NA NA


A proxy play on the Bangalore realty market with compelling valuations

BF Utilities Ltd.Elec Utilities [CMP Rs 921, M Cap Rs. 3468 Cr, TTM P/E: 4603.5x]


7/12


The shift in focus towards improving the liability franchise through network expansion to 1100 branches by

FY2012, strong emphasis on improving CASA ratio and reworking the deposit portfolio to reduce cost ofdeposits should help expand the net interest margins.

The growth in the Net Interest Income (on the back of expanding NIMs along with strong credit growth,improving credit deposit ratio), lower NPAs and minimal restructuring should provide a fillip to the bottom-line. The change in ownership of Ispat Industries (one of its largest NPA accounts) along with restructuringinitiatives should significantly help lower provisioning.

Return ratios to improve significantly on the back of a proactive management and all round improvement incore performance through a launch of various schemes to attract low cost deposits. Expect earnings growthto gallop at a CAGR upwards of 38% on the back of margin expansion and growth in other income andincreases in RoA from 0.4% to greater than 0.8% by FY2012. RoE by FY2012 should be upwards of 15%.

(Rs in crore)


(%)

FY08 11638.4 766.5 10.6 15.6 10.5 7.5 5.5

FY09 15531.2 1020.5 14.1 11.7 12.8 7.2 2.6

H1FY10 8866.3 680.0 6.9 23.9* NA NA NA


The big boy wakes up

IDBI Bank Ltd.Banks [CMP Rs 165, M Cap Rs. 16219 Cr, TTM P/E: 23.9x]


8/12


Selan Oil Exploration, engaged in the oil exploration and production business, is all set to announce

significant enhancement of its 2P reserves (oil discoveries in its 2 new oil filed namely Karjisan and Ognaj)from its current reported reserves of 73 mn boe over the next year.

In order to arrest the declining oil output, Selan has undertaken several initiatives to improve the productionfrom its existing fields through EOR measures and significant 3D/4D seismic studies. Further Selan is lookingto drill several additional wells in its blocks to improve the production over the next 3-5 years in a phasedmanner. IN line with these measures we expect we expect a sharp ramp up in production from FY2012

onwards. The planned production enhancement involves a significant capital outlay and the company plans to

finance this largely through internal accruals, cash reserves, debt and raising of equity.

Being located in close proximity to the Governments crude gathering stations, the cost of production is lowand hence it has a very high sensitivity to the price of crude. Also with crude prices expected to remainbullish given the strong global demand we expect strong profit growth over the medium term

(Rs in crore)


(%)

FY08 99.9 46.6 32.6 12.0 61.2 75.3 1.2

FY09 70.8 28.8 18.6 21.0 23.9 32.9 0.4

H1FY10 35.6 17.7 10.4 37.6* NA NA NA


Enhancement of reserves and production to boost profitability.

Selan Oil Exploration Ltd.Oil Exploration [CMP Rs 392, M Cap Rs. 666 Cr, TTM P/E: 37.6x]


9/12


Good monsoons, cash rich farmers and government support to the farm industry should aid in higher demand

for tractors and UVs, directly benefitting M&M. New launches in both the segments will also aid in growthfrom this segment. Furthermore, foray into M&HCV and LCV sales will also be earnings accretive over themedium term.

In the SUV segment, M&M is all set to position itself high on the luxury segment with the premium productline of Ssangyong. It can also leverage the global presence of Ssangyong to expand its reach on the globalplatform thus providing itself with an opportunity to grow beyond the domestic market. In order to expand itsdomestic presence across all segments, the company has entered the motorcycle segment with launch of two

motorcycles, the 110cc Stallio and the 300cc Mojo.

We believe the companys core business will provide reasonable growth on account of the strong productpipeline. The tractor business is likely to continue its strong growth on the back of increase in capacities andgood monsoons while the outlook for the UV business remains strong. M&M's investment in its subsidiary andassociate companies adds substantially to the company's valuations. Value unlocking in these companieswould act as trigger for M&M's stock.

(Rs in crore)


(%)

FY08 13093.7 836.8 15.4 50.5 17.6 14.5 0.7

FY09 18602.1 2087.8 36. 9 21.0 32.1 30.1 1.2

H1FY10 10435.4 1320.9 23.2 19.5* NA NA NA


Strong product pipeline and growth in farm sector makes M7M a compelling buy.

Mahindra & Mahindra Ltd.Automobiles [CMP Rs 778, M Cap Rs. 46388 Cr, TTM P/E: 19.5x]


10/12


The Petrochemical segment to shine on the back of strong performance. The margins of this segment are

likely to remian robust due to higher product prices and stable feedstock prices. RIL being a market leadercommands immense control over the entire polyester chain. On the back of demand substitution due tohumongous surge in cotton prices, polyester prices are believed to remain buoyant thus leading toimprovement in growth and profitability. The company plans aggressive capex in the petrochemical segment.

The Gross Refining Margins of RILs high complexity refinery has shown improvement on a sequential basiswith GRMs at US$7.9/bbl in Q2FY11 against US$7.3/bbl in Q1FY11 and US$6.0/bbl in Q2FY10. With gradualimprovement on refining demand supply balance the refining margins are likely to expand further from the

current levels mainly on account of increase in light heavy crude differentials.

RILs E&P assets to add incremental value to RILs existing businesses. Although the KG D6 oil and gasproduction is likely to be stable for the next 3-4 quarters, it would be beneficial for the long termsustainability and higher recovery from the block. The company has speeded up the development of itsdiscoveries in the E&P business over the next 3-5 years. RIL shale acreages would be value accretive on therising demand for Natural Gas. Drilling programmes at RIL JVs with Pioneer and Atlas are on track and RILsshare of shale gas production in the US is expected to reach 31mmboe in CY13. RILs foray into telecom and

power would further generate value for RIL in the long term. (Rs in crore)


(%)

FY08 141847.5 15309.3 48.7 21.6 15.8 13.2 1.2

FY09 192461.1 16235.7 49.6 21.2 13.3 11.8 0.7

H1FY10 115707.0 9774.0 29.8 17.6* NA NA NA


Petrochemical segment to lead the growth.

Reliance Industries Ltd.Oil and Gas [CMP Rs 1058, M Cap Rs. 346324 Cr TTM P/E: 17.6x]


11/12


Ester Industries Limited (ESL) has undertaken an Rs 216 cr expansion plan for doubling its PET Films

production capacity to 62,000 TPA which has been commissioned in November 2010. Besides the metalizingPET film facility, the capacity addition is mainly in the value added products of PET films which should helpreduce vulnerability to the cyclical downturn. In addition the management has undertaken a number of costcutting initiatives like use of rice husk as an alternative feedstock for steam generation & rationalization ofmanpower which should in improving profitability.

Besides the capacity expansion, increasing spreads for its finished products should help Ester grow its top lineat a brisk pace with profits rising even faster. This is evident from the Q2FY2011 results where the net profit

has expanded by a whopping 535% on a 33.6% growth in top line. Ester mostly caters to the domesticflexible packaging segment which in turn depends on the FMCG segment where the demand is strong. Itsengineering plastic division is also gaining traction on account of buoyant demand from the automobile &electrical segments.

(Rs in crore)


(%)

FY08 372.4 33.42 6.02 13.7 28.8 29.41 0.6

FY09 395.4 27.85 4.43 18.6 18.2 22.9 1.2

H1FY10 257.61 43.45 6.91 9.4* NA NA NA


Robust volume growth and buoyant product demand makes the stock a compelling buy.

Ester Industries Ltd.Polyester [CMP Rs 83, M Cap Rs. 524 Cr, TTM P/E: 9.4x]


12/12


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10 STOCKS FOR A PROFITABLE 2011

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