Rhh Top Buys - Cy2010

8/8/2019 Rhh Top Buys - Cy2010

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Established 1803

Religare Hichens Harrison plc.

Institutional Research – Top Buys for CY2010



Sun TVGateway Distriparks

Shree CementCairn India

Biocon

BHEL

Bharti Airtel

Bank of Baroda

Bajaj Hindusthan

Bajaj Auto

Phoenix Mills

Philips Carbon Black

Patni

Pantaloon Retail

Marico

IVRCL Infra

RHH Top Buys



Bajaj Auto

MCap: Rs 249.0bn CMP: Rs 1,720 Target: Rs 1,809 BUY

• India’s largest two-wheeler manufacturer & three-wheeler exporter

– India’s second largest manufacturer and the largest exporter of two-wheelers – manufactured 1.9mn motorcycles in FY09 with a

domestic market share of 21.9%

– Also India’s leading manufacturer and exporter of three-wheelers with volume sales of 0.27mn units in FY09. Domestic marketshare of 47% in passenger carriers and 12% in goods carriers

– Recently entered into the production of ultra low cost cars

• New launches to drive volume /market share growth

– A slew of launches over the past six months – three new variants of Pulsar in the 150+cc category, the new XCD and a new Pulsar in the 135cc, and the new Discover 100cc

– New launches have been well-received by the market as reflected in the continued, healthy volumes

– Company to regain lost market share in the two-wheeler segment through an enriched portfolio. Domestic motorcycle volumesprojected to grow by 27% in FY10 and 15% in FY11

• Three-wheeler launches to promote modest growth

– New initiatives in the three-wheeler space, which include planned new launches in the passenger and cargo segment, shoulddrive modest growth in this segment

– Opening up of licences in Mumbai, West Bengal, and Tamil Nadu should augment passenger carrier volumes. A strengtheningsales and service network and sharpened focus on retail financing to support growth of the cargo segment

– We expect three-wheelers to grow by 12% in FY10 and 8% in FY11



Bajaj Auto

• Improving global environment to perk exports

– Exports (~30% of BAL’s volumes) were severely hit in H2FY09 by the economic downturn in key markets like Latin America andSouth East Asia

– Improving macro-economic conditions globally have arrested the sluggishness in exports, especially in markets like Africa. We

project exports to grow by 7% in FY10 and 14% in FY11

• Margin expansion to continue

– Strong EBITDA margin of 22% in Q2FY10

– We expect continued margin strength on the back of: a) increase in volumes of high-margin three-wheelers, b) richer product mixskewed towards high-margin bikes, c) higher export realisations, d) tax incentives for the Pantnagar plant

• Best bet in auto space

– Currently trading at 14x FY11E EPS, BAL is a strong candidate for upgrades. We value BAL at 15x FY11E EPS

– Our top pick given a strong balance sheet, cheap valuations, and strong, expected growth in volumes and market share

17.9100.8(10.5)-Growth (%)

120.6102.350.956.9FDEPS (Rs)

17.9100.8(7.2)-Growth (%)

17,45214,7987,3717,942Adj net income

16.225.5(2.2)-Growth (%)

128,537110,60188,14890,170RevenueFY11EFY10EFY09FY08(Rs mn)

Financial highlights Profitability and Return ratios

37.139.523.6-ROCE

43.540.123.1-ROIC

50.864.642.9-ROE

13.613.48.48.8Adj PAT margin

18.318.311.311.7EBIT margin

19.619.712.813.6EBITDA marginFY11EFY10EFY09FY08(%)



Bajaj Hindusthan

MCap: Rs 38.2bn CMP: Rs 215 Target: Rs 234 Buy

• India in the second year of a sugar upcycle

– Two consecutive years of record sugar production (SY06 and SY07) resulted in abnormally large stocks and depressed sugar prices

in India. However, the cycle began to turn in SY09 and is expected to trend up for the next two years– Sugar demand-supply mismatch stemmed from drop in cane acreage due to increasing preference for other crops. The mismatch

needs to be set off through greater and timely imports; this, besides rising sugar prices, would be the key growth driver

• One of the largest sugar and alcohol manufacturer

– Owns 14 sugar mills with a consolidated cane crushing capacity of 136,000tcd. Is the largest sugar and industrial alcohol

manufacturer in India in terms of installed capacity– Operates on an integrated business model, producing alcohol and power from its by-products – a clear edge over competition

• High raw sugar imports to drive volume growth

– Has booked 0.7mt of imported raw sugar to be processed in SY10. This would account for 89% of its SY10 sugar output (estimatedat 0.7mt) and partly offset the adverse impact of lower residual inventories

– Sugar production to increase by 11% YoY in SY10. Greater imports to bolster sugar volumes by 70% YoY. This, along with higherrealisations, to facilitate a more than six-fold rise in its SY10 net profit



Bajaj Hindusthan

• Power foray and expanded MDF business - a guard during sugar down-cycle

– Has recently forayed into the power business (aggregate power generating capacity of 820MW). Diversified revenue base to act asa cushion during down-cycle post SY11

– Scaling up of MDF board facility to cushion the impact of a sugar down cycle

• Excellent leverage on rising sugar prices - Buy

– On account of its high leverage (1.2x debt-equity in SY09), the company makes an excellent play on rising sugar prices – every Re1 rise in free-sugar realisation adds ~Rs 1.2bn (24%) to its pre-tax profit

– An attractive bet on rising sugar prices. We rate the stock as a Buy with a target price of Rs 234

(43.1)645.5NANAGrowth (%)

13.323.43.1(12.8)FDEPS (Rs)

(43.1)645.5NANAGrowth (%)

25504485602(1803)Adj net income

(26.9)115.9(2.1)16.3Growth (%)

31964437452026020702Revenue

SY11ESY10ESY09SY08(Rs mn) YE Sep


7.010.55.90.5ROCE

6.39.80.8(1.7)ROIC

9.018.23.5(13.8)ROE

8.010.33.0(8.7)Adj PAT margin

13.414.83.7(6.6)EBIT margin

22.921.620.86.9EBITDA margin

SY11ESY10ESY09SY08(%) YE Sep



Bank of Baroda

MCap: Rs 183.2bn CMP: Rs 502 Target: Rs 575 BUY

• A leading PSU bank

– Bank of Baroda (BoB) is India’s third largest PSU Bank with a total business size of Rs 3.4tn and a strong network of over 3,000

domestic and 78 overseas branches

– Actively present in other financial services businesses - asset management, cards, and capital markets. Entered in to a JV with theUK-based Legal & General and Andhra Bank for life insurance business that should commence operations beginning 2010

• Geared for growth

– Has consistently reported higher-than-industry growth in advances. Growth to slow down from 32% CAGR over FY04-FY09 to 20-

21% in FY10-FY but remain higher rate than the industry

– Adequately capitalised for growth - CAR at 14.7% and Tier I capital of 8.9%

• Biggest overseas operations amongst PSUs

– One of the biggest overseas operations amongst Indian PSU banks accounting for about 24% (Q2FY10) of its business, spanningacross 25 countries

– International operations gives better RoA and ROEs lead by lower C/I ratio, higher contribution to fee income and healthy assetquality. Overseas operations contribute over 35% to total fee income with gross NPA of ~0.5%.

• Best-in-class asset quality

– Restructures assets equivalent to 3.1% of advances. Although the reported restructuring is based on facility-wise classification andtherefore not exactly comparable with peers, asset quality remains better than its PSU peers

– Gross NPA and net NPA healthy at 1.3% and 0.3% respectively. Slippage ratio stable at ~1%



Bank of Baroda

• Key risks

– Lower credit growth for the system remains a key concern. However, BOB’s strong presence in northern & western India shouldenable it outperform the industry

– Spike in benchmark yields and provisions related to pension liabilities could negatively impact profitability

• Healthy and improved return ratios

– Despite large overseas operations, NIMs have been steadily improving. Profitability growth has remained strong on highercontribution of fee income and declining C/I ratio

– RoE has sharply improved on better profitability and improved capital leverage. RoA has also risen from sub 1% levels to ~1%

• Strong prospects, attractive valuations– Overall performance to remain strong supported by the structural improvement in its profitability

– Currently trades at 1x FY11E ABV. Maintain BUY with a target of Rs 575 (1.3x FY11 ABV)

14.217.555.239.9Growth (%)

81.871.660.939.3FDEPS (Rs)

20.13.947.021.3Growth (%)

53,67944,71143,05029,285PPP

21.215.331.09.3Growth (%)

71,62359,07551,23439,118NII

FY11EFY10FY09FY08(Rs mn)


0.30.30.30.5Net NPA

0.91.01.00.8ROA

18.417.315.812.1ROE

44.746.745.450.9Cost/inc ratio

26.229.535.034.4Non-int inc/ Total inc

2.62.62.82.7Net interest margin

FY11EFY10EFY09FY08(%)



Bharti Airtel

MCap: Rs 1,221.1bn CMP: Rs 321 Target: Rs 380 BUY

• Attractively valued

– Bharti Airtel (Bharti) is trading at PER of 14x FY10 and FY11E earnings, at a marginal premium to global peers despite relatively

stronger balance sheet and return ratios

– In contrast to the broader market, Bharti trades at a 20% discount. Market multiple at 17x FY11E earnings

• Near term pain, long term gain

– Recent correction in stock prices factors in only near-term negatives led by hyper-competition and declining tariffs

– Tariff decline only medium term phenomena; reversal of tariffs likely in 6-12 months. Re-rating of stock expected in Q1FY11

– Fundamental story remains intact with penetration (at 45% in India vs. 80% for global average) and telecom services spend (at 2%of GDP in India vs. 2.5% global average) in India still lower than the global average

– Bharti, with an extensive network coverage (82% population coverage), brand positioning, and distribution strength (1.5mn+ retailoutlets) remains best-positioned to leverage on the rural growth story

• Passive Infrastructure sharing = operating leverage = competitive advantage = potential value unlocking– Bharti Infratel and Indus tower [JV company between Bharti (42%), Vodafone (42%) and Idea (16%)], provides high visibility on

assured tower tenancy of 2.4x-2.8x in contrast to 1.8x-2x for others, enabling the trio to benefit from lower network cost

– Network cost currently contributes 30-50% of the overall cost. Potential value unlocking from listing of Bharti Infratel and Industower could provide additional upside



Bharti Airtel

• Low minute cost – a clear edge

– Bharti has one of the most lean cost-efficient business models due to significantly high economies of scale and 900 MHz spectrumin 14 operating circles

– It would be difficult for competition to match Bharti’s 35 paise per minute cost against RPM of 45-50 paise

• Fully equipped to leverage 3G

– Bharti remains best-positioned to leverage from 3G auction

– 3G spectrum to offer gamut of new services with relatively less competition due to limited number of slots

• Key risks

– Competition

– Consolidation and rationalisation of tariffs could take longer-than-expected

(2.1)4.126.357.2Growth (%)

22.723.222.317.7FDEPS (Rs)

3.45.033.452.6Growth (%)

164,693159,207151,680113,716EBITDA

12.96.436.845.9Growth (%)

443,750393,116369,615270,251Revenue



17.319.125.627.2ROCE

18.220.429.730.4ROIC

20.925.732.237.4ROE

19.422.422.924.8Adj. PAT margin

23.625.328.228.3EBIT margin





BHEL

MCap: Rs 1,141.2bn CMP: Rs 2,330 Target: Rs 2,536 BUY

• JV route to boost supercritical sales

– Has signed a MoU with Madhya Pradesh SEB to build 2x800MW supercritical power plants through a JV. Has already set up two

similar JVs to build such plants with Tamil Nadu SEB (2x800MW) and Karnataka SEB (2x660/800MW and 1x660/800MW)

– Has also signed a MoU with Maharashtra SEB for setting up a 2x660MW supercritical plant

– Supercritical orders through JV route to eliminate waiting time for bulk tendering that would build a decisive mass of such ordersto indigenise this technology

• Private orders gain traction

– Out of its total order inflow of Rs 204.5bn till Q2FY10, ~80% has come from private players

– Has recently signed an agreement of Rs 56bn with the JP group for supply of a supercritical BTG package for the 3x660MW Barathermal power plant

• Competition on the run

– Strategy of lowering prices by ~10% has helped enhance order inflow

– Though delivery timelines for Chinese vendors are shorter at ~24 months, infrastructure bottlenecks and visa issues increase theiroverall implementation cycle. Concerns on availability of spares and services also continue to perturb Chinese vendors

– Government contemplating to introduce a clause for domestic sourcing of equipment for all future UMPPs – this could also hurtthe competition



BHEL

• Trades at an average premium of 45-50% to Sensex

– Currently, the stock trades at 21.2x its FY11E earnings and at ~35% premium to the Sensex. The stock has been trading at aaverage premium of 45-50% to the Sensex over the last three to four years

– Increasing private sector orders and fading concerns on competition to result in outperformance of stock. We have a Buy rating on

the stock with a price target of Rs 2536

24.739.014.113.1Growth (%)

110.388.463.655.8FDEPS (Rs)

24.739.014.113.1Growth (%)

53,97143,27531,13827,299Adj net income

20.423.035.512.0Growth (%)

395,809328,725267,268197,269Revenue



28.828.625.627.9ROCE

22.717.415.617.4ROIC

28.728.625.627.9ROE


17.816.614.517.5EBIT margin





Biocon


• Healthy revenue growth of 19%

– Revenues pegged to grow at 19% CAGR over FY09-11E driven by 14% sales CAGR in biopharma business, strong growth in non-

statins (key product launches like Mycophenolate in US) and domestic formulations revenues

– Research services business estimated to grow at a strong 26% CAGR over FY09-11E on incremental revenues from the new BMScontract. The Axicorp business continues to gain traction with incremental revenues from AOK product – Metformin. Segment togrow at a 22% CAGR.

• EBITDA margins to expand with improving revenue mix:

– Base business profitability to improve over FY09-11E on the back of increasing contribution from high-margin research servicesbusiness.

– The Axicorp business to gain from AoK contract supply that has higher margins than the base business in Germany. Key productopportunities like the Mycophenolate in the US market to also support margin accretion.

• Earnings to grow at over 21% & RoCE by 200bps over FY09-FY11E:

– We estimate a 21% earnings CAGR over FY09-11E driven by revenue growth and improvement in operating profitability

– Overall improvement in profitability and strong earning growth, without significant increase in capital employed to enhance returnratios. RoCE now estimated to expand by ~200bps over the next two years driven by an improving business mix.

• Strong balance sheet:

– Strong balance sheet marked by no FCCBs, a low debt level, and a D/E ratio of less 0.3x - a key differentiating factor from other

mid-cap pharma stocks



Biocon

21.221.48.817.0Growth (%)

18.515.312.611.6FDEPS (Rs)

21.221.48.817.0Growth (%)

3,7013,0542,5152,311EBITDA

2.039.152.7 6.9Growth (%)

22,82022,37016,08710,538Revenue

FY11EFY10EFY09FY08(Rs mn)


16.215.114.216.1ROCE

13.413.513.914.9ROIC

19.218.616.818.1ROE

16.213.715.621.9Adj. PAT margin

14.913.513.919.2EBIT margin



• Medium and longer term catalysts in place

– To list its research services through 100% subsidiary Syngene. This would facilitate fund raising besides unlocking the value of thehigh growth, high-margin research services business

– Long-term growth to be driven by out-licensing of R&D molecules and launch of biogenerics from FY11E onwards

• Valuations factor in most concerns, ignore potential positive surprises

– Trades at a PER of 18.1xFY10E and 15.0x FY11E earnings. The discount-to-market valuation multiples factors in most of concernsrelated to its partial commoditised nature of business, delay in BMS contract research operation, and integration of Axicorp

– Discounted valuations to make the risk-reward favourable. Valuation multiple to improve, going ahead, driven by over 20%sustainable earnings growth over the next 2-3 years

• Key risks

– Pricing pressure in the high-margin research services business



Cairn India


• Likely firming up of crude prices – a key trigger

– We expect crude oil prices to firm up to ~US$ 85/bbl average in FY11 from ~US$ 70/bbl in FY10

– This would make Cairn India the best bet in the sector due to its high correlation with crude oil prices. In contrast, its PSUupstream peers would continue to reel under proportionately higher subsidy burden as crude prices ascend

• Steady ramp up expected at Rajasthan fields

– First horizontal well drilled in Mangala during Q2FY10 tests successfully at a healthy ~11,500bpd production rate

– Management should meet guidance of ramping up oil production from Mangala field from ~10,000bpd currently to 125,000bpdby H1CY10

– Commissions train one (30,000bpd capacity) on schedule. Targets to commission train two (50,000bpd) and train three(50,000bpd) by early 2010 and in H1FY10 respectively. Has completed ~560km of the 670km Mangala Production Terminal.

– Total production from the Rajasthan basin to ramp up to 175,000bpd by H1CY11, with a potential to reach 205,000bpd

• Offtake and pricing concerns resolved as of now– Secures government nod to sell crude to private refiners and export the same. Current provisions allow PSU refiners to draw up to

0.7mmt in FY10. May scale down ramp-up plans on delays in securing buyers.

– Prices for Rajasthan crude have been fixed and would be linked to Bonny Light - giving an appropriate discount based on GrossProduct Worth (GPW) method. Guides for a 10-15% discount to Brent on past six months average price



Cairn India

• Cash inflows to easily fund upcoming E&P projects

– At plateau production rate, the company should generate an operating cash flow of ~US$ 2.bn p.a. from the Rajasthan basin

– This should provide adequate liquidity for funding other exploration projects while broadening the company’s reserve base

• Operating margin to near double– We expect EBITDA margin to expand from ~47% in FY09 to ~80% in FY12, when the company achieves its peak production rate

• Expected increase in crude price to perk up stock

– Currently, the stock trades at a P/E multiple of 8.3x on FY11E earnings and EV/BOE of US$ 10.6

– Stock valued on SOTP basis (DCF for the Rajasthan, Ravva, and Cambay fields, and EV/BOE for other reserves), giving us a target

price of Rs 312. Any increase in crude prices would firm up the stock. Buy.

401.650.0--Growth (%)

32.26.44.3(0.1)FDEPS (Rs)

401.651.7 --Growth (%)

61,12212,1868,035(245)Adj net income

260.992.041.5-Growth (%)

99,26127,50114,32710,123Revenue

FY11EFY10EFY09CY07(Rs mn)


16.23.42.4(0.1)ROCE

16.23.21.10.0ROIC

17.63.82.6(0.1)ROE

61.644.356.1(2.4)Adj PAT margin

72.346.927.9(0.4)EBIT margin


FY11EFY10EFY09CY07(%)



Gateway Distriparks


• Second largest player in the Indian rail haulage space

– Gateway Distriparks (GDL) is the second largest player in the Indian rail haulage space (after Concor) with four Container Freight

Stations (CFS), three Inland Container depots (ICD), and ~18 rakes

– With overall container traffic growing at twice the pace of cargo traffic, a revival in macroeconomic scenario will lead to a ~14%CAGR in container traffic during FY09-FY15E

• Fund infusion to aid ramping-up of rail business

– Recent fund infusion will enable GDL to expand aggressively through terminal development at Faridabad, Ludhiana, and further

rake additions

– This will generate greater efficiencies and improve margins from the rail business

• CFS business – milking the cash cow

– GDL’s Mumbai CFS has a capacity of 0.36mn teu (~23% of aggregate capacity at JNPT). Besides, it also has a presence inChennai, Vizag, and Kochi with an aggregate capacity of 0.52mn teu.

– A cash cow, the CFS business has contributed ~87% to the EBITDA in FY09. GDL is well-positioned to capitalise on the overallimprovement in global container movement



Gateway Distriparks

• Rail business – from a laggard to the future growth driver

– GDL entered the rail business in 2007. Due to its smaller scale, this business had more than offset the profits of the CFS business

– However, as operations scale up and operating margins improve, the rail business should break-even in FY10 (positive net profit inFY11) and start contributing significantly to GDL’s bottomline

– We expect the business to contribute ~32% of EBITDA in FY11, a sharp increase from ~9% in FY09.

• Offers ~22% upside potential

– We rate the stock as a Buy with a target price of Rs 154 – offering ~22% upside from the current levels

38.7 0.915.9(5.7)Growth (%)

10.37.57.46.4FDEPS (Rs)

38.7 0.98.2(5.6)Growth (%)

1113803796736Adj net income

35.7 21.466.268.6Growth (%)

7434547745102714Revenue

FY11EFY10EFY09FY08(Rs mn) (YE Mar)


11.310.112.911.6ROCE

11.89.311.210.9ROIC

15.612.412.511.6ROE


20.517.322.527.0EBIT margin


FY11EFY10EFY09FY08(%) YE Mar



IVRCL Infrastructure


• Robust order book

– Order book, as on 30 September ’09, stood at Rs 149bn (excluding L1 orders of Rs 41bn) led by water and environment projects

(71% orders). Expects to close the order book at Rs 180bn by end-FY10, implying fresh inflows of Rs 90bn–100bn in FY10

– Plans to diversify geographically by entering into the Middle East, mainly in the water and power divisions

• To merge BOT portfolio with IVR Prime

– The proposed merger of two wholly owned subsidiaries – IVR Strategic Recourse & Services (SRSL) and IVRCL Water Infrastructure(WIL) – with IVR Prime will give IVRCL an 80.46% stake in its property development arm, up from 62.35% at present. Holding of

IVRCL promoters in IVR Prime would halve from 14.66% to 7.61%

• Merger to generate key positives

– Post-merger, IVRCL will be able to leverage the net worth of IVR Prime, which stands at Rs 10bn as of March ’09, to bid for largerBOT projects

– With the merger, IVR Prime will become the holding company for all BOT and L1 projects, enabling IVRCL to comfortably access

capital markets



IVRCL Infrastructure

• Target price of Rs 451 – Buy:

– Currently trades at 15.2x FY11E earnings; adjusting for subsidiary value, it trades at 11.7x FY11E earnings.

– Core construction business valued at 16x FY11E earnings; investment in IVR Prime and Hindustan dorr valued at 30% discount toits market capitalisation

– SOTP target price stands at Rs 451; we have a BUY rating on the stock

21.731.80.613.3Growth (%)

22.318.413.913.8FDEPS (Rs)

21.731.80.828.4Growth (%)

3,0142,4781,8801,865Adj net income

20.030.033.458.8Growth (%)

76,15763,46548,81936,606Revenue



12.512.012.012.1ROCE

11.010.510.911.6ROIC

14.913.411.012.7ROE


8.48.37.79.0EBIT margin





Marico


• Well-entrenched in the domestic coconut oil market

– Marico is the market leader in the organised coconut oil market with a consistently improving share (55% currently) led by its

flagship brand Parachute

– Incremental growth in the segment to come from upgrading loose oil consumers (40% of the total coconut oil market)

• Hair oil growth to be in line with industry growth

– Marico is ranked second in the value-added hair oil category with a 21% share and brands like Parachute and Nihar

– Volume growth in this category to match industry growth of ~14-15%

• Edible oil growth to be led by Saffola

– To cash on the ‘good for heart’ branding of Saffola as more Indians become health conscious

– Most of the new product lunches will be in this category. Segment volume growth to stand at 14-15%, going ahead



Marico

• Kaya slowdown unlikely

– Currently, 99 Kaya stores are operational with two stores added till Q2FY10

– Company well on track to meet its target of adding 15 stores a year. The profitability of the business is set to improve as old storesstart adding to the bottomline

• Raw material price deflation to bolster margins

– Prices of key raw materials, Copra and Safflower oil (Kardy), have corrected to the extent of 25% YoY. Further correction may leadto higher margins, going ahead

• Buy with target of Rs 113

– Currently trades at a P/E of 24.3x and 21.0x and an EV/EBITDA multiple of 16.5x and 14.6x its FY10E and FY11E earnings– We have valued the company at 23x its FY11E earnings with a Buy rating and a price target of Rs 113

15.626.820.449.8Growth (%)

4.94.23.32.8FDEPS (Rs)

15.626.820.449.8Growth (%)

2,9852,5832,0371,692Adj net income

14.514.625.322.5Growth (%)

31,32727,36523,88419,069Revenue



30.531.631.435.5ROCE

32.933.632.035.6ROIC

40.247.453.066.8ROE


12.712.911.211.9EBIT margin





Pantaloon Retail


• Top retail play

– Largest player in the Indian retail space with aggregate retail space of ~12mn sq ft

– Presence in both value (Big Bazaar, Food Bazaar stores) and lifestyle retailing (Pantaloon, Central stores) through multiple storeformats

– Set to emerge as the primary beneficiary of a revival in consumer spending

• Retail space to double by FY15; same-store-sales head north

– Plans to more-than-double its retail space to ~20-25mn sq ft over the next 3-4 years– With improving consumer sentiment, same-store sales growth is on an upward trajectory from its low levels in Jan-April ’09

– Higher same-store-sales growth coupled with retail expansion will drive overall growth

• Cost-cutting measures, sharpened focus on private labels to support margins

– Cost-cutting measures to partly negate the adverse impact of higher contribution from low-margin value retailing

– Thrust on private labels, both in the apparels and food and merchandise category, coupled with lower overheads and easing leaserentals, would support margins and profitability



Pantaloon Retail

• Return ratios to strengthen; negative free cash flows to continue

– With an overall improvement in its profitability, return ratios would emerge stronger

– Steady funding requirement will restrict EVA spread

• Proposed fund raising – the near-term trigger– Scouting for various options to raise funds to fuel its expansion plans

– Any clarity on such fund raising plans could be a near-term trigger for the stock

• SOTP value of Rs 393

– We value the core business at 10x FY11E EV/EBITDA, financial services and logistics business at Rs 35 and Rs 8 respectively, and

its stake in Home Solutions at Rs 393.

5940.9(9.0)249.7 Growth (%)

16.110.17.27.9FDEPS (Rs)

5952.311.6296.1Growth (%)

3,4032,1411,4061,260Adj net income

28.7 27.325.656.0Growth (%)

103,92580,73163,41750,489Revenue



9.27.97.68.8ROCE

9.28.07.77.9ROIC

10.68.16.88.6ROE


8.08.08.37.5EBIT margin





Patni Computer Systems


• De-risking on the cards

– Intends to achieve >40% of revenues from non-US geographies by 2012

– The management aims to take APAC to 15% (from ~6% currently) and Europe to 25–30% of revenues (from 15% currently)

– Diversification planned by increasing revenue share of PI, IMS, and BPO, and reducing the share of ADM (65% of revenues)

• Restructured management proves itself

– Restructured management renews focus on large deals (>US$ 50mn). Company in advanced stages of winning two such deals

– Deal pipeline has doubled in the past six months from US$ 600mn to US$ 1.2bn

– The management has undertaken a massive cost control initiative in the last 9 months to improve EBIT margin from 11% inQ1CY08 to 17.2% in Q3CY09

– Despite proposed investments in S&M , we expect the EBIT margin to sustain at 16-17% by exercising the margin levers

• Ideal candidate for re-rating

– To deliver above industry average growth rates beyond CY09 through better geographic mix, large deal wins, and acquisitions

– Currently trades at 11.9x its CY10E earnings as compared to ~19.7x for tier I and 14.3x for tier II companies. This valuation gapshould narrow down considering the growth prospects and sustainable margins

– Eyeing acquisitions in PI, IMS or BPO services in Europe & APAC. Four firms (revenues US$ 150mn-US$ 400mn) have beenshortlisted as potential targets. One deal to be closed by Feb’10. Return ratios to be a positive point for all acquisitions

– The overhang on the sale by promoters and GA has mellowed down. This should support the appreciation in stock price



Patni Computer Systems

• Insurance vertical to drive growth

– Insurance vertical (~31% of revenues) to outperform company growth as key clients supplement existing deals. Continued volumeramp-up expected at second largest client - State Farm Insurance

– Manufacturing (~28%) is also stabilising after declining for three successive quarters, while BFS (~14%) remains under pressure

• Attractively valued at 13.5x CY10E EPS

– We maintain a Buy on the stock with a target price of Rs 525

– At our target price, the stock would trade at 13.5x CY10E EPS of Rs 38.9 - a 35% discount to Infosys & a 5% discount to other tier-II players

10.729.8(18.5)74.7Growth (%)

38.935.127.133.2FDEPS (Rs)

10.722.6(20.7)75.5Growth (%)

4,9904,5073,6764,637Adj net income

8.2(1.3)18.73.2Growth (%)

34,18031,57631,99126,950Revenue

CY10ECY09ECY08CY07(Rs mn)


14.515.214.019.3ROCE

23.822.319.320.4ROIC

14.615.314.119.5ROE


16.916.512.914.5EBIT margin


CY10ECY09ECY08CY07(%)



Phillips Carbon Black


• Well-timed expansion to bolster volumes

– Commenced a 90,000mt carbon black capacity facility at Mundra in October ’09. To expand its Kochi facility by 50,000mt,

taking total capacity from 3,60,000mt to 410,000mt

– Carbon black sales volumes to grow by 35% in FY10 and 15% in FY11 on expanded capacities

• Power business to de-risk operations

– Of the total power capacity of 44.5MW, 10.5MW is used internally and surplus sold to SEBs

– Enhanced power capacities (existing 30MW at Durgapur, upcoming 16MW plant at Mundra and 10MW plant at Kochi) to bolsterpower revenues from Rs 155mn in FY09 to Rs 1.3bn in FY11

• Operating margin in the black again

– Operating margin turns around from -5.6 % in FY09 to 10.9% in Q1FY10

– We expect a further improvement to 15.2% in FY11on higher contribution from the power segment and lower raw material prices



Phillips Carbon Black

• Healthy earnings trajectory

– Revenue growth pegged at 22.3% CAGR over FY09-FY11as against a 16.9% CAGR over FY06-FY09

– Net profit estimated to stand at Rs 1.5bn in FY11 vis-à-vis a net loss of Rs 648mn in FY09

• Attractively valued at 2x FY11E power BV

– At a SOTP-based target price of Rs 262, the core carbon black business (commodity) is valued at Rs 106 (4x FY11E PAT of thedivision) and power business at Rs 156 (DCFE of individual power plants)

– At this value, the implied P/BV for the power business works out to 2x FY11E power book value which, in our opinion, isattractive. Buy

48.3246.8(170.6)198.0Growth (%)

52.535.4(24.1)34.2FDEPS (Rs)

48.3254.3(172.6)279.5Growth (%)

1,4841,000(648)893Adj net income

19.325.412.63.5Growth (%)

17,40714,58811,63310,332Revenue



20.417.6(6.0)21.8ROCE

23.119.5(10.2)23.5ROIC

39.338.0(28.4)44.7ROE

8.56.9(5.6)8.6Adj PAT margin

13.111.4(7.2)12.2EBIT margin15.213.3(5.6)14.2EBITDA margin




Phoenix mills


• Moving towards an earnings model

– The Phoenix Mills (PML) is developing over 43.5mn sq ft (msf) of retail space and follows a highly capital-intensive business modelof assets ownership and lease

– It is likely to adhere to this asset-heavy model for the next two years or until its SPV projects (under EWDPL and PHCPL amongothers) becomes debt free. Post this, dividend would be floated to PML’s books, transforming its model into an earnings one

• High Street Phoenix – a money spinner

– High street Phoenix (HSP) in Lower Parel, Mumbai, boasts of record footfalls and close to 100% occupancy. Its luxury mallPalladium (started operations in Sept’09) is likely to fetch rentals of Rs 1.7bn in FY11E as against Rs 1.3bn in FY10E

– PML, post Palladium, would have 0.95mn sq ft (msf) under operation. Phase IV to increase this area to 1.3-1.6msf

• Strong emphasis on execution

– Has a project portfolio aggregating 43.5msf, of which Market City projects comprises 12.3msf

– Market city projects of Kurla and Pune to commence in June ’10. Kurla project (~25% stake) to fetch a rental income of Rs 3bn

post completion

– EWDPL comprises 24.5msf (17 projects in tier II cities) of which 15.1msf is under construction. Currently has two malls underoperation – to increase to four by FY10 end (1.9msf)

– Holds a 40% stake in EWDPL that is looking for a public issue in FY10-FY11



Phoenix mills

• NAV of Rs 223

– Valued on SOTP basis with a target price of Rs 223 – this includes Rs 203 as the aggregate value of PML’s projects, Rs 20 forinvestment in subsidiaries and other quoted investment, and Rs 14 for application money for acquired stake in a hospitality chain

– Excluding net debt outstanding as on FY09, we arrive at a one-year forward NAV of Rs 223

56.827.579.36.5Growth (%)

10.66.85.33.0FDEPS (Rs)

56.827.579.36.5Growth (%)

1,533978767428Adj net income

136.551.221.3(17.0)Growth (%)

3,5641,507996821Revenue



6.24.74.44.5ROCE

6.63.32.53.4ROIC

9.66.45.56.2ROE


59.059.151.051.7EBIT margin65.766.560.461.0EBITDA margin




Shree Cement

MCap: Rs 64.9bn CMP: Rs 1,864 Target: Rs 2,165 BUY

• Established presence in North India – a high growth region

– Total cement capacity of 11mn tonnes in the high-growth northern region

– One of the most cost efficient players in the industry; continues to outperform its peers every quarter

• Margins to remain superior than most peers

– Registers a strong performance in Q2FY10 with 23% higher dispatches YoY. This, and a 15% rise in realisations, bolster topline by43% YoY

– For FY10, we expect a 38% growth in topline and an EBITDA margin of ~42% (EBITDA/tonne of Rs1,508), among the strongest inthe industry

• De-risks profile through merchant power sales

– To generate revenues of ~Rs 1.6bn and Rs 4.7bn from surplus power sales in FY10 and FY11 respectively

– These incremental, high-margin revenues to shore up bottomline. In FY09, average profit from external power sales stood at

Rs4/unit (~65% PBIT margin) while blended realisations were ~Rs~6 per unit

• Capex of Rs 25bn lined up in next three years

– Capital outlay of Rs 6.5bn earmarked for 145MW power plants; power capacity to aggregate ~250MW post expansion in FY11

– Considering a requirement of 100MW for cement and the balance for merchant sale, we assign a value of 2x to the BV of Rs 9.9bn(Rs 6.5bn equity + Rs 3.4bn profits for FY10 and FY11), assuming funding from internal accruals

– This gives us a valuation of Rs 19.7bn for the power business and a value per share of Rs 566

– Further 300MW expansion planned in two phases by March ’11 and September ’11 (not factored in our estimates). Post expansion,surplus power is expected at ~450MW



Shree Cement

• Top pick of the cement sector

– One of the highest EBITDA/Tonne generators

– Trades at a P/E of 7.7x and EV/EBITDA of 4.9x on FY11E

– Excluding the power business, it is still at an attractive valuation of US$ 79/tonne. Valued lower than ACC and Ambuja Cement -

both trade above the replacement cost of US$ 110/tonne

– At our target P/E multiple of 9x on FY11E earnings, we have a fair value of Rs 2,165 for the company. At our target, the stockwould trade at an EV/EBITDA of 5.1x on FY11E

(8.9)51.2103.492.1Growth (%)

240.5264.1174.785.9FDEPS (Rs)

(8.9)51.2103.492.1Growth (%)

8,3799,2026,0872,993Adj net income

7.637.929.051.0Growth (%)39,52636,73326,64220,659Revenue



24.833.228.319.3ROCE

26.231.727.218.9ROIC

33.755.864.750.9ROE






Sun TV


• Robust business model

– A dominant player in South India, with 20 channels in Tamil Nadu, Karnataka, Andhra Pradesh and Kerala

– Sells a percentage of its ad slots to content providers, who sell the same to advertisers. IPR ownership for the content remains withthe producer, ensuring that the risk of recouping content cost lies with the production house and not with the broadcaster

• Hikes ad rates across channels from 1 January ’10

– Ad rates for Tamil channels (~50% of total ad revenues) hiked from 9%to 33% – an effective rate hike of 15%

– Ad rates for Telugu, Kannada, and Malayalam channels (balance 50% of ad revenues) also hiked by 5% to 16% – an average ad

rate hike of 10%

• Radio and movie segments to provide further fillip

– We expect the company to release one big budget and 10 small budget movies in FY11. Consequently, this business will emergea key revenue driver, going ahead

– Radio business to also start contributing to the topline in FY10 as all 44 stations become operational



Sun TV

• Superior operating margins

– Under the broadcast fee model, only 1/3rd revenues are recognized for a time slot from advertisers. Broadcast fees is booked onthe balance. This leads to understatement of revenues vis-à-vis peers as broadcast fees are recognised net of content costs

– Since costs are kept on the producer’s books, it translates to an EBITDA margin of ~70%. Even on aligning its business model withthat of other broadcasters, margins remain high at ~45% vis-à-vis 24-25% for peers

– Operating margins to remain stable over the long term

• Valued at 23x with a target price of Rs 360

– Currently trades at a P/E of 26.2x and 20.8x on FY10E and FY11E earnings respectively. Revenue and earnings CAGR expected at27.5% and 29.4% over FY09-FY11. The stock deserves a premium on account of its dominant position in south India

– Valued at 23x FY11E earnings, giving a price target of Rs 360. One of the fastest growing media companies – Buy

26.332.618.1(77.9)Growth (%)

15.612.49.37.9FDEPS (Rs)

26.332.618.126.3Growth (%)

6,1674,8833,6823,119Adj net income

26.228.819.528.3Growth (%)16,90213,38810,3948,699Revenue



26.325.422.623.0ROCE

46.738.527.932.6ROIC

26.125.123.023.6ROE




Rhh Top Buys - Cy2010

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