Unplug Scepticism; Embrace Equities

17

Transcript of Unplug Scepticism; Embrace Equities

Page 1: Unplug Scepticism; Embrace Equities
Page 2: Unplug Scepticism; Embrace Equities

• Benchmark equity indices are trading at all-time high levels with the

Deal Team – At Your ServiceUnplug Scepticism; Embrace Equities

The imminent Budget would provide the first glimpse into the policy• Benchmark equity indices are trading at all-time high levels with theSensex and Nifty at 25627 and 7676, respectively, having appreciated~21% in 2014 on a stronger-than-expected mandate in the generalelections. On the back of buoyant sentiments, the markets would getfurther re-rated and continue to move ahead of EPS growth (16.0% CAGRover FY14-16E). Investors are expecting speedy and effectiveimplementation of reforms, which would provide much needed relief fromthe menace of an economic slowdown and high inflation

The imminent Budget would provide the first glimpse into the policyformation of the new government. Markets would continue to have highexpectations but once the initial euphoria settles down, critical evaluationof government's performance may lead to volatility in markets. In addition,the risk of below normal monsoon may not only dash the hope of ratecuts but also delay an economic revival and recovery in cyclicals.

• Sensex earnings grew 17.1% in FY14, partly aided by suppressed growthof 6 9% in the last two years cumulatively As the high base effect catchesthe menace of an economic slowdown and high inflation

• In the last few years, anxiety stemming from weak economic health andunstable policy environment has resulted in defensive sectorscommanding high scarcity premium while debt ridden cyclicals witnesseda de-rating

• However, the current rally has totally reversed this trend, with thefrontrunners of last year (IT, pharma and FMCG) underperforming so far in2014 O h h h d ld i l di i l d

of 6.9% in the last two years cumulatively. As the high base effect catchesup, earnings would grow 16.7% and 15.2% in FY15E and FY16E,respectively. We expect the Sensex to get further re-rated and trade at16.5x FY16E EPS of 1835 at 30300 by December 2015 with the Niftyreaching 9050

FY14 FY15E FY16EMid Year Strategy 2014 - Sensex & Nifty Target

2014. On the other hand, old economy sectors, including capital goods,realty, metals, power and oil & gas have been topping the charts this year,signifying changing investor preference

• FII investments into Indian equities continue to surge with inflows of $9.2billion so far in 2014. Cumulative FII investments in the last 10 years inIndian equities stand at $129.9 billion, about 1.8 times the second highestFII investment in any other emerging market, highlighting the increasing • With improving sentiments, most sectors that were being avoided have

5 6Sensex EPS 1365 1593 1835Growth (%) 17.1% 16.7% 15.2%Target Multiple 16.5xSensex Target - December 2015 30300Corresponding Nifty Target 9050

FII confidence in India

• Rotation of capital has been witnessed not only within equities but alsoacross asset classes. Physical savings, including gold and real estate,which were hot favourites in the last few years, have been losing sheen asthe outlook for equities is improving. While equities have appreciated~21% in 2014, gold, in terms of INR, is down ~8%

• Even though we have witnessed a breathtaking performance in equities

p g gstarted to attract investors in search of higher alpha. We are underweighton defensive sectors like FMCG, pharma and IT, which would give way tohigh beta, capital intensive sectors.

• We continue to be bullish on quasi defensive sectors like automobiles,cement and banks with healthy balance sheets. Moreover, we upgradecapital goods, power, infrastructure, metals and oil & gas to overweighton a clearer policy outlook.Even though we have witnessed a breathtaking performance in equities,

the economic performance continues to be below par. There have beenno signs of a revival in the recently released Q4FY14 GDP growth of 4.6%,with FY14 growth at 4.7% closer to decade low. On the brighter side, thenew government has already given several indications of streamliningprocesses and facilitating faster policy actions. We believe the marketswould continue to trade with a positive bias while an economic recoverywill follow with a lag

on a clearer policy outlook.

• Our top picks include Bank of Baroda, Bharti Airtel, CESC, ContainerCorporation of India, Gail, Greaves Cotton, JK Cement, Larson & Toubro,Mahindra CIE Automotive, Mahindra Lifespace, DCB Bank, NMDC, OilIndia and Taj GVK

2

will follow with a lag

• Though things have already started to look up for market participants,there is a risk of expectations not being met by the new government.

June 11, 2014

Page 3: Unplug Scepticism; Embrace Equities

Deal Team – At Your ServiceSensex weightage rebalancing: Sectoral earnings leaders and laggards

Sensex EPS Breakup

27532269

7181

182 153200

241285

157124 38

102116

126

174157

127 164165

205

236

724923

1,090 1,165 1,1651,365

1,593

1,835

8001,0001,2001,4001,6001,8002,000

(|)

EPS CAGR (FY09-14): 13.5%

EPS CAGR (FY14-16E): 16.0%

155 191 227 278 338 393 469 54896 107 123 139 168 199216 237

152 217 189 235225 236

275

5680 76

79 7969

88 161182 153

8866

157166

174

11

0200400600800

FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E

Banking and NBFC IT Oil and Gas Capital Goods Auto Metals and Mining Others* Totalg p g

Bankex Realty FMCG C Durable BSE Auto Healthcare Midcap C Goods Small Cap Nifty Sensex Metal Oil & Gas Power IT2012

Sectoral Indices Yearly Return

56.7% 53.4% 46.6% 46.1% 40.3% 38.5% 38.5% 34.7% 33.0% 27.7% 25.7% 19.1% 13.1% 10.9% -1.2%

IT Healthcare FMCG Sensex BSE Auto Nifty Oil & Gas C Goods Midcap Bankex Metal Small Cap Power C Durable Realty

59.8% 22.6% 11.0% 9.0% 7.3% 6.8% 3.7% -5.6% -5.7% -9.4% -10.0% -11.2% -14.6% -24.6% -32.1%

C Goods Small Cap Realty C Durable Metal Power Midcap Bankex Oil & Gas BSE Auto Nifty Sensex Healthcare FMCG IT

59 5% 52 9% 52 7% 48 8% 39 1% 38 8% 37 4% 36 0% 33 8% 25 9% 21 5% 20 8% 6 3% 5 7% 4 5%

2014

2012

2013

59.5% 52.9% 52.7% 48.8% 39.1% 38.8% 37.4% 36.0% 33.8% 25.9% 21.5% 20.8% 6.3% 5.7% -4.5%

Source: Bloomberg ICICIdirect com Research

Defensives Quasi Defensives Cyclicals Benchmark Indices

3

Source: Bloomberg, ICICIdirect.com Research(Top) Others represents FMCG, Power, Pharma, Telecom Real Estate, (Below) 2014 performance is YTD

Page 4: Unplug Scepticism; Embrace Equities

Deal Team – At Your ServiceSectoral Outlook

Apparels BankingApparels

• After growing revenues and PAT at 20%+ in FY14, we expect healthygrowth to continue for our apparel pack (excluding Vardhman Textiles).We expect our apparel universe to grow revenues and PAT at a CAGR of19.1% and 22.1% during FY14-16E, respectively. Vardhman Textiles islikely to witness a slowdown owing to a bumper FY14

• The apparel players are better placed than the pure play textile companies

Banking

• We have a positive view on the sector. With the reform orientedgovernment fueling hopes of an improvement in the overall economy, thewoes of the banking sector, especially on the NPA front, are expected toease after Q2FY15. For our coverage universe, we expect the GNPA ratioto reduce to 3.4% (| 157811 crore) by FY16E from 3.7% as on FY14

• Going ahead, an improvement in investment cycle will lead to a rise in• The apparel players are better placed than the pure play textile companiesas they (a) are less capital intensive; (b) earn better margins and (c) enjoysuperior return ratios. Hence, we are positive on apparel players

• With a revival in the global economies, we expect export demand to pickup. However, a stronger rupee could limit the absolute growth

• Led by an overall improvement in the macro situation, companies couldwitness a multiple expansion over a medium-long term perspective. While

Going ahead, an improvement in investment cycle will lead to a rise incapex. This, in turn, would lead to a pick-up in credit growth from current13-15%. We have factored in 16% CAGR in credit for our coverage whilePAT is estimated to rise at 17.4% CAGR over FY14-16E to | 62902 crore

• If credit traction were to improve to 20% CAGR, PAT growth wouldimprove to 21% CAGR to | 66303 crore while the GNPA ratio wouldimprove to 3.2% by FY16E

W f B B f h b i i ld l ipure play textile players could command higher single digit multiples,apparel players could also witness a 10% multiple expansion

• We prefer BoB as occurrence of the above positive events would result ina higher re-rating of banking stocks, especially in case of PSU banks

Auto

• We expect the improvement in overall sentiment to positively impact theauto industry coming off two years of subdued demand. We expect

Capital Goods

• We believe commencement of ordering for Thirteenth Plan (FY16-17Eonwards) and reactivating of participation of private players in power

structural factors like pent-up consumer demand, favourabledemographics, low penetration levels (2W: ~85 per 1000, PV:~15 per1000) to be pillars of growth in coming years. We also expect thecommercial vehicle segment to more than double in volume by FY17E onthe back of a strong policy push from the new government

• Thus, an improvement in demand will aid capacity utilisation levels, whichare currently at ~ 65%. A jump to ~80% utilisation levels is likely to have

sector will be strong catalysts for order inflows. Renewed focus of thegovernment on renewables, defence and railways space will act as strongcatalysts for commencement of capex cycle from H2FY15 onwards

• From a sensitivity analysis perspective, a 10% upward revision inexecution and 10 bps change in interests cost to sales ratio can see apositive revision of ~12% on PAT for the coverage universe. We wouldprefer players with diversified exposure in terms of segments/geography,

Source: ICICIdirect com Research

y j p y>2x multiplier effect on profits as operating leverage plays out. Benefitswould accrue across the value chain with ancillaries benefitting more

• On valuations front, we expect OEMs to trade at a premium to broadermarket multiples (~15-16x PE) as RoCEs move to >20%. Ancillaries haddepressed valuations in the down cycle. We feel these can re-rate ahead

p p y p g g g p ywith huge delta in PAT arising from operating/financial leverage

• Improved execution will help lead to operating leverage gains as revenuesof the coverage universe may rise at 11% CAGR with EBITDA exhibiting aCAGR of 12% over FY14-16E. In terms of profitability, flattish interestcosts would lead to PAT CAGR of 9% over FY14-16E

4

Source: ICICIdirect.com Research

Positive Outlook on Sector Neutral Outlook on Sector Negative Outlook on Sector

Page 5: Unplug Scepticism; Embrace Equities

Deal Team – At Your ServiceSectoral Outlook

Cement FMCGCement

• Given the high focus of the new government on infra development, weexpect the cement sector to witness strong growth in tandem with theeconomic recovery. Fast clearances of major infra projects and bettergovernance will support strong demand growth, going ahead. We expectdemand CAGR of over 6.5% during FY14-16E to 275MT (vs. CAGR of4.2% reported during FY12-14). Further, with significant operating

FMCG

• The FMCG industry witnessed slower growth mainly due to companieswith a skewed premium products portfolio (HUL 9%; Nestlé 7%).However, companies with high rural contribution continued to see stronggrowth (Dabur 15%; Colgate 15%) in FY14. Despite slower volume

growth, earnings (coverage universe) have increased at 17% CAGR inFY12 14 We believe a revival in urban consumption & expected recoveryp g ) , g p g

leverage benefit and a stable cost environment, we expect the cementsector to surpass the margins of over 25%, an average of FY07-10, from16.6% in FY14 leading to a three-fold jump in net profits.

• While the valuations of large caps have moved beyond the currentreplacement costs ($160/tonne), midcaps are trading at a 60% discount tolarge caps against average historical discount of 25-30% (FY07-10)

• We p efe JK Cement gi en its st ong ea ning g o th moment m led b

FY12-14. We believe a revival in urban consumption & expected recoveryin GDP growth would boost topline growth for staples. We expect FMCGcompanies to continue to maintain elevated operating margins and strongearnings growth considering the relief from raw material inflation withcurrency benefit. This would give manoeuvring power to increase ad ex

• In last five years, valuation multiples of FMCG companies have expanded~40-50% along with strong earnings growth. With the market eyeing

li l b li i f d f i k ld h i k l i• We prefer JK Cement given its strong earning growth momentum led bywhite cement expansions and comfortable valuations

cyclicals, we believe premium of defensive stocks would shrink resultingin multiple contraction & its underperformance over broader market

Consumer Discretionary

• We believe consumer discretionary companies will witness 8-18% volumegrowth (FY14-16E) supported by sustained demand from rural India, tier-

Healthcare

• We expect sideways consolidation in the pharma space on account of ashift from defensives to cyclicals as the newly elected government at the

II, tier-III cities due to lower penetration level. This would also besupported by a recovery in industrial product (cable, switchgear & EPC)demand coupled with new product launches. Paints, discretionaryproducts, saw tepid volume growth (FY11-14) due to deferral of repaintingdemand and subdued industrial paint. With a GDP revival, volume growthmay get back on track (10-12%) driven by a recovery in industrial (drivenby automotive paints) and repainting demand in decorative segment

Centre is expected to rapidly move ahead with stalled reforms

• Another short term negative will be the strengthening of the rupee vis-à-vis the US$ as for most players. US sales account for 30-35% of theturnover while YoY currency benefit will exhaust from Q2FY15 onwards

• Despite lower growth of ~6% in FY14, we do not expect a completerecovery in the Indian formulations industry as majority of the playershave not taken price hikes while penetration of generic generics are also

Source: ICICIdirect com Research

• We believe there will be a slight recovery in overall margin (of 70-80 bps)led by CD companies on account of an improved industrial performance.For paint companies, the margin would be largely driven by higheroperating leverage (volumes from industrial segment) and price hiketaken to mitigate currency fluctuation and inflationary pressure

have not taken price hikes while penetration of generic generics are alsoincreasing. We expect domestic formulations to grow at 8-10% in FY15

• We expect profitability margins to come under pressure as companiesacross the board are increasing the R&D spend by 100-150 bps fromcurrent levels

5

Source: ICICIdirect.com Research

Positive Outlook on Sector Neutral Outlook on Sector Negative Outlook on Sector

Page 6: Unplug Scepticism; Embrace Equities

Deal Team – At Your ServiceSectoral Outlook

Hotel ITHotel

• With the redefined role of the new government (i.e. from regulator to acatalyst), we expect integrated development of enabling infrastructure toboost the overall growth of the hotel industry. With improved tourismmeasures, we expect the sector to get back on the high growth track withaverage revenue growth of 12-13% over the next two years (i.e. in linewith average annual CAGR of 13% reported during FY05-08)

IT

• Though the FY15E themes including 1) optimistic demand environment,2) recovery in the US and market share gains in Europe, 3) large dealpipeline and ramp-ups, and 4) improvement in deal closures continue toplay out, headwinds from an appreciating rupee, if any, remain a keyoverhang in the near term. This, coupled with sector rotation, could leadto a relative underperformanceg p g )

• Although the high gearing ratio remains a concern for the sector, REIT, ifintroduced, would help hotel players in de-leveraging the balance sheet.Additionally, it should also free up the capital for future expansion

• Given the strong room portfolio of EIH and IHCL, both are in a goodposition to take advantage of the possible introduction of REITs. In termsof revenue growth, we see TajGVK as the preferred play with a possiblesha p demand eco e in Andh a P adesh post fo mation of a ne state

p

• Though FY15E dollar revenue growth could be better than that of FY14(13% tier-I average vs. 12.2%) rupee revenue growth could moderate to~10% vs. ~25% in FY14 as rupee tailwinds wane. Average tier-I EBITmargins could decline ~60 bps YoY (24.3%) in FY15E vs. 25% in FY14 aswe expect 2.8% appreciation in the average rupee rate in FY15E

• Valuation are reasonable at a 4% discount to the Sensex one-year forwardPE (15 6 s 16 1 ) and eaknesses co ld be sed to acc m late selectsharp demand recovery in Andhra Pradesh post formation of a new state

apart from it being also a beneficiary of REIT, if introducedPE (15.6x vs. 16.1x) and weaknesses could be used to accumulate selectnames in a staggered manner

Infrastructure

• After a clear mandate, the government unveiling its 10 year agenda tofocus on infrastructure coupled with its intent to speed up decision

Logistics

• In FY14, the decline in major port volume was compensated, to an extent,by good volume growth at private ports. Improvement in economic

making towards stuck/stalled projects worth | 15-20 lakh crore lends usenough comfort there will be better opportunities & execution in long run

• Furthermore, the dovish tone of the RBI towards interest rate would alsolead to better liquidity and interest saving. As per our working, EPCplayers would see an EPS upgrade of 6-35% for every 100 bps decline ininterest rate. Beside this, asset developers would also see a valuationupgradation of 7-25% for every 100 bps decline in cost of equity

scenario would enable enhanced volume growth and better margins dueto positive operating leverage. We remain positive on the sector

• We expect I-direct logistic universe to report CAGR of 13%, 19% and 18%in revenue, EBITDA and PAT, respectively, over FY14-16E. Over the nextthree to four years, implementation of macro policies like FDI in rail, GSTand dedicated freight corridor would result in an orbital shift in earningsleading to re-rating of valuation multiples commanded by the sector

Source: ICICIdirect com Research

pg y p q y

• While valuations of the infrastructure sector have moved from distressedto reasonable, we still see significant scope for the re-rating of the sectorgiven the focus of the new government to boost infrastructure, speed upthe decision making progress and RBI’s dovish tone towards RBI. Weprefer Sadbhav Engineering, Simplex Infrastructure & JP Associates

g g p y

• We prefer Container Corporation, TCI and Gateway Distriparks due to theirleadership in their respective segments along with superior infrastructureand healthy financials (FY16E debt equity ratio of 0x, 0.6x, 0.4x andimprovement in RoE by 210 bps, 50 bps and 220 bps, respectively, overFY14 to FY16E to 16%, 16.1% and 18.4%)

6

Source: ICICIdirect.com Research

Positive Outlook on Sector Neutral Outlook on Sector Negative Outlook on Sector

Page 7: Unplug Scepticism; Embrace Equities

Deal Team – At Your ServiceSectoral Outlook

Media Oil & GasMedia

• With a gradual improvement in the economy, ad growth is expected togrow at a healthy 14.5% CAGR in FY14-16E across our coverage universe

• Within the broadcaster segment, after 22.0% growth in FY14, subscriptiongrowth may slow down to 13.5% CAGR (FY14-16E) as digitisation inPhase III and IV cities is expected to grow at a slower pace. Similarly,MSO and DTH companies may post 15% growth over the same period

Oil & Gas

• With a clear majority for the NDA government, we believe there will begas pricing and subsidy sharing reforms over the next year. Also, gradualprice hikes in diesel will lead to a reduction in gross under-recoveries to| 1,16,233.4 crore and | 88,323.5 crore in FY15E and FY16E, respectivelyfrom | 1,39,869 crore in FY14. PSU oil upstream companies’ earnings mayincrease by ~65% if gas prices are hiked to $7.4/mmbtu and subsidiesMSO and DTH companies may post 15% growth over the same period

• Though broadcasters may witness flat margins in the range of 33-34%due to higher programming cost and new launches, print companies maywitness margin expansion (from 21% in FY14 to 24% in FY16E) due to astabilising currency resulting in lower newsprint cost & maturing ofrecently launched editions

• In the multiplex space, PVR is expected to post revenue and PAT CAGR

y g p $ /decline by $10/barrel. OMC’s earnings are expected to increase ~7% iftheir net subsidy share is reduced from expected 2% to 1%. We prefer OilIndia and HPCL in the oil upstream and downstream space.

• For gas companies, we expect a gradual increase in volume growth overthe next two years due to an increase in domestic production and RLNGcapacity coming on stream mainly in FY16E. Also, 100% allocation ofdomestic gas supply to CGD companies will augur well for volume

over FY14-16E of 17% and 63%, respectively. Aggressive rollout, on timeexecution and a dominant market position would help it sustain richvaluations

domestic gas supply to CGD companies will augur well for volumegrowth. We prefer Gail from the gas utility space

Metals

• With the change of guard at the Centre, we expect a revival in the capexcycle. In terms of financial performance, improved demand will help lead

Power

• India has till date added ~45.5 GW of its targeted ~88.5 GW (TwelfthPlan) capacity. Furthermore, the new government plans to focus more on

to operating leverage gains as revenue of the coverage universe isexpected to rise at 7.4% CAGR while EBITDA is likely to grow at a CAGRof 12.7% over FY14-16E. In terms of profitability, elevated depreciationexpense is likely to restrict PAT CAGR to 8.3% over FY14-16E

• Backed by huge investment anticipated in the infrastructure segmentcoupled with healthy demand from key user industries like automobiles,etc. the demand outlook for the metal sector remains favourable for a

renewable sources like solar as it plans to replicate the Gujarat modelacross the country and plans to add 20 GW solar capacity by 2022. Withimproved focus on fuel availability and curtailing AT&C losses, we believePLF is likely to improve, going ahead. As per our analysis, a 1% change inPLF above 83% could yield 30-40 bps higher RoE. Accordingly, we believethe sector and companies within the space may witness an upgradation inrating and multiples assigned to them.

Source: ICICIdirect com Research

long term horizon. Over the next six to eight years, spending on infraprojects is expected to result in incremental steel demand of 50-60 MT

• We have a positive view on NMDC, which has a healthy balance sheet androbust cash flow. Furthermore, on the back of restrictions in iron oremining in certain states, we believe NMDC will be a key beneficiary

• For companies within our coverage, sales and PAT are both expected togrow 11.6% YoY driven by better availability. In terms of stock selection,we would stick to CESC (stable base business, improving retail business& BPO investment, higher capacity) and NHPC (low valuation, incrementalcapacity to drive earnings and reduction in CWIP to improve RoE)

7

Source: ICICIdirect.com Research

Positive Outlook on Sector Neutral Outlook on Sector Negative Outlook on Sector

Page 8: Unplug Scepticism; Embrace Equities

Deal Team – At Your ServiceSectoral Outlook

Real Estate ShippingReal Estate

• We anticipate a demand flush in the property market led by improvedsentiments, a stable government and dovish RBI tone on interest rate.Consequently, we expect our universe sales volume to grow at a CAGR of27.5% to 7.8 million square feet during FY14-16E.

• On the commercial property front, we believe Sebi and governmentfinalisation of REIT framework including single layer tax structure would

Shipping

• CY14 has been a depressing year for Baltic Dry Index (BDI) as it crashed55% YTD to ~ 1000 level. We expect the weakness in the segment topersist owing to huge oversupply of vessels. A substantial increase intonnage supply over next two years (19% and 13% of current global fleetfor dry bulk carriers and tankers, respectively) is expected to cap theupside in freight rates. We maintain a negative stance on the sector.finalisation of REIT framework including single layer tax structure would

be key catalysts. We believe REIT listing would lead to a compression inthe cap rate, leading to better valuation for commercial properties inaddition to freed up the capital for developers. In our coverage, OberoiRealty could see ~5% increase in valuation from a 100 bps decline in thecap rate

• Mahindra Lifespace and Oberoi Realty remain our top picks in the sectorgi en the q alit of management and bette balance sheet st ength

p g g

• We expect revenue for the I-direct shipping universe to grow at a CAGR of7% over FY14-16E to | 11272 crore. PAT is expected to improve from| 302 crore in FY14 to | 617 crore in FY16E on account of animprovement in profitability of GE Shipping and lower net loss by SCI(due to improvement in EBITDA margin from earlier abysmal levels)

• Among shipping stocks, we prefer GE Shipping owing to its low leverage(D/E of 0 7) and st ong p esence in the l c ati e offsho e segmentgiven the quality of management and better balance sheet strength (D/E of 0.7) and strong presence in the lucrative offshore segment

Retail

• We expect a marginal recovery in the retail sector on the back of a revivalin the economy. Having said that, space addition is likely to remain muted

Telecom

• Data volumes having grown 102% in FY14 may continue to grow at arobust pace of 48.6% (FY14-16E CAGR) to 853 billion MB. However, with

in forthcoming years considering the continued focus on profitablegrowth. We expect SSSG to remain in the range of 6-12%, therebyleading to 10-20% revenue growth

• In a scenario where inflation is under control and interest rates turnfavourable, an increased disposable income could boost sales. Hence, wehave a cautiously positive outlook on the retail sector

• Specialty retail players are likely to perform well – Titan is likely to benefit

disruptive pricing, realisation would continue to decline and may reach21.5 paisa/MB. Nonetheless, data revenue would grow at 35.5% CAGR(FY14-16E) to reach |18391 crore, forming 17.1% of total revenue.

• The new government may work towards liberalising spectrum (sharingand trading) and M&A policies, which would help in terms of lower capexand spectrum related cost. Moreover, an industry friendly M&A policy willlead to further consolidation, facilitating lower competition. In this

Source: ICICIdirect com Research

Specialty retail players are likely to perform well Titan is likely to benefitfrom relaxation of gold import norms and softer gold prices. Bata isexpected to benefit from continued store expansion. Titan is likely to bewitness a multiple upgrade from 26-28x to 30-32x on the back of thepositive changes in the sector while Bata could also witness a 8-10%multiple expansion led by improving return ratios

g pbackdrop, we expect voice ARPM to increase from 34.4 paisa in FY14 to37.0 paisa in FY16, resulting in ~200 bps expansion in Indian margins.

• Declining capex intensity & improved operating performance will aid freecash flow, enabling debt repayment. Our telecom universe is expected topost 8.3%, 56.7% revenue, PAT CAGR, respectively, in FY14-16E

8

Source: ICICIdirect.com Research

Positive Outlook on Sector Neutral Outlook on Sector Negative Outlook on Sector

Page 9: Unplug Scepticism; Embrace Equities

Deal Team – At Your ServiceStock Picks

Bank of Baroda (BANBAR) Target Price: | 1250 (40% upside) Bharti Airtel (BHATE) Target Price: | 480 (35%)Bank of Baroda (BANBAR) Target Price: | 1250 (40% upside)

• Traditionally, Bank of Baroda (BoB) was the third largest bank in India buthas climbed up to second position during FY14 on the back of consistentcredit growth. BoB has grown its credit at a healthy 22.6% CAGR from| 143251 crore in FY09 to | 397006 crore in FY14. The outstanding bookincreased by | 253754 crore in FY09-14 of which international credit wasthe major contributor (| 90001 crore). Going ahead, we estimate credit

Bharti Airtel (BHATE) Target Price: | 480 (35%)

• Airtel, the largest telecom operator in India with subscriber and revenueshare of 23.2% and 30.5%, respectively, has not only shown dominancein the voice segment but has one of the largest footprints in the datasegment with high speed data spectrum in 20 circles in the country

• Though voice minutes may grow at a lower CAGR (FY14-17E) of 4.5% to1173 billion (bn) due to high penetration of 70% data volume may growj ( ) g ,

will grow at 15.6% CAGR to | 530134 crore over FY14-16E

• BoB has a pan-India presence with a wide network of 4874 branches. Ofthese, 30% branches (~| 1450 branches) are in Gujarat and Maharashtra,which are CASA rich states and have higher industrial activity. Thedomestic CASA ratio of BoB has been stable at 32% over FY12-14, whichis expected to be maintained for FY15E, FY16E. This will support thedomestic NIM of ~2 9% The global NIM is low at 2 3% as the bank earns

1173 billion (bn) due to high penetration of 70%, data volume may growat 44.5% CAGR to 442 bn MB, resulting in 8.9% CAGR in wireless revenue

• Industry has grown healthier with operators/circle reducing from 11-12 in2010 to eight to nine in FY14. This is reflected in average realisation perminute (ARPM) and mobility margins of Airtel, which have expanded from42.4 paisa and 30.0% to 44.5 paisa and 33.7%, respectively, in the lastyear itself. Further consolidation on the back of unsustainable operationsof f inge ope ato s and fa o able go e nment policies ma es lt in fi edomestic NIM of 2.9%. The global NIM is low at 2.3% as the bank earns

only 1.2% NIM on its overseas loan book (31% of total credit). Goingahead, global NIM is estimated to be maintained at 2.3-2.4% on the backof a strong liability franchise and faster growth in domestic advances

• The loan book composition is well-diversified with the overseas bookproportion at 31.4%, SME- 13.9%, retail- 11.4%, agri- 7.0%, corporate-| 36.3%. Diversified geographic & sector exposure has contained NPA ofBoB compared to peers which have GNPA ratio of 4%+ & RA of 8%+

of fringe operators and favourable government policies may result in fiveto six operators/circle. Led by reduced competition, sustained price hikesand exponential growth in data, ARPM would reach 50.4 paisa by FY17with mobility margins inching up towards historical levels of ~38%

• Airtel has a net debt of ~| 65000 crore in FY14 but is already past its peakcapex requirement. In addition, with possible allowance of spectrumsharing and instalment payment in auction, further outgo in spectrum

ld b li i d Ai l FCF f | 0000 hBoB compared to peers, which have GNPA ratio of 4%+ & RA of 8%+.BoB’s GNPA ratio is 2.9% (| 11876 crore) while its RA is | 22447 crore(5.7% of credit). Even on domestic credit, its GNPA ratio is 3.6% (| 9900crore) & RA book is 7% (| 19209 crore), which depicts superior creditmonitoring mechanism. We estimate GNPA ratio of 3.2% by FY16E

• BoB has showcased a steady performance on a consistent basis relative topeers. Its return ratios are better compared to peers with RoA of 0.7% andR E f 13% b FY16E It t d t (NNPA + RA) ti i

would be limited. Airtel may generate FCF of over | 10000 crore eachyear. Net debt may reduce to | 49396 crore by FY17E, which coupled withhigher profitability, would result in RoE and RoCE expansion to 10.4% and13.2% in FY17E from 4.6% and 8.7% in FY14, respectively

• African operations have remained sub-par due to higher competition.However, if the company is able to divest its stake in tower companies,the operating matrix would improve and also help reduce debt

RoE of 13% by FY16E. Its stressed asset (NNPA + RA) proportion isrelatively low at 7.2% of credit, which provides comfort on earningsvisibility. We value BoB at 1.5x FY16E ABV and arrive at a target price of| 1250 providing an upside of 37% from current levels

Source: ICICIdirect com Research

• Net debt to EBITDA reduction to 1.1x, favourable government policies,consolidation in industry and expansion in ARPM would result in revenueand PAT CAGR (FY14-17E) of 7.7% and 42.8%, respectively, leading to re-rating of the stock. Using DCF methodology we assign a target price of |480 to the stock, implying FY17 EV/EBITDA multiple of 6.2x

9

Source: ICICIdirect.com Research

Page 10: Unplug Scepticism; Embrace Equities

Deal Team – At Your ServiceStock Picks

CESC Ltd (CESC) Target Price: | 825 (35%) Container Corporation of India (CONCOR) Target Price: | 1580 (34%)CESC Ltd (CESC) Target Price: | 825 (35%)

• CESC is engaged in electricity generation & distribution business across567 sq km of licensed area across Kolkata, with installed capacity of 1,525MW. Assured fuel supply and PPA arrangement under regulatory businessmodel shielded the company from various sectoral woes like fuel supplyconstraints and higher debtors, resulting in healthy balance sheet. Whilemany private players struggled with a high D/E of over 3–4x, CESC’s D/E

Container Corporation of India (CONCOR) Target Price: | 1580 (34%)

• Concor appears well placed to benefit from the improving economicscenario owing to its pan-India presence and inimitable infrastructure. It isplanning to garner higher volumes and provide value added services.Concor is, thus, investing in setting up private freight terminals (PFT) andmulti modal logistic parks (MMLP) across 15 locations in India. Currently,the PFT at Khatuwas and Nagulpally are operational and are expected toy p p y gg g / , /

remained below 2x with a stable cash flow of ~| 500 crore per annum.CESC’s capacity may increase to 2,425 MW with commissioning ofChandrapur (600 MW- FY15E) & Haldia project (2x300 MW- FY16E)

• CESC has infused over ~| 1,400 crore equity over the past five to sixyears in it’s retail arm Spencers’ that has been a drag on its cash flow(40% of its yearly standalone cash flow of ~| 500 crore). However, thebusiness has witnessed a sharp improvement over its operating

g p y p pscale up in the near term. Further, Concor plans to acquire land in thecentral and eastern regions of the country, in close proximity to thededicated freight corridor (DFC), to scale up its PFT business

• Over FY10-13, Concor’s volume growth remained sluggish and grew at aCAGR of 2.2%. However, FY14 has seen a revival in cargo volumes with10.9% YoY growth. Going ahead, we expect cargo volumes to grow at aCAGR of ~11 5% over FY14-17E on account of the improving economicbusiness has witnessed a sharp improvement over its operating

performance since FY13 and is expected to achieve EBITDA breakeven inFY15E. Accordingly, we believe pressure on cash flow will ease and, thus,surplus cash flow fund of ~| 200-225 crore will be used for expansion anddevelopment of future power projects. Furthermore, the managementplans to divest its stake in Spencer's’, going ahead, further improvingCESC’ return in the business and strengthening its balance sheet

• CESC had acquired a 57% stake in Firstsource Solutions (FSL) in FY13 by

CAGR of 11.5% over FY14 17E on account of the improving economicscenario and Concor’s strategy of providing better rates for volumecommitments by clients

• Concor is the market leader with a dominant market share (79%) amongcontainer train operators while other CTOs are still miniscule in size. Thecompany has unmatched infrastructure and an existing pan-Indiapresence that would enable it to capture higher volume growth in animproved economic scenario It has made strategic investments in• CESC had acquired a 57% stake in Firstsource Solutions (FSL) in FY13 by

investing | 454 crore at ~| 12.10/ share. The share price has increased to| 33.5/share factoring in the management’s effort to bring down its debtlevel and improve FSL’s margin by 200-300 bps by FY15E. FSL made adebt repayment of $45 million in FY14 and at the current repayment rate,FSL would repay $135 million of its debt by FY17E. It will become debtfree compared to a current debt of $155 million (FY14 – cash $ 35 million)

With Ch d U it 1 i i d H ldi ill b i i d b

improved economic scenario. It has made strategic investments inbuilding infrastructure close to the proposed DFC with the intention ofgarnering a higher volume share over the longer term. We believe Concorwould be the prime beneficiary of any up-tick in economic activity and willbe well placed to accelerate its revenue and earning growth. We expectearnings per share to register a CAGR of 17% over FY14-17E to | 78.9 andreturn on equity to improve from 13.8% in FY14 to 16% in FY17E.Considering the expected acceleration in earning growth improvement in• With Chandrapur Unit – 1 commissioned, Haldia will be commissioned by

FY16, which would provide stability to CESC’s cash flow. Factoring inSpencer’s declining cash losses, we now assign it a positive value.Furthermore, CESC’s investment in FSL continues to add value.Accordingly, we value CESC on an SOTP basis and arrive at target price of| 825, (upside potential of 33%).

Source: ICICIdirect com Research

Considering the expected acceleration in earning growth, improvement inreturn ratios and debt free status, we assign a P/E multiple of 20x FY17EEPS to arrive a target price of | 1580.

10

Source: ICICIdirect.com Research

Page 11: Unplug Scepticism; Embrace Equities

Deal Team – At Your ServiceStock Picks

Gail India (GAIL) Target Price: | 551 (28%) Greaves Cotton Ltd (GREAVE) Target Price: | 127 (26%)Gail India (GAIL) Target Price: | 551 (28%)

• Gail (India) Ltd is India’s leading integrated natural gas company with apresence in transmission (75% share of volumes), gas trading, gasprocessing, LPG production & transmission, petrochemicals and oil & gasexploration & production (E&P). The company reported revenues of| 57508 crore and PAT of | 4030.4 crore in FY14

• The core strength of Gail lies in its strong pipeline network which will

Greaves Cotton Ltd (GREAVE) Target Price: | 127 (26%)

• Greaves Cotton (GCL) derives ~60% of revenues (engine supply to OEM+ spares sales) from the auto segment (3W vehicles + 4W SCVs). Goingahead, with the urban population expected to grow at a CAGR of 4.9%over FY14-20E, we believe the need for last mile transportation is set toincrease at least in line with GDP growth of 6-6.5% over the next coupleof years. This, we believe, will provide steady but dominating visibility to• The core strength of Gail lies in its strong pipeline network, which will

enable it to tap the growing demand for natural gas in the country. Anincrease in domestic gas supply from ONGC marginal fields, GSPC, KGbasin, etc. and LNG capacity additions over the next three to four yearswill add 65-80 mmscmd of gas supply in India, auguring well for the gastransmission business. We expect gas transmission volumes of Gail toincrease from 96.4 mmscmd in FY14 to 106.2 mmscmd for FY16E. Theincreased presence in the gas trading business through signing of global

y , , p y g yGCL as it commands 80%, 35% share in 3W goods, passenger segments,respectively, coupled with the recent foray in supplying engines to TataMotors

• Quadricycles can be an emerging segment for passenger transportationwhere players like Bajaj Auto are striving hard to launch the first product.We believe a successful launch of the same (post regulatory clearances)can open up a new segment for GCL as we believe competing OEMs ofincreased presence in the gas trading business through signing of global

long term LNG sourcing contracts (8.3 MMTPA) from 2018 would also addto gas transmission & trading volumes in the long term

• Doubling of petrochemical capacity and reduction in subsidy burdenborne by Gail’s LPG business would be growth drivers for Gail. With theincrease in capacity, we expect the share of the petchem business inGail’s EBIT to increase from current levels of 22.7%. Also, Gail is likely tobe excluded from the subsidy sharing mechanism as per the

can open up a new segment for GCL as we believe competing OEMs ofBajaj can be a prospect for the company. GCL has already developed a265 cc engine to cater to the needs of OEMs but the timing/quantum ofdemand is still unfathomable

• From a share as high as 27% (| 348 crore) in overall revenues in FY08,infrastructure segment revenue share has fallen to 7% (| 124 crore) inFY14. Resultant EBIT losses of | 27 crore have dented the profitability ofthe engine segment However given the massive infrastructurebe excluded from the subsidy sharing mechanism as per the

recommendations of the Kirit Parikh Committee when the expected gasprice hike is implemented by the new government. This move willincrease EPS by | 7.4. However, the increase in profitability will bepartially offset by an increase in raw material costs for LPG and petchem

• Gail is currently trading at 11.1x FY16E EPS, at a discount to its historicalP/E ratio of 12.5x in the last five years. We believe the company’sd f i b i d l f t i i i t h b i

the engine segment. However, given the massive infrastructureopportunity in the Twelfth Plan ($1 trillion opportunity) and ThirteenthPlan, we believe the segment can be a money spinner for GCL in the longrun given a) even in testing times, GCL been able to maintain its marketshare in the road construction/concrete segment and b) on resumption ofthe policy reforms and capex cycle

• We expect revenues to grow at a CAGR of 10% and expect RoEs to be at20% i FY16E H ll l ti FY16E EPS d idefensive business model of gas transmission, growing petchem business

and reduction in subsidy burden would create value for investors, goingforward. We have valued the company using the SOTP methodology, to

arrive at a target price of | 551 for Gail with a time frame of 24 months

Source: ICICIdirect com Research

20% in FY16E. Hence, we roll our valuations on FY16E EPS and increaseour target multiple from 11x to 16x (given all quality midcap companiesare trading at 15-20x range) to factor in gains from operating leverage,pick-up in auto volumes, strong recovery in the infrastructure segmentand improvement of 800 bps in RoIC from 22% in FY14 to ~30% inFY16E. Our target price stands revised at | 127/share (24 months)

11

Source: ICICIdirect.com Research

Page 12: Unplug Scepticism; Embrace Equities

Deal Team – At Your ServiceStock Picks

JK Cement (JKCEME) Target Price: | 524 (36%) Larsen & Toubro Ltd (LARTOU) Target Price: | 2277 (33%)JK Cement (JKCEME) Target Price: | 524 (36%)

• We prefer JK Cement as a midcap stock in the cement space, given itshigh growth potential due its presence in strong regions and attractivevaluations. The company is expanding its cement capacity by 3.0 MT inNorth India. The work on this expansion is on track and cementdispatches are likely to start from the split grinding unit in Jhajjar fromJune 2014 and from the integrated unit at Mangrol during the July-

Larsen & Toubro Ltd (LARTOU) Target Price: | 2277 (33%)

• It is the most diversified engineering & infrastructure developer in thecountry with a presence across all segments of infrastructure i.e. power,roads, hydrocarbons & process industries. It is also planning to scale up inniche areas like defence, nuclear power and shipbuilding, which have thepotential to add significantly to overall revenues in the next three to fiveyears (for instance, opening of defence FDI and ordering can help L&Tg g g y

September 2014 quarter. The company has already installed the grey cumwhite cement plant with an installed capacity of 0.6 MTPA (white cement)and 1.02 MTPA (grey cement) in UAE, which will start flowing the fullbenefits from Q1FY15 onwards. With this, we expect white cementcontribution to increase to 36% in FY16E from 30.8% in FY14

• The company’s 40% capacity is located in Karnataka (i.e. 3.0 MT), thesouthern region South India is currently facing a demand-supply

y ( , p g g pachieve scale of 5x in terms of defence segment revenues from current| 1000 crore run rate). Over the last couple of years, L&T has addedcapacity to meet increasing volumes. For instance, the company hadadded 5000 MW of power equipment facility, the heavy engineeringfacility in Oman (FY10) and recently added complex shipbuilding facility

• L&T’s business model has become resilient to downturns over the last fewyears This mainly stems from a) high degree of diversity across verticalssouthern region. South India is currently facing a demand supply

mismatch situation with capacity utilisation of ~55-60% only. The majorproblem that seemed to be affecting South India was political uncertaintyin Andhra Pradesh (AP) over the Telangana issue, which was a major roadblock hampering government projects. This also led to a price correctionin Karnataka as well. With the AP issue now being resolved, we expect thesouthern region to witness an overall improvement in demand leading tobetter realisations, which will be beneficial for the company

years. This mainly stems from a) high degree of diversity across verticals(infra, hydrocarbons, process, etc.) and geographies (21% internationalbacklog as of FY14) and b) preferred bidder in complex private sectorprojects as ~40% of backlog, 39% of order inflows are contributed byprivate sector as of FY14. Hence, L&T is best placed to weather the capexcycle downs and capitalise on upswings

• The new government’s focus on revival of the capex cycle will benefit L&T, p y

• White cement segment has a strong market due to limited capacity in theindustry. It contributes over 30% to the topline of JK Cement. With onlytwo major players manufacturing white cement, other being UltraTechCement, plants operate at very healthy utilisations and command higherEBITDA/tonne (white cement | 2739 vs. grey margin of | 269 for FY14).Further, with doubling of white cement capacity, we expect blendedmargins to expand significantly from 13 0% in FY14 to 21 3% in FY16E

the most. Even on the downside, L&T is comfortably placed given thestrong order intake and diversified exposure. Efforts on assetmonetisation have begun (L&T recently sold its stake in Dhamra port andprobable stake sale in IDPL by H1FY15E). This, we believe, will positivelyimpact RoEs. Going ahead, the improvement of the domestic economyand buoyant international markets will ensure L&T records revenue CAGRof 17% coupled with a PAT CAGR of 11%. This, in our view, makes L&Th b l i h I di i l dmargins to expand significantly from 13.0% in FY14 to 21.3% in FY16E

• Given the upcoming new capacity from March 2014, we expect growth inprofitability to remain healthy over the next two years. We expectexpansion led revenue CAGR of 22.2% in FY14-16E. The stock is currentlyavailable at 5.3x FY16E EV/EBITDA and $67/tonne on FY16 capacity

Source: ICICIdirect com Research

the best play on capex recovery in the Indian capital goods space

• Our bull case target price of | 2277 now will be our base case target forL&T by December 2015. Hence, we recommend buying L&T with a targetprice of | 2277 over a period of 18 months. Any significant correction inthe interim will be an opportunity to buy L&T from a portfolio perspective

12

Source: ICICIdirect.com Research

Page 13: Unplug Scepticism; Embrace Equities

Deal Team – At Your ServiceStock Picks

Mahindra CIE Automotive (MAHAUT) Target Price: | 175 (51%) Mahindra Lifespace Developers Ltd (GESCOR) Target Price: | 700 (38%)Mahindra CIE Automotive (MAHAUT) Target Price: | 175 (51%)

• Mahindra CIE Automotive (MCI), an entity formed by the amalgamation ofall automotive component companies of Mahindra Systech and CIE’sEuropean forging companies, is one of the world’s largest forger with apresence across North/South America, Europe, India and China.

• MCI is a strong tier-1.5 supplier to global OEMs, i.e. a supplier of criticalcomponents to OEMs MCI’s greatest advantage is in its significant

Mahindra Lifespace Developers Ltd (GESCOR) Target Price: | 700 (38%)

• Mahindra Lifespace Developers (MLDL) is the first private player in theSEZ space that demonstrated its capabilities by providing world classinfrastructure at the Chennai SEZ (~1550 acres). Enhancing its learningcurve, MLDL is leveraging its expertise on Jaipur SEZ (~3000 acres) andNorth Chennai SEZ (~750 acres). We also like MLDL’s strategy to balanceout its SEZ portfolio with different maturity, which will not strain itscomponents to OEMs. MCI s greatest advantage is in its significant

geographic spread, which limits competition as global car makers movetowards homologation with modular architecture, global platforms andstandards

• CIE’s management has laid out clear plans for the turnaround of hot spotsin MCI. The first one targeted is Mahindra Forgings Europe (MFE), whichhas seen high operating costs. Along with many others, CIE has targeted a600 bps EBITDA ma gin inc ease on an o e all basis in 36 months CIE is

p y,balance sheet

• MLDL is also expected to benefit from the recently passed LARR Bill, as ithas already acquired large tracts of land for its large integrateddevelopment Jaipur SEZ (~2900 acres out of 3000) and North Chennai(~550 acres out of 750 acres). We believe this will provide a hugeadvantage to MLDL as new players in the SEZ space will have to incurhigher land acquisition cost due to the rehabilitation & resettlement600 bps EBITDA margin increase on an overall basis in 36 months. CIE is

well known for its intense cost focus and decentralised management,which bodes well for turnaround possibilities. Already, the impact of thesame is visible with MFE posting strong margins in Q4FY14

• We feel MCI provides a rare, unique Indian auto component play, whichhas a global footprint with global promoters along with massiveturnaround possibilities in the company. Post the consummation of thed l CIE ld h ld % i h i hil M hi d ld di l h ld

higher land acquisition cost due to the rehabilitation & resettlementpackage as well as elongation of land acquisition process

• MLDL also strengthened its land bank in the residential segmentsignificantly by adding land inventory of ~4 mn sq ft. With theseacquisitions, MLDL currently has a pipeline of 6.6 mn sq ft, providingstrong visibility over sales volumes. Consequently, we expect salesvolume to jump from 0.9 mn sq ft in FY14 to 2 mn sq feet in FY16E.Coupled with better sales from MWC Chennai & Jaipur we expect toplinedeal, CIE would hold 51% in the entity while Mahindra would directly hold

~20%. MCI has a presence across both commercial vehicles andpassenger vehicles with complementary strengths of dual parents. Withcost controls and economic recovery playing out, we expect utilisationlevels to improve leading to EBIT margins rising to ~8% and RoCEexpansion to ~14.5% in FY17E

• An improvement in the financials on the back of cost rationalisation and

Coupled with better sales from MWC Chennai & Jaipur, we expect topline,bottomline to grow at 29.7%, 31.9% CAGR, respectively, over FY14-16E

• We also derive our comfort in MLDL due to its strong parentage. MLDL ispromoted by the Mahindra Group. The group has exhibited a strong trackrecord of being top players across different business verticals. The strongparentage lends us comfort that MLDL will emerge as a dominant playerin the real estate space as well

demand growth could lead to a further re-rating for the firm. We forecast~6% and ~92% CAGR in revenues and earnings, respectively, overFY14E-17E and value the stock on a combination of PE and EV/EBITDAmultiples to arrive at a target price of | 175.

Source: ICICIdirect com Research

• Considering its strong parentage, strong visibility over residential portfolioand early mover advantage in integrated development, we believe MLDLis currently trading at attractive valuations of 1.2x FY16 P/BV. We valuethe stock at | 700/share (at 25% discount to FY16 NAV)

13

Source: ICICIdirect.com Research

Page 14: Unplug Scepticism; Embrace Equities

Deal Team – At Your ServiceStock Picks

DCB Bank (DCB) Target Price: | 100 (43%) NMDC Ltd (NATMIN) Target Price: | 256 (41%)DCB Bank (DCB) Target Price: | 100 (43%)

• DCB earned its highest yearly profit of | 150 crore in FY14. It is in aturnaround phase. DCB had made significant losses of | 88 crore in FY09& | 79 crore in FY10 due to large unsecured exposure (29%, | 1176 crore)as on FY08. Post FY10, credit monitoring is lot more stringent. DCB doesnot have exposure to troubled corporate names floating in the market.Hence, its GNPA has declined from | 306 crore (GNPA ratio - 9.3%) in

NMDC Ltd (NATMIN) Target Price: | 256 (41%)

• NMDC has a large reserve base with high grade deposits & significantmine life. As on January 1, 2010, as per JORC, the total iron ore reserve &resource base stands at 1360.7 million tonnes (MT). At current productionrate, the company has a mine life of ~42 years. A higher mine life coupledwith superior quality deposit provides strong earnings visibility

• NMDC's two principal mining complexes Kirandul and Bacheli produced, ( )FY09 to | 138 crore (GNPA ratio - 1.7%) in FY14. Such cautious lendingprovides us comfort on asset quality with NNPA sustaining at sub-1%

• The bank was in a consolidation phase during FY08-11 with ~85 brancheswith the credit book flat at ~| 4200 crore in FY08-11. Post FY11, it hasalmost doubled its credit book from | 4271 crore in FY11 to | 8140 crorein FY14. DCB has steadily shed its risky unsecured loan book, which nowcomprises less than 4% (| 300 crore) of the loan book and is fully

• NMDCs two principal mining complexes, Kirandul and Bacheli produced~70% of the company's production of iron ore in FY14. Concentration ofmajority of output at the two mining complexes results in economies ofscale for NMDC. On the back of stable realisations coupled with low costof operations, NMDC realises a high EBITDA margin to the tune of ~65-70%. The cost of production (CoP, including royalty) at US$18-20 /tonne isone of the lowest in the world

• I on o e p ices domesticall ha e emained fi m in the ecent past and a ecomprises less than 4% (| 300 crore) of the loan book and is fullyprovided. In the past couple of years, 55% (| 1578.3 crore) of loan growthis contributed by mortgage, which now comprises 38.4%. As on FY14,agri constituted 14.2%, SME– 16.6%, corporate- 25.7% & retail– 43.5%

• Going ahead, the bank is embarking on a branch expansion, which isestimated to rise from 130 in FY14 to 185 by FY16E. The management hasguided at doubling the bank’s balance sheet in three years albeit on asmall base We estimate a credit book of | 12523 crore (| 8140 crore now)

• Iron ore prices domestically have remained firm in the recent past and arelargely insulated against the swing in global iron ore prices. Domesticprices have been firm on account of a shortage of iron ore due to theongoing mining restrictions in Odisha. Going forward, we expect iron orefines prices to remain firm on the back of a healthy demand scenario amidrapid addition of sintering and pelletisation facilities in the country. Thecompany has undertaken a capacity addition programme wherein it is ontrack to exit FY15 with a mining capacity of 48 MT from 32 MT in FY12small base. We estimate a credit book of | 12523 crore (| 8140 crore now)

by FY16E implying 24% CAGR. The management is targeting a credit mixof 40% retail, 20% SME and 30% corporate in the long term. NIM isexpected to be maintained at 3.5%. Its C/I ratio is high at 63% but isestimated to improve to 55.8% in FY16E owing to healthy NII growth

• Visibility of earnings growth is strong on the back of i) steady NII growthand ii) stringent lending mechanism to maintain stable asset quality andl i i i DCB i ll l d i t f it l d

track to exit FY15 with a mining capacity of 48 MT from 32 MT in FY12.Correspondingly, NMDC has also been working on the plan to augment itsexcavation capacity

• We believe NMDC will be a key beneficiary of restrictions in the iron oremining activity prevailing in different parts of the country. Restricted ironore supply will shift bargaining power in favour of NMDC and also ensurea steady offtake. Going forward, over FY14-16E we estimate sales volumeill t CAGR f 8 6% t 36 MT NMDC l h h lth di id dlow provisioning. DCB is now well-placed in terms of capital adequacy

(Tier I at 12.9%) and asset quality, which are major concerns of theindustry. Return ratios are decent with 1.3% RoA and 15% RoE. Being aprivate sector bank, it has the potential to command higher multiplesduring growth phase. We value DCB at 1.9x FY16E ABV with a target priceof | 100.

Source: ICICIdirect com Research

will grow at a CAGR of 8.6% to 36 MT. NMDC also has a healthy dividendpayout ratio (dividend payout at 52.5% of PAT in FY14). We have valuedthe company on an SoTP basis wherein our revised target price stands at| 256 for a 24 months horizon. Superior quality iron ore reserves, low costof operations and dominance in the domestic market reiterate our positivestance on NMDC

14

Source: ICICIdirect.com Research

Page 15: Unplug Scepticism; Embrace Equities

Deal Team – At Your ServiceStock Picks

Oil India Ltd (OILIND) Target Price: | 782 (31%) Taj GVK Hotels & Resorts Ltd (TAJGVK) Target Price: | 116 (29%)Oil India Ltd (OILIND) Target Price: | 782 (31%)

• Oil India, a Navratna PSU, is engaged in exploration, development,production and transportation of crude oil and natural gas in India andabroad. Oil India is the second largest public sector E&P company with adomestic presence in 56 blocks and an international presence across ninecountries. The company reported revenues of | 9612.7 crore and PAT of| 2981.3 crore in FY14.

Taj GVK Hotels & Resorts Ltd (TAJGVK) Target Price: | 116 (29%)

• We prefer TajGVK Hotels in the midcap hotel space due to renewedbusiness sentiments in Hyderabad post resolution of the Telangana issueand its planned expansions into newer geographies. The company’smuscular parentage [GVK and Indian Hotels Company (IHCL)], operationalsupport from IHCL and strong balance sheet remain key positives forfurther growth once the economy turns around

• The increase in gross crude oil under-recoveries over the past few yearsled to a higher subsidy burden and a decline in net realisation fromUS$60.5/barrel in FY08 to US$47.3/barrel in FY14. Hence, more clarityneeds to emerge on the subsidy sharing mechanism, wherein lowersubsidy burden needs to be set for upstream companies. We expect thedecision on the subsidy sharing mechanism to come soon, given thestrong government and the political sensitivity of the decision being the

further growth once the economy turns around

• In line with the subdued performance in the Indian hotels industry,TajGVK has also witnessed a considerable moderation in performancesince the peak of FY08. The Hyderabad centric business also led to theTelangana issue impacting the company severely. Between FY08 andFY14, its revenue growth remained flattish while the increase in fixedoverheads led to a sharp contraction in margins (i.e. down from 47% inFY08 21 5% i FY14) H i h l i f hi li i l istrong government and the political sensitivity of the decision being the

least. An increase in US$10/barrel in net oil realisation would increase OilIndia’s EPS by | 15 (~20% increase in FY16E EPS). Currently, we expectnet realisation of US$53.0/barrel for both FY15E and FY16E, respectively

• Given that the gas price hike is inevitable, we believe clarity on the samefrom the new government will emerge soon. We have not assumed anygas price hike for FY15E (US$4.2/mmbtu). However, for FY16E, we haveassumed a gas price of US$7 4/mmbtu An increase of US$1/mmbtu in

FY08 to 21.5% in FY14). However, with resolution of this political issue,we expect the company to reach occupancy and ARR levels of early 2013with a significant pick-up in the meetings, incentives, conferences &exhibitions (MICE) segment, which would help it to grow at a healthy rate,going forward. Taking this into account, we expect revenue CAGR of 7.2%during FY14-16E

• Further, to reduce dependence on one location, it is expanding into newerassumed a gas price of US$7.4/mmbtu. An increase of US$1/mmbtu ingas price would increase Oil India’s EPS by | 5

• The company is trading at inexpensive valuations of 7.7x FY16E EPS of| 76.9 and offers a dividend yield of ~3.5%. Also, the Mozambique asset,where Oil India has a 4% stake, and the recent reserve upgrades bolsterthe investment decision. The current price offers a favourable risk-rewardratio as Oil India is already factoring in a high subsidy burden. With thet t i th C t t th d i i th i

geographies of Bangalore and Mumbai, which we believe would providethe company with better scale and geographic diversity over the longerterm. The company is also planning to enter the value for money segmentthrough the ‘Ginger’ brand in Andhra Pradesh. The excavation works onthe first Ginger hotel on a site located near the Shamshabad InternationalAirport are complete and civil work is expected to commence in duecourse. We believe the expansion into newer geographies of Bangalored M b i ld id h i h b l dstrong government in the Centre, we expect the decision on the gas price

hike and subsidy sharing mechanism to come soon. We have assumed agas price of US$7.4/mmbtu and net oil realisation of US$65/barrel from

FY17E onwards to arrive at a target price for Oil India at | 782 within atime frame of 24 months

Source: ICICIdirect com Research

and Mumbai would provide the company with better scale andgeographic diversity over the longer-term given its key expertise, strongparentage and healthy balance sheet (D/E ratio of 0.6x). The stock iscurrently available at 11.4x FY16E and 8.0x FY16E and FY17E EV/EBITDAvs. industry average multiple of 12.0x and FY14 EV/room of | 0.7 crore

15

Source: ICICIdirect.com Research

Page 16: Unplug Scepticism; Embrace Equities

Deal Team – At Your ServiceStrategy 2014 Stock Performance

Strategy 2014 stock performanceScrip Name Reco Price Target price Return (%) Status Target (|)Bajaj Auto 1935 2180 12.7 Open 2450IndusInd Bank 422 505 19.7 Target achievedIdea Cellular 168 144 -14.3 Open 193ITC 322 387 20.2 Target achievedMarico 221 262 18.6 Target achievedShree Cements 4399 5080 15.5 Target achievedOberoi Realty 231 275 18 6 Target achieved

Strategy 2014 stock performance

Oberoi Realty 231 275 18.6 Target achievedTitan Industries 229 279 21.8 Target achieved

Source: ICICIdirect com Research

16

Source: ICICIdirect.com ResearchStrategy 2014 stocks recommended on December 27, 2013

Page 17: Unplug Scepticism; Embrace Equities

Pankaj Pandey Head – Research [email protected]

ICICIdirect.com Research Desk,ICICI Securities Limited,1st Floor, Akruti Trade Centre,Road No 7, MIDCAndheri (East)

DisclaimerThe report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in anyway, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior

Andheri (East)Mumbai – 400 [email protected]

y, , p , p , y p p y , pwritten consent of ICICI Securities Ltd (I-Sec). The author may be holding a small number of shares/position in the above-referred companies ason date of release of this report. I-Sec may be holding a small number of shares/position in the above-referred companies as on date of releaseof this report. This report is based on information obtained from public sources and sources believed to be reliable, but no independentverification has been made nor is its accuracy or completeness guaranteed. This report and information herein is solely for informationalpurpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or otherfinancial instruments. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or

i i bl i ifi i Th i i di d d i i d i hi bstrategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not besuitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions andneeds of specific recipient. This report may not be taken in substitution for the exercise of independent judgment by any recipient. The recipientshould independently evaluate the investment risks. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of theuse of this report. Past performance is not necessarily a guide to future performance. Actual results may differ materially from those set forth inprojections. I-Sec may have issued other reports that are inconsistent with and reach different conclusion from the information presented in thisreport This report is not directed or intended for distribution to or use by any person or entity who is a citizen or resident of or located in anyreport. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in anylocality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or whichwould subject I-Sec and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may ormay not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come arerequired to inform themselves of and to observe such restriction.