February 28, 2013
Karvy Top Picks Institutional Equities
India Research
Stock Recommendations
Company Reco TP Upside
(Rs) (%)
ACC BUY 1,602 23
Bajaj Auto BUY 2,460 24
CESC BUY 366 27
Cipla HOLD 405 12
Dr. Reddys BUY 2,170 23
HDFC Bank HOLD 685 5
ICICI Bank BUY 1,520 43
ITC BUY 320 10
JK Lakshmi BUY 200 59
Jyothy Labs BUY 210 34
Kolte‐Patil Deve BUY 180 84
KVB BUY 600 26
M&M BUY 1150 28
Maruti Suzuki BUY 2,022 34
Oil India BUY 610 16
Page Ind BUY 3,861 18
SBI BUY 2,870 31
UltraTech BUY 2,300 21
V‐Guard BUY 558 16
Source: Karvy Institutional Research
Analysts Contact
R. Murali Krishnan
022 6184 4301
Institutional Research
022 6184 4000
High On quality ‐ high on returnsOur top picks are meticulously selected from large‐caps and quality mid‐
caps within our coverage universe. Whilst stock selection is supported by
moderate economic recovery they are best in class in terms of earnings,
economies of scale and positioning relative to their respective sectors and
the broader Benchmark indices.
Restrained pickup in economic activity expected in FY14
Monetary Policy easing is likely to play a key role in moderate revival of
economic activity in 2HFY14. We forecast Repo rate cut to an extent of 125‐
150bps during FY14 which should stimulate the investment cycle from
2HFY14. Ease in interest rates and fiscal consolidation would further boost
private investments. We estimate FY14 GDP growth to moderately expand
by 30bps YoY to 5.7% impacted by slowdown in Services sector. Due to
sluggish demand for exports, trade sector is expected to weigh heavily on
performance in Services sector. Slow and uncertain pickup in global economy
is expected to continue to hamper the growth on the domestic front.
However, strong focus on fiscal consolidation in FY14 is likely to maintain
economy in the slowdown phase.
Twin deficits risks to moderate in FY14
In this budget, steps are likely to be taken for fiscal consolidation by cutting
down the revenue expenditure. This is expected to lower the probability of
sovereign rating downgrades. Government is likely to take steps in lowering
the CAD gap by providing stimulus to the export sensitive sectors and
curbing imports in valuables. We expect the risks pertaining to twin deficits
to be lowered in the FY14 as compared to the current year.
Karvy top picks universe encapsulates the consumption theme
We prefer top down stock selection approach in the large cap space and
bottom up stock picking in the mid‐ cap space. Our stock selection is backed
with strong fundamentals, superior corporate governance and a steady
management track record which has helped consistently deliver strong
growth/ shown resilience in earnings and stock price performance. Large
caps companies that are comfortably leveraged and attractively valued
would be our preferred play. Average FY15E P/E of the mid‐cap stocks is ~
10x which is at a 18% discount to the BSE Sensex P/E of 12.3x.
Our Recommendations
Our high‐conviction sectors from a relative valuations perspective from our
large‐cap portfolio are Automobiles, Banking, Consumer Durables and Building
Materials. Amongst Mid‐Cap our high convictions picks are largely end‐user
consumption driven.
Risks to our call
In our view the predominant risks to the market are: 1) elevated interest rates and
RBIʹs exit policy on hard policy rates, 2) global economic recovery, and 3)
consequential flows into Emerging Markets.
2
Economy
Economy
Persistent slowdown in IIP
IIP in Q3FY13 witnessed an uptick after 5 consecutive quarters of the downhill
performance mainly due spike in Oct’12 numbers. Uptick in October IIP reading
was mainly driven by the late Diwali effect. We expect Jan’13 IIP to show tad
positive growth as compared to decline in production growth in last two months.
This is reflected by 8.0% YoY growth in auto production and 5.9% growth in
electricity generation for month of January. Commercial vehicles, major
component in capital goods sector, plunged for third consecutive month by more
than 20.0% YoY; indicating that capital goods sector is expected to continue to
decline in Jan’13
On an average IIP in FY13 is likely to remain in range of 0.5%‐1.2%. Observing
the trend of the lagged relation between IIP and persistent high inflation, IIP is
expected to remain sticky and below 5.0% in the Q4FY13
GDP growth expected to moderate to 5.7% in FY14 from
5.3% in FY13
We estimate FY13 GDP at 5.3% which is expected to be largely driven by
weakness in Services sector. Services sector is estimated to grow by 6.4% as
compared to 8.9% growth in FY12. Due to sluggish demand for exports, trade
sector is expected to weigh heavily on performance in Services sector. However
our estimate is higher than CSO estimate of 5.0% based on our slightly positive
outlook in the Industry sector as compared to CSO. CSO estimates Industry at
3.1% YoY while we estimate it at 4.5%
While fiscal consolidation and global slowdown is likely to continue to adversely
impact the economic activity. We expect FY14 growth to moderately improve to
5.7% mainly driven by ease in monetary policy. Moderate improvement in
H2FY14 is expected as impact of monetary policy transmission is likely to be
witnessed in second half
GDP expected to slow down to 5.3%
(%) FY12 FY13
Real GDP 6.5 5.3
Agriculture 2.8 2.1
Industry 3.4 4.5
Services 8.9 6.4
Nominal GDP 15.0 13.1
Source: CSO, Karvy Institutional Research
Receipts side of the government balance sheet
Our expectation of Net Tax Revenue is optimistic on back of assumption of
nominal GDP growth of 13.1%
Service tax revenue expected to be higher than budgeted on back of higher
incidence of tax and widening tax base. Service tax imposed on railway and
passenger freight from Oct’12 onwards is expected to boost the collections in
the subsequent period
Analysts Contact
Kruti Shah
022 ‐ 6184 4320
3
Economy
Budgeted increase of 29.0% YoY in Excise duty is highly optimistic with
average IIP growth of 0.8% in first nine months of FY13. We have projected
excise collection to increase by less than half the estimate
With lukewarm response of 2G spectrum sale government was able to fetch
only INR94.1bn from B.E. of INR400bn. While government is able to garner
only INR81.8bn of disinvestment proceeds for the first nine months against the
target of INR300.0bn
Revenue Budget Expectation V/S Our Expectations
(Rs Cr) BE FY13 YoY (%) Our Exp Absolute Diff% of B.E. YoY
Net Tax Revenue 771,071 20.1 734,503 (36,568) 95.3 14.4%
Corporate Tax 373,227 13.9 363,725 (9,502) 97.5 11.0%
Income Tax 195,786 13.9 195,083 (703) 99.6 13.5%
Customs 186,694 22.0 168,300 (18,394) 90.1 10.0%
Excise Duty 194,350 29.0 171,793 (22,557) 88.4 14.0%
Service Tax 124,000 30.5 126,350 2,350 101.9 33.0%
Non Tax Revenue 164,614 32.0 139,520 (25,094) 84.8 11.9%
Other Non Tax Revenue 94,094 76.3 69,000 (25,094) 73.3 50.0%
Source: India Budget, Karvy Institutional Research
Fiscal Targets
Fiscal deficit is expected at 5.9% of GDP, with the assumption of Nominal GDP
growth of 13.1%, as against budget expectation of 5.2%. The shortfall in revenue
side of the balance sheet is likely to push the deficit higher. However Govt. has
curbed planned expenditure to the extent of INR930bn which is likely to cover the
shortfall on revenue front
Fiscal Deficit Target FY13
Budget Estimates Karvy Estimates
Fiscal deficit 5.2% 5.9%
Primary deficit 1.9% 2.5%
Revenue Deficit 3.5% 4.2%
Source: India Budget, Karvy Institutional Research
Currency under pressure
With the upcoming budget, pressure on rupee is expected to build in along with
persistent high twin deficits and no major policy actions taken to tackle the
burgeoning deficits. Pressure on foreign exchanges reserves is also in turn likely to
impact rupee liquidity. We expect INR to hover in the band of 54‐58 in the near
term
Tight Liquidity conditions
Currently, liquidity position is tight as witnessed by LAF remaining on an average
above 1.0% of NDTL in month of February. Liquidity is likely to further tighten in
Mar’13 due to seasonality and reduction in government plan expenditure in the
last quarter. Call rates are hovering above Repo rate while short term t‐bills have
eased down after the rate cut in Jan’13. Yield curve is slightly upwards slopping as
compared to flattish curve observed in Jan’13
4
Economy
Top Picks’ Price Performance
CMP Mkt Cap Absolute Return (%) Relative to Sensex Return (%)
Company (Rs) Rs bn 1m 3m 6m 12m YTD 1m 3m 6m 12m YTD
ACC LTD 1,298 244 ‐2.1 ‐6.1 ‐3 2.4 ‐9.3 3.3 ‐8.7 ‐9.9 ‐3.7 ‐7.2
BAJAJ AUTO LTD 1,922 556 ‐7.6 5.5 12.3 9 ‐9.8 ‐2.2 2.9 5.4 2.9 ‐7.7
CESC LTD 287 36 ‐13.7 2.7 ‐9 12.1 ‐9.6 ‐8.3 0.2 ‐15.9 6 ‐7.5
CIPLA LTD 362 290 ‐9.1 ‐5.3 ‐1.4 15.2 ‐12.7 ‐3.7 ‐7.8 ‐8.3 9.1 ‐10.6
DR. REDDYʹS LABORATORIES 1,769 300 ‐9 0.5 5.5 8.6 ‐3.3 ‐3.6 ‐2 ‐1.4 2.5 ‐1.2
HDFC BANK LIMITED 651 1,545 ‐2.1 ‐1.6 9.2 24.1 ‐4 3.3 ‐4.2 2.3 18 ‐1.9
ICICI BANK LTD 1,064 1,224 ‐9.3 4.5 11.5 14.2 ‐6.5 ‐3.9 1.9 4.6 8.1 ‐4.4
ITC LTD 291 2,294 ‐3 1.3 9.7 38.9 1.4 2.4 ‐1.3 2.8 32.8 3.5
JK LAKSHMI CEMENT LTD 126 15 ‐14.1 ‐6 29.1 109.9 ‐22.3 ‐8.7 ‐8.5 22.2 103.8 ‐20.1
JYOTHY LABORATORIES LTD 157 25 4.5 ‐11.9 1.3 60.5 ‐3.7 9.5 ‐13.3 ‐6.7 51 ‐2
KARUR VYSYA BANK LTD 478 51 ‐9.4 3.8 18.9 24.3 ‐14.9 ‐4 1.2 12 18.2 ‐12.8
KOLTE‐PATIL DEVELOPERS LTD 98 7 ‐16.3 22 138.4 131.6 ‐13.7 ‐10.9 19.4 131.5 125.5 ‐11.6
MAHINDRA & MAHINDRA LTD 866 532 ‐4 ‐6.1 13.6 18.6 ‐7.1 1.4 ‐8.7 6.7 12.5 ‐5
MARUTI SUZUKI INDIA LTD 1,404 406 ‐12.2 ‐5.9 18 9.3 ‐5.8 ‐6.8 ‐8.4 11.1 3.2 ‐3.6
OIL INDIA LTD 525 315 ‐1.6 15.6 9.6 2.7 12.7 3.8 13 2.6 ‐3.4 14.8
PAGE INDUSTRIES LTD 3,285 37 ‐4.2 ‐1.9 9.7 33.6 ‐4.1 1.2 ‐4.4 2.8 27.5 ‐2
STATE BANK OF INDIA 2,198 1,475 ‐12.5 5.1 16.1 ‐0.3 ‐7.8 ‐7.1 2.5 9.2 ‐6.4 ‐5.7
ULTRATECH CEMENT LTD 1,903 522 ‐0.7 1.9 10.4 35.7 ‐4.2 4.7 ‐0.7 3.5 29.6 ‐2.1
V‐GUARD INDUSTRIES LTD 454 14 ‐11.2 ‐12.3 6.9 128.1 ‐10 ‐5.8 ‐14.9 ‐0.1 122 ‐7.8
NSE CNX NIFTY INDEX 5,761 38,605 (5.2) 2.2 7.0 6.1 (2.4)
S&P BSE SENSEX INDEX 19,015 31,739 (5.4) 2.6 6.9 6.1 (2.1)
Source: Bloomberg, Karvy Institutional Research
Karvy Top Picks
Cement
ACC
Bloomberg: ACC INReuters: ACC.BO BUY
Institutional Equities
India Research
Recommendation
CMP: Rs1,298
Target Price: Rs1,602
Upside (%) 23%
Stock Information Market Cap. (Rs bn / US$ mn) 244/4,507
52‐week High/Low (Rs) 1,545/1,104
3m ADV (Rs mn /US$ mn) 461/8.5
Beta 0.8
Sensex/ Nifty 19,015/5,761
Share outstanding (mn) 188
Stock Performance (%) 1M 3M 12M YTD
Absolute (2.1) (6.1) 2.4 (9.3)
Rel. to Sensex 3.5 (8.5) (3.5) (7.4)
Performance
Source: Bloomberg
Analyst Contact Rajesh Kumar Ravi
022 6184 4313
900
1,100
1,300
1,500
1,700
15,500
17,500
19,500
21,500
Feb‐12
Apr‐12
May‐12
Jun‐12
Jul‐12
Sep‐12
Oct‐12
Nov‐12
Jan‐13
Feb‐13
Sensex (LHS) ACC (RHS)
Steady Growth We expect ACC’s sales volume CAGR to remain lower at ~4% YoY in CY11‐
13E compared to 12% growth in CY11 due to its high exposure (~31%) in
over‐capacity southern region and lack of any near‐term capex by ACC,
while industry capacity is expected to grow by 6% in CY11‐14E. However,
we estimate that the ensuing supply discipline should more than
compensate for its lower volume growth. ACC should also benefit from its
pan‐India presence, strong distribution and logistics infrastructure,
increased brand visibility, large availability of low‐cost linkage coal (~50%).
We factor in EBITDA & PAT CAGR of 18% & 20%, respectively for CY11‐
14E period.
Installed Capacity to Grow by 4 mn MT to ~34 mn MT in CY15E: ACC is
increasing its capacity in the high demand potential eastern markets. At its
Jamul (Chhattisgarh) site, ACC’s 0.6 mn MT existing old clinker unit is being
replaced by a 2.8 mn MT unit. Meanwhile, the Company is adding
decentralized grinding units in the region to boost installed capacity to ~34 mn
MT by CY15E, which would entail total capex of ~Rs. 33 bn over next three
years. These expansions will increase ACC’s capacity in eastern market to 34%
from 24% currently. The Company should be able to meet these capex through
internal accruals and should remain a net cash company.
Outlook & Valuation
ACC should deliver strong EBITDA/PAT CAGRs of 17%/20% in CY11‐14E,
driven by 8% realization CAGR, which would help operating margin
expansion of 190 bps (despite 7% opex CAGR in the same period). With
EBITDA per MT rising to ~Rs. 1149 in CY14E, ACC’s RoE should expand to
~20% in CY13E. We re‐iterate our “BUY” recommendation on the stock with a
target price of Rs. 1,602 valuing the stock at 9.0x its Jun’14E EBITDA (implying
replacement cost of US$160 per MT).
Key Trigger: Recovery in cement prices in peak construction period (H1CY13).
Key Financials (Standalone)
Y/E Dec (Rs mn) CY10 CY11 CY12P CY13E CY14E
Net Sales 79,758 95,986 113,600 127,384 142,266
EBITDA 18,124 18,590 21,956 26,340 30,244
EBITDA margin (%) 22.7 19.4 19.3 20.7 21.3
PAT (Rs) 10,380 10,355 12,859 15,360 17,910
EPS (Rs) 55.2 55.1 68.4 81.7 95.3
YoY growth (%) (35.4) (0.2) 24.2 19.4 16.6
RoE (%) 16.6 15.2 17.4 19.2 20.0
RoCE (%) 14.8 14.1 15.9 17.5 18.5
P/E (x) 23.5 23.6 19.0 15.9 13.6
EV/EBITDA (x) 11.6 11.6 9.6 7.7 6.4
EV/mt (US$) 133 136 133 128 121
Source: Company, Karvy Institutional Research
Automobiles
Bajaj Auto
Bloomberg: BJAUT INReuters: BAJA.BO BUY
Institutional Equities
India Research
Recommendation
CMP: Rs1,922
Target Price: Rs2,460
Upside (%) 25%
Stock Information Market Cap. (Rs bn / US$ mn) 574/10,590
52‐week High/Low (Rs) 2,229/1,423
3m ADV (Rs mn /US$ mn) 923/17.1
Beta 0.9
Sensex/ Nifty 19,643/5,943
Share outstanding (mn) 289
Stock Performance (%) 1M 3M 12M YTD
Absolute (3.7) 8.5 9.9 (7)
Rel. to Sensex (1.8) 1.2 2.3 (8)
Performance
Source: Bloomberg
Analyst Contact Mitul Shah
+91 22 6184 4312
1,1501,3501,5501,7501,9502,1502,350
15,500
17,500
19,500
21,500
Feb‐12
Apr‐12
May‐12
Jun‐12
Jul‐12
Sep‐12
Oct‐12
Nov‐12
Jan‐13
Feb‐13
Sensex (LHS) Bajaj Auto (RHS)
Rising Volume & Better Realisation in
Overseas Markets to Drive Growth
Bajaj Auto’s (BAL) strategy of launching new vehicle at regular interval has
been paying off well. The new products are not the refurbished old models,
but truly value‐added products with better features i.e. Pulsar 200NS,
Discover 125ST & Discover 100T. We expect the new launches would help
the Company in gaining domestic market share and strong double‐digit
export growth in FY14E. We expect 1.4%, 15% & 13.2% YoY volume growth
in FY13E, FY14E & FY15E, respectively and margin improvement of 220 bps
YoY in FY14E. Reducing dependence on domestic market and rising exports
would act as key growth driver, while leading to expansion of valuation
multiples for the Company.
Strong Exports & Favourable Currency – Key Profitability Driver: Strong
exports (1/3rd of total volume) provide BAL with a good hedge against
domestic slowdown. Again, the countries like Africa, Bangladesh & Egypt are
relatively less susceptible to global meltdown. Hence, shortfall from Sri Lanka
will be adequately compensated by growth in other markets. BAL has hedged
$700 mn in the range of Rs. 53‐62/$ for FY14, which is ~2/3rd of its net currency
exposure. Moreover, the current exchange rate provides better opportunity of
future hedging at higher rates, which has led us to earning upgrade by 8.4%
and margin expansion of 220 bps YoY to 20.6% in FY14E. BAL’s operating
margin is highest in the industry and its RoE & RoCE range between 40‐50%. It
generates ~ Rs. 30‐32 bn cash every year, with almost negligible yearly capex of
~Rs. 3‐4 bn.
Expect Healthy Return Ratio & Cash Flow in FY14E: High export realisation,
rising contribution of three‐wheeler segment and launch of high value
products (New 100T) would translate into 200 bps rise in margin & 43% RoE
in FY14E, which may lead to expansion in BAL’s multiple to 15x1 year
forward P/E. Its Cash & Cash Equivalent stood at Rs. 53.74 bn at Q3FY13‐end.
Outlook & Valuation
The stock currently trades at P/E of 12x FY15E. We reiterate our “BUY”
recommendation on Bajaj Auto with price target of Rs. 2,460 per share, valuing
stock at 15xFY15E and adding Rs. 60/share for stake in KTM.
Key Financials
Y/E Mar (Rs mn) FY11 FY12 FY13E FY14E FY15E
Net Sales 165,768 197,696 208,902 256,529 290,997
EBITDA 33,808 38,441 38,483 52,743 56,369
Adj. Net Profit 27,998 30,099 31,218 41,618 46,284
EPS (Rs.) 96.8 104.0 107.9 143.8 160.0
PER (x) 19.9 18.5 17.8 13.4 12.0
P/BV 11.3 9.2 7.3 5.4 4.1
EV/ EBITDA 16.5 14.1 14.1 10.3 9.8
ROCE (%) 51.5 46.1 39.5 41.6 36.0
ROE (%) 61.0 48.3 41.1 42.8 36.7
Source: Company, Karvy Institutional Research
Power
CESC
Bloomberg: CESC INReuters: CESC.BO BUY
Institutional Equities
India Research
Recommendation
CMP: Rs287
Target Price: Rs366
Upside (%) 27%
Stock Information Market Cap. (Rs bn / US$ mn) 36/663
52‐week High/Low (Rs) 347/243
3m ADV (Rs mn /US$ mn) 182/3.4
Beta 0.9
Sensex/ Nifty 19,015/5,761
Share outstanding (mn) 125
Stock Performance (%) 1M 3M 12M YTD
Absolute (13.7) 2.7 12.1 (9.6)
Rel. to Sensex (8.8) 0.2 5.6 (7.7)
Performance
Source: Bloomberg
Analyst Contact Rupesh Sankhe
022 6184 4315
200
250
300
350
15,500
17,500
19,500
21,500
Feb‐12
Apr‐12
May‐12
Jun‐12
Jul‐12
Sep‐12
Oct‐12
Nov‐12
Jan‐13
Feb‐13
Sensex (LHS) CESC (RHS)
Improvement in Retail Biz, Rerating for Power
Biz; Maintain “BUY CESC has outperformed Power Index ~18% since Jan’12 owing to tariff
approval and permitting FDI in multi‐brand retail. Still, we believe that
the stock is trading at attractive levels and trading below its book value.
We believe that CESC’s earnings from power business would decline
further, as its retail business has started showing positive EBITDA at the
store levels.
Regulated Biz with Assured RoE: Operating under regulated business
model provides CESC with strong and steady income flow. Currently, it
caters to Kolkata region with a capacity of 1,225MW having assured RoE at
15.5% & RoE of 15% on generation and distribution respectively. The equity
base of regulated business is likely to grow to Rs. 34 bn by FY14E from Rs. 26
bn in FY11. We continue to expect capacity at 2,450MW by FY14E.
Progress on Chandrapur & Haldia to Trigger Growth: Signing of FSAs with
Coal India will benefit CESC’s under‐construction projects mainly 600MW
Chandrapur (COD likely in May’13) & 600MW Haldia project (COD likely in
Jun’14). Currently, CESC has LoA of 5.6 MTPA with Coal India.
Retail Biz Likely to turnaround by FY15E: Spencer’s average sales have
increased from Rs. 1,087/sq ft in YTD 9M FY`12 to Rs. 1,230/ sq ft in YTD 9M
FY13, marking a growth of 13.15%. Same stores sales have increased from Rs.
1,124/sq ft in YTD 9M FY12 to Rs. 1,303/ sq ft in YTD 9M FY13, registering a
growth of 16%. Spencer`s Retail has made a store level EBITDA of Rs. 51/sq ft
per month in Q3FY13. We expect CESC to earn PAT by FY15E with the
rerating of its power business.
Outlook & Valuation
At the CMP, the stock is trading at 0.6xFY14 Adj.BV, which in our view does
not reflect the true strength in its core assured RoE power business, progress
on expansion and likely turnaround of retail business. At CMP of Rs. 287, the
stock is trading at FY13E & FY14E P/E multiples of 6.2x & 5.8x, respectively
and P/BV multiples of 0.5x for FY14E. We reiterate our “BUY”
recommendation on the stock with SOTP‐based target price of Rs. 366.
Key Financials (standalone)
Y/E Mar (Rs mn) FY10 FY11 FY12 FY13E FY14E
Net Sales 33,584 40,105 48,289 53,592 57,650
Op. Profits 8,727 11,315 13,232 14,292 15,160
OPM (%) 26.0 28.2 27.4 26.7 26.3
Adjusted Net Profit 4,233 4,781 5,543 5,879 6,225
YoY Gr. (%) 7.4 12.9 16.0 6.1 5.9
EPS (Rs) 33.7 38.1 44.1 46.8 49.6
RoE (%) 10.6 10.5 10.2 9.4 9.2
ROCE (%) 10.0 11.2 11.5 10.2 9.4
EV/EBIDTA (x) 6.5 5.6 5.3 6.1 6.4
PE (x) 8.5 7.6 6.5 6.2 5.8
P/B (x) 0.85 0.75 0.60 0.56 0.52
Source: Company, Karvy Institutional Research
Pharmaceuticals
Cipla
Bloomberg: CIPLA INReuters: CIPL.BO HOLD
Institutional Equities
India Research
Recommendation
CMP: Rs362
Target Price: Rs405
Upside (%) 12%
Stock Information Market Cap. (Rs bn / US$ mn) 290/5,366
52‐week High/Low (Rs) 435/286
3m ADV (Rs mn /US$ mn) 842/15.6
Beta 0.5
Sensex/ Nifty 19,015/5,761
Share outstanding (mn) 803
Stock Performance (%) 1M 3M 12M YTD
Absolute (9.1) (5.3) 15.2 (12.7)
Rel. to Sensex (3.9) (7.6) 8.6 (10.8)
Performance
Source: Bloomberg
Analyst Contact Rahul Sharma
022 ‐ 6184 4310
250
300
350
400
450
15,500
17,500
19,500
21,500
Feb‐12
Apr‐12
May‐12
Jun‐12
Jul‐12
Sep‐12
Oct‐12
Nov‐12
Jan‐13
Feb‐13
Sensex (LHS) CIPLA (RHS)
Upsides priced in
Cipla is in the midst of makeover with the changes in the senior
management for key geographies. Sizeable ARV business, which is being
secured, would negatively impact the margins, going forward. We reiterate
our “HOLD” recommendation on the stock.
Launch of Combination Inhalers: Exploring High Margin Opportunities:
Cipla has launched Dymista, and as per industry data, the prescriptions for
Dymista have doubled in Jan’13, which could be a meaningful opportunity
for the Company, as we have factored US$35 mn in FY14E. The Company
has also roped in Franz Peters (ex‐Head at Teva Pharma) to spearhead the
inhaler opportunity in the European markets. The Company is hopeful of
launch of Seretide in Europe in next 1 to 1½ year.
Focus on Profitable Business to Remain Muted; Scale‐up in Indore SEZ
Remains a Mirage: Going forward, Cipla’s plan to defocus on low profitable
business will remain muted, as the Company has received huge orders for
ARV products in South Africa. The 9 month figures of Indore SEZ have been
disappointing with revenues of Rs. 4 bn, while the overheads costs is
expected to plague the Company.
Outlook & Valuation
Contraction in core EBDITAM in FY14E on back of higher cost pressures on
gross margins, increased staff and overheads we downgrade our EDBITAM
to 23.8%. We remove the option value of Rs 20 for Medpro and factor
additional other income due to deferment of Medpro acquisition. We
upgrade our EPS by 3.3 % to Rs 19.9 and downgrade our price target from Rs
426 to Rs 405 based on 20.3x FY 2014E. We reiterate our HOLD rating on the
stock.
Key Financials
Y/E Mar (Rs mn) FY10 FY11 FY12 FY13E FY14E
Net sales 56,057 63,194 69,775 82,887 96,815
EBITDA 13,106 12,709 15,819 22,495 22,996
Net Profit 9,733 9,497 11,240 16,105 16,000
EPS(Rs) 12.1 11.8 14.0 20.1 19.93
EPS growth (%) 25.7 ‐2.4 18.4 43.3 ‐0.6
EBITDA margin (%) 23.4 20.1 22.7 27.1 23.8
PER(x) 29.8 30.6 25.8 18.0 18.1
EV/EBITDA (x) 21.9 22.7 17.7 12.2 11.7
RoCE (%) 21.5 17.2 19.1 25.5 21.6
RoE (%) 21.8 15.8 16.3 20.1 17.2
Source: Company, Karvy Institutional Research
Pharmaceuticals
Dr. Reddyʹs Lab
Bloomberg: DRRD INReuters: REDY.BO BUY
Institutional Equities
India Research
Recommendation
CMP: Rs1,769
Target Price: Rs2,170
Upside (%) 23%
Stock Information Market Cap. (Rs bn / US$ mn) 300/5,553
52‐week High/Low (Rs) 1,970/1,526
3m ADV (Rs mn /US$ mn) 791/14.6
Beta 0.7
Sensex/ Nifty 19,015/5,761
Share outstanding (mn) 170
Stock Performance (%) 1M 3M 12M YTD
Absolute (9) 0.5 8.6 (3.3)
Rel. to Sensex (3.8) (2) 2.4 (1.2)
Performance
Source: Bloomberg
Analyst Contact Rahul Sharma
022 ‐ 6184 4310
1,4001,5001,6001,7001,8001,9002,000
15,50016,50017,50018,50019,50020,500
Feb‐12
Apr‐12
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Feb‐13
Sensex (LHS) Dr. Reddy's (RHS)
Strong Revenue Visibility
Dr. Reddy’s Laboratories (DRL) has been under pressure on account of
margins contraction. However, with several growth engines – i.e. scale‐up
in low competition opportunities, launch of two niche products in the US,
decent traction in domestic formulations, PSAI lock‐ins in place and among
the low impact companies due to the New Pricing Policy – we believe that
the Company will gain its pride of place in the foreseeable future.
New Launches to Address Contraction in EBDITA Margin: The Company’s
contraction in EBDITA margin has been on account of no new launches in the
US markets and margin pressure in the API space, which the Company
would address with new launches. The launch of two oncology injections is
expected in FY14E – which have not been factored – are expected to give upside
in excess of US$50 mn.
Launch of Propecia: Dr. Reddy’s Labs’ current market share during
exclusivity is 70%, which would enable the Company to get revenues to
the tune of Rs. 756 mn in Q4FY13E and higher margins.
Atorvastatin’s market share has increased to 15% in Q4FY13E from 8‐
14% in the previous quarter. This advantage in market share ramp‐up
should also help in FY14 numbers.
Metaprolol’s market share has gone up from 2‐2.5% in Q3FY13 to 15% in
Jan’13, which would enable the Company to get better gross margins in
Q4FY13E. We expect revenues to ramp up to US$36 mn in FY14 from this
product.
Outlook & Valuation
Better traction in domestic formulations and PSAI segments coupled with
forward covers of US$600 mn at Rs. 55‐57 would aid margins. On the back of
ramp‐up in niche opportunities and regular launches of complex products,
we reiterate our “BUY” recommendation on the stock with a price target of
Rs. 2,170 per share based on 19.7x FY 2014E (EPS RS 109.9) – including an
option value of Rs. 2 for Propecia.
Key Financials
Y/E Mar (Rs mn) FY10 FY11 FY12 FY13E FY14E
Net sales 70,277 74,692 96,738 112,537 125,350
EBITDA 14,771 16,498 24,507 25,788 28,961
Net Profit 1,068 10,762 14,263 15,085 18,660
EPS(Rs) 6.3 63.6 84.1 88.8 109.9
EPS growth (%) N.A 905.3 32.2 5.6 23.7
EBITDA margin (%) 21.0 22.1 25.3 22.9 23.1
PER(x) 279.1 27.8 21.0 20.5 16.6
EV/EBITDA (x) 20.6 19.3 12.9 12.5 10.7
RoCE (x) 4.0 19.4 23.8 19.8 21.3
RoE (%) 2.5 24.2 27.6 23.7 24.2
Source: Company, Karvy Institutional Research
Banking
HDFC Bank
Bloomberg: HDFCB INReuters: HDBK.BO HOLD
Institutional Equities
India Research
Recommendation
CMP: Rs645
Target Price: Rs685
Upside (%) 5%
Stock Information Market Cap. (Rs bn / US$ mn) 1,545/28,562
52‐week High/Low (Rs) 706/482
3m ADV (Rs mn /US$ mn) 1,861/34.4
Beta 1.0
Sensex/ Nifty 19,015/5,761
Share outstanding (mn) 2,372
Stock Performance (%) 1M 3M 12M YTD
Absolute (2.1) (1.6) 24.1 (4)
Rel. to Sensex 3.5 (4.1) 17.0 (2)
Performance
Source: Bloomberg
Analysts Contact
Hatim Broachwala, CFA
022‐6184 4329
Paresh Jain
022 6184 4324
400
500
600
700
800
15,500
17,500
19,500
21,500
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Apr‐12
May‐12
Jun‐12
Jul‐12
Sep‐12
Oct‐12
Nov‐12
Jan‐13
Feb‐13
Sensex (LHS) HDFC Bank (RHS)
Quality at a Price
HDFC Bank has one of the best banking models with superior deposit
franchise and relatively un‐risked lending, which is getting reflected in its
asset quality.
Superior Asset Quality – Credit Cost Likely to be Higher: HDFC Bank’s
asset quality has shown tremendous resilience in last 2‐3 years, while its
slippages have declined to 1% in FY12, which is better than the reasonable
expectations by its Management. The Bank’s gross NPA remains stable at 1%
with no major restructured asset. We believe that it would be very difficult for
the Bank to further improve on this front, given its composition of its loan
book. Hence, we factor higher credit cost going ahead, assuming it does not
heavily utilizes its floating provision.
Sustaining Business Momentum: HDFC Bank’s credit growth remains
strong and it continues to grow 4‐5% above the industry’s growth rate.
However, the growth has off late come more from the Retail Segment,
whereas the Corporate Segment has relatively slowed down. The Bank’s
CASA – which used to be >50% – has declined to ~45% in Q3FY13.
Best‐in‐Class NIMs: Despite difficult conditions, backed by its strong deposit
franchise, the Bank has been able to maintain the NIMs (calculated) of 4.5%,
which is best in the industry. Its cost of funds is one of the lowest at 5.4%. Its
Management has guided to maintain its NIMs at current levels. Despite
decline in CASA, the Bank has been able to maintain its NIMs on the back of
shift in portfolio mix from corporate to retail.
Outlook & Valuation
At the CMP, the stock trades at 20.2x & 17.6x FY14E & FY15E earnings, and at
3.7x & 3.2x P/ABV FY14E & FY15E, respectively. Based on its historical mean
valuation and implying 3.4x P/ABV FY15E, we reiterate our “HOLD”
recommendation on HDFC Bank with target price of Rs. 685 per share.
Key Financials
Y/E Mar (Rs mn) FY11 FY12 FY13E FY14E FY15E
Net interest income 1,05,431 1,22,967 1,50,409 1,75,843 2,02,672
Operating Profit 77,254 89,505 1,12,340 1,29,328 1,46,609
PAT 39,264 51,671 65,982 75,065 86,086
EPS (Rs) 16.9 22.0 28.1 32.0 36.7
ABV (Rs) 111.0 132.1 154.1 176.5 201.7
P/E (x) 38.2 29.3 22.9 20.2 17.6
P/ABV (x) 5.8 4.9 4.2 3.7 3.2
Gross NPA (%) 1.0 1.0 1.0 1.2 1.3
Net NPA (%) 0.2 0.2 0.3 0.3 0.3
ROE (%) 16.7 18.7 20.3 19.7 19.4
ROA (%) 1.6 1.7 1.8 1.7 1.6
Source: Company, Karvy Institutional Research
Banking
ICICI Bank
Bloomberg: ICICIBC INReuters: ICBK.BO BUY
Institutional Equities
India Research
Recommendation
CMP: Rs1,071
Target Price: Rs1,520
Upside (%) 43%
Stock Information Market Cap. (Rs bn / US$ mn) 1,224/22,621
52‐week High/Low (Rs) 1,232/767
3m ADV (Rs mn /US$ mn) 3,324/61.5
Beta 1.3
Sensex/ Nifty 19,015/5,761
Share outstanding (mn) 1,150
Stock Performance (%) 1M 3M 12M YTD
Absolute (9.3) 4.5 14.2 (6.5)
Rel. to Sensex (4.1) 1.9 7.6 (4.5)
Performance
Source: Bloomberg
Analysts Contact
Hatim Broachwala, CFA
022‐6184 4329
Paresh Jain
022 6184 4324
500
700
900
1,100
1,300
15,500
17,500
19,500
21,500
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Apr‐12
May‐12
Jun‐12
Jul‐12
Sep‐12
Oct‐12
Nov‐12
Jan‐13
Feb‐13
Sensex (LHS) ICICI Bank (RHS)
On a Strong Footing
ICICI Bank has magnificently restructured its balance sheet both on the
liability as well as the asset fronts. As a result, its profitability parameters
are now comparable to peers. We believe its substantial valuation discount
to its peers is unjustified.
Substantial Improvement in Asset Quality: There has been substantial
improvement in the asset quality of the Bank with gross NPA improving over
180 bps in last ten quarters vis‐à‐vis industry trend of further deterioration. Its
restructured book at just 1.5% of loan book seems to be at comfortable zone.
As per the Bank’s Management, the credit cost – including restructuring related
provisioning – would remain within 0.75% of loan book in FY13E.
Revival in Balance‐sheet Growth: Picking up the pace, the Bank’s balance‐
sheet growth has started growing marginally above the industry compared to
flattish numbers reported last year. Though the Bank’s retail credit has shown
the initial signs of revival, it has shifted significantly away from the unsecured
retail credit. It has now built a strong CASA base of 40.9% in Q3FY13 from
28.7% in FY09.
Improved NIMs – To Sustain at Current Levels: NIMs for the Bank has
improved by 50bps over last three years to 3.1%, with push from domestic as
well as international segment. Its Management has guided stable NIMs ahead.
We believe with CASA at comfortable levels, it won’t be very difficult for the
Bank to maintain the NIMs at current levels.
Outlook & Valuation
At the CMP, the stock – after adjusting for subsidiaries – trades at 11.7x & 9.7x
FY14E & FY15E earnings, and at 1.4x & 1.3x P/ABV FY14E & FY15E,
respectively. Based on 15% premium to historical mean valuation gap to
HDFC Bank implying 2x P/ABV FY15E for parent & Rs. 200 for its stake in
subsidiaries, we reiterate our “BUY” recommendation on ICICI Bank with
target price of Rs. 1,520 per share.
Key Financials
Y/E Mar (Rs mn) FY11 FY12 FY13E FY14E FY15E
Net interest income 90,169 107,342 137,599 153,966 176,069
Operating Profit 90,476 103,866 130,525 140,610 166,584
PAT 51,514 64,653 82,264 85,553 103,251
EPS (Rs) 44.7 56.1 71.4 74.2 89.6
ABV (Rs) 457.4 498.5 555.7 606.2 663.3
P/E (x) 19.5 15.5 12.2 11.7 9.7
P/ABV (x) 1.9 1.7 1.6 1.4 1.3
Gross NPA (%) 4.5 3.6 3.2 2.7 2.5
Net NPA (%) 1.1 0.7 0.7 0.5 0.6
RoE (%) 9.7 11.3 13.1 12.4 13.7
RoA (%) 1.3 1.5 1.6 1.5 1.6
Source: Company, Karvy Institutional Research, Valuation after adjusting for subsidiaries
FMCG
ITC
Bloomberg: ITC INReuters: ITC.BO BUY
Institutional Equities
India Research
Recommendation
CMP: Rs291
Target Price: Rs320
Upside (%) 10%
Stock Information Market Cap. (Rs bn / US$ mn) 2,294/42,412
52‐week High/Low (Rs) 311/203
3m ADV (Rs mn /US$ mn) 2,206/40.8
Beta 0.8
Sensex/ Nifty 19,015/5,761
Share outstanding (mn) 7,887
Stock Performance (%) 1M 3M 12M YTD
Absolute (3) 1.3 38.9 1.4
Rel. to Sensex 2.6 (1.2) 30.9 3.6
Performance
Source: Bloomberg
Analyst Contact Naveen Trivedi
022‐6184 4316
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330
15,500
17,500
19,500
21,500
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Jun‐12
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Nov‐12
Jan‐13
Feb‐13
Sensex (LHS) ITC (RHS)
Dominant Player in Cigarette Biz with Better
Prospects in Non‐cigarette Biz
ITC is a dominant player in cigarette business – with >80% market share –
that accounts for ~44% of net sales and >80% of PBIT of the Company. It has
maintained 16‐18% growth in cigarette business in past several quarters
despite pressure on volume. We believe ITC would sustain similar growth in
cigarette business, going forward. Besides, ITC’s non‐cigarette business –
with ~70% contribution of FMCG & Agribusiness – is expected to grow by
19% CAGR in FY12‐15E compared to 17% CAGR recorded in FY09‐12 period.
Cigarette Segment to Sustain Momentum: ITC’s dominance in cigarette space
would continue due to extensive portfolio, large distribution network, and
brand loyalty amid suitable backward integration. Strong pricing power
coupled with foray into 64mm segment would aid ITC in maintaining healthy
growth momentum, unless there are some unfavorable governmental
guidelines/policies on tobacco consumption. We believe that growth in
cigarette business would drive ITC’s overall profitability, with rise in
PBIT/stick to 109 paisa by FY15E from ~80 paisa in FY12P.
Non‐Cigarette Biz to grow at 19% CAGR in FY12‐15E: We expect ITC’s non‐
cigarette business to show 19.1% CAGR in FY12‐15E vs. 16.7% CAGR in
FY09‐12. Its FMCG business – which has grown 15x in last 8 years – is likely to
clock ~21% CAGR in FY12‐15E owing to better foothold of the existing
portfolio, foray into newer segments and aggressive marketing strategy.
Meanwhile, we expect ITC to clock 14% & 21% CAGR in Paperboard &
Agribusiness segments, respectively in FY12‐15E period. We expect
non‐cigarette business to contribute ~25% to ITC’s total PBIT in FY15E,
compared to 19% in FY12.
Outlook & Valuation
We use DCF valuation instead relative valuation, as relative valuation seems to
be not feasible without any apparent comparison for ITC. Our DCF valuation
assumes 18% and 16% FCF growth during first and second 5 years post FY15E.
We reiterate our “BUY” recommendation on the stock with target price of Rs.
320 per share.
Key Financials
Y/E Mar (Rs mn) FY11 FY12 FY13E FY14E FY15E
Net Revenues 222,737 261,795 302,334 355,033 413,141
EBIDTA 74,208 88,376 105,234 124,721 144,659
EBITDA Margins (%) 33.3 33.8 34.8 35.1 35.0
Adjusted Net Profit 49,558 62,580 73,542 88,074 102,261
EPS (Rs) 6.3 8.0 9.4 11.3 13.1
YoY Growth (%) 20.5 26.3 17.5 19.8 16.1
RoE (%) 30.1 32.2 32.7 33.7 33.7
RoCE (%) 44.2 44.7 46.0 46.9 46.9
P/E (x) 46.1 36.5 31.0 25.9 22.3
EV/EBITDA (x) 29.8 24.9 20.9 17.4 14.8
P/BV (x) 13.8 11.7 10.2 8.7 7.5
Source: Company, Karvy Institutional Research
Cement
JK Lakshmi Cement
Bloomberg: JKLC INReuters: JKLC.BO BUY
Institutional Equities
India Research
Recommendation
CMP: Rs126
Target Price: Rs200
Upside (%) 59%
Stock Information Market Cap. (Rs bn / US$ mn) 15/284
52‐week High/Low (Rs) 180/56
3m ADV (Rs mn /US$ mn) 44/0.8
Beta 1.0
Sensex/ Nifty 19,015/5,761
Share outstanding (mn) 122
Stock Performance (%) 1M 3M 12M YTD
Absolute (14.1) (6) 109.9 (22.3)
Rel. to Sensex (9.2) (8.3) 97.8 (20.6)
Performance
Source: Bloomberg
Analyst Contact Rajesh Kumar Ravi
022 6184 4313
50
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150
200
15,500
17,500
19,500
21,500
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Apr‐12
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Feb‐13
Sensex (LHS) JK Lakshmi Cement
Fresh Ambition, Fresh Upside
Doubling of its cement capacity to 10.5 mn MT during FY13‐15E period by
JK Lakshmi Cement (JKLC) should drive its industry leading volume
CAGR 13% in FY12‐15E period, while strong demand and ensuing supply
discipline would help its realization CAGR of ~6.5% during this period.
Subsequently, fuel cost pressure is expected to remain moderate on
account of ~100% captive power sources for cement production and
increased usage of pet coke, which has seen price moderation over the last
one year.
Capacity set to double: JKLC’s capacity is set to rise by 5.2 mn MT by
FY15E/early FY16E. These expansions are Brown‐field expansion of 0.5 mn
MT in north by FY14E, Green‐field expansion of 2.7 mn MT in east by FY15E,
Green‐field expansion of 0.5 mn MT in west by FY15E and revival of Udaipur
Cement Works’ 1.5 mn MT capacity in north by FY15E/ early FY16E.
Fairly Comfortable Balance Sheet despite Large Capex: Despite doubling of
capacity in three year period, we do not expect JKLC’s balance sheet to
unduly stretch, as strong operating cash flow of Rs. 14 bn would fund most
of its capex of ~Rs. 17 bn during FY13‐15E period. Hence, we expect net debt‐
equity to peak out in FY14E.
Outlook & Valuation
JKLC currently sells ~90% of its cement in the northern and western regions,
where demand is expected to remain strong. Driven by strong volume and
price growths along‐with fuel/power cost efficiency, we expect EBITDA &
PAT CAGR of 29% & 39% during FY12‐15E period. Subsequently, JKLC’s
RoCE should expand by 500 bps driven by strong operating profit growths,
while its RoE is expected to remain flat owing to increase in near‐term capital
costs. At 5.2x its Sept’14E EBITDA, we arrive at a fair value of Rs. 200
(implied replacement cost of US$85 per MT, which is at ~50% discount to the
large cap cement companies). We recommend “BUY”.
Key Financials (Standalone)
Y/E Mar (Rs mn) FY11 FY12 FY13E FY14E FY15E
Net Sales 26,162 32,567 38,924 44,002 50,131
EBITDA 6,288 9,388 11,287 12,391 14,051
EBITDA margin (%) 24.0 28.8 29.0 28.2 28.0
PAT (Rs) 2,109 3,850 4,399 5,062 6,245 EPS (Rs) 8.9 16.2 18.5 21.3 26.2
RoE (%) 12.9 20.3 19.7 19.4 20.3
RoCE (%) 8.9 13.6 15.3 16.4 18.5
P/E (x) 27.8 15.2 13.3 11.6 9.4
EV/EBITDA (x) 13.7 9.1 7.3 6.4 5.3
EV/MT (US$) 81.1 83.5 84.3 91.2 50.6
Source: Company, Karvy Institutional Research
FMCG
Jyothy Laboratories
Bloomberg: JYL INReuters: JYOI.BO BUY
Institutional Equities
India Research
Recommendation
CMP: Rs157
Target Price: Rs210
Upside (%) 34%
Stock Information Market Cap. (Rs bn / US$ mn) 25/468
52‐week High/Low (Rs) 211/78
3m ADV (Rs mn /US$ mn) 36/0.7
Beta 0.7
Sensex/ Nifty 19,015/5,761
Share outstanding (mn) 161
Stock Performance (%) 1M 3M 12M YTD
Absolute 4.7 (11.5) 58.5 (3.5)
Rel. to Sensex 10.7 (13.7) 49.4 (1.4)
Performance
Source: Bloomberg
Analyst Contact Naveen Trivedi
022‐6184 4316
60
110
160
210
15,500
17,500
19,500
21,500
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Apr‐12
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Feb‐13
Sensex (LHS) Jyothy Lab (RHS)
Multiple Triggers to Unlock
Jyothy Laboratories (Jyothy) has come out well from the phase marked
with great pressure in terms of acquisition of Henkel India (Henkel), slow
growth in core business owing to distribution restructuring and interest
obligation. On the back of distribution restructuring and its short‐term
adverse impact on performance, the stock has corrected by 20% in the past
4‐months. However, we believe the ensuing quarters’ better performance
would drive the stock in the near to medium term. As distribution
restructuring is over, Jyothy’s overall performance is expected to improve
substantially from Q4FY13 onwards, with which Jyothy’s valuation
discount compared to its peers would shrink further.
Expect Strong Sales Growth Traction: In core business, “Exo” has shown
strong ~50% growth in last four quarters vs. 30% growth in Jyothy’s
standalone business. We expect “Exo” to continue to show strong growth on
account of pan‐India launch plan by FY13‐end. Besides, we believe that
Jyothy Consumer (JCPL) – formerly Henkel – has added 6‐7 strong brands to
its portfolio. We see strong potential of these acquired brands and with
aggressive marketing efforts, we expect strong performance in FY14‐FY15E.
Anticipate Strong Operational Performance: Distribution restructuring
would save Jyothy’s operational cost by 600 bps – 400bps through
rationalization of distribution margin and 200bps saving by moving from
own depot to C&F. Its Management expects additional 200bps saving
through better raw material sourcing and packaging. We expect Jyothy
would initially invest large part of this saving through higher A&P, which
will boost its business. However, we expect Jyothy’s EBITDA margin would
expand by 200‐250bps in FY14‐15 period.
Outlook & Valuation
We value Jyothy on 19x P/E on 24‐month forward earnings. Our target P/E is
at 30% discount to its peers to recompense any delay in execution. We
reiterate our “BUY” recommendation on the stock with a target price of Rs.
210 per share.
Key Financials
Y/E Mar (Rs mn) FY11 FY12 FY13E FY14E FY15E
Net Revenues 6,174 9,130 12,568 15,231 18,187
EBIDTA 727 842 1,628 2,302 2,848
EBITDA Margins (%) 11.8 10.2 13.0 15.1 15.7
Adjusted Net Profit 688 536 821 1,371 1,875
EPS (Rs) 4.3 3.3 5.1 8.5 11.6
% Growth (22.0) 10.7 38.3 67.0 36.7
RoE (%) 10.9 8.8 13.5 22.4 29.7
RoCE (%) 10.4 7.1 14.4 21.1 26.7
P/E (x) 36.6 46.9 30.6 18.3 13.4
EV/EBITDA (x) 30.9 35.8 18.4 12.7 10.1
P/BV (x) 4.0 4.1 4.1 4.1 4.0
Source: Company, Karvy Institutional Research
Real Estate
Kolte Patil Developers
Bloomberg: KPDLReuters: KOLT.BO BUY
Institutional Equities
India Research
Recommendation
CMP: Rs98
Target Price: Rs180
Previous Target: Rs106
Upside (%) 84%
Stock Information Market Cap. (Rs bn / US$ mn) 07/137
52‐week High/Low (Rs) 136/34
3m ADV (Rs mn /US$ mn) 139/2.62.6
Beta 1.0 1.0
Sensex/ Nifty 19,015/5,761
Share outstanding (mn) 76
Stock Performance (%) 1M 3M 12M YTD
Absolute (16.3) 22.0 131.6 (13.7)
Rel. to Sensex (11.5) 18.9 118.3 (11.8)
Performance
Source: Bloomberg
Analyst Contact Parikshit Kandpal
022‐6184 4311
0
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19,000
21,000
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Sensex (LHS) Kolte Patil Developers
This is what good looks like
The share price of Kolte Patil Developers (KPDL) has appreciated 64% since
our coverage dated 16.10.2012 outperforming the BSE Realty Index by 42%.
As highlighted in our note, “multiple triggers” have led to a partial
“multiple re‐rating” and over course of FY14‐15E we see further expansion
playing out. Despite a recent run‐up, we believe that the stock still offers
84% upside to reach our increased DCF‐based target of Rs. 180 per share (20%
discount to NAV of Rs. 225).
Multiple Triggers – Multiple Re‐rating: We see (i) residential sales of 6.5 mn
sqft – (Rs. 21 bn in value and Rs. 3.2 bn terms of profit) – over past 18 months
entering into revenue recognition throwing enormous surplus cash‐flows; (ii)
7‐8 mn square feet of new launches over next 12‐18 months providing visibility
beyond FY15E; and (iii) D/E – 0.2x leaving scope for future land acquisition to
replenish sales delivery. In true sense, KPDL is witnessing strong
transformation with recent talent acquisition (VP‐Marketing joining from
Prestige Estates, Head Business Development joining from HCC Realty),
Mumbai foray and Bangalore expansion, whilst in Pune the Company is
consolidating its market share beyond 11‐12% (3 mn sqft).
Focus on Strengthening Corporate Governance & Sharing Profits: We see
major corporate governance improvement with changes in Internal Auditors
and we believe that with growing size, the KPDL may change its statutory
auditors as well. Besides, the Company is one of few realty companies which
have a stated dividend policy of distributing 15‐25% of annual profits.
Strong Balance Sheet – Undemanding Valuation: Despite a strong balance
sheet D/E‐0.2x (Net debt Rs.800mn), valuation seems to be undemanding at
5.4x FY14EPS. KPDL has a very conservative approach to debt, which reflects
in strong PE partnership with ICICI Venture, IL&FS & Portman Holdings (3rd
largest US developer) with no guaranteed IRRs structure. Besides, KPDL’s new
land acquisitions have been largely Joint Developments Agreements (JDAs).
Outlook & Valuation
We value KPDL on NAV based target of Rs180 (giving a 20% NAV discount).
At CMP the KPDL trades at 5.4xFY14E EPS. We maintain our “BUY”
recommendation on the stock.
Key Financials
Y/E Mar (Rs mn) FY11 FY12 FY13E FY14E FY15E
Net Sales 2,028.6 2,492.4 7,017.9 9,470.0 7,648.1
Growth % 37.4 22.9 181.6 34.9 ‐19.2
EBIDTA 845.7 677.1 1,774.1 2,711.1 2,625.5
EBIDTA margins % 41.7 27.2 25.3 28.6 34.3
PAT 479.1 340.8 939.5 1,334.7 1,228.1
EPS (Rs/share) 6.3 4.5 12.4 17.6 16.2
RoCE % 3.9 5.1 12.7 18.7 18.2
P/E(x) 15.8 20.9 8.0 5.4 6.0
Source: Company, Karvy Institutional Research
Banking
Karur Vysya Bank
Bloomberg: KVB INReuters: KARU.BO BUY
Institutional Equities
India Research
Recommendation
CMP: Rs478
Target Price: Rs600
Upside (%) 26%
Stock Information Market Cap. (Rs bn / US$ mn) 51/946
52‐week High/Low (Rs) 592/352
3m ADV (Rs mn /US$ mn) 93/1.7
Beta 0.7
Sensex/ Nifty 19,015/5,761
Share outstanding (mn) 107
Stock Performance (%) 1M 3M 12M YTD
Absolute (9.4) 3.8 24.3 (14.9)
Rel. to Sensex (4.2) 1.2 17.2 (13.1)
Performance
Source: Bloomberg
Analysts Contact Paresh Jain
022 6184 4324
Hatim Broachwala, CFA
022‐6184 4329
300350400450500550600
15,500
17,500
19,500
21,500
Feb‐12
Apr‐12
May‐12
Jun‐12
Jul‐12
Sep‐12
Oct‐12
Nov‐12
Jan‐13
Feb‐13
Sensex (LHS) Karur Vysya Bank (RHS)
Riding High on Growth – Key Segments to
Boost Credit Growth
Karur Vysya Bank (KVB) has reported strong growth in balance sheet with
balanced profit growth of above 20% during FY10‐FY12 period. Managing
its asset quality watchfully, The Bank has reduced it NPAs over past few
years. Its profitability continues to remain superior to most of its peers. Business Growth to Surpass Industry Growth: The business growth of KVB
continues to remain above industry growth rate. Its loan book grew 34% in
FY12, while the overall banking industry grew by 18%. We expect the Bank
to continue its high growth momentum in FY12‐15E as well. The key
segments likely to contribute the credit growth for the Bank are: SME,
Agricultural & Personal Loans.
NIMs – Expected to Remain Stable: We believe KVB’s NIMs to remain
stable in the range of 3.1%‐3.2% in FY13E. Meanwhile, we expect yield on
advances to decline in H2FY13E owing to decline in policy rates, this is
expected to get offset by decline in cost of funds.
Impeccable Asset Quality: The Bank’s asset quality continues to remain
healthy and its Management doesn’t expect any negative surprise. We
believe that the Bank’s slippages would marginally increase, going forward,
as it will be difficult for the Bank to improve asset quality further.
Consequently, we expect its gross NPA & net NPA to show marginal uptick
from current levels of 1.3% & 0.4%, respectively. The Bank is currently
having a healthy provision coverage ratio of 75%. It has an outstanding
restructured loan book of Rs. 9 bn, which constitutes 3.3% of its loan book.
Outlook & Valuation
At CMP, the stock trades at 7.3x & 5.8x FY14E & FY15E earnings, and at 1.5x
& 1.3x P/ABV FY14E & FY15E, respectively. Based on 20% premium to its
mean valuation and implying 1.5x P/ABV FY15E, reiterate our “BUY”
recommendation on Karur Vysya Bank with target price of Rs. 600 per share.
Key Financials
Y/E Mar (Rs mn) FY11 FY12 FY13E FY14E FY15E
Net Interest Income 7,669 9,171 11,693 15,040 18,316
Operating profit 5,628 6,995 8,065 11,081 13,648
PAT 4,156 5,017 5,888 7,506 9,365
EPS (Rs) 44.9 46.8 54.9 70.0 87.4
ABV (Rs) 222.7 246.8 285.0 335.4 402.2
P/E (x) 10.6 10.2 8.7 6.8 5.5
P/ABV (x) 2.1 1.9 1.7 1.4 1.2
Gross NPA (%) 1.3 1.3 1.3 1.4 1.6
Net NPA (%) 0.1 0.3 0.4 0.4 0.4
ROE (%) 22.3 20.8 20.2 22.1 23.1
ROA (%) 1.7 1.5 1.4 1.5 1.5
Source: Company, Karvy Institutional Research
Automobiles
Mahindra & Mahindra
Bloomberg: MM INReuters: MAHM.BO BUY
Institutional Equities
India Research
Recommendation
CMP: Rs866
Target Price: Rs1,150
Upside (%) 33%
Stock Information Market Cap. (Rs bn / US$ mn) 552/10,183
52‐week High/Low (Rs) 976/621
3m ADV (Rs mn /US$ mn) 1,167/21.6
Beta 1.1
Sensex/ Nifty 19,643/5,943
Share outstanding (mn) 614
Stock Performance (%) 1M 3M 12M YTD
Absolute 1.4 (4.3) 20.0 (3.6)
Rel. to Sensex 3.5 (10.7) 11.8 (4.6)
Performance
Source: Bloomberg
Analyst Contact Mitul Shah
+91 22 6184 4312
5506507508509501,050
15,500
17,500
19,500
21,500
Feb‐12
Apr‐12
May‐12
Jun‐12
Jul‐12
Sep‐12
Oct‐12
Nov‐12
Jan‐13
Feb‐13
Sensex (LHS) M&M (RHS)
Stellar Performance of UVs & Tractors in FY15
Backed by General Elections; Maintain “BUY”Mahindra & Mahindra (M&M) has maintained undisputed leadership in
domestic UV segment, with its current market share standing at >45%,
which fell by 900 bps YoY to 47.5% in YTD’13, due to success of Ertiga,
Duster & other UVs. We expect M&M’s market share in UV segment to
decline further by 200 bps to 45.5% in FY15E. However, we observed a
strong positive co‐relation between PV sales and election period, with the
PV sales recording higher volume during the election year and a year prior
to that.
UV Segment to Record 31% CAGR; Diesel price Hike to have Trivial
Impact: The usage of UVs for election campaigning has increased over last
decade, which coupled with rising preference of SUVs over Sedan is expected
to result in high double digit CAGR of 31% in UV space over FY12‐FY15E. We
believe that, M&M will be the biggest beneficiary of outperformance in UV
space over next two years, despite losing some market share in the segment.
Its premium SUV i.e. XUV500 has been a runaway success and is considered
to be India’s most appealing vehicle, which has been developed and
manufactured indigenously. We believe that diesel price hike would have
marginal impact on PV sales in the near‐term, but would not have major
impact on buying behaviour of consumer.
Tractor Segment to Back on Track: We have also observed positive co‐
relation between tractor volume and election period. Farm segment always
benefits from election money‐flow, which coupled with relief to farmers from
government would result in strong demand for tractors in FY15E, which will
benefit M&M on volume and margin front as well, going forward.
Outlook & Valuation
Our FY13E, FY14E & FY15E EPS estimates stand at Rs. 54, Rs. 64.7 and Rs. 78,
respectively. We reiterate our “BUY” recommendation on M&M, while
maintaining our SOTP‐based target price of Rs. 1,150 per share, valuing
M&M’s core business at EV/EBIDTA of 8xFY15E to Rs. 902 and valuing
subsidiary to Rs. 305 per share, post taking 20% holding discount. We exclude
Rs. 57 per share as value erosion in other auto business.
Key Financials (Standalone)
Y/E Mar (Rs mn) FY11 FY12 FY13E FY14E FY15E
Net Sales 234,434 318,526 411,488 489,909 579,293
EBITDA 34,375 37,698 48,757 58,501 70,835
Net Profit 25,220 26,439 33,813 40,425 49,094
EPS (Rs.) 42.0 43.1 55.1 65.6 79.7
PER (x) 20.6 20.1 15.7 13.2 10.9
P/BV 5.0 4.4 3.6 3.0 2.4
EV/ EBITDA 15.0 14.0 11.0 9.1 7.3
RoCE (%) 20.8 18.7 20.1 20.6 21.2
RoE (%) 26.7 22.7 24.4 24.2 24.2
Source: Company, Karvy Institutional Research
Automobiles
Maruti Suzuki
Bloomberg: MSIL INReuters: MRTI.BO BUY
Institutional Equities
India Research
Recommendation
CMP: Rs1,404
Target Price: Rs2,022
Upside (%) 44%
Stock Information Market Cap. (Rs bn / US$ mn) 436/8,044
52‐week High/Low (Rs) 1,639/1,051
3m ADV (Rs mn /US$ mn) 1,261/23.3
Beta 0.9
Sensex/ Nifty 19,643/5,943
Share outstanding (mn) 289
Stock Performance (%) 1M 3M 12M YTD
Absolute (2.5) 0.6 14.1 1.2
Rel. to Sensex (0.6) (6.1) 6.3 0.1
Performance
Source: Bloomberg
Analyst Contact Mitul Shah
+91 22 6184 4312
8501,0501,2501,4501,6501,850
15,500
17,500
19,500
21,500
Feb‐12
Apr‐12
May‐12
Jun‐12
Jul‐12
Sep‐12
Oct‐12
Nov‐12
Jan‐13
Feb‐13
Sensex (LHS) Maruti Suzuki (RHS)
Volume & Margins to Witness Accelerated
Growth; BUY Maruti Suzuki India (MSIL) is India’s most preferred brand by customers
with highest recall value, due to its most promising products and after sales
service. One of MSIL’s key strengths is wide range of products at every price
points for every class of customers. Though, over the years MSIL’s market
share declined due to intensifying competition, its strategy of regularly
launching completely new products has been paying off well. High booking
for Swift, D’zire & Ertiga even during period of uncertainty of production at
Manesar plant, indicates customer’s overwhelming faith on MSIL and its
products.
New Launches & Diesel Plant – To Meet Sturdy Demand for Diesel
Vehicles: MSIL has launched over 12 new products over past 3‐4 years and it
plans to launch new compact SUV in fastest growing UV space in FY15E,
which would be key growth driver, going forward. In addition to SPIL & Fiat
tie‐ups, MSIL’s captive diesel plant would be operational by next year, which
would help the Company in capitalizing sturdy demand for diesel vehicles.
Increasing Focus on Localisation – Expect Margins to Improve: MSIL’s focus
on increasing localisation (78% to 86%), expanding export base would lead to
lower its currency exposure, which acted negatively in past 3‐4 quarters.
Moreover, additional cost advantage of localised product coupled with
economy of scale would lead to marked improvement in margins. Moreover,
recent depreciation of Yen against USD would act as a game changer for the
Company, as every 1% change in Yen/USD translates into ~20 bps benefit on
MSIL’s margins. We believe that favourable currency would kick in MSIL’s
margins to double digit & RoE to 15% in FY15E, which may lead stock’s re‐
rating closer to its historical average P/E of 16x1, year forward.
Outlook & Valuation
Maintaining our revenue and EPS estimate, we expect MSIL to post an EPS of
Rs. 62.2, Rs. 99.6 & Rs. 125 in FY13E, FY14E & FY15E, respectively. Our
combined estimate (MSIL & SPIL) stands at EPS of Rs. 135 in FY15E. Valuing
the stock at 15xFY15E (combined EPS of Rs. 135), we reiterate “BUY” on MSIL
with a target price of Rs. 2,022 per share.
Key Financials
Y/E Mar (Rs mn) FY11 FY12 FY13E FY14E FY15E
Net Sales 366,508 356,962 428,839 509,843 603,581
EBITDA 36,788 28,188 32,804 47,990 58,620
Net Profit 22,592 15,996 18,801 30,082 37,764
EPS (Rs.) 78.2 55.4 62.2 99.6 125.0
PER (x) 18.0 25.4 23.1 14.4 11.5
P/BV 2.9 2.7 2.1 1.9 1.6
EV/ EBITDA 10.4 13.9 11.8 7.9 6.1
ROCE (%) 16.7 10.6 10.1 13.0 14.4
ROE (%) 17.4 10.9 10.4 13.5 15.0
Source: Company, Karvy Institutional Research
Oil & Gas
Oil India
Bloomberg: OINL INReuters: OILI.BO BUY
Institutional Equities
India Research
Recommendation
CMP: Rs525
Target Price: Rs610
Upside (%) 16%
Stock Information Market Cap. (Rs bn / US$ mn) 315/5,832
52‐week High/Low (Rs) 618/430
3m ADV (Rs mn /US$ mn) 271/5.0
Beta 0.5
Sensex/ Nifty 19,015/5,761
Share outstanding (mn) 601
Stock Performance (%) 1M 3M 12M YTD
Absolute (1.6) 15.6 2.7 12.7
Rel. to Sensex 4.0 12.7 (3.2) 15.1
Performance
Source: Bloomberg
Analyst Contact Vinay Nair
022 6184 4319
400
450
500
550
600
15,500
17,500
19,500
21,500
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Apr‐12
May‐12
Jun‐12
Jul‐12
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Nov‐12
Jan‐13
Feb‐13
Sensex (LHS) Oil India (RHS)
Left Behind in the Rally despite Low ValuationRecently, the stocks of oil PSUs rallied strongly on the back of fuel policy
reforms, thus nearing our target prices. However, Oil India (OIL) has been
relatively an under performer amongst the PSUs consequent to Offer for
Sale (OFS) with floor price of Rs. 510 per share. We believe that OIL is
valued much cheaper than its mean P/E at 8.5x vis‐à‐vis ONGC at 10x FY14E.
We expect the valuation gap to shrink, going forward as policy reforms
unfold further.
Reforms Equally Benefits OIL & ONGC: Assuming an average of Rs. 3 per
liter phased hike in diesel price in FY14E, our EPS assumptions stand at Rs. 33
for ONGC & Rs. 64 for OIL. We have assumed crude oil price and INR at $110
per barrel and Rs. 54 per Dollar, respectively and subsidy burden at Rs. 1,320
bn for FY14E. Our net realization assumptions stand 21% higher YoY at Rs.
3,504/bl for OIL and 19%YoY higher at Rs. 2,984/bl for ONGC in FY14E.
Volumes Growth unlikely to be Catalyst for both; Realization Triggers
better for OIL: ONGC doesn’t have an edge against OIL in terms of volume
growth as both the legacy fields have peaked out. The annual capex is mere
taking care of sustainability of outputs at current level. The triggers are more
confined to realization of crude per barrel. Further correction by 5% in crude
price and stronger INR at Rs. 52 is expected to result in flat EPS for ONGC
since OVL take a hit on its earnings and ~7% higher EPS for OIL. Besides, delta
for OIL is expected to be higher on gas price hike, since it is realizing $1.5/
Mmbtu lower than ONGC.
Outlook & Valuation OIL is trading at 12% discount to its mean of 9.5x and 15% discount to ONGC
consequent to its cheaply priced OFS. ONGC is currently fairly valued at its
mean P/E of 10x FY14E. We expect the valuation gap to shrink, as policy
reforms unfold further in the form of phased hike in diesel price. Even if the
monthly diesel price hike is put to a halt due to inflationary concerns and
political pressures, OIL’s downside is relatively lower at 6% from CMP, as
against 16% downside in ONGC. Arriving at a valuation of Rs. 610 at median
P/E 9.5 x FY 14E EPS of Rs. 64, we have upgraded our recommendation on OIL
to “BUY”.
Key Financials
Y/E Mar (Rs mn) FY11 FY12 FY13E FY14E FY15E
Net Sales 86,114 98,632 104,806 120,481 120,209
EBITDA 46,032 46,747 51,575 63,936 63,285
EBITDA margin (%) 53.5 47.4 49.2 53.1 52.6
PAT 28,876 34,469 30,878 38,667 37,919
PAT margin (%) 33.5 34.9 29.5 32.1 31.5
EPS (Rs) 48 57.3 59.5 64.3 63.1
P/E (x) 11.4 9.5 9.2 8.5 8.7
EV/EBITDA (x) 3.9 3.9 3.1 2.3 2.2
P/BV (x) 0.8 0.7 0.6 0.6 0.5
RoCE (%) 18.9 19.0 15.5 20.2 24.2
RoE (%) 18.5 19.5 16.4 17.4 15.4
Source: Company, Karvy Institutional Research
Textile & Apparel
Page Industries
Bloomberg: PAG INReuters: PAGE.BO BUY
Institutional Equities
India Research
Recommendation
CMP: Rs3,285
Target Price: Rs3,861
Upside (%) 18%
Stock Information Market Cap. (Rs bn / US$ mn) 37/677
52‐week High/Low (Rs) 3,610/2,424
3m ADV (Rs mn /US$ mn) 22/0.4
Beta 0.6
Sensex/ Nifty 19,015/5,761
Share outstanding (mn) 11
Stock Performance (%) 1M 3M 12M YTD
Absolute (4.2) (1.9) 33.6 (4.1)
Rel. to Sensex 1.2 (4.3) 25.9 (2)
Performance
Source: Bloomberg
Analyst Contact Rahul Singh
+91‐40‐44857911
1,700
2,200
2,700
3,200
3,700
15,500
17,500
19,500
21,500
Feb‐12
Apr‐12
May‐12
Jun‐12
Jul‐12
Sep‐12
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Nov‐12
Jan‐13
Feb‐13
Sensex (LHS) Page Industries
Well‐positioned in High Growth Segments
Strong market presence with global brand ‘Jockey’ in its portfolio makes
Page Industries (Page) the market leader in Indian branded inner‐wear
segment. Its license has been extended up to 2030 by Jockey International
and renewed license agreement includes the rights for the UAE, in
addition to the existing markets of India, Sri Lanka, Nepal & Bangladesh.
We expect top‐line and earnings growth at a CAGR of 24% & 26% over
FY12‐FY15E.
To Lead Growth in Premium Innerwear Market: Page caters to middle and
premium segments of men’s and women’s category with an approximate
market share of 21% & 12%, respectively. We believe that the premium
innerwear market is likely to grow at 28‐30% with a base of Rs. 37 bn, and the
Company would lead the growth due to brand recognition, product
innovation, and reach across over 1,200 cities, over 400 distributors and
>23,000 retail outlets along with 100 EBOs.
High Volume Growth with Improving Realizations on Product‐mix: We
expect the Company to maintain 18‐19% volume growth for FY13‐FY15, as
witnessed in FY12, with average realizations improving on high growing
value‐added products like leisure wear etc. Moreover, with ~18% price hike
across products in early FY12, we are expecting 5‐6% realization hike in
FY14E. The Company is undergoing capacity expansion with total installed
capacity to reach 150 mn pieces by Dec’13E & ~155‐160 mn pieces by CY15E
to keep up pace with demand.
Outlook & Valuation
We expect Page to deliver EBITDA/PAT CAGRs of 25%/26% in FY12‐15E
period, driven by high volume growth coupled with moderate price hikes. At
CMP of Rs. 3,285 per share, the stock is trading at 26.1x and 20.4x FY14E and
FY15E earnings respectively. We recommend “BUY” with target price of Rs.
3,861 per share valuing at 24.0x FY15E EPS.
Key Financial
Y/E Mar (Rs mn) FY11 FY12 FY13E FY14E FY15E
Net Sales 4,916 6,834 8,446 10,507 13,104
EBITDA 904 1,330 1,605 2,049 2,588
EBITDA margin (%) 18.4 19.5 19.0 19.5 19.8
PAT 585 900 1,095 1,403 1,794
EPS (Rs) 52.5 80.7 98.1 125.8 160.9
YoY growth (%) 47.8 53.7 21.7 28.1 27.9
RoE (%) 52.6 62.1 58.2 57.8 54.8
RoCE (%) 27.0 32.7 34.1 35.9 37.7
P/E (x) 62.6 40.7 33.5 26.1 20.4
P/Sales (x) 7.5 5.4 4.3 3.5 2.8
EV/EBITDA (x) 41.7 28.2 23.5 18.4 14.5
Source: Company, Karvy Institutional Research
Banking
State Bank of India
Bloomberg: SBIN INReuters: SBI.BO BUY
Institutional Equities
India Research
Recommendation
CMP: Rs2,198
Target Price: Rs2,870
Upside (%) 31%
Stock Information Market Cap. (Rs bn / US$ mn) 1,475/27,274
52‐week High/Low (Rs) 2,552/1,802
3m ADV (Rs mn /US$ mn) 5,277/97.6
Beta 1.2
Sensex/ Nifty 19,015/5,761
Share outstanding (mn) 671
Stock Performance (%) 1M 3M 12M YTD
Absolute (12.5) 5.1 (0.3) (7.8)
Rel. to Sensex (7.5) 2.4 (6) (5.8)
Performance
Source: Bloomberg
Analysts Contact
Hatim Broachwala, CFA
022‐6184 4329
Paresh Jain
022 6184 4324
1,6001,8002,0002,2002,4002,600
15,500
17,500
19,500
21,500
Feb‐12
Apr‐12
May‐12
Jun‐12
Jul‐12
Sep‐12
Oct‐12
Nov
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Jan‐13
Feb‐13
Sensex (LHS) SBI (RHS)
Best Play Post Likely Turnaround in Economy
State Bank of India (SBI) is by far the largest bank of India and it is the
best play or the domestic economy. It is one of the largest players in almost
every lending segment. With expected turnaround in the economy, we
expect SBI to be the biggest beneficiary.
Credit Cost to Move Southwards: SBI has witnessed huge pressure on its
asset quality with its gross NPA increasing by over 200 bps during last two
years. Resultantly, the Bank has accounted for higher credit cost, while
keeping provision coverage stable. With expectations of gradual recovery in
the economy, we expect incremental slippages and credit cost to start
trending downwards.
Pressure on NIMs is Likely to Continue: SBI’s NIMs (domestic) underwent a
significant compression of ~70 bps over last four quarters. Pressure on its
NIMs is expected to continue, going forward on account of slowdown
witnessed in high‐yielding SME segment and discounts offered in the retail
segment.
Overall Growth to Remain Moderate: Overall slowdown in SBI’s corporate
credit is a cause of concern. The Bank has significantly tightened its lending
standards for mid‐corporate and SME segment, which has seen higher
slippages. SBI’s Management has hinted at marginal improvement in new
project proposals. We believe that majority of incremental growth will be
driven by retail and large corporate segments.
Outlook & Valuation
At the CMP, the stock – after adjusting for subsidiaries – trades at 6.2x & 5.0x
FY14E & FY15E earnings, and at 1.3x & 1.1x P/ABV FY14E & FY15E,
respectively. Based on 10% discount to its historical mean valuation implying
1.5x P/ABV FY15E for parent & Rs. 560 for its stake in subsidiaries, we
reiterate our “BUY” recommendation on SBI with target price of Rs. 2,870 per
share.
Key Financials
Y/E Mar (Rs mn) FY11 FY12 FY13E FY14E FY15E
Net interest income 325,264 432,910 448,206 514,463 584,498
Operating Profit 253,356 315,735 334,115 384,043 456,965
PAT 82645 117073 154025 176688 221045
EPS (Rs) 130.1 174.5 229.5 263.3 329.4
ABV (Rs) 829.0 1,015.4 1,043.7 1,259.7 1,540.3
P/E (x) 12.6 9.4 7.2 6.2 5.0
P/ABV (x) 2.0 1.6 1.6 1.3 1.1
Gross NPA (%) 3.3 4.5 5.4 5.2 5.0
Net NPA (%) 1.6 1.8 2.6 2.2 1.9
ROE (%) 12.6 15.7 17.1 17.1 18.5
ROA (%) 0.7 0.9 1.1 1.1 1.2
Source: Company, Karvy Institutional Research, Valuation after adjusting for subsidiaries
Cement
UltraTech
Bloomberg: UTCEM INReuters: UTCEM.BO BUY
Institutional Equities
India Research
Recommendation
CMP: Rs1,903
Target Price: Rs2,300
Upside (%) 21%
Stock Information Market Cap. (Rs bn / US$ mn) 522/9,647
52‐week High/Low (Rs) 2,154/1,255
3m ADV (Rs mn /US$ mn) 439/8.1
Beta 0.6
Sensex/ Nifty 19,015/5,761
Share outstanding (mn) 274
Stock Performance (%) 1M 3M 12M YTD
Absolute (0.7) 1.9 35.7 (4.2)
Rel. to Sensex 5.0 (0.7) 27.9 (2.1)
Performance
Source: Bloomberg
Analyst Contact Rajesh Kumar Ravi
022 6184 4313
850
1,350
1,850
2,350
15,500
17,500
19,500
21,500
Feb‐12
Apr‐12
May‐12
Jun‐12
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Feb‐13
Sensex (LHS) Ultartech Cement (RHS)
Growing Unrestricted
We prefer India’s largest cement manufacturer i.e. UltraTech Cement
(UTCEM) on account of its improving cost efficiency, moderating fuel cost
pressure and incremental upcoming capacities. We believe that the
Company’s cost‐efficiency would improve, going forward, as its capex is
partially targeted towards improving logistics and other infrastructure as
well as towards increased use of higher captive thermal and waste heat
power.
Increased Capacity to Drive Volume Growth: UTCEM’s domestic capacity
is expected to rise by ~20% to 59 mn MT by H1FY14E after 9.2 mn MT
expansion at Chhattisgarh & Karnataka, and 1 mn MT de‐bottlenecking in
Gujarat. Hence, the Company seems to be better placed to gain from demand
recovery over the next two years thereby driving its 7% volume CAGR in
FY12‐15E period, which is the highest amongst its comparable peers.
Expect EBITDA & PAT CAGR of 19% & 16% in FY12‐15E: We expect
UTCEM’s EBITDA & PAT CAGR of 19% & 16% in FY12‐15E driven by 8%
CAGR realization in FY12‐15E and higher volume growths in FY14‐15E
period. Further, increased usage of pet coke, benefits from the plant
modernization exercise should drive the UTCEM’s operating cost efficiency,
going forward. We expect UTCEM net D:E ratio to remain closer to zero
despite the Rs. 120 bn capex plan in FY12‐14E period.
Outlook & Valuation
With its pan‐India presence, strong brand equity and distribution reach, we
believe UTCEM should continue trade at ~15‐20% premium to replacement
cost of US$160 per MT. We recommend “BUY” on the stock with a raised
target price of Rs. 2,300 valuing at 9.5x its Sept’14E EBITDA.
Key Triggers: Recovery in cement prices in peak construction period
(H1CY13E) and commissioning of its plants in H1FY14E.
Key Financials
Y/E Mar (Rs mn) FY11 FY12 FY13E FY14E FY15E
Net Sales 133,228 183,131 206,554 240,681 280,694
EBITDA 26,764 41,474 49,023 58,255 69,481
EBITDA margin (%) 20.1 22.6 23.7 24.2 24.8
PAT 14,096 24,602 27,968 32,247 38,757
EPS (Rs) 51.4 89.8 102.0 117.7 141.4
YoY growth (%) (41.4) 74.5 13.7 15.3 20.2
RoE (%) 18.5 20.9 19.8 22.3 19.4
RoCE (%) 13.7 14.7 14.6 15.2 15.9
P/E (x) 37.0 21.2 18.6 16.2 13.5
EV/EBITDA (x) 29.9 25.4 19.4 12.4 10.5
EV/mt (US$) 192 191 190 157 152
Source: Company, Karvy Institutional Research
Electrical & Electronic Equipment
V‐Guard Industries
Bloomberg: VGRD INReuters: VGUA.BO BUY
Institutional Equities
India Research
Recommendation
CMP: Rs454
Target Price: Rs558
Upside (%) 16%
Stock Information Market Cap. (Rs bn / US$ mn) 14/251
52‐week High/Low (Rs) 591/167
3m ADV (Rs mn /US$ mn) 64/1.2
Beta 0.8
Sensex/ Nifty 19,015/5,761
Share outstanding (mn) 30
Stock Performance (%) 1M 3M 12M YTD
Absolute (11.2) (12.3) 128.1 (10)
Rel. to Sensex (6.2) (14.5) 115.0 (8)
Performance
Source: Bloomberg
Analyst Contact Naveen Trivedi
022‐6184 4316
120220320420520620
15,500
17,500
19,500
21,500
Feb‐12
Apr‐12
May‐12
Jun‐12
Jul‐12
Sep‐12
Oct‐12
Nov‐12
Jan‐13
Feb‐13
Sensex (LHS) V‐Guard Inds (RHS)
Re‐rating PotentialV‐Guard Industries (V‐Guard) is focusing more on non‐South Indian
geographies to become one of India’s leading household electrical and
electronic appliances players. The Company plans to increase the
dealership network to ~10,000 by FY13E‐ end, while most of the new
dealers will be added in non‐South India. We expect operational
performance would improve in the coming quarters which will drive the
stock.
Robust growth in Top‐line & Bottom‐line: V‐guard has been consistently
showing strong sales and PAT growth in the past several quarters. The
Company’s sales, EBITDA & PAT have shown 38%, 49% and 71% YoY
growth, respectively in 9MFY13. We believe that aggressive marketing along
with consistent new launches would sustain the momentum of growth in
high earnings. We expect V‐Guard’s sales, EBITDA & PAT to grow by 32%,
37% and 48% CAGR, respectively in FY12‐14E.
Improvement in Cash Conversion Cycle: V‐Guard has improved its cash
conversion cycle to 71 days in Q2FY13 vs. 94 days in Q2FY12 due to better
inventory management and increase in creditor days through vendor
financing. However, the debtor‐days remained same at ~46 and the
management is planning to decrease through channel financing after
successful implementation of vendor financing. Its Management is planning
to decrease the conversion cycle by 5 days per quarter in the ensuing four
quarters through better inventory management, debtor days reduction,
channel financing and vendor financing.
Outlook & Valuation
We believe that V‐Guard will register 35% and 30% revenue growth in FY13E
& FY14E, respectively. We expect the net income to grow by 55% and 39% in
FY13E & FY14E, respectively. We believe that consistent improvement in
fundamentals would further re‐rate the stock. We give 16x P/E multiple on
12‐month forward earnings. We reiterate our “BUY” recommendation on the
stock with a target price of Rs. 558 per share.
Key Financials
Y/E Mar (Rs mn) FY10 FY11 FY12 FY13E FY14E
Net Sales 4,541 7,263 9,934 13,386 17,398
EBIDTA 504 728 933 1,344 1,746
EBIDTA Margin % 11.1 10.0 9.4 10.0 10.0
PAT 255 426 508 787 1,091
EPS (Rs) 8.5 14.3 17.0 26.4 36.5
YoY Growth (%) 46.8 67.4 19.1 54.9 38.6
ROE (%) 19.0 27.2 26.6 32.7 35.0
ROCE (%) 22.5 23.8 26.2 35.5 39.0
P/E (x) 53.2 31.8 26.7 17.2 12.4
EV/EBITDA (x) 28.4 20.4 15.6 10.8 8.3
P/BV (x) 9.6 7.9 6.4 5.0 3.8
Source: Company, Karvy Institutional Research
Institutional Equities Team Rangachari Muralikrishnan
Head – Institutional Equities /
Research / Strategy +91‐22 61844301 [email protected]
K. Anant Rao Head ‐ Sales‐Trading & Derivatives +91‐22 61844303 [email protected]
Uday Raval Karvy Inc. USA +1 212 2674334 [email protected]
INSTITUTIONAL RESEARCH
Analysts Industry / Sector Desk Phone Email ID
Amey Chalke Research Associate ‐ Pharmaceuticals +91 ‐22 61844325 [email protected]
Dwaipayan Poddar Chief Technical Strategist +91‐22 61844372 [email protected]
Hatim Broachwala, CFA Banking +91‐22 61844329 [email protected]
Kruti Shah Economist +91‐22 61844320 [email protected]
Manoj Kumar Manish Derivatives and Quant Analyst +91‐22 61844327 [email protected]
Maruti Kadam Research Associate +91‐22 61844326 [email protected]
Mitul Shah Automobiles +91‐22 61844312 [email protected]
Naveen Trivedi FMCG +91‐22‐61844316 [email protected]
Paresh Jain BFSI +91‐22 61844324 [email protected]
Parikshit Kandpal Infra / Real Estate / Strategy +91‐22 61844311 [email protected]
Rahul Sharma Pharmaceuticals +91‐22 61844310 [email protected]
Rahul Singh MidCap +91‐40‐44857911 [email protected]
Rajesh Kumar Ravi Cement & Logistics +91‐22 61844313 [email protected]
Rupesh Sankhe Power/Capital Goods +91‐22 61844315 [email protected]
Varun Chakri Research Associate +91 22 61844326 [email protected]
Vinay Nair Oil & Gas +91‐22 61844319 [email protected]
INSTITUTIONAL SALES
Dinesh Bajaj Sales +91‐22 61844341 [email protected]
R. Sriram Sales +91‐22 61844340 [email protected]
Shabbir Dahodwala Sales (USA) +1‐212‐2674334 [email protected]
Tejash Gandhi Sales +91‐22 61844345 [email protected]
INSTITUTIONAL SALES TRADING & DEALING
Bhavesh Gandhi Institutional Dealer +91‐22 61844368 /69 [email protected]
Prashant Oza Institutional Dealer +91‐22 61844370 /71 [email protected]
Parag Shah Sales Trader +91‐22 61844364 /65 [email protected]
Sriram Jagdish Sales Trader +91‐22 61844366 /67 [email protected]
Gurdarshan Singh Kharbanda Sales Trader +91‐22‐61844368 / 69 [email protected]
PRODUCTION
Asim Kumar Mohapatra Editor +91‐22 61844318 [email protected]
Vijayalaxmi L. Moolya Production +91‐22 61844328 [email protected]
For further enquiries please contact:
Tel: +91‐22‐6184 4300
Disclosures Appendix
Analyst certification
The following analyst(s), who is (are) primarily responsible for this report, certify (ies) that the views expressed herein
accurately reflect his (their) personal view(s) about the subject security (ies) and issuer(s) and that no part of his (their)
compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this
research report.
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