SharekhanTopPicks_30032013

7/28/2019 SharekhanTopPicks_30032013

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Sharekhan Top Picks

Political uncertainties and the Cyprus issue added to the

post-Budget selling pressure in the domestic equity market

in March this year. Though the benchmark indices have

declined marginally by around 0.5-0.6% since our last

update on March 1, 2013, but the damage in the broader

markets has been much severe and the CNX Mid-Cap Index

has lost close to 2% during the same period.

Our strategy to tilt the flavour of our Top Picks basket in

favour of the front-line large-cap stocks enabled us to post

better returns (the Top Picks basket is down 0.3%) than

Name CMP* PER (x) RoE (%) Price Upside

(Rs) FY12 FY13E FY14E FY12 FY13E FY14E target (%)

Bajaj Corp 224 27.7 20.2 16.2 29.9 37.2 41.9 303 35

Federal Bank 481 10.6 9.7 8.1 14.4 14.1 15.0 590 23

GCPL 779 46.4 39.5 28.9 26.3 23.2 27.4 - -

HCL Technologies 796 22.0 14.9 13.8 28.9 33.4 28.5 - -HDFC Bank 631 28.7 22.1 17.5 18.7 20.7 22.1 712 13

ICICI Bank 1,045 18.6 14.7 12.7 11.2 13.0 13.8 1,320 26

Larsen & Toubro 1,365 19.7 17.4 15.5 17.7 17.3 17.4 1,790 31

Oil India 507 8.8 8.2 8.0 19.8 19.6 18.0 600 18

Reliance Industries 774 12.7 12.3 11.9 11.5 10.6 9.9 1,010 30

Sun Pharma 818 32.7 27.0 23.1 21.3 20.2 19.6 - -

Zee Entertainment Enterprises 211 34.6 28.5 23.2 18.1 19.2 20.7 280 33

* CMP as on March 28, 2013

March 30, 2013Visit us at www.sharekhan.com

Absolute outperformance Constantly beating Nifty and Sensex (cumulative returns)

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the market in this period. HCL Technologies and HDFC Bank,

the two stocks added in the last shuffle, have given a

positive average return of 5.8% since March 1, 2013.

This month, we are making a lone change by replacing

Relaxo Footwear with Bajaj Corp keeping the fourth

quarter results in mind. We expect Bajaj Corp to post a

strong performance for Q4FY2013 on the back of a

continued double-digit growth in the volume offtake of

its key products. It is also among the cheapest stocks in

our universe of consumer stocks.

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sharekhan top picks

Name CMP PER (x) RoE (%) Price Upside


Bajaj Corp 224 27.7 20.2 16.2 29.9 37.2 41.9 303 35

Remarks: Bajaj Corp is the third largest player in the hair oil segment and has emerged as the dominant player in the

premium light hair oil (LHO) category with its Almond Drops hair oil.

With consumers upgrading to the LHO category, we expect the strong volume growth momentum to continue in

the coming quarters. With the prices of the key inputs stabilising, we expect the GPM to improve in the coming

quarters.

The companys thrust on enhancing the distribution reach in rural India and improving the market share every

year has helped it clock a good sales volume growth for the past few quarters. Any initiative to expand its limited

product portfolio or strengthen its core business would be the key upside trigger for the stock.

At the CMP, the stock is trading at 20.2x its FY2013E EPS of Rs11.1 and 16.2x its FY2014E EPS of Rs13.8.

Federal Bank 481 10.6 9.7 8.1 14.4 14.1 15.0 590 23

Remarks: Federal Bank is an old private bank with a network of over 1,000 branches and a dominant presence in south

India. Under a new management the bank is working on a strategy to gain pan-Indian presence, shift the loan

book to better-rated corporates, increase the fee income, become more efficient and improve the asset quality.

The asset quality of the bank has remained steady after showing some strain initially. The slippages from the SME

and retail accounts have declined substantially while the slippages from the corporate accounts remain stable.

Going forward, with the initiatives undertaken the recoveries could pick up and the NPAs may decline.

Federal Banks loan growth has slowed over the past few quarters as the bank is cautious in view of the weakness

in the economy. However, the loan growth is likely to be in line with the industry while risk adjusted margins may

improve, thereby driving the operating performance.

The banks return ratios are likely to go up led by an increase in the profits. We expect a RoE of ~16% and a RoA

of around 1.2% by FY2015 led by a 17% CAGR in the earnings. We have price target to Rs590 (1.4x on average of

FY2014E and FY2015E book value [BV]) and maintain Buy rating on the stock.

2 March 2013Sharekhan


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sharekhan top picks



GCPL 779 46.4 39.5 28.9 26.3 23.2 27.4 - -

Remarks: Godrej Consumer Products Ltd (GCPL) is a major player in the Indian fast-moving consumer goods (FMCG) market

with a strong presence in the personal care, hair care and home care segments in India. The recent acquisitions(in line with the 3x3 strategy) have immensely improved the long-term growth prospects of the company.

On the back of strong distribution network, and advertising and promotional support, we expect GCPL to sustain

the market share in its core categories of soap and hair colour in the domestic market. On the other hand,

continuing its strong growth momentum, the household insecticide business is expected to grow by ~20% YoY.

In the international markets, the Indonesian and Argentine businesses are expected to achieve a CAGR revenue

growth of around 25% and 35% respectively over FY2012-15. This along with the recently acquired Darling Group

would help GCPL to post a top-line CAGR of ~24% over FY2012-15.

Due to the recent domestic and international acquisitions, the companys business has transformed from a

commodities soap business into the business of value-added personal care and home care products. Therefore,

we expect its OPM to be in the range of 16-18% in the coming years. Overall, we expect GCPLs bottom line to

grow at a CAGR of above 25% over FY2012-15.

We believe the increased competitive activity in the personal care and hair care segments and the impact of high

food inflation on the demand for its products are the key risks to the companys profitability.

At the CMP, the stock trades at 39.5x its FY2013E EPS of Rs19.7 and 28.9x its FY2014E EPS of Rs27.0.

HCL Technologies 796 22.0 14.9 13.8 28.9 33.4 28.5 - -

Remarks: HCL Technologies Ltd (HCL Tech) is a global information technology (IT) services company providing software-led

IT solutions, remote infrastructure management services and BPO services. The company has a leading position in

remote infrastructure management services which has helped it win large IT outsourcing contracts. Through theAxon plc acquisition the company has gained strong SAP consulting footing.

In the current environment, we believe that HCL Technologies is well placed in terms of its Business strategy of

consciously targeting the re-bid market. The recently won contracts is testimony to HCL Techs capability to gain

a larger share in the growing rebid market. The results of which are evident in the consistent outperformance in

terms of volume and revenue growth. The company has overcome any apprehensions on the margin front by

consistently improving margins despite headwinds.

Going forward, gradual and consistent improvement in operating margins will aid further re-rating of the stock.

We maintain our Buy recommendation on the stock.


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sharekhan top picks



HDFC Bank 631 28.7 22.1 17.5 18.7 20.7 22.1 712 13

Remarks: HDFC Bank is expected to continue strong growth in advances due to strong presence in the retail segments.

While the credit demand has moderated in corporate segment, it continues to remain reasonably strong in retailwhich will benefit bank.

The banks current and savings account (CASA) ratio is among the highest in the sector which should stable net

interest in margins (~4.2% levels). Any reduction in the policy rates by RBI would improve the credit demand and

will be positive from margins perspective.

HDFC Banks asset quality is among the best in the sector and is expect to sustain it due to strong credit origination

practices and marginal exposure to the troubled segment. Further the higher provisions provide comfort on asset

quality.

We expect HDFC Bank to deliver earnings compound annual growth rate (CAGR) of 27% over (FY2012-15) leading

to return on equity (RoE) and return on assets (RoA) of 23% and 1.8% respectively. We believe the bank will

continue to command premium over peers due to strong and consistent growth. We have a target price of Rs712

for the stock.

ICICI Bank 1,045 18.6 14.7 12.7 11.2 13.0 13.8 1,320 26

Remarks: ICICI Bank continues to report strong growth in advances with stable margins of ~3%. We expect the advances of

the bank to grow by 20% CAGR over FY2012-15. This should lead to a ~21% CAGR growth in the net interest income

in the same period.

ICICI Banks asset quality has shown a turnaround as its NPAs have continued to decline over the last eleven

quarters led by contraction in slippages. This has led to a sharp reduction in the provisions and an increase in the

profitability. Going forward, we expect the NPAs to decline further which will lead to lower NPA provisions andhence aid the profit growth.

Led by a pick-up in the business growth and an improvement in the margins, the RoE is likely to expand to about

15.1% by FY2015 while the RoA would improve to 1.7%. This would be driven by a 21% CAGR in profits over

FY2012-15.

The stock trades at 1.7x FY2014E BV. Moreover, given the improvement in the profitability led by lower NPA

provisions, a healthy growth in the core income and improved operating metrics we recommend Buy with a price

target of Rs1,320.


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sharekhan top picks

Oil India 507 8.8 8.2 8.0 19.8 19.6 18.0 600 18

Remarks: Oil India Ltd (OIL) has several hydrocarbon discoveries across reserves in Rajasthan and the north-eastern region

of India. The total 1P (proven) and 2P (proven and probable) reserves of the company stood at 473 million barrels

(mmbbls) and 941mmbbls as on March 2012. In addition to the huge oil reserves, the companys reserve-replacement

ratio (RRR) is quite healthy at 1.23x which implies a comfortable level of accretion of oil reserves through new

discoveries.

Recent proposal by Oil ministry to partially deregulate diesel and proposal by Rangarajan committee to increasegas upto$8-$8.5 per mmbtu augurs well for the company and will significantly increase earnings of the company

going ahead.

Further, OIL has cash of around Rs10,935 crore (Rs182 per share) as on March 2012 and offers a healthy dividend

pay-out (dividend yield of 4.3%), which provides comfort to the investor.

The key risks remain any adverse movement in the price of crude oil and failure in proper utilisation of the huge

cash.

We remain bullish on OIL because its huge reserves and healthy RRR would provide a reasonably stable revenue

growth outlook and its stock is available at an attractive valuation and likely rerating of the company on account

of partial deregulation of diesel. The fair value works out to Rs600 per share (based on the average fair value

arrived at using the DCF, PE and EV/EBIDTA valuation methods).



Larsen & Toubro 1,365 19.7 17.4 15.5 17.7 17.3 17.4 1,790 31

Remarks: Larsen & Toubro (L&T), the largest engineering and Construction Company in India, is a direct beneficiary of the

strong domestic infrastructure development and industrial capital expenditure (capex) boom.

L&T continues to impress us with its good execution skills, reporting decent numbers throughout this year despite

the slowdown in the industrial capex cycle. Also we have seen order inflow traction in recent quarters.

Despite challenges like deferral of award decisions and stiff competition, the company has given robust guidance

of 15-20% growth in revenue and order inflow for FY2013. We believe the company will manage to meet its

guidance.

Sound execution track record, bulging order book and strong performance of its subsidiaries reinforce our faith in

L&T. With the company entering new verticals, namely solar and nuclear power, railways, and defence, there

appears a huge scope for growth.

At the CMP, the stock is trading at 15.5x its FY2014E standalone earnings.


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sharekhan top picks



Reliance Industries 774 12.7 12.3 11.9 11.5 10.6 9.9 1,010 30

Remarks: Reliance Industries Ltd (RIL) has a strong presence in the refining, petrochemical and upstream exploration

business. The refining division of the company is the highest contributor to the companys earnings and is operatingefficiently with a better gross refining margin (GRM) compared with its peers in the domestic market due to the

ability of its plant to refine more of heavier crude. However, the gas production from the Krishna-Godavari-D6

field has fallen significantly in the past one year. With the government approval for additional capex, we believe

production will improve going ahead.

In case of the upstream exploration business, the company has recently got the nod for further investments in

exploration at the Krishna-Godavari basin, which augurs well for the company and could address the issue of

falling gas output.

Further, the new gas pricing formula recommended by the Rangarajan panel augurs well for the company and

could provide further upside to the earnings.

The key concern remains in terms of a lower than expected GRM, profitability of the petrochemical division andthe companys inability to address the issue of falling gas output in the near term.

At the current market price (CMP) the stock is trading at PE of 11.9x its FY2014E earnings per share (EPS).

Sun Pharma 818 32.7 27.0 23.1 21.3 20.2 19.6 - -

Remarks: The combination of Sun Pharma and Taro offers an excellent business model for Sun Pharma, as has been reflected

in the 44% YoY revenue and 48% profit growth in M9FY2013.

Though Taro may not show a similar performance in the next quarter, but we expect a better performance from

Sun Pharma going forward mainly driven by (1) the resumption of sales from the US based subsidiary Caraco

Pharma post USFDA clearance, (2) contribution from newly acquired Dusa Pharma and URL Pharma in US and (3)

launch of key products in US and emerging markets including India. We expect 21% and 16% revenue and PAT CAGR

respectively over FY2012-15E. With a strong cash balance, Sun Pharma is well positioned to capitalise on the

growth opportunities. Its debt-free balance sheet insulates it from the negative impact of volatile currency.

Due to provisions of Union Budget 2012-13, which provided for Alternate Minimum Tax (ALT) on partnership based

units availing various tax concessions, Sun Pharmas effective tax rate is likely to be higher at 18.5% in FY2013

and 19% in FY2014 (v/s 11.4% in FY2012).

At the CMP, Sun Pharma is trading at 23x and 21x FY2014E and FY2015E estimated EPS respectively. We maintain

our Buy recommendation on the stock.


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sharekhan top picks

Zee Entertainment 211 34.6 28.5 23.2 18.1 19.2 20.7 280 33Enterprises

Remarks: Among the key stakeholders of the domestic TV industry, we expect broadcasters to be the prime beneficiary of

the mandatory digitisation process initiated by the government. The broadcasters would benefit from highersubscription revenues at the least incremental capex as the subscriber declaration improves in the cable industry.

Zee TV has climbed to top position in the Hindi GEC (general entertainment channel) hierarchy in the fourth week

of 2013, after almost 19 weeks. Zee TV's upward crawl to the No. 1 position was driven by Zee Cine Awards rated

a whopping 3.9 TVR, contributing 31 GRPs (gross rating points), as n Zee TV collected 237 points in the week

ended 26 January 2013.

Zee coming back to the number 1 spot among the GEC space is a positive development for ZEEs advertisements

revenues traction and companys ability to command premium ads rates than competitors.

ZEELs earnings are expected to grow at a CAGR of 25% over FY2013-15. Further, strong cash levels would drive

the managements inclination to reward the shareholders which would act as a positive trigger for the stock. We

maintain our Buy rating on the stock with a target price Rs280.

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The information contained herein is from publicly available data or other sources believed to be reliable. While we would endeavour to update the information herein on reasonable basis, SHAREKHAN, its

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other reasons that may prevent SHAREKHAN and affiliates from doing so. We do not represent that information contained herein is accurate or complete and it should not be relied upon as such. This document is

prepared for assistance only and is not intended to be and must not alone betaken as the basis for an investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this

document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks

involved), and should consult its own advisors to determine the merits and risks of such an investment. The investment discussed or views expressed may not be suitable for all investors. We do not undertake to

advise you as to any change of our views. Affiliates of Sharekhan may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report.

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herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such

restriction.

SHAREKHAN & affiliates may have used the information set forth herein before publication and may have positions in, may from time to time purchase or sell or may be materially interested in any of the securities

mentioned or related securities. SHAREKHAN may from time to time solicit from, or perform investment banking, or other services for, any company mentioned herein. Without limiting any of the foregoing, in no

event shall SHAREKHAN, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. Any comments or statements made

herein are those of the analyst and do not necessarily reflect those of SHAREKHAN.

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