Download pdf - Diwali Dhamaka 2013 - India Infolinecontent.indiainfoline.com/wc/research/research... · November 01, 2013 India Strategy Nifty: 6,299 Sensex: 21,165 Theme Report Amar ... Shriram

India has underperformed vis‐à‐vis developed markets

3.98.3 10.8 13.4

21.9

35.3

65.1

0.0

20.0

40.0

60.0

80.0

Shanghai

Hangseng

Nifty

Sensex

Dow Jones

Nasdaq

Nikkei

(%)

Source: Bloomberg, India Infoline Research

Sectoral performance since last Diwali

‐30.1

‐18.2‐16.8

‐15.2

‐8.8

‐1.7

7.7

9.6

13.0

17.3

23.8

46.5

‐40 ‐20 0 20 40 60

BSE Realty

BSE Power

BSE Small‐Cap

BSE Cap Goods

BSE Metal

BSE Bank

BSE‐200

BSE Oil & Gas

BSE Auto

BSE FMCG

BSE Pharma

BSE IT (%)

Source: Bloomberg, India Infoline Research

November 01, 2013

India Strategy

Nifty: 6,299 Sensex: 21,165

Theme Report

Amar Ambani [email protected]

Diwali Dhamaka

A Dozen reasons to smile It’s not really been a cracker of a year and indices are celebrating near new highs with less fireworks. However, the market liquidity is back just in time to welcome the festival of lights. Whether it was destined or not, we are not sure! Coincidentally, two Governors have been instrumental in bringing back cheer and optimism to the Indian bourses. On one end was the surprising taper delay by the US Fed Governor. On the other was the INR stability, largely the outcome of the new RBI Governor’s FCNR‐B deposits limit hike and the ensuing swap facility, that immediately turned FIIs into net buyers of Indian equities in September and October (In the preceding three months, they were net sellers).

A litany of fresh hopes has further improved the sentiment in anticipation of what lies ahead. There is a strong feeling among market participants that India’s Current Account Deficit (CAD), third largest in the world in absolute terms, will fall in line in the coming months. Official gold imports have drastically fallen in recent months and oil prices are likely to be under check with shale gas discoveries, muted global demand and INR scale back. Exports have also picked up recently. The recent monthly trade data was encouraging to say the least (A mere $6.8bn trade deficit compared to the whopping $17.7bn of the previous year).

More importantly, the previous RBI Governor’s liquidity tightening regime has been reversed. The MSF rate is down by 150 basis points to 8.75%. No wonder, liquidity is on the rise and short term rates have noticeably eased. Yes, Repo rate was raised (and we expect one more hike before year‐end) but these pro‐active hikes are only expected to check the H1 2014 inflation. By the mercy of the rain gods, the satisfactory monsoon promises improvement in agricultural yield and rise in rural incomes. On the political front, the market is pinning its hopes on a BJP‐led Government at the centre (Disclaimer: this is not our political opinion on the quality of governance of different political parties but only a reportage of the discernibly prevalent market perception). While we believe it’s premature to predict a thumping BJP majority just yet, the fact remains that this very hope is driving the market. Likely BJP wins in the state elections of Rajasthan, MP and Chhattisgarh may further boost the current rally.

So, is this the onset of a bull market? Well, there are many macro problems that pose a hurdle to the dream run. We desperately need milestone reforms across several fronts. While the government has indeed taken a few steps, the fact that we are so close to election time makes concrete measures difficult. We are yet to see any action on potentially landmark reforms like putting in place a rule‐based system for allocation of natural resources, GST and the like. To make matters worse, interest rates and inflation remain painfully elevated. India’s domestic savings and investment rate is steadily declining, causing a fall in the respective share of financial savings. Asset quality of banks continues to be a worry area. Our research estimates ~1% and ~0.3% deterioration in PSU bank and private bank gross NPAs

2

Diwali Dhamaka: A Dozen reasons to smile

respectively, in the next year alone. While the CAD is expected to be controlled, the fiscal deficit shows no encouraging signs of any check. We have already spent a disproportionately large budget amount in the first half of FY14. With revenues not growing anywhere close to budgeted levels, coupled with an overshooting subsidy bill (which was under‐stated to begin with), serious risks to the fiscal deficit loom large.

Real GDP growth is back to the ‘90s level at 4.4% and showing no signs of bottoming out. No wonder, growth has suffered downgrades by IMF and many other entities. Corporate earnings continue to be under pressure with the current quarter being the fourth consecutive quarter of sluggish performance. With the run‐up in markets, valuations are getting rich. For this rally to transform into a bull run, many of the above issues would need to be strongly addressed. Else we could well see indices reverse, sentiments change for the worse and liquidity evaporating from our market in search of greener pastures. But for now, a new high seems round the corner and the liquidity tap is very much on.

The best way to approach this market would be to adopt an asset allocation strategy; broadly, a 60% exposure to fixed income and other assets and 40% to equities. Within equities, we favour companies catering to rural demand, global markets that are recovering and beneficiaries from rupee depreciation. Last Diwali, we had recommended nine stocks, out of which eight were successfully closed, in what was a difficult year for stock markets. Only one stock remained open but that too with positive return. Assuming equal investment in each stock, the portfolio delivered an absolute return of 17%, excluding dividends (see page 15 for details). If annualized, these returns would be significantly higher. We had also recommended fixed income investment in NCDs, which have been serviced timely. This year, by way of a portfolio approach, we recommend a Diwali Dozen ‐ 12 stocks with expected returns of 12‐21% individually in 6‐9 months. These 12 scrips account for ~15% of India’s equity market capitalisation. Wishing you and your families a Happy Diwali and a bright and prosperous Samvat 2070! Recommendation snapshot

Company Sector Mkt Cap (Rs bn)

Weight (%)

CMP (Rs)

Target (Rs)

Upside (%)

Cipla Pharmaceuticals 332 10.0 413 482 16.7

Emami FMCG 111 9.0 497 576 15.9

HDFC Bank BFSI 1,628 10.0 681 777 14.1

Hero Motocorp Auto 417 7.0 2,078 2,350 13.1

Hindalco Metals 237 6.0 115 129 12.2

Idea Telecom 563 8.0 172 200 16.3

Infosys IT 1,909 10.0 3,310 3,744 13.1

ING Vysya BFSI 111 8.0 589 712 20.9

M&M Auto 409 8.0 888 1,041 17.2

Reliance Oil & Gas 2,907 10.0 915 1,027 12.2

Shriram Transport Fin BFSI 139 6.0 611 722 18.2

Wipro IT 1,173 8.0 478 576 20.5

Source: India Infoline Research

3

Sector: Pharma

Sector view: Positive

Sensex: 21,165

52 Week h/l (Rs): 450 / 354

Market cap (Rscr) : 33,177

6m Avg vol (‘000Nos): 1,476

Bloomberg code: CIPLA IS

BSE code: 500087

NSE code: CIPLA

FV (Rs): 2

Price as on October 31, 2013

Company rating grid Low High

1 2 3 4 5

Earnings Growth

Cash Flow

B/S Strength

Valuation appeal

Risk

Share price trend

60

80

100

120

140

Nov‐12 Apr‐13 Sep‐13

Cipla Sensex

Share holding pattern

‐

20

40

60

80

100

Dec‐12 Mar‐13 Jun‐13 Sep‐13

Others Institutions Promoters%

Rating: BUY Target (9‐12 months): Rs482

CMP: Rs413

Upside: 16.7%

Cipla

Research Analyst: Hemant Nahata

[email protected]

Strategic shift to bolster growth

Strategic shift to front-end model to boost growth Cipla has adopted the lucrative front‐end model for regulated markets overseas, a strategic shift from its earlier practice of partnership‐based tie‐ups. This is a step in the right direction; it has already filed a few ANDAs with the US FDA. It has put in place a professional management with global credibility. It is now open to inorganic growth opportunities as well.

It already has a healthy presence in several other markets like South Africa, Australia and the Middle East, besides US and Europe. Cipla has the third largest capacity in the world for inhalers and approval for the same in Europe is a key trigger. The acquisition of the Medpro gives it a front‐end in Africa and could add to earnings by ~5% in the medium term. Expansion in place; operating leverage to kick-in in two years Cipla is the biggest player in Indian formulations with presence across therapeutic segments. It has scaled up capacity with large investments in the past few years to produce a variety of drugs. With no large investment required, it stands to gain from operating leverage on rising revenues in the next 2‐3 years. Commercial production has already started at its SEZ project in Indore and will contribute meaningfully to growth and operating leverage. Key beneficiary of INR depreciation Cipla is one of the major beneficiaries of Rupee depreciation with ~50% of income from overseas. Gain from Rupee depreciation also helps offset the high base impact of FY13 due to the one‐off contribution of generic Lexapro. Defensive play; re-rating on the cards There is an upside risk to Cipla’s FY14 revenue guidance of ~15% given its strong performance in Q1. The domestic business may be partially impacted due to the new drug pricing policy. The cost pressures due to rising manpower costs and R&D expenses will be partly offset by gains from operating leverage and INR depreciation. Cipla has healthy free cash flow and P/E multiple expansion seems on the cards. The stock is a defensive play and trades at a P/E of 17.7x FY15E earnings.

Financial summary Y/e 31 March (Rs m) FY12 FY13 FY14E FY15E Revenues 70,207 82,793 102,008 117,904

yoy growth (%) 11.0 17.9 23.2 15.6

Operating profit 16,589 21,979 25,929 29,481

OPM (%) 23.6 26.5 25.4 25.0

Reported PAT 11,443 15,051 16,625 18,876

yoy growth (%) 15.6 35.0 7.6 13.5

EPS (Rs) 14.3 18.7 20.7 23.5

P/E (x) 29.1 22.1 20.0 17.7

Price/Book (x) 4.4 3.7 3.2 2.7

EV/EBITDA (x) 20.0 15.5 13.2 11.6

Debt/Equity (x) 0.0 0.1 0.1 0.1

RoE (%) 16.0 18.1 17.0 16.6

RoCE (%) 19.4 23.0 21.0 20.6 Source: Company, India Infoline Research

4

Sector: FMCG


Sensex: 21,165

52 Week h/l (Rs): 540 / 367


6m Avg vol (‘000Nos): 250

Bloomberg code: HMN IB

BSE code: 531162

NSE code: EMAMILTD

FV (Re): 1


Company rating grid

Low High

1 2 3 4 5

Earnings Growth

Cash Flow

B/S Strength

Valuation appeal

Risk

Share price trend

50

100

150

Oct‐12 Feb‐13 Jun‐13 Oct‐13

EMAMI Sensex


0

50

100


Promoters Institutions Others


CMP: Rs497

Upside: 15.7%

Research Analyst: Vanmala Nagwekar

[email protected]

Unique portfolio

Strong product portfolio in niche categories Emami operates in niche categories like cooling oils, pain balms, antiseptic creams and men’s fairness creams with dominant market shares. Emami enjoys strong pricing power in most segments, thanks to its dominant market shares and minimal competition from large companies. Emami continues to record healthy mid‐double digit revenue growth in the domestic business, witnessing a ~20% CAGR over the past three years. The international business revenue contribution is expected to increase to 18‐20% from current ~10% over the next five years led by strong growth in Bangladesh and GCC. We expect Emami to witness 16% revenue CAGR over FY13‐15.

New product pipeline to secure long-term growth Emami has an established track record of launching new brands and categories (like Men’s whitening cream) and transforming brands to block‐buster brands. Emami continues to churn out new products that are either in niche segments or occupy differentiated positions within large categories. Over the past 2‐3 years, Emami focused on growth in existing brands. However, in CY14, 3‐4 new launches and brand extensions are likely to secure long‐term growth. Emami is looking at OTC/healthcare as a future growth driver and is planning to expand its portfolio.

Margins to expand, recommend Buy Given that rural growth is outpacing urban growth, Emami plans to add 75,000 to 100,000 outlets to its direct distribution reach in FY14, which will further fuel revenue growth. With menthol prices (key raw material input comprising ~35% of Emami’s total raw material cost) coming off, Emami’s margins can potentially see significant upside of ~220bps in FY14. We believe, growth in low‐penetration core categories, sustained product innovation, and expansion in the international business will drive ~19% earnings CAGR over FY13‐15. Recommend Buy rating on the stock.

Financial summary Y/e 31 Mar (Rs m) FY12 FY13 FY14E FY15E

Revenues 14,535 16,991 19,540 22,764

yoy growth (%) 16.6 16.9 15.0 16.5


OPM (%) 20.4 20.4 22.6 22.8

Pre‐exceptional PAT 2,768 3,205 3,917 4,505

Reported PAT 2,588 3,147 3,917 4,505

yoy growth (%) 13.2 21.6 24.4 15.0

EPS (Rs) 12.2 14.1 17.3 19.9

P/E (x) 40.8 35.2 28.8 25.1

Price/Book (x) 16.0 14.5 11.4 9.0

EV/EBITDA (x) 37.7 32.0 25.1 21.3

Debt/Equity (x) 0.2 0.2 0.1 0.1

RoE (%) 39.6 43.2 44.3 40.2


Emami Ltd

5

Sector: Financials

Sector view: Neutral

Sensex: 21,165

52 Week h/l (Rs): 727 / 528


6m Avg vol (‘000Nos): 3,885

Bloomberg code: HDFCB IN

BSE code: 500180

NSE code: HDFCBANK

FV (Rs): 2


Company rating grid

Low High

1 2 3 4 5

Earnings Growth

RoA Progression

B/S Strength

Valuation appeal

Risk

Share price trend


80

90

100

110

120

Oct‐12 Feb‐13 Jun‐13 Sep‐13

HDFC Bank Sensex

‐

20

40

60

80

100


Others Institutions Promoters

%


CMP: Rs681

Upside: 14.1%

Research Analyst: Rajiv Mehta

[email protected]

Best banking franchise Market share gain would accelerate HDFC Bank is set to gain market share at faster clip over FY13‐15 with a loan CAGR of 21%. Structural growth drivers would be large and diversified retail asset franchise (54% of advances), bank’s dominant position in each products, substantial network expansion in past three years and widened retail product distribution. In corporate lending space, the bank is better placed than peers with pre‐dominant working capital exposure. Deposit profile is likely to get stronger with retail CASA and term deposits contribution receiving fillip from expanding network. With Tier‐1 capital near 11%, capital adequacy is sufficient to support healthy balance sheet growth.

NIM to be firm near 4.5%; cost/income ratio to improve further Medium term NIM outlook is encouraging with structural and cyclical levers in place. Key structural drivers would be increasing retail loan share and improvement in CASA ratio. The cyclical softening of wholesale and retail FD rates would also support spreads. Cost saving initiatives and improving productivity of young branches have been kicking‐in efficiency gains. Further improvement in core cost/income ratio would underpin brisk PPOP growth.

Sturdy asset quality; improving RoA to support valuation Except for some stress in CV/CE loans, asset quality has been robust in the retail portfolio with actual losses significantly below expected loss (priced‐in) levels. The unsecured credit piece is relatively safe as primarily it is to long‐standing internal customers. Going forward, some normalization in asset quality could drive marginally higher credit cost as seen in H1 FY14. Notwithstanding moderation in growth and increase in provisioning, bank’s RoA is estimated to improve by 15‐17bps over FY13‐15 due to decline in cost/income ratio. High inherent profitability and performance predictability of the bank would support its premium valuation. If macro continues to deteriorate, the relative premium would only expand. Absolute valuation is also not demanding in the context of robust RoA delivery.


Total operating income 186,682 226,637 275,140 330,938

Yoy growth (%) 25.5 21.4 21.4 20.3

Operating profit (pre‐provisions) 93,906 114,276 141,992 173,823

Net profit 51,671 67,263 83,880 103,348

yoy growth (%) 31.6 30.2 24.7 23.2

EPS (Rs) 22.0 28.3 35.1 43.3

Adj. BVPS (Rs) 126.0 150.2 174.4 207.3

P/E (x) 30.7 23.9 19.3 15.6

P/Adj.BV (x) 5.4 4.5 3.9 3.3

ROE (%) 18.7 20.3 21.2 22.1

ROA (%) 1.7 1.8 1.9 2.0

CAR (%) 16.5 16.8 16.3 15.2 Source: Company, India Infoline Research

HDFC Bank

6

Sector: Auto


Sensex: 21,165

52 Week h/l (Rs): 2,127 / 1,434



Bloomberg code: HMCL IB

BSE code: 500182

NSE code: HEROMOTOCO

FV (Rs): 2


Company rating grid

Low High

1 2 3 4 5

Earnings Growth

Cash Flow

B/S Strength

Valuation appeal

Risk

Share price trend

70

80

90

100

110

120


Hero Sensex


0%

20%

40%

60%

80%

100%


Promoter Institutions Others

Rating: BUY Target (9‐12 months): Rs2,350

CMP: Rs2,078

Upside: 13.1%

Research Analyst: Prayesh Jain

[email protected]

Vrooming ahead! Rural India and scooters to drive domestic growth Scooters segment has seen a strong growth over the past few years and contribution of scooters to total 2‐W volumes at the industry level has jumped from 15% in FY08 to 23% in domestic markets. We believe rural demand will continue to remain robust driven by 1) above normal monsoons, 2) rising MSPs, 3) improving finance availability and 4) rural development programs launched by the government. Urban demand is also expected to catch up with 1) ever rising traffic commotion, 2) over‐crowded public transport and 3) lack of parking space. Hero Motocorp (HMCL), in spite of rising competition has seen a steady increase in its market share in the segment from 11% in FY08 to 20% currently. Company is raising its capacity for the scooter segment and is well placed to benefit from the uptrend.

Huge export potential Post its split from erstwhile JV partner Honda, HMCL has gained access to new export markets, especially in Africa and South America. HMCL has a target of reaching 1mn units of exports by FY17 as compared to 0.16mn units in FY13. With 1) market leadership of Hero Motocorp in the below 100cc category motorcycles (majority of exports from India) and 2) under penetration in these markets, we assign high probability to possibility of this target being met. Currently, the company is present in 10 export markets and has plans to enter eight new markets in H2 FY14.

Cost cutting initiatives to drive earnings growth Hero Motocorp launched a 30‐month Margin Transformation Project, whereby it aims to cut costs by 400‐500bps. With focus on sourcing and operating expenses, the company is currently implementing initiatives for a few models. Over the next 24 months, the company plans to encompass all its models under this initiative. For FY14, HMCL envisages savings of Rs600‐800mn and expects annual cost savings of Rs15bn by FY17‐18. With estimated FY13‐15E earnings CAGR of 19.4%, RoE of 46% in FY15 and FCF generation of more than Rs30bn in FY14 and FY15 each, valuations appear attractive at P/E of 13.6x FY15E EPS.


Revenues 235,790 237,681 248,633 289,132

yoy growth (%) 21.6 0.8 4.6 16.3


OPM (%) 15.3 13.8 14.4 14.9

Reported PAT 23,781 21,182 20,603 30,193

yoy growth (%) 23.4 (10.9) (2.7) 46.5

EPS (Rs) 119.1 106.1 103.2 151.2

P/E (x) 17.4 19.6 20.1 13.7

Price/Book (x) 9.7 8.3 7.3 5.7

EV/EBITDA (x) 11.2 12.6 11.4 9.0

Debt/Equity (x) 0.0 0.0 0.0 0.0

RoE (%) 65.6 45.6 38.5 46.4


Hero Motocorp

7

Sector: Metals


Sensex: 21,165

52 Week h/l (Rs): 137 / 83


6m Avg vol (‘000Nos): 9,214

Bloomberg code: HNDL IB

BSE code: 500440

NSE code: HINDALCO

FV (Re): 1

Prices as on October 31, 2013

Company rating grid

Low High

1 2 3 4 5

Earnings Growth

Cash Flow

B/S Strength

Valuation appeal

Risk

Share price trend

40

60

80

100

120


Hindalco Sensex


‐

50

100


Promoters Institutions Others

%


CMP: Rs115

Upside: 12.2%

Research Analyst: Tarang Bhanushali

[email protected]

Earnings growth to resume Depreciating rupee coupled with higher volume to boost earnings Hindalco’s two major expansion projects are in their final stage of completion and are expected to be commissioned in H2 FY14. We expect aluminium metal volume CAGR of 19% over FY13‐15E with major volumes rising in FY15. We believe that further downside in aluminium prices would be limited. On the other hand, the depreciation in the rupee would lead to higher product prices for the company. We expect the impact of rising input costs would be offset by strong aluminium prices (due to rupee depreciation) and margins to expand over FY13‐15E.

Higher volumes and superior product mix to expand margins Hindalco’s subsidiary, Novelis, has been impacted by lower volumes in US and margin pressure in Asia over the last six months. We believe this impact on earnings would be offset by the strong volume growth in Asia and the shift in product mix towards automotive division. The company commissioned its two new automotive finishing lines in North America in Q2 FY14 after commissioning its 0.35mtpa rolling capacity and 0.265mtpa recycling capacity in Korea. This would be followed by ~0.24mtpa ramp up at Brazil through H2 FY14. We expect volumes to rise by 5.7% yoy in FY14 and 6.2% yoy in FY15.

Earnings growth to resume; maintain Buy Hindalco has underperformed the benchmark indices over the last one year due to soft aluminium prices globally, project delays and allocation of coal block to the Mahan smelter. We believe the downside for aluminium prices is limited as it is below the mean of the global cost curve. In addition to this, the decline in global aluminium prices is offset by the depreciation of the rupee against the dollar. The new projects would provide some volume boost to the company in FY15E. We believe Novelis would register strong earnings growth in H2 FY14 on the back of increased capacity and change in product mix. This would drive the earnings of the consolidated entity over the next one year. We recommend Buy on the stock with a 9‐month target price of Rs126.


Revenues 808,214 801,928 935,834 1,027,722

yoy growth (%) 11.9 (0.8) 16.7 9.8


OPM (%) 10.1 9.8 10.1 11.1


Reported PAT 33,969 30,269 27,884 38,257

yoy growth (%) 38.3 (10.9) (7.9) 37.2

EPS (Rs) 17.7 15.8 13.5 18.5

P/E (x) 6.3 7.1 8.3 6.0

EV/EBITDA (x) 7.2 9.4 7.9 6.3

Debt/Equity (x) 1.3 1.6 1.5 1.3

RoE (%) 11.2 9.0 7.5 9.3


Hindalco Industries Ltd

8

Sector: Telecom


Sensex: 21,165

52 Week h/l (Rs): 188/84


6m Avg vol (‘000Nos): 5,334

Bloomberg code: IDEA IB

BSE code: 532822

NSE code: IDEA

FV (Rs): 10


Company rating grid

Low High

1 2 3 4 5

Earnings Growth

Cash Flow

B/S Strength

Valuation appeal

Risk

Share price trend

0

50

100

150

200

250

Oct‐12 Jan‐13 Apr‐13 Jul‐13 Oct‐13

Idea Sensex


0

20

40

60

80

100


%Others FIIs Promoters


CMP: Rs172

Upside: 16.3%

Research Analyst: Bhavesh Gandhi

[email protected]

Idea Cellular

Risk reward favourable

Robust data growth to bolster margin Data revenues have been on a persistent rise over the past few quarters and blended 2G+3G customers now account for more than 25% of Idea’s subscriber base in Q2 FY14. Hence even as non data VAS is under pressure due to double confirmation rules, data VAS is growing at a rapid pace with doubling of volumes in the past one year for the company. Since data revenues carry inherently better margin as compared to voice, we expect data growth to bolster EBIDTA margin in the next 2‐3 years.

Pricing to move north; to support revenue growth In addition to volume growth, pricing is likely to support robust EBIDTA margin upside in the next 1‐2 years. Idea’s consistent efforts to prune promotional/discounted minutes from the system have helped improve realization in the past three quarters, a trend which we expect to continue since there is still enough gap between headline tariffs in most circles and actual realized rate by the company.

Lower spectrum prices to be beneficial Regulatory uncertainty on several issues like spectrum farming, renewal fees, one time spectrum charge etc still persists but we do expect above issues to be gradually resolved. On the other hand, lower spectrum reserve prices as recommended by TRAI are a big positive for incumbents like Bharti and Idea as it would reduce potential payouts and ease concerns on excess borrowings.

Expect ~24% EBIDTA cagr over FY13-15; retain BUY Idea is expected to clock ~24% EBIDTA cagr over FY13‐15 driven by ~16% revenue rise and ~360bps rise in margin over the same period. Leverage ratios would improve further over the next two years while RoE is likely to nearly double from FY13 levels. Although regulatory uncertainty still persists, we believe the worst may be over for the stock; recommend BUY with 9‐12mth target of Rs200.


Revenues 194,887 224,074 268,791 302,150

yoy growth (%) 26.2 15.0 20.0 12.4


OPM (%) 25.9 26.6 29.5 30.2

Reported PAT 7,230 10,109 17,170 22,523

yoy growth (%) (19.6) 39.8 69.8 31.2

EPS (Rs) 2.2 3.1 5.2 6.8

P/E (x) 77.8 55.7 32.8 25.0

P/BV (x) 4.3 3.9 3.5 3.1

EV/EBITDA (x) 13.9 11.9 8.7 7.3

Debt/Equity (x) 1.1 1.0 0.8 0.7

ROE (%) 5.5 6.7 11.4 13.3

ROCE (%) 7.9 8.6 11.8 14.0 Source: Company, India Infoline Research

9

Sector: IT


Sensex: 21,165

52 Week h/l (Rs): 3,372/2,190


6m Avg vol (‘000Nos): 1219

Bloomberg code: INFY IB

BSE code: 500209

NSE code: INFY

FV (Rs): 5



1 2 3 4 5

Earnings Growth

Cash Flow

B/S Strength

Valuation appeal

Risk

Share price trend

70

90

110

130

150


Infosys Sensex


0

20

40

60

80

100


Others FIIs Promoters


CMP: Rs3,310

Upside: 13.1%

Research Analyst: Aniruddha Mehta

[email protected]

Infosys Ltd

Getting back its mojo!

Demand improvement, large deals’ focus to drive revenue growth Infosys, over FY12‐13, saw sustained deceleration in revenue traction impacted by weak global demand, its lower focus/flexibility towards large outsourcing deals and heightened competition. A skewed portfolio with high discretionary service contribution also led to the softening of growth. More recently, though, with return of Mr. NRN and the consequent tactical and strategic changes, the revenue momentum has shown notable improvement. More specifically, the increased focus on highly competitive large deal space, higher sales investments and overall bounce back in the IT demand environment are key factors driving better‐than‐expected 14%+ growth in H1 FY14. These should lead to reduced revenue growth differential with faster peers in our view.

Margin to improve driven by better utilisation and offshoring A lack of overall revenue traction, low growth in high‐realisation discretionary services, pricing pressure on the traditional IT services and higher business investments (esp. on the employees front) had led to correction in EBIDTA margin of ~400bps over FY11‐13. With the management’s increased focus on improving margin by location optimization, improving offshoring (onsite costs have increased materially over past 2 years) and better delivery should lead to improving margin over next four quarters. More so, as the growth returns, a head‐room in utilisation is also expected to support the margin.

Valuation at 15x FY15E provide a good entry point Infosys’ management commentary and H1 FY14 performance indicate a sustained (and much less volatile) performance from Infosys in coming quarters. While the guidance for FY14 remained status quo (at the upper end), we believe the 14%+ growth in H1 (versus ~16.5% for TCS) should lead to lowering growth differential with faster growing peers. An overall improvement in spending environment, better outlook for discretionary services as indicated by companies in our coverage and industry analysts also bodes well for our growth thesis. While we turn positive, possible fallout from immigration regulations could be a negative surprise to our expectation.

Financial summary Y/e 31 March (Rs m) FY12 FY13 FY14E FY15E

Revenues 335,853 402,980 500,638 558,624

yoy growth (%) 22.2 20.0 24.2 11.6


OPM (%) 31.9 28.7 27.0 29.0

Reported PAT 83,160 94,210 104,837 126,483

yoy growth (%) 21.9 13.3 11.3 20.6

EPS (Rs) 144.8 164.1 182.6 220.3

P/E (x) 22.9 20.2 18.2 15.1

EV/EBITDA (x) 15.8 14.6 12.0 9.6

RoE (%) 28.0 25.7 24.1 24.3


10

Sector: Financials


Sensex: 21,165

52 Week h/l (Rs): 667 / 406



Bloomberg code: VYSB IN

BSE code: 531807

NSE code: INGVYSYABK

FV (Rs): 10


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ING Vysya Bank Sensex

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CMP: Rs589

Upside: 20.9%


[email protected]

Strong build Customer asset growth to beat system; retail and SME key drivers ING Vysya Bank’s (IVB) is confident of growing its customer assets (CA) ahead of the banking system. Bank’s diversified SME book (~35% of CA) has been growing at strong pace. Retail portfolio (~20% of CA) is witnessing healthy growth aided by robust traction in products such as LAP, Gold Loan, Personal Loans and Vehicle Loans. Being cautious in mid‐corporate segment (~12% of CA), bank is pursuing selective growth opportunities.

Multiple tailwinds for NIM to bounce In Q2 FY14, IVB’s NIM contracted by less‐than‐expected 10bps qoq to 3.46%. NIM outlook for H2 FY14 is robust on account of 1) utilization of equity proceeds (raised Rs18.4bn in June 2013) for funding growth 2) softening wholesale funding rates 3) full transmission of Base Rate hike that will re‐price corporate/SME loans and 4) loan mix shift towards better‐yielding SME/Retail loans. For the full‐year, we estimate NIM to be 5‐10bps higher than FY13. A more benign liquidity scenario in FY15 would push margin to a multi‐year high.

Improvement in cost/income ratio to continue Though bank has initiated calibrated branch expansion, core cost/income ratio has declined in the past many quarters. In our view, a combination of NIM expansion, higher non‐interest income and sustained productivity/cost focus would drive incremental efficiency gains over the medium term. We see reported cost/income ratio declining to 52% in FY15 from 56% in FY13.

Asset quality has been healthy; strong RoA trajectory to be sustained In the ongoing credit cycle, IVB’s asset quality has been resilient due to 1) largely working capital and lower sensitive exposure in corporate segment 2) robust underwriting/monitoring in SME segment and 3) material retail asset contribution. Though, delinquencies and credit cost could inch‐up in medium term on account of percolation of macro stress, bank’s improved RoA trajectory is likely to be protected. Current valuation does not fully capture strengthened profitability and robust capitalization (Tier‐1 ratio at 14.3%).



Yoy growth (%) 13.0 20.6 18.7 20.8


Net profit 4,563 6,130 7,322 9,047

yoy growth (%) 43.2 34.3 19.5 23.6

EPS (Rs) 30.4 39.6 39.6 48.9

Adj. BVPS (Rs) 254.6 291.6 370.7 406.7

P/E (x) 19.1 14.7 14.7 11.9

P/Adj.BV (x) 2.3 2.0 1.6 1.4

ROE (%) 14.3 14.6 12.7 12.3

ROA (%) 1.1 1.2 1.3 1.3

CAR (%) 14.0 13.2 17.2 15.8 Source: Company, India Infoline Research

ING Vysya Bank

11

Sector: Auto


Sensex: 21,165

52 Week h/l (Rs): 1,026 / 741


6m Avg vol (‘000Nos): 1,452

Bloomberg code: MM IB

BSE code: 500520

NSE code: M&M

FV (Rs): 5


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M&M Sensex


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CMP: Rs888

Upside: 17.2%


[email protected]

The rural drive Tractor demand to remain strong Tractor industry sales volumes in domestic markets have surged by 24% in H1 FY14 as compared to a 2% fall in FY13. The buoyant trend has been on the back of 1) above normal monsoons, 2) rising MSPs, 3) improving finance availability and 4) rural development programs launched by the government. Low penetration of mechanization and lower availability of labour owing to employment guarantee scheme of the government have provided additional thrust to demand. We see these trends lasting over the medium term and M&M with sustained market leadership is well poised to leverage on this growth. With EBIT margins of 15%+ for its farm segment v/s 9% for its auto segment, higher growth of tractors bodes well for M&M’s overall margins.

Auto segment recovery likely in FY15 For H1 FY14, M&M’s auto segment volumes fell by 7.8% yoy led by UVs which declined 14.5% yoy. The key reasons for the fall were 1) rising interest rates, 2) increase in excise duty for UVs and 3) rising fuel prices. Interest rates are close to peak levels and we expect only 25bps hike in the remainder of fiscal. Diesel prices might continue to rise but as per our calculations, even if diesel prices were fully decontrolled, the incremental cost for diesel cars can be recovered within 3 years for daily travel of 50kms. This, we believe, will eventually translate into demand revival for UVs especially on a low base created in FY14. M&M’s deeper presence in rural areas will help it defend its market share amid rising competition.

Improving performance of subsidiaries M&M’s listed subsidiary value of Rs300/share (after holding discount of 30%) accounts for 35% of its market price. Most of these subsidiaries are in growing businesses and have seen steady improvement in financial performance. The street has been worried regarding its unlisted 2‐W and CV subsidiaries. While the CV business is expected to remain weak, the performance of 2‐W business has been steadily improving and M&M is gaining market share. Hence, we believe that these subsidiaries will continue to add value to M&M.


Revenues 318,472 404,412 395,987 446,438

yoy growth (%) 35.7 27.0 (2.1) 12.7


OPM (%) 11.8 11.6 11.7 12.0

Reported PAT 28,789 33,528 32,516 37,302

yoy growth (%) 8.1 16.5 (3.0) 14.7

EPS (Rs) 47.0 54.7 54.0 62.0

P/E (x) 19.1 16.4 16.6 14.4

Price/Book (x) 4.4 3.6 3.2 2.7

EV/EBITDA (x) 14.6 11.6 11.9 10.1

Debt/Equity (x) 0.3 0.2 0.1 0.1

RoE (%) 24.7 24.4 20.5 20.3


Mahindra & Mahindra

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Sector: Oil & Gas


Sensex: 21,165

52 Week h/l (Rs): 955 / 761


6m Avg vol (‘000Nos): 3,833

Bloomberg code: RIL IB

BSE code: 500325

NSE code: RELIANCE

FV (Rs): 10


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Reliance Sensex


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CMP: Rs915

Upside: 12.2%


[email protected]

Petchem projects driving value Refining: RIL to outperform global benchmarks With refining capacity additions expected to keep pace with incremental global demand, we believe global GRMs will see a flattish trajectory over the next couple of years. However, RIL during this course is expected to outperform the benchmarks on back of 1) petcoke gasification project (addition of US$2/bbl to GRMs from FY16), 2) dynamic sourcing of crude and 3) efficient marketing of products in terms of geographies.

Petchem: New capacity adds to drive value RIL is currently implementing capacity expansion programs across its petchem division, which includes a refinery off‐gas cracker (ROGC). These projects will double RIL’s petchem capacity and will start contributing to revenues over the next couple of years. The operational costs of ROGC would be much lower than current costs leading to sharp improvement in margins of the segment.

E&P: KG-D6 a worry, Shale gas and other E&P projects possess value The hue and cry around RIL’s E&P segment regarding gas price, budget approvals, penalties and relinquishment of acreage is pertaining to KG‐D6 block, which puts Rs75/share our SOTP value at risk. However, other blocks such as NEC‐25 and CBM blocks will add value and gain from the ensuing gas price hike. Its shale gas business is growing at a fast pace and the trend is expected to continue as production ramps up. These projects cumulatively can add Rs110/share.

Retail growing, prudent moves in telecom, cash deployment a key RIL’s retail business has seen substantial traction and is now EBIDTA positive. The company is targeting Rs400‐500bn over the next couple of years and can possibly achieve PAT breakeven by end of FY15. In its telecom business, the company has made tie‐ups with telecom infrastructure companies avoiding a lot of cash burn and gestation period. While RIL is investing heavily in its petchem division, we note that the company will remain FCF positive in FY15 and FY16. Utilization of this cash flow will be keenly watched.

Financial summary Y/e 31 Mar (Rs mn) FY12 FY13 FY14E FY15E

Revenues 3,585,010 3,970,620 4,764,529 5,063,461

yoy growth (%) 34.9 10.8 20.0 6.3


OPM (%) 9.7 8.3 7.3 7.8


Reported PAT 197,240 208,790 222,528 255,982

yoy growth (%) 2.2 5.9 6.6 15.0

EPS (Rs) 61.2 63.8 68.0 78.2

P/E (x) 14.7 14.1 13.2 11.5

Price/Book (x) 1.7 1.6 1.5 1.3

EV/EBITDA (x) 9.7 10.1 9.3 8.1

Debt/Equity (x) 0.5 0.5 0.4 0.4

RoE (%) 12.4 11.9 11.6 12.1


Reliance Industries

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Sector: Financials


Sensex: 21,165

52 Week h/l (Rs): 843 / 464



Bloomberg code: SHTF IN

BSE code: 511218

NSE code: SRTRANSFIN

FV (Rs): 10


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STFC Sensex

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CMP: Rs611

Upside: 18.2%


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Attractive valuation for a strong buisness Niche business model Shriram Transport Fin Co (STFC) is the largest CV financier commanding ~26% market share in pre‐owned CV financing and ~7% market share in new CV financing. With 30+ years of experience and strong expertise in loan origination, used vehicle valuation and cash collection, STFC’s business model is difficult to replicate. STFC has pan‐India presence through a network of 620 branches and 11,000+ field officers. Company has mainly focused on SRTOs operating on state highways ferrying essential commodities.

Used CVs financing segment driving AUM growth STFC is witnessing strong disbursement growth in CV financing driven by deepening branch network, significant increase in field officers and customers preference for used young CVs. The share of used CV financing has in increased from 81% to 93% in disbursements and from 77% to 84% in AUM over the past five quarters. On the back of robust 47% disbursement growth, used CV financing AUM has witnessed 31% growth in H1 FY14. Company’s intense focus, strong competitive position and widening rural reach would continue to drive brisk AUM growth in this segment despite weak economy.

NIM recovery ahead; operating leverage to accrue FY15 onwards NIM decline in Q2 FY14 was exceptional on account of excess balance sheet liquidity maintained by the company in the wake of unusual tightness in system liquidity. Therefore, margin is expected to recover smartly in coming quarters driven by 1) shift in asset mix towards used CV financing 2) utilization of excess balance sheet liquidity 3) cyclical softening of funding cost and 4) shift in funding mix away from bank borrowings. Operating leverage of the ongoing business investments will drive a decline in cost/income ratio over FY14‐16.

Potential risks adequately captured in valuation We believe that medium‐term asset quality risks and suppressed RoA outlook are adequately captured in current undemanding valuation. On flipside, improving longer‐term growth/margin outlook is yet to be fully discounted.



Yoy growth (%) 8.7 7.6 11.2 23.8


Net profit 12,591 13,622 13,830 15,587

yoy growth (%) 2.2 8.2 1.5 12.7

EPS (Rs) 55.6 60.0 61.0 68.7

Adj. BVPS (Rs) 260.4 306.5 353.5 400.4

P/E (x) 11.1 10.3 10.1 9.0

P/Adj.BV (x) 2.4 2.0 1.7 1.5

ROE (%) 23.1 20.7 17.8 17.3

ROA (%) 2.8 2.6 2.3 2.2 Source: Company, India Infoline Research

Shriram Transport Fin Co

14

Sector: IT


Sensex: 21,165

52 Week h/l (Rs): 3,372/2,190


6m Avg vol (‘000Nos): 2,503

Bloomberg code: WIPRO IB

BSE code: 507685

NSE code: WIPRO

FV (Rs): 2



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Wipro Sensex


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CMP: Rs478

Upside: 20.5%

Research Analyst: Aniruddha Mehta

[email protected]

Wipro Ltd

Valuations attractive!

Recent performance, deal pipeline show sustained improvement Wipro has, over past six quarters, delivered improving operational metrics, stable margin and expanding deal pipeline. Though the volumes traction is still not strong, there is an improving trend which underlines the growing business momentum. This is seen through its encouraging quarterly dollar revenue guidance (1.8‐3.6% qoq for seasonally weak Q3), large deal wins and material improvement in commentary. The deal closure rates too have shown improvement as reiterated by the management. The strategic business restructuring has led to improvements in key operating metrics too. Focussed client engagement continues to result in increased client satisfaction and client mining (Top 2‐10 clients witnessed 3.2% CQGR over past eight quarters). This is also visible with broad based improvement across client buckets.

Headroom in margin levers to help sustain operating margin Wipro’s OPM performance has remained stable in the recent past despite correction in utilisation, salary hikes, realisation pressure and sustained S&M investments. This impressive margin show was on the back of cost efficiency, weaker rupee and improved revenue productivity. Going forward, with better external growth momentum (especially with improving demand in developed markets), headroom in margin levers of utilization and G&A leverage, we expect margin to improve (~240bps over FY13‐15E). Additionally delivery automation, higher offshoring and broadening employee pyramid should also act as longer term margin levers for the company.

Valuations at 13.4x FY5E earnings are attractive In the past, as the business momentum at Wipro had been tepid compared to its faster growing peers (TCS, HCLT), its valuations too have remained relatively cheap (25%+ discount to TCS). The momentum has started improving as evidenced in better revenue trajectory, guidance and constructive management commentary (over past 2‐3 quarters) and hence we expect Wipro to reduce its growth differential with peers in coming quarters. P/E Valuation of 13.4x FY15E earnings is at sizeable discount of to TCS and hence provides an attractive entry.

Financial summary Y/e 31 March (Rs m) FY12 FY13 FY14E FY15E

Revenues 322,749 377,669 438,807 496,499

yoy growth (%) 3.9 17.0 16.2 13.1


OPM (%) 21.6 21.3 22.9 23.7

Reported PAT 1,417 1,876 2,301 2,704

yoy growth (%) 1.5 32.4 22.6 17.6

EPS (Rs) 21.7 25.3 30.7 36.0

P/E (x) 22.2 19.1 15.7 13.4

EV/EBITDA (x) 16.1 13.6 10.5 8.5

RoE (%) 20.4 21.9 24.3 23.9


15

Diwali Dhamaka: A Dozen reasons to smile

Past performance: Diwali Dhamaka 2012

Company Sector Reco Price

(Rs)

Target set / Closure price

(Rs)

Returnsdelivered

(%) Call Closure/Target achievement Date

Dr. Reddy's Pharma 1,769 1,980 11.9 13‐May‐13

GCPL FMCG 692 792 14.5 8‐Mar‐13

ICICI Bank Banking 1,059 1,340 5.8 Open

IPCA Pharma 428 492 15.0 12‐Dec‐12

Karur Vysya Bank Banking 469 530 13.0 27‐Dec‐12

Mahindra Satyam IT 108 129 19.4 11‐Mar‐13

NBCC Real Estate 142 192 35.2 8‐Jan‐13

Radico Khaitan Breweries 127 145 14.2 27‐Nov‐12

Swaraj Engines Auto Ancillary 431 535 24.1 10‐Jul‐13

Source: India Infoline Research

Out of the nine stocks recommended last year, eight were successfully closed. Only one stock remained open but that too with positive return. Assuming equal investment in each stock, the portfolio delivered an absolute return of 17%, excluding dividends. If annualized, these returns would be significantly higher.

Recommendation parameters for fundamental reports:

Buy – Absolute return of over +10%

Market Performer – Absolute return between ‐10% to +10%

Sell – Absolute return below ‐10%

Published in 2013. © India Infoline Ltd 2013 This report is for the personal information of the authorised recipient and is not for public distribution and should not be reproduced or redistributed without prior permission. The information provided in the document is from publicly available data and other sources, which we believe, are reliable. Efforts are made to try and ensure accuracy of data however, India Infoline and/or any of its affiliates and/or employees shall not be liable for loss or damage that may arise from use of this document. India Infoline and/or any of its affiliates and/or employees may or may not hold positions in any of the securities mentioned in the document. The report also includes analysis and views expressed by our research team. The report is purely for information purposes and does not construe to be investment recommendation/advice or an offer or solicitation of an offer to buy/sell any securities. The opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. Investors should not solely rely on the information contained in this document and must make investment decisions based on their own investment objectives, risk profile and financial position. The recipients of this material should take their own professional advice before acting on this information. India Infoline and/or its affiliate companies may deal in the securities mentioned herein as a broker or for any other transaction as a Market Maker, Investment Advisor, etc. to the issuer company or its connected persons. This report is published by IIFL ‘India Private Clients’ research desk. IIFL has other business units with independent research teams separated by 'Chinese walls' catering to different sets of customers having varying objectives, risk profiles, investment horizon, etc and therefore, may at times have, different and contrary views on stocks, sectors and markets. 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 any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to local law, regulation or which would subject IIFL and affiliates to any registration or licensing requirement within such jurisdiction. The securities described 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. IIFL, IIFL Centre, Kamala City, Senapati Bapat Marg, Lower Parel (W), Mumbai 400 013. For Research related queries, write to: Amar Ambani, Head of Research at [email protected] or [email protected] For Sales and Account related information, write to customer care: [email protected] or call on 91‐22 4007 1000