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Prime Picks – Vol. 3 

  Prime Picks
December 24, 2010

Index performance (6-month) Prime Picks

25 In the third edition of Prime Picks, we have put together eight large
(%)
20
20.1 cap and six midcap companies that are well placed to deliver high
15 13.9 13.6 14.0 returns in the year 2011. Several scam revelations have taken away
11.4 12.7
10 a lot of the outperformance of early 2010 and the market currently
6.3
5 trades in a range bound territory with falling volumes (year end
0 effect). While some more correction cannot be ruled out, we believe
this gives a great opportunity to add to quality stocks to your
Shanghai
Hang Seng
Dow Jones

Nikkei
Sensex

Nasdaq
Nifty

portfolio. We believe the year 2011 will be a good one for Indian
equities. FII inflows will remain strong given ongoing easy liquidity
stance around the globe, ~5% appreciation in the INR vs the USD
  and the continuing high growth of the Indian economy. The Nifty, in
Source: Bloomberg
our opinion, can cross the 7,000 mark in 2011-12.
Sectoral performance (6-month)
Stocks Brief
BSE Realty (12.1) (%) The highest exposure is to the Auto and Financial space (assuming
BSE Power (6.2) equal investment in each stock irrespective of market cap) followed
BSE Oil & Gas 0.5 by the Energy related space. We like consumption themes like Autos
BSE Small-Cap 3.9 that will continue to benefit from rising income levels, both in rural
BSE Cap Goods 5.2
and urban markets. While Finance companies may be seen having
BSE FMCG 10.9
tough time in the near future, we believe they will be one of the
BSE-200 11.2
BSE Pharma 12.1
alpha generators over 12 months. The Energy related space
BSE Metal 15.6
comprises Metals and Oil & Gas stocks. Commodity prices will
BSE Bank 21.0
continue to rise in 2011 in our view. This will benefit integrated
BSE Auto 23.7 metals players. For the Oil & Gas space, the impact will be mixed,
BSE IT 25.2 but deregulation expectations are high. The midcap names have
been vigilantly picked after giving due consideration to corporate
(30) (10) 10 30
  governance, growth and valuations. We recommend avoiding the
Source: Bloomberg Cement sector facing supply overhang and Real estate, as the sector
faces a sluggish demand scenario, financing problems and has
FII & DII net activity serious governance issues.
FII DII
300 (Rs bn)
M Cap CMP Target Upside
200 Company Sector (Rs bn) (Rs) (Rs) (%)
100 Large Caps
Bajaj Auto Auto 417 1,446 1,727 19.4
0
L&T Infrastructure 1,177 1,935 2,300 18.9
(100) M&M Auto 444 752 864 14.9
Jun-10 Aug-10 Oct-10 Dec-10 REC NBFC 292 299 418 39.8
 
Source: Bloomberg Reliance Ind Oil & Gas 3,457 1,058 1,216 14.9
SBI Banking 1,751 2,746 3,500 27.5
Sectoral Outlook Sterlite Ind Metals 613 180 210 16.7
Sector Outlook Tata Steel Metals 602 662 740 11.8
Automobiles Positive
Banks & Financial Services Positive
Breweries Positive Mid Caps
Capital goods Positive Escorts Auto 18 171 220 28.7
Cement Negative OnMobile Telecom 16 279 391 40.1
FMCG Positive
Petronet LNG Oil & Gas 96 127 150 18.1
Hotels Neutral
Infrastructure Positive Radico Khaitan Breweries 21 159 203 27.7
Information technology Positive Unity Infra Infrastructure 7 89 140 58.2
Metals & mining Neutral Yes Bank Banking 107 310 400 29.0
Oil & gas Positive Source: India Infoline Research
Pharmaceuticals Positive
Pipes Positive
Telecom Neutral
Utilities Positive
Source: India Infoline Research

 
Prime
 
Picks 

Large caps

 Bajaj Auto: Robust domestic & export growth; industry best margins

 L&T: Best placed to benefit when Government & industrial capex revives

 M&M: Rural India play; Ssangyong acquisition to be value accretive

 REC: Play on power capex; strong traction in sanctions; stable spreads; robust asset quality;
impressive return ratios

 Reliance: Recovery in GRMs, stable petrochemical spreads; healthy balance sheet

 SBI: Extensive reach; well-diversified portfolio

 Sterlite: Extremely attractive valuations; strong earnings from zinc & power businesses

 Tata Steel: Raw material integration; earnings boost with improved European performance

Mid caps

 Escorts: Volume growth to beat consensus estimates; balance sheet restructured; Valuations
cheap at P/E of 6.9x F9/12E

 OnMobile: Dominates domestic VAS industry (33% share); Telefonica deal to bear fruit in FY12;
49% EPS cagr over FY10-12E

 Petronet LNG: Gains from strained demand-supply balance for natural gas

 Radico Khaitan: 15% volume growth in mainline brands; earnings 53% cagr between FY10-12E

 Unity Infra: Healthy balance sheet; robust revenue cover; strong earnings growth potential; cheap
valuation

 Yes Bank: Best bet in private banking; Robust balance sheet growth; superior return ratios;
negligible NPLs

 
Top Large Cap BUYs
  Bajaj Auto – BUY

Sector: Automobiles Momentum in two wheeler sales to continue

Sensex: 19,983 Two wheeler sales witnessed resurgent times in FY10 reporting a
robust growth of 26% against decline of 8% in FY08 and a flattish
CMP (Rs): 1,446
growth of 3% in FY09. The trend continued in H1 FY11 with 26%
52 Week h/l (Rs): 1665 / 810
jump. We expect the momentum to continue over the next two years
Market cap (Rscr) : 41,848
driven by 1) higher penetration into rural markets and 2) strong
6m Avg vol (‘000Nos): 596 urban demand led by higher disposable income. Further, exports of
No of o/s shares (mn): 289 two wheelers will continue to remain strong on back of entrance into
FV (Rs): 10 newer markets in Asia.
Bloomberg code: BJAUT IN
BAL’s branding strategy; pivotal to growth
Reuters code: BAJA.BO
Bajaj Auto Ltd (BAL) has increased its market share from 21.9% in
BSE code: 532977 FY09 to 28% in H1 FY11 in motorcycles owing to its innovative
NSE code: BAJAJAUTO branding strategy of segmenting its product profile into commuter
Prices as on 23 Dec, 2010 category (serviced by Discover brand) and the sports segment
Shareholding pattern (serviced by Pulsar brand). The success of this strategy coupled with
September '10 (%) increasing presence in rural markets will lead to improvement in
Promoters 49.7 market share. Furthermore, strong growth in three wheeler exports
Institutions 23.5 would provide additional traction to rise in volumes for BAL.
Non promoter corp hold 8.9
Healthy OPM vis-à-vis peers on back of better product mix
Public & others 17.9 BAL has earned an enviable OPM of more than 20% for five
consecutive quarters. Key factors driving the performance are 1)
Performance rel. to sensex superior product mix with significant contribution of three wheelers
(%) 1m 3m 1yr (better margin product vis-à-vis two wheelers), 2) timely price hikes
Bajaj Auto (13.2) (0.3) 54.7 for its products and 3) sound currency hedging strategy (exports for
Hero Honda (3.2) 6.1 1.7 FY11 hedged at Rs47/US$). These factors will translate into
TVS (9.2) (1.8) 130.9 continued outperformance of BAL when compared with its peers in
terms of OPM.
Share price trend
Superior earning profile implying higher valuation
Bajaj Auto Sensex We expect volumes for BAL to witness higher than industry growth in
250 the next two years resulting in revenue CAGR of 27% over FY10-
200 12E. With commodity prices not expected to witness a quantum
150 jump and a favorable product mix for BAL, we estimate OPM to be
100
maintained at current levels. Premium valuations would continue on
the back of industry best earnings profile.
50
0 Valuation summary
Dec-09 Apr-10 Aug-10 Dec-10 Y/e 31 March (Rs m) FY09 FY10 FY11E FY12E
Revenues 88,104 119,210 164,942 192,354
yoy growth (%) (2.6) 35.3 38.4 16.6
Operating profit 11,777 25,907 34,336 39,538
OPM (%) 13.4 21.7 20.8 20.6
Pre-exceptional PAT 8,616 18,632 25,335 29,397
Reported PAT 6,545 17,017 25,335 29,397
yoy growth (%) (13.4) 160.0 48.9 16.0

EPS (Rs) 22.6 58.8 87.6 101.6

P/E (x) 63.8 24.6 16.5 14.2
P/BV (x) 22.3 14.3 9.4 6.6
EV/EBITDA (x) 18.8 8.5 12.1 10.4
Debt/Equity (x) 0.8 0.5 0.0 0.0
ROE (%) 49.8 77.7 68.5 54.6
ROCE (%) 37.1 66.8 79.7 75.0
Source: Company, India Infoline Research

 
  Larsen & Toubro – BUY

Sector: Infrastructure Best infra play due to diversified presence

Sensex: 19,983
We believe L&T is best placed to benefit from reviving Government
infrastructure investments and industrial capex due to its diversified
CMP (Rs): 1,935
presence. Business segments such as power equipment, nuclear
52 Week h/l (Rs): 2213 / 1371
power and railways would be key growth drivers with government
Market cap (Rscr) : 117,619 emphasis on increased private participation and company’s capability
6m Avg vol (‘000Nos): 1,234 enhancing investments in these areas. In power equipment space,
No of o/s shares (mn): 608 company’s boiler and turbine facility has become operational and
FV (Rs): 2 orders of 8,200MW for turbines and 6,600MW for boiler have been
Bloomberg code: LT IN bagged. In nuclear power, L&T is setting up a heavy forging shop
and has tied-up with NPCIL and various technology partners such as
Reuters code: LART.BO
Westinghouse Electric, Atomstroy Export, GE-Hitachi and Atomic
BSE code: 500510
Energy of Canada.
NSE code: LT
Prices as on 23 Dec, 2010 Improving book-bill ratio; increasing revenue visibility
Shareholding pattern Current order book of L&T at ~Rs1.2tn, 3x TTM revenues, provides
September '10 (%) strong revenue visibility for next three years. In FY10, the order
Promoters 0.0 intake growth outstripped revenue growth. This trend would continue
Institutions 53.9 in FY11 also with management guiding for order intake growth of
Non promoter corp hold 6.2 25% yoy and revenue growth of 20% yoy. Company expects
Public & others 39.8
domestic power sector, hydrocarbon sector in India/Gulf region and
revival of industrial capex to drive order inflow. Further, Rs80bn-
Performance rel. to sensex
100bn captive orders from the Hyderabad metro project and
~Rs50bn bulk orders for supercritical boilers from NTPC would help
(%) 1m 3m 1yr
company in achieving its order intake guidance. We expect the book-
L&T (7.1) (4.0) (1.1)
bill ratio to improve to 3.4x by FY12.
BHEL 0.5 (6.8) (19.3)
HCC (22.4) (24.8) (52.7) Value unlocking in subsidiaries and strong growth to support
higher valuations
Share price trend Planned unlocking of value in L&T Finance and L&T Infra Finance
140 L&T Sensex during FY11 through IPO/private equity would be a significant
positive for the stock. We expect L&T’s stand-alone revenues to
witness 22.9% CAGR over FY10-12E. OPM is expected to remain
stable in FY11 and witness marginal decline in FY12. Pre-exceptional
110
earnings are expected to witness 20% CAGR over FY10-12E. Based
on SOTP valuations, we arrive at a target price of Rs2,300.

80 Valuation summary
Dec-09 May-10 Oct-10 Y/e 31 Mar (Rs m) FY09 FY10 FY11E FY12E
Revenues 339,264 370,348 447,469 560,223
yoy growth (%) 36.5 9.2 20.8 25.2
Operating profit 38,676 48,145 58,171 71,148
OPM (%) 11.4 13.0 13.0 12.7
Pre-exceptional PAT 27,091 31,847 38,632 45,928
Reported PAT 34,816 43,755 38,632 45,928
yoy growth (%) 60.2 25.7 (11.7) 18.9

EPS (Rs) 46.3 52.9 64.2 76.3

P/E (x) 41.8 36.6 30.1 25.4
Price/Book (x) 9.1 6.3 5.5 4.6
EV/EBITDA (x) 29.8 24.4 20.9 17.1
Debt/Equity (x) 0.5 0.4 0.3 0.3
RoE (%) 24.6 20.7 18.7 19.8
Source: Company, India Infoline Research

 
  Mahindra & Mahindra – BUY

Sector: Automobiles Improving rural consumer sentiment to drive volume growth

Sensex: 19,983 With FY11 monsoons being better than normal vis-à-vis a drought
CMP (Rs): 752
last year, strong revival is expected in agriculture growth. This
coupled with government initiatives such as higher support prices for
52 Week h/l (Rs): 826 / 475
crops, interest subvention for farmers and rural employment
Market cap (Rscr) : 44,834
schemes will shore up rural consumer sentiment. This will translate
6m Avg vol (‘000Nos): 1,940 into higher demand for tractors and UVs, directly benefitting M&M.
No of o/s shares (mn): 597 New launches in both the segments will provide additional traction
FV (Rs): 5 for the company. Furthermore, entry into M&HCV and LCV sales will
Bloomberg code: MM IB also be earnings accretive over the medium term.
Reuters code: MAHM.BO
BSE code: 500520 Ssangyong acquisition could be beneficial over medium term
Recently, M&M was selected as the preferred bidder for Ssangyong,
NSE code: M&M
a leading SUV manufacturer in Korea. We believe, the acquisition at
Prices as on 23 Dec, 2010
0.5x CY09 sales would be value accretive for M&M over the medium
Shareholding pattern
term. M&M will also see benefits such as 1) Ssangyong being a
September '10 (%) premium SUV player, M&M could gain from its design and
Promoters 25.8 technological capabilities and 2) of M&M’s export product profile
Institutions 48.0 would widen aiding it to meet its target of increasing its exports from
Non promoter corp hold 8.2 10% of sales to 20% over the next three years.
Public & others 18.0
Raw material sourcing strategy and stable commodity prices
Performance rel. to sensex to support operating margins
(%) 1m 3m 1yr M&M reported an OPM of 16.4% in Q2 FY11 (much ahead of our and
M&M (2.6) 8.0 29.0 street estimates) despite pressure of higher commodity prices and
Maruti (4.8) (5.5) (27.9)
shortage in component supplies. The resilient performance was
owing to better raw material sourcing strategy and benefits of
Tata Motors 9.6 24.9 65.8
operating leverage. If current level of commodity prices continues,
Ashok Ley (15.7) (15.0) 15.9
we believe there would be upsides from the current levels in terms of
margin performance. Continued volume momentum and sorting out
Share price trend of component shortage issue will provide further benefits of
M&M Sensex operating leverage.
200
Best play on rural India theme
We value M&M at Rs864/share, which includes Rs621 for its
100 automotive business (14x P/E for FY12E) and Rs243 for its
subsidiaries. Substantial exposure to rural sector and improving
product profile will keep earnings momentum intact. We have not
0 factored in any value from its commercial vehicle JV with Navistar.
Dec-09 Apr-10 Aug-10 Dec-10
Valuation summary
Y/e 31 March (Rs m) FY09 FY10 FY11E FY12E
Revenues 130,937 186,021 212,501 245,548
yoy growth (%) 13.5 42.1 14.2 15.6
Operating profit 10,926 29,552 32,513 36,341
OPM (%) 8.3 15.9 15.3 14.8
Pre-exceptional PAT 8,265 19,970 23,171 25,836
Reported PAT 8,368 20,878 23,171 25,836
yoy growth (%) (24.2) 149.5 11.0 11.5

EPS (Rs) 14.8 34.3 39.8 44.4

P/E (x) 50.8 21.9 18.9 16.9
P/BV (x) 8.0 5.6 4.6 3.8
EV/EBITDA (x) 40.7 15.2 13.8 12.0
Debt/Equity (x) 0.8 0.4 0.2 0.0
ROE (%) 17.2 30.5 26.7 24.6
ROCE (%) 13.1 27.5 27.3 28.8
Source: Company, India Infoline Research

 
  Rural Electrification Corp – BUY

Sector: NBFC
Rs1tn sanctions to drive loan cagr of 26%
Rising demand in the power financing space, limited competition
Sensex: 19,983
from banks (owing to ALM mismatch) and dominant market position
CMP (Rs): 299
have enabled REC to report strong loan growth in the past. Loan
52 Week h/l (Rs): 410 / 205 book grew at sturdy 30% cagr over FY08-10. With cumulative
Market cap (Rscr) : 29,550 pending sanctions to the tune of Rs1tn (1.5x FY10 loan book), we
6m Avg vol (‘000Nos): 1,693 expect loan cagr of 26% over FY10-12. This would drive a 24% cagr
No of o/s shares (mn): 987 in balance sheet/net profit.
FV (Rs): 10
Increasing pvt sector exposure; share of generation on rise
Bloomberg code: RECL IB
Loans to state and central entities constituted >90% of the total loan
Reuters code: RURL.BO portfolio in FY10. Given the huge demand from private sector in
BSE code: 532955 upcoming five year plan, REC has now shifted its focus towards this
NSE code: RECLTD segment. Loan share to private sector currently stands at 8% and
Prices as on 23 Dec, 2010 the management has guided to increase the same to 15%. Also, with
Shareholding pattern ~Rs9tn of planned capex (43% of total) in XI and XII plan towards
September '10 (%)
generation, REC has increased its exposure towards the segment.
Sanctions and disbursement for generation stood at ~50% in
Promoters 66.8
H1FY11.
Institutions 25.5
Non promoter corp hold 4.3 Spreads to remain intact; IFC status a feather in the cap
Public & others 3.4 In wake of rising inflationary pressure, RBI has raised its key rates -
repo (+125bps) and reverse repo (+175bps) since Mar’ 10.
Borrowing costs too have risen sharply during the period (up 20bps).
Performance rel. to sensex
However, shift in focus towards private sector and higher proportion
(%) 1m 3m 1yr
of short term loans have safeguarded spreads at >3% level.
REC (15.3) (12.4) 9.5
PFC (7.9) (6.6) 10.9 REC has been accredited with Infra financing status which it plans to
IDFC (7.6) (10.2) (2.8)
leverage through raising of ~Rs10bn via infra bonds. The status also
allows REC to take additional lending exposure (up to 5% - single
Srei Infra (12.9) 9.8 31.3
borrower and 10% - group borrowers), in addition to eligibility to
raise funds to the tune of US$500mn via ECB route. Prudent funding
Share price trend
mix - ~85% in fixed liabilities, increasing exposure towards
200 REC Sensex generation and private sector, would enable REC maintain spreads.
170
Supportive valuation with healthy risk-return ratio
140 The stock has underperformed its peers and currently trades at 1.9x
110 FY12 BV which does not adequately reflect 1) a diversified 26% loan
80 cagr over FY10-12 2) stable spreads coupled with negligible NPL and
3) impressive return ratios (avg RoE/RoA of 22%/3.2%). We expect
50
valuations to re-rate from current levels. Foray into banking space
Dec-09 May-10 Oct-10
and increase in FII limit to 35% remain key positives. Slowdown in
power capacity addition remains a key concern.

Valuation summary
Y/e 31 Mar (Rs m) FY09 FY10A FY11E FY12E
Total operating income 20,492 28,516 35,541 44,430
yoy growth (%) 37.9 39.2 24.6 25.0
Operating profit (pre-provisions) 19,254 26,811 33,449 41,839
Net profit 12,731 20,224 24,973 31,237
yoy growth (%) 32.9 58.8 23.5 25.1

EPS (Rs) 14.8 20.5 25.3 31.6

BVPS (Rs) 72.1 112.5 130.4 154.9
P/E (x) 20.2 14.6 11.8 9.5
P/BV (x) 4.1 2.7 2.3 1.9
ROE (%) 20.5 23.4 20.8 22.2
ROA (%) 2.6 3.3 3.2 3.2
CAR (%) 11.7 16.3 15.1 14.3
Source: Company, India Infoline Research

 
  Reliance Industries – BUY

Sector: Oil & Gas Steep underperformance v/s broader markets unwarranted
Sensex: 19,983 YTD Reliance Industries (RIL) has underperformed Sensex by 21%,
the steepest underperformance since 2004. Over a three year
CMP (Rs): 1,058
period, the underperformance is higher at 26% when compared with
52 Week h/l (Rs): 1,187 / 841
Sensex and 13% with BSE Oil and Gas index. Key reasons for this
Market cap (Rscr) : 346,291
underperformance are 1) declining GRMs and petchem spreads and
6m Avg vol (‘000Nos): 5,545 2) delay in ramp up of KG-D6 production. For the former we expect
No of o/s shares (mn): 3,273 a gradual recovery and a busy exploration season along with focus
FV (Rs): 10 on shale gas and other fields should take care of the latter.
Bloomberg code: RIL IN
Reuters code: RELI.BO
Cyclical pressure on refining and petchem margins priced in
Downtrend in refining and petrochemical margins have resulted in
BSE code: 500325
earnings downgrade for major players including RIL. However, these
NSE code: RELIANCE
have adequately been factored in through a steep underperformance
Prices as on 23 Dec, 2010 vis-à-vis broader markets. Going ahead, we believe refining margins
Shareholding pattern have limited downside from the current levels due to 1) strong
September '10 (%) demand from emerging economies in Asia, 2) delays in new
Promoters 44.7 capacities and 3) closure of unviable refineries. Petrochemical
Institutions 27.1 segment, although, will continue to reel under some pressure, RIL’s
Non promoter corp hold 5.1 integrated nature will allow it to deliver a better performance.
Public & others 23.1
E&P segment – shale gas and new discoveries to be looked at
So far a majority of the value for RIL’s E&P business was ascribed to
Performance rel. to sensex
KG-D6 basin. Although, it still continues to be the highest value
(%) 1m 3m 1yr
generator, we believe, the focus would now shift to new discoveries
Reliance Ind. 4.8 5.2 (17.7)
and its venture into shale gas acreages in US. Going ahead, RIL has
ONGC 3.3 (7.1) (3.3) a busy exploration calendar in its key blocks including D-3, D-4, D-9
Cairn India 0.7 (1.4) 0.1 and NEC-25. Announcement of reserve estimates related to these
Essar Oil 3.3 1.3 (19.4) blocks or new discoveries will only improve sentiment.

Share price trend New ventures would drive news flow in the medium term
During its AGM in June 2010, RIL had announced its intent to enter
Reliance Sensex
into power and telecom sector. In the telecom space, it acquired
150
Infotel which was the largest winner for broadband licenses. RIL has
plans to bid for Ultra Mega Power Plants (UMPP) projects.
100
Furthermore, the company recently acquired a 14.2% stake in EIH
50 Hotels for a sum of Rs10bn. With cash and cash equivalents of
~Rs293bn and a net debt/equity ratio of 0.3x, we believe RIL’s
0 inorganic initiatives will gain further momentum.
Dec-09 Apr-10 Aug-10 Dec-10
Valuation summary
Y/e 31 March (Rs m) FY09 FY10 FY11E FY12E
Revenues 1,512,240 2,037,397 2,470,722 2,729,426
yoy growth (%) 10.3 34.7 21.3 10.5
Operating profit 234,222 308,939 381,771 443,737
OPM (%) 15.5 15.2 15.5 16.3
Pre-exceptional PAT 149,687 158,976 206,506 251,399
Reported PAT 149,687 245,031 206,506 251,399
yoy growth (%) 1.2 6.2 29.9 21.7

EPS (Rs) 51.8 82.3 63.2 76.9

P/E (x) 20.5 12.9 16.8 13.8
P/BV (x) 2.5 2.2 2.2 1.9
EV/EBITDA (x) 15.8 11.9 9.4 8.0
Debt/Equity (x) 0.6 0.5 0.4 0.3
ROE (%) 14.5 12.1 13.7 14.7
ROCE (%) 11.8 11.0 12.9 14.4
Source: Company, India Infoline Research

 
  State Bank of India – BUY

Sector: Banking Loan growth momentum to become more broad-based

Sensex: 19,983
SBI has witnessed strong loan book expansion of ~20% in the past 12
months increasing its market share to 17%. Key drivers have been
CMP (Rs): 2,746
robust branch addition and the new-found aggressiveness especially
52 Week h/l (Rs): 3515 / 1863
with respect to retail loans. SBI has emerged as the No.1 retail lender
Market cap (Rscr) : 174,386 in the country with dominant market share in home, auto and
6m Avg vol (‘000Nos): 2,342 education loans. Going ahead, growth is likely to become more broad-
No of o/s shares (mn): 635 based with demand picking up from other segments also. We estimate
FV (Rs): 10 SBI’s loan growth at 20% in FY11 and 22% in FY12.
Bloomberg code: SBIN IS
NIM to stabilize after recent expansion
Reuters code: SBI.BO
SBI’s NIM has recovered by significant 110bps in the past five quarters
BSE code: 500112 aided by 1) material decline in average surplus liquidity 2) significant
NSE code: SBIN improvement (900 bps+) in the CASA ratio 3) reduction in contribution
Prices as on 23 Dec, 2010 of bulk term deposits and within high-cost deposits and 4) sharp
Shareholding pattern improvement in C/D ratio (900 bps). We believe that bank should be
September '10 (%) able to hold NIM in the range of 3.1-3.4% in the medium term with
Promoters 59.4 credit growth having picked-up amidst tight liquidity conditions. Recent
deposits and lending rate hike would have a net marginal impact.
Institutions 29.5
Non promoter corp hold 2.4 Asset quality needs attention; equity issuance to bolster capital
Public & others 8.6 There has been a material deterioration in bank’s asset quality over the
past five quarters with present NPL levels being higher than most
Performance rel. to sensex peers. Slippages from the restructured portfolio were significant at
(%) 1m 3m 1yr Rs6.6bn in Q2 FY11. NPL risk is the highest for SBI with Net NPLs
SBI (8.6) (13.4) 8.4 comprising 17.6% of FY10 networth. With PCR at 63%, the bank
PNB (9.4) (6.2) 18.3 requires substantial additional provisioning to reach the stipulated 70%
ICICI Bank (3.9) 1.8 15.2 cover by Sept 2011. We estimate SBI’s balance sheet to witness 19%
HDFC Bank (9.2) (11.9) 12.8 CAGR over FY10-12, which would be mainly funded by plough backs
and a rights issue/follow-on offer. While RoA is likely to improve, RoE
Share price trend
would be depressed by the planned equity issuance.

170 SBI Sensex Recent price correction has made valuation attractive
Given the bank’s sheer size (commands 1/4th of the industry as a
140 group), extensive reach (to benefit from semi-urban and rural upswing)
and a well-diversified loan portfolio, SBI is the best proxy on the Indian
110 Banking story. Recommend BUY with a SOTP target price of Rs3,500
which has been arrived after valuing 1) stand-alone bank at Rs2,830
using our proprietary Bank 20 valuation model 2) ownership in the six
80
Dec-09 May-10 Oct-10
associate banks at Rs460 3) 74% stake in SBI Life at Rs157 4) 63%
stake in SBI MF at Rs19 and 5) SBI Caps at Rs35.

Valuation summary
Y/e 31 Mar (Rs m) FY09 FY10 FY11E FY12E
Total operating income 335,650 386,396 490,795 591,422
yoy growth (%) 30.5 15.1 27.0 20.5
Op profit (pre-prov) 179,163 183,209 255,098 306,229
Net profit 91,223 91,660 106,736 135,996
yoy growth (%) 35.6 0.5 16.4 27.4

EPS (Rs) 143.7 144.4 149.4 190.4

BVPS (Rs) 912.7 1,038.8 1,340.9 1,484.5
P/E (x) 19.1 19.0 18.3 14.4
P/BV (x) 3.0 2.6 2.0 1.8
ROE (%) 17.1 14.8 13.2 13.5
ROA (%) 1.1 0.9 0.9 1.0
Dividend yield (%) 1.1 1.1 1.2 1.5
CAR (%) 14.3 13.4 14.8 14.0
Source: Company, India Infoline Research

 
  Sterlite Industries – BUY

Sector: Metals & Mining Base metal prices to remain high

Sensex: 19,983 Base metals have performed extremely well this year, led by ample
liquidity globally and production discipline maintained by the
CMP (Rs): 180
producers. Prices have also rallied on expectations of a revival in
52 Week h/l (Rs): 232 / 149
demand from developed nations and continued strong demand from
Market cap (Rscr) : 60,543
emerging markets. We believe prices would remain high in the near
6m Avg vol (‘000Nos): 8,377 term as liquidity situation remains fine led by the quantitative easing
No of o/s shares (mn): 3,361 measures taken by the various Central banks. However, we expect
FV (Re): 1 the upside to be capped as interest rates harden in China and major
Bloomberg code: STLT IB emerging markets and excess capacity persisting in the system.
Reuters code: STRL.BO
Operating profit to jump 37% over FY10-12E
BSE code: 500900
Hindustan Zinc Ltd (HZL) is on the verge of completion of its
NSE code: STER
expansion project to 1mn tons of zinc and lead capacity. We expect
Prices as on 23 Dec, 2010 a jump of 47% in production volumes over the period FY10-12E. On
Shareholding pattern the back of captive resources and operational efficiencies the
September '10 (%) company lies in the lowest quartile of the cost curve. This coupled
Promoters 52.8 with an increase in silver production would boost the company’s
Institutions 21.2 profitability over the period FY10-12E. We expect HZL’s operating
Non promoter corp hold 5.5 profit to increase by 36.7% over FY10-12 on the back of strong
Public & others 20.5 volume growth and higher by-product credits.

Performance rel. to sensex

VAL’s delayed capex to enable higher power merchant sales
We believe the delay in the aluminium expansion plans would reopen
(%) 1m 3m 1yr
an opportunity for SEL to tap the merchant power market instead of
Sterlite 3.4 3.4 (32.1)
selling to VAL under a long-term pricing agreement. In addition, the
HZL 7.3 19.1 (7.0) company will also have surplus power sales from the captive units
Hindalco 9.4 22.3 36.1 associated with the aluminium plants under BALCO. We expect
NALCO (1.4) (8.1) (21.4) contribution of power to jump over the next two years.

Share price trend Power and zinc to drive earnings, Recommend BUY
140 Sterlite Sensex
Sterlite has underperformed the broader markets and its peers over
the last one year on the back of regulatory restrictions on the
company’s operations in Orissa and Tuticorin. However, any
110
breakthrough in the arbitration proceedings for its proposed
acquisition of the government’s minority stakes in BALCO and HZL
80 would be a positive trigger for the company. We believe going
forward Sterlite’s earnings will be boosted by strong numbers from
50 the power and zinc division. We believe that the stock has limited
Dec-09 May-10 Oct-10 downside and recommend a BUY rating on the stock.

Valuation summary
Y/e 31 March (Rs m) FY09 FY10 FY11E FY12E
Revenues 211,443 244,104 304,290 407,343
yoy growth (%) (14.4) 15.4 24.7 33.9
Operating profit 47,110 60,870 82,642 130,520
OPM (%) 22.3 24.9 27.2 32.0
Pre-exceptional PAT 34,915 37,284 43,383 76,777
yoy growth (%) (21.6) 6.8 16.4 77.0

EPS (Rs) 12.3 11.1 12.9 22.8

P/E (x) 14.6 16.2 13.9 7.9
P/BV (x) 2.0 1.7 1.5 1.3
EV/EBITDA (x) 11.1 11.4 7.9 4.5
Debt/Equity (x) 0.3 0.3 0.4 0.3
ROE (%) 14.6 12.0 11.3 17.4
ROCE (%) 16.4 14.3 13.6 17.7
Source: Company, India Infoline Research

 
  Tata Steel – BUY

Sector: Metals & Mining Input cost pressure to push steel prices higher
Sensex: 19,983 Steel prices globally have recovered over the last one month after a
sharp decline during October to mid-November. The recovery has
CMP (Rs): 662
been led by a jump in input costs and rise in expectations of a
52 Week h/l (Rs): 737 / 449
stronger revival in demand from the developed countries. Adding to
Market cap (Rscr) : 59,686
the rally in prices has been a sharp decline in steel inventories in
6m Avg vol (‘000Nos): 7,997 China. Chinese inventory levels have declined since March ’10 as
No of o/s shares (mn): 902 steel demand remained stable, whereas production declined due to
FV (Rs): 10 various measures taken by the Chinese government. We expect steel
Bloomberg code: TATA IB prices to rise in FY12 led by cost side pressures, production
Reuters code: TISC.BO
rationalization in China and higher demand in developed nations.
BSE code: 500470
Rise in raw material to lead to higher margins in India
NSE code: TATASTEEL
Over the years, Tata Steel’s domestic operations have exhibited
Prices as on 23 Dec, 2010 robust performance on the back of high raw material integration and
Shareholding pattern superior product mix. The company in the last three quarters has
September '10 (%) achieved an EBIDTA/ton of >US$450/ton, the highest among its
Promoters 32.5 peers. For FY12, we expect Tata Steel India to continue to report
Institutions 42.6 EBITDA/ton of +US$400. This coupled with volume growth led by
Non promoter corp hold 3.4 the new facility would also boost earnings; accounting for ~71% of
Public & others 21.6 the company’s operating profit in FY12.

Performance rel. to sensex

Europe to remain EBIDTA positive
The strong performance in the European operations over the last one
(%) 1m 3m 1yr
year has been due to combination of higher realization and utilization
Tata Steel 6.5 5.3 (6.2)
rates. Both, capacity utilization rates and average realization, for the
JSW Steel (7.2) (8.5) (2.7) company has been higher than its peers. Even though margin would
SAIL (0.0) (9.6) (37.4) be under pressure due to high raw material prices, we expect the
JSPL 5.9 (1.3) (21.5) company to remain EBIDTA positive. Led by the various cost
initiatives and the increase in utilization rate, we expect EBIDTA/ton
Share price trend of US$61/ton in FY12.
140 Tata Steel Sensex
Tata Steel India to boost earnings, Recommend BUY
Over the last one month, Rio Tinto has been in discussion with
110
Riversdale Mining (Tata Steel holds 24.3% equity in Riversdale and
35% stake in the Mozambique JV with 40% off-take rights), valuing
80 Tata Steel’s investment at Rs40/share. Domestic operations would
continue to be the earnings driver led by strong raw material
50 integration and volume growth led by the commissioning of the new
Dec-09 May-10 Oct-10 blast furnace. We expect the stock to outperform the market in the
near term and recommend BUY.

Valuation summary
Y/e 31 March (Rs m) FY09 FY10 FY11E FY12E
Revenues 1,473,290 1,023,930 1,109,314 1,213,705
yoy growth (%) 12.0 (30.5) 8.3 9.4
Operating profit 181,254 88,689 155,878 184,778
OPM (%) 12.3 8.7 14.1 15.2
Pre-exceptional PAT 90,432 5,007 68,104 83,449
yoy growth (%) 51.1 (94.5) 1,260.0 22.5

EPS (Rs) 123.9 5.6 75.5 91.3

P/E (x) 5.3 116.9 8.7 7.2
P/BV (x) 2.1 2.4 1.6 1.3
EV/EBITDA (x) 5.9 11.8 6.8 5.5
Debt/Equity (x) 2.6 1.9 1.3 0.9
ROE (%) 34.1 1.9 22.1 20.0
ROCE (%) 15.5 6.5 14.3 15.0
Source: Company, India Infoline Research

 
Top Midcap BUYs
  Escorts Ltd – BUY

Sector: Auto Multiple tailwinds for rural economy advocate sustained

Sensex: 19,983 uptrend for tractors
CMP (Rs): 171 Escorts Ltd, a leading tractor manufacturer in India, is well poised to
52 Week h/l (Rs): 246 / 116 gain from the improving growth outlook for agriculture. Proactive
Market cap (Rscr) : 1,811
steps by government such as raising MSP prices, interest subvention
schemes, setting up of agricultural export zones, NREGA scheme,
6m Avg vol (‘000Nos): 834
loan waivers; thereby improving financial health of farmers. Above
No of o/s shares (mn): 106
normal monsoons in the current year has provided additional boost.
FV (Rs): 10
These factors along with lower degree of agricultural mechanization
Bloomberg code: ESC IB will keep the demand for tractors strong. Escorts, with a dominant
Reuters code: ESCO.BO share in the North India will be a major beneficiary.
BSE code: 500495
NSE code: ESCORTS Balance sheet repaired with exit from non-core businesses
Prices as on 23 Dec, 2010 Since 2004, Escorts has undergone substantial business re-
Shareholding pattern
structuring, whereby it exited from unrelated and non-profitable
businesses of telecoms and hospitals. Proceeds from sale of
September '10 (%)
investments in these businesses helped Escorts reduce its debt from
Promoters 26.8
Rs8.4bn in F9/07 to Rs4bn in F9/09 (current D/E of 0.3x).
Institutions 47.7
Non promoter corp hold 4.3 Strong growth for construction and railways related segments
Public & others 21.2 Spend on infrastructure and housing, both by government and
Performance rel. to sensex private sector is on the rise. Railways have also planned an
(%) 1m 3m 1yr investment of Rs2.5trillion over the next five years for creating
Escorts (24.0) (13.6) 25.7 dedicated freight corridors. Escorts aims to increase revenue share
M&M (2.6) 8.0 29.0
from the equipment business, currently at ~30%.
VST Till (7.5) (17.8) 23.4
Margins to improve on back of operating leverage
Force Mot 7.9 48.6 202.2 Utilization levels for most segments of Escorts were in the range of
40-50% during F9/09. This should improve going ahead considering
Share price trend strong volume traction across its product categories. We project a
margin expansion of 140bps and 30bps in F9/11 and F9/12
Escorts Sensex
respectively.
300

Valuations attractive at 6.9x F9/12E EPS of Rs24.6

200
Backed by robust volume growth, we expect Escorts to witness a
100 CAGR of 11% in revenues during F9/10-F9/12E. Margin expansion
and declining debt levels (lower interest costs) should result in a PAT
0 (pre-exceptional) CAGR of 31% during the same period. Considering,
Dec-09 Apr-10 Aug-10 Dec-10 strong earnings growth, we believe the valuations are attractive at
  6.9x F9/12E EPS of Rs24.6.

Valuation summary
Y/e 31 Mar (Rs m) F9/09 F9/10 F9/11E F9/12E
Revenues 25,980 33,242 36,305 40,712
yoy growth (%) (2.1) 28.0 9.2 12.1
Operating profit 1,472 1,909 2,581 3,012
OPM (%) 5.7 5.7 7.1 7.4
Pre-exceptional PAT 645 1,266 2,012 2,264
Reported PAT 286 1,323 2,012 2,264
yoy growth (%) - 362.6 52.1 12.5

EPS (Rs) 8.0 13.7 21.8 24.6

P/E (x) 21.2 12.4 7.8 6.9
Price/Book (x) 1.0 0.9 0.8 0.8
EV/EBITDA (x) 10.7 9.2 5.4 3.9
Debt/Equity (x) 0.3 0.2 0.2 0.1
RoE (%) 5.5 8.1 11.4 11.6
RoCE (%) 9.0 9.8 13.0 14.4
Source: Company, India Infoline Research

 
  OnMobile Global – BUY

Sector: Telecom Dominates VAS market with ~33% share

Sensex: 19,983 OnMobile has firmly ensconced itself in the leadership position as the
CMP (Rs): 279 dominant VAS provider to majority of domestic telcos. We reckon
52 Week h/l (Rs): 546/225
OnMobile FY10 domestic revenues accounted for ~33% of the
addressable VAS market (ex-P2P SMS & non-aggregator share of
Market cap (Rscr) : 1,642
revenues) worth Rs10-11bn.
6m Avg vol (‘000Nos): 457
No of o/s shares (mn): 59
Moreover, in a difficult FY10 wherein incumbent telcos battled new
FV (Rs): 10 entrants in a cut-throat pricing war, the company managed to
Bloomberg code: ONMB IN sequentially outgrow VAS industry in all but one quarter. Notably, such
Reuters code: ONMO.BO outperformance comes amidst stagnant non-SMS VAS revenues
BSE code: 532944 (estimated at ~Rs42bn) for the four leading telcos in FY10.
NSE code: ONMOBILE
Prices as on 23 Dec, 2010 Telefonica deal to ramp up revenues beyond FY11
Shareholding pattern In June’ 09, OnMobile signed an agreement with Telefonica, amongst
September '10 (%) the world’s largest mobile operators, for an exclusive (valid for a period
Promoters 50.1
of 5-7 years) and non-exclusive market rights to deploy several of its
VAS products. These include RBTs, Music Radio, Soccer Portal etc in
Institutions 30.0
Telefonica operated 13 Latin American countries. OnMobile is likely to
Non promoter corp hold 6.0
complete roll out by Mar’-Apr’ 11.
Public & others 13.9

As of Q2, company has gone live in 3 countries including Mexico, the

Performance rel. to sensex first large-scale deployment. The real impact of the deal would be felt
(%) 1m 3m 1yr from FY12 as rapid revenue ramp up occurs from next fiscal.
OnMobile 9.0 (23.2) (44.7)
OPM recovery seen on stable content cost
Share price trend Content cost, except for one-offs in Q4 FY10, has been contained in the
160
19-20% range in the past 6 quarters. Moreover, we believe content
OnMobile Sensex
cost may not materially deviate from current levels, despite the ongoing
Telefonica deployment. Also, as revenues kick in from international
120
deals, benefits of operating leverage could help expand OPM by
~280bps over FY10-12.
80
Robust ~49% EPS cagr underpins our BUY
40 OnMobile is set to report increased traction in revenues driven by
Dec-09 Jun-10 Dec-10 leadership in domestic business and upsides from Telefonica and
   Vodafone deals. It would incur a capex of Rs700-800mn and pay
Rs1.7bn in deferred liability to Telefonica in the current fiscal,
comfortably supported by Rs1.5bn in operating CFs. We project
revenue/EPS cagr of ~24%/49% over FY10-12 coupled with improved
OPM and recommend BUY.

Valuation summary
Y/e 31 March (Rs m) FY09 FY10 FY11E FY12E
Revenues 4,064 4,544 5,409 6,956
yoy growth (%) 55.2 11.8 19.0 28.6
Operating profit 1,281 831 1,147 1,468
OPM (%) 31.5 18.3 21.2 21.1
Reported PAT 852 428 754 954
yoy growth (%) 39.5 (49.8) 76.2 26.5

EPS (Rs) 14.7 7.3 12.9 16.3

P/E (x) 19.0 38.1 21.6 17.1
P/BV (x) 2.3 2.2 2.0 1.8
EV/EBITDA (x) 10.4 17.5 13.0 10.0
ROE (%) 13.0 6.0 9.7 11.1
ROCE (%) 16.9 7.5 10.0 12.8
Source: Company, India Infoline Research

 
  Petronet LNG – BUY

Sector: Oil & Gas Gas demand-supply balance favours Petronet

Sensex: 19,983 The demand-supply balance for natural gas in the country is
CMP (Rs): 127
expected to be stretched over the next few years as 1) demand
growth is likely to remain strong with newer applications across
52 Week h/l (Rs): 131/69
industries, 2) peak production from RIL’s KG-D6 field delayed and 3)
Market cap (Rscr) : 9,570
no other major gas field going into production in the medium term.
6m Avg vol (‘000Nos): 3,428 This we believe would translate into strong demand for LNG. With
No of o/s shares (mn): 750 Petronet LNG (PLNG) having tied up 7.5mtpa for Dahej and 1.5mtpa
FV (Rs): 10 for Kochi, it is well poised to gain on the increasing gas deficit.
Bloomberg code: PLNG IB
Reuters code: PLNG.BO Expanding capacities at opportune time
BSE code: 532522 PLNG has doubled its re-gasification capacity at the Dahej terminal
from 5mtpa in FY08 to 10mtpa in FY10. Furthermore, the effective
NSE code: PETRONET
capacity is likely to increase by 2.5mtpa to 12.5mtpa in FY11. Kochi
Prices as on 23 Dec, 2010
terminal having an initial capacity of 2.5mtpa is expected to
Shareholding pattern
commence operations in FY14E. The capacity can be further scaled
September '10 (%) up to 5mtpa.
Promoters 50.0
Institutions 20.0 Port and power projects to aid growth
Non promoter corp hold 2.0 PLNG is currently setting up a solid cargo port through a JV
Public & others 28.1 company; Adani Petronet (Dahej) port, where it has a 26% stake.
The project is scheduled to be completed by H2 CY10 and involves
Performance rel. to sensex an investment of US$270mn (PLNG’s equity share of US$26mn). The
(%) 1m 3m 1yr company also plans to set up a 1,200MW gas based power plant at
Petronet 6.7 18.7 64.4 Dahej. The construction of the project is likely to commence in CY11.
GAIL 2.3 5.6 6.5
These projects, we believe, would be earnings and value accretive
over the medium term.
GSPL 1.4 4.8 2.6
Guj Gas 2.9 (2.0) 54.1
Strong earnings visibility
PLNG has long term sale and purchase agreement for 7.5mtpa of
Share price trend LNG with Rasgas of Qatar. On the customer side, it has offtake
Petronet Sensex agreement with GAIL, IOC and BPCL. This provides a strong revenue
200 visibility for PLNG over the longer term. Further, with limited threat
to re-gasification margins, earnings visibility is also robust. Over
150
FY10-13E we expect revenue CAGR of 19.1% and PAT CAGR of
100 21.7%.
50
Valuation summary
0 Y/e 31 March (Rs m) FY09 FY10 FY11E FY12E
Dec-09 Apr-10 Aug-10 Dec-10
Revenues 84,287 106,491 123,333 165,984
yoy growth (%) 28.6 26.3 15.8 34.6
Operating profit 9,013 8,465 11,198 14,562
OPM (%) 10.7 7.9 9.1 8.8
Pre-exceptional PAT 5,184 4,045 4,714 5,484
Reported PAT 5,184 4,045 4,714 5,484
yoy growth (%) 9.2 (22.0) 16.5 16.3

EPS (Rs) 6.9 5.4 6.3 7.3

P/E (x) 18.4 23.5 20.2 17.4
P/BV (x) 4.8 4.3 3.8 3.3
EV/EBITDA (x) 12.4 13.8 11.4 10.3
Debt/Equity (x) 1.2 1.1 1.4 1.9
ROE (%) 28.8 19.2 19.8 20.1
ROCE (%) 21.9 16.3 17.3 16.8
Source: Company, India Infoline Research

 
  Radico Khaitan – BUY

Sector: Breweries Mainline brands to sport ~15% volume cagr

Sensex: 19,983 Mainline brands (70%+ of total volumes) reported a strong 16.7% yoy
CMP (Rs): 159 growth in Q2 FY11, led by ~47% surge in sales of Magic Moments
52 Week h/l (Rs): 187/108
vodka. Overall volume growth stood at a respectable 13.8%-in line with
the IMFL industry average. We expect volumes to pick up in H2 driven
Market cap (Rscr) : 2,110
by new launches and sustained marketing spends.
6m Avg vol (‘000Nos): 405
No of o/s shares (mn): 133
Mainline brands would sport a ~15% cagr over FY10-12 which in turn
FV (Rs): 2 should lead to 14% compounded growth in total volumes to ~19mn
Bloomberg code: RDCK IN cases. Additionally, premiumization of portfolio (higher growth rates for
Reuters code: RADC.BO top-end brands) would impart impetus to revenues.
BSE code: 532497
NSE code: RADICO Revival of 8PM whisky, brand launch key positives
Prices as on 23 Dec, 2010 Radico has successfully managed to revive its flagship brand 8PM
Shareholding pattern whisky (24% of volumes) in the previous fiscal, after two consecutive
September '10 (%) years of decline. It would also gradually roll out newly launched
Promoters 37.7
premium whisky brand – ‘After Dark’ on a pan-India basis. Between
8PM and After Dark, the company now caters to both regular and
Institutions 44.1
premium end of the whisky segment. ‘Magic Moments’, the fastest
Non promoter corp hold 8.0
selling vodka in all segments, grew at a blistering ~48% yoy in Q2. We
Public & others 10.2
expect these brands along with the stability in the mature portfolio to
drive our forecast volume growth over next two years.
Performance rel. to sensex
(%) 1m 3m 1yr Molasses cost to ease on improved sugar supplies
Radico (4.8) (9.7) 23.9 Domestic sugar output is pegged at ~25mn tonnes in the current
United Spirits 2.3 (8.7) (2.8) crushing season, up 30% from last year. Accordingly, molasses price is
likely to decline in Q4, albeit ethanol blending would cushion the
Share price trend downside. This would lower spirits costs and support OPM expansion.
However, marketing costs are likely to remain above FY10 levels which
170 Radico Sensex
would restrict margin gain to approx 140bps over next two years.
140
Low leverage, improved return ratios support our BUY
Radico had raised Rs3.4bn via QIP in Mar’ 10 which it has utilized to
110 repay debt and lower FY11 gross D/E to 0.7x-the lowest since at least
FY05. We project revenue cagr of 14% over FY10-12, driven by robust
80 volume growth and increased premiumization. OPM would expand on
Dec-09 Jun-10 Dec-10 the back of lower spirits costs while savings in interest expense would
drive a 53% EPS cagr. Recommend BUY.

Valuation summary
Y/e 31 March (Rs m) FY09 FY10 FY11E FY12E
Revenues 6,960 8,356 9,767 10,792
yoy growth (%) (14.0) 20.0 16.9 10.5
Operating profit 456 1,302 1,553 1,835
OPM (%) 6.6 15.6 15.9 17.0
Pre-exceptional PAT (154) 381 770 972
Reported PAT 65 415 770 972
yoy growth (%) (80.2) 535.5 85.4 26.2

EPS (Rs) 0.5 3.2 5.8 7.4

P/E (x) 320.7 50.5 27.2 21.6
P/BV (x) 7.1 3.5 3.2 2.8
EV/EBITDA (x) 50.1 19.3 16.1 13.4
Debt/Equity (x) 3.0 0.8 0.7 0.6
ROE (%) (6.6) 9.3 12.4 14.0
ROCE (%) 4.0 10.5 11.8 13.3
Source: Company, India Infoline Research

 
  Unity Infraprojects Ltd – BUY

Sector: Infrastructure Order book at 2.4x revenues; order inflow to improve

Sensex: 19,983 Unity’s order book stands at ~Rs38bn, 2.4x TTM revenues, providing
good revenue visibility for the medium term. Order inflow ytd has not
CMP (Rs): 89
been that encouraging at Rs10.5bn but company is confident of
52 Week h/l (Rs): 138 / 75
achieving Rs20bn accretion for the full year. Presently, Unity is L1 in
Market cap (Rscr) : 657
Rs5bn worth of orders and has bid for 8-10 projects (no BOTs)
6m Avg vol (‘000Nos): 187 aggregating ~Rs30bn that would open soon. With enhanced networth
No of o/s shares (mn): 74 post the QIP (~Rs730mn) in December 2009, company’s bidding run-
FV (Rs): 2 rate has improved substantially to Rs25-30bn per month.
Bloomberg code: UIP IN
Revenues to witness FY10-12 CAGR of 22% on execution pick-up
Reuters code: UTIL.BO
Execution growth after decelerating sharply in FY10 (to 16.5%) is
BSE code: 532746 expected to improve materially in FY11 (to 19%) and FY12 (to 25%)
NSE code: UNITY and the execution rate would also improve to 33% in FY12 as against
Prices as on 23 Dec, 2010 29% in FY10. Acceleration in execution would drive a brisk 22% CAGR
Shareholding pattern in revenues over FY10-12. In H1 FY11, Unity displayed satisfactory
September '10 (%) execution with revenue growth at 18% yoy, higher than most peers.
Promoters 62.7 Management expects revenues to grow by 19% in FY11.
Institutions 17.8
NPM to improve on OPM expansion and reduction in working
Non promoter corp hold 9.5
capital intensity; growth to be funded by debt/cash profits
Public & others 10.0 Unity has been historically earning above-industry operating margin
driven by a) selective bidding approach (target 15-16% OPM) b) price
Performance rel. to sensex
escalation cover for 90+% projects c) on/before time completion of
(%) 1m 3m 1yr projects and d) savings in equipment hiring cost due to strong
Unity Infra (13.8) (23.0) (29.9) machinery bank. In Q2 FY11, margin materially improved to 14.2%
IVRCL (7.9) (27.0) (46.3) (13% in Q1) with significant revenue shift towards the more lucrative
NCC 2.3 (16.9) (29.7) Water & Irrigation segment. It is likely to be sustained in the range of
Ahluwalia (11.7) (28.9) (33.8) 13.5-14% going ahead as 50% of the order book comes from this
segment. OPM expansion coupled with reduction in working capital
Share price trend cycle would drive an improvement in net margin. We do not foresee
any need for equity dilution for Unity to fund the estimated business
140 Unity Infra Sensex
growth. Balance sheet leverage (net of cash) is expected to remain
comfortable at <1x.

110 Valuation extremely attractive; Recommend BUY with TP Rs140

Unity’s current valuation at 5x FY12 P/E is extremely attractive in the
light of estimated strong 25% earnings CAGR over FY10-12. We only
80 value the stand-alone EPC business and have not assigned any value to
Dec-09 May-10 Oct-10 the company’s investment (~Rs2bn) in URDL, the real estate
subsidiary. Therefore, successful land developments by URDL as
planned would mean additional upside for the stock.

Valuation summary
Y/e 31 Mar (Rs m) FY09 FY10 FY11E FY12E
Revenues 11,308 14,768 17,500 21,875
Yoy growth (%) 33.1 30.6 18.5 25.0
Operating profit 1,428 1,913 2,397 2,975
OPM (%) 12.6 13.0 13.7 13.6
Reported PAT 697 851 1,058 1,333
Yoy growth (%) 16.0 22.2 24.2 26.0

EPS (Rs) 10.4 11.5 14.3 18.0

P/E (x) 8.5 7.7 6.2 4.9
P/BV (x) 1.4 1.2 1.0 0.8
EV/EBITDA (x) 6.7 6.2 5.2 4.6
Net Debt/Equity (x) 0.9 0.9 0.9 0.9
RoE (%) 18.0 17.3 17.3 18.5
Source: Company, India Infoline Research

 
  Yes Bank – BUY

Sector: Banking Healthy loan growth in past; renewed focus on retail and SME
Sensex: 19,983 portfolio
CMP (Rs): 310
Yes Bank reported a healthy 53% CAGR in loan book over FY08-10.
While the growth in loan book was led by huge exposure towards
52 Week h/l (Rs): 388 / 223
large corporates; the bank has now placed renewed focus on
Market cap (Rscr) : 10,751
increasing its retail and SME portfolio. Further, with view to increase
6m Avg vol (‘000Nos): 2,803
its low cost franchise, (currently at 10% of total deposits); it plans to
No of o/s shares (mn): 347 add 100+ branches during the current year.
FV (Rs): 10
Bloomberg code: YES IB Despite being wholesale funded, Yes bank has been able to maintain
Reuters code: YES.BO its net interest margins at 3%+ for the past seven quarters. This is
BSE code: 532648 on account of >75% loan-to-deposit ratio and increasing proportion
NSE code: YESBANK of exposure towards commercial and business banking (30% as at
Prices as on 23 Dec, 2010 H1 FY11).
Shareholding pattern
September '10 (%)
Minimal concerns on asset quality, provision coverage
remains comfortable
Promoters 26.7
Despite exceptional growth in loan book over the past few years, Yes
Institutions 62.4 bank has been able to contain asset quality at negligible levels.
Non promoter corp hold 1.5 Gross NPLs (0.22% of total loans) and Net NPLs (0.06%) for the
Public & others 9.4 bank are the lowest in the sector. Provision coverage ratio at 74%
too remains above RBI stipulated requirement of 70%. While many
 
private and public peers continue to report incremental restructuring,
Performance rel. to sensex
Yes bank has been reporting decline in restructured loans. The
(%) 1m 3m 1yr
restructured loan portfolio constitutes mere ~0.2% of total loans.
Yes Bank (5.7) (8.7) (0.9)
Axis Bank (9.1) (12.9) 17.4 Well capitalised for brisk growth; returns ratio too remain
HDFC Bank (9.2) (11.9) 12.6 attractive
ICICI Bank (3.8) 2.0 15.5 With CAR at 19% (Tier-I at 11%), Yes bank is all set to deliver a
robust balance sheet CAGR of 35% over FY10-12E. While the
Share price trend banking sector currently grapples with concerns pertaining to 1)
exposure to telecom companies under 2G scam scanner b) lending to
Yes Bank Sensex
170
MFI’s and c) bribery cases, we believe, that the asset quality for the
140 sector as a whole does not stand at risk.

110 A 42% loan CAGR over FY10-12E and strong returns ratio (RoE 20%,
RoA 1.6%) make Yes Bank the best bet in private banking space.
80
The stock has underperformed its peers and currently trades at an
50 attractive valuation of 2.3x FY12 BV.
Dec-09 May-10 Oct-10
Valuation summary
Y/e 31 Mar (Rs m) FY09 FY10 FY11E FY12E
Total Oper. Inc. 9,462 13,635 19,523 25,896
yoy growth (%) 36.9 44.1 43.2 32.6
Oper. profit (pre-prov. 5,277 8,633 12,949 17,314
Net profit 3,038 4,777 6,744 9,059
yoy growth (%) 51.9 57.2 41.2 34.3

EPS (Rs) 10.2 14.1 19.9 26.7

BVPS (Rs) 54.7 90.6 108.4 132.1
P/E (x) 30.3 22.0 15.6 11.6
P/BV (x) 5.7 3.4 2.9 2.3
ROE (%) 20.6 20.3 19.9 22.1
ROA (%) 1.5 1.6 1.6 1.5
Dividend yield (%) 0.0 0.5 0.6 1.0
CAR (%) 16.6 20.6 15.9 14.2
Tier I (%) 9.5 12.9 10.3 9.7
Source: Company, India Infoline Research

 
 

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