Visit us at www.sharekhan.

com

February 02, 2013

Sharekhan Top Picks

The market continued to move in a fairly narrow range in January 2013. The better than expected results in the initial part of the result season, positive global cues and monetary easing (policy rate cut by 25 basis points and cash reserve ratio reduced by 25 basis points) failed to push the market beyond the 6100 level on the Nifty. The foreign investors continue to keep faith in the Indian market but the persistent selling by the domestic investors seems to be putting pressure on the market. Consequently, the market has been largely flat since our last update on January 1, 2013. Accordingly, the Top Picks basket has also remained marginally negative in this period. With the important event of Union Budget ahead, we are making three changes in the Top Picks basket this month. As part of the churn in the pharmaceutical sector, we are replacing
Absolute outperformance (returns in %)
210.0% 180.0% 150.0% 120.0% 90.0% 60.0% 30.0% 0.0% -30.0% -60.0% CY2012 CY2011 CY2010 CY2009 Sensex Since Jan 2009 Nifty

Dishman Pharma with a more stable and front-line company, Sun Pharmaceuticals. Given the governments focus on reforms in the oil & gas sector, we are introducing Oil India in place of Bharat Heavy Eelectricals, which is struggling to procure fresh orders due to tough conditions in the power generation sector. Lastly, we believe that it is better to avoid Mahindra and Mahindra (M&M) before the Union Budget as the noises related to a higher tax on diesel vehicles are getting louder. Moreover, the move to reduce diesel under-recoveries by regularly hiking the retail price of diesel would also affect sentiments for M&M due to the companys dependence on the diesel-powered portfolio of automobiles. We are introducing United Phosphorous in place of M&M due to the latters strong performance in Q3FY2013 and attractive valuation.
Constantly beating Nifty and Sensex (cumulative returns in %)
300 250 200 150 100 50 0 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Sharekhan Sensex Nif ty

Sharekhan (Top Picks)

Name CanFin Homes Federal Bank GCPL ICICI Bank Larsen & Toubro OIL India Relaxo Footwear Reliance Sun Pharmaceutical Industries United Phosphorous Zee Entertainment Enterprises
* CMP as on February 01, 2013

CMP* (Rs) 169 511 711 1,171 1,535 526 809 893 720 132 231

FY12 7.9 11.3 36.1 20.9 22.1 9.2 24.3 14.6 28.8 11.0 37.9

PER (x) FY13E 6.4 10.3 26.4 16.4 19.6 8.5 18.7 14.2 25.4 8.4 31.2

FY14E 5.0 8.6 21.0 14.2 17.4 7.9 13.9 13.7 21.4 8.1 25.4

FY12 13.3 14.4 26.3 11.2 18.1 27.0 20.3 11.5 21.3 13.3 18.1

RoE (%) FY13E 14.5 14.1 23.2 13.0 17.7 28.2 20.4 10.6 19.1 15.2 19.2

FY14E 16.4 15.0 27.4 13.8 17.3 26.8 20.6 9.9 19.0 13.8 20.7

Price target 220 590 811 1,320 1,790 600 885 1,010 775 171 280

Upside (%) 30 15 14 13 17 14 9 13 8 30 21

For Private Circulation only

Sharekhan Ltd, Regd Add: 10th Floor, Beta Building, Lodha iThink Techno Campus, Off. JVLR, Opp. Kanjurmarg Railway Station, Kanjurmarg (East), Mumbai 400 042, Maharashtra. Tel: 022 - 61150000. BSE Cash-INB011073351; F&OINF011073351; NSE INB/INF231073330; CD - INE231073330; MCX Stock Exchange: CD - INE261073330 DP: NSDL-IN-DP-NSDL233-2003; CDSL-IN-DP-CDSL-271-2004; PMS INP000000662; Mutual Fund: ARN 20669. Sharekhan Commodities Pvt. Ltd.: MCX10080; (MCX/TCM/CORP/0425); NCDEX -00132; (NCDEX/TCM/CORP/0142)

sharekhan top picks Name CMP (Rs) CanFin Homes Remarks: 169 FY12 7.9 PER (x) FY13E 6.4 FY14E 5.0 FY12 13.3 RoE (%) FY13E 14.5 FY14E 16.4 Price target 220 Upside (%) 30

CanFin Homes has renewed its focus on growth and the recent aggressive expansion of its branch network has put it on a high-growth path for the next few years. It has added 26 branches since March 2011 which amounts to an increase of close to 60% in its current branch network of 67 outlets. Consequently, we expect the companys disbursement to grow at about 60% CAGR resulting in a 38% CAGR in the loan book over FY2012-14. The companys branches are strategically located (outside cities) and serve customers requiring relatively smaller loans (of below Rs10 lakh), which are eligible for interest subvention. Further, the company gets refinancing from the National Housing Board at competitive rates due to lending in semi-urban rural areas (that account for about 40% of its loan book). Thus, we expect CanFins NIM to sustain at over 3% going ahead. The asset quality of the company is strong as its gross NPAs were under 1% of the advances and its net NPAs were nil in FY2012. This is mainly possible due to stringent credit appraisals (customer referrals preferred) and efficient recoveries. We believe the operational performance and return ratios of CanFin are improving which should lead to a rerating of the stock. We continue to value the company at 1x FY2014E BV and recommend Buy with price target of Rs220.

Federal Bank Remarks:

511

11.3

10.3

8.6

14.4

14.1

15.0

590

15

Federal Bank is an old private bank with a network of over 1,000 branches and a dominant presence in south India. Under a new management the bank is working on a strategy to gain pan-Indian presence, shift the loan book to better-rated corporates, increase the fee income, become more efficient and improve the asset quality. The asset quality of the bank has remained steady after showing some strain initially. The slippages from the SME and retail accounts have declined substantially while the slippages from the corporate accounts remain stable. Going forward, with the initiatives undertaken the recoveries could pick up and the NPAs may decline. Federal Banks loan growth has slowed over the past few quarters as the bank is cautious in view of the weakness in the economy. However, the loan growth is likely to be in line with the industry while risk adjusted margins may improve, thereby driving the operating performance. The banks return ratios are likely to go up led by an increase in the profits. We expect an RoE of ~16% and an RoA of around 1.2% by FY2015 led by a 17% CAGR in the earnings. We have revised the price target to Rs590 (1.4x FY2014E book value [BV]) and maintained our Buy rating on the stock.

sharekhan top picks Name CMP (Rs) GCPL Remarks: 711 FY12 36 PER (x) FY13E 26.4 FY14E 21.0 FY12 26.3 RoE (%) FY13E 23.2 FY14E 27.4 Price target 811 Upside (%) 14

Godrej Consumer Products Ltd (GCPL) is a major player in the Indian fast-moving consumer goods (FMCG) market with a strong presence in the personal care, hair care and home care segments in India. The recent acquisitions (in line with the 3x3 strategy) have immensely improved the long-term growth prospects of the company. On the back of a strong distribution network, and advertising and promotional support, we expect GCPL to sustain the market share in its core categories of soap and hair colour in the domestic market. On the other hand, continuing its strong growth momentum, the household insecticide business is expected to grow by ~20% YoY. In the international markets, the Indonesian and Argentine businesses are expected to achieve a revenue growth of around 25% and 35% CAGR respectively over FY2012-15. This along with the recently acquired Darling Group would help GCPL to post a top line CAGR of ~24% over FY2012-15. Due to the recent domestic and international acquisitions, the companys business has transformed from a commodities soap business into the business of value-added personal care and home care products. Therefore, we expect its OPM to be in the range of 16-18% in the coming years. Overall, we expect GCPLs bottom line to grow at a CAGR of above 25% over FY2012-15. We believe the increased competitive activity in the personal care and hair care segments and the impact of high food inflation on the demand for its products are the key risks to the companys profitability. At the current market price, the stock trades at 36.1x FY2013E EPS of Rs19.7 and 26.3x FY2014E EPS of Rs27.0.

ICICI Bank Remarks:

1,171

20.9

16.4

14.2

11.2

13.0

13.8

1,320

13

ICICI Bank continues to report a strong growth in advances with stable margins of ~3%. We expect the advances of the bank to grow by 20% CAGR over FY2012-15. This should lead to a ~21% CAGR growth in the net interest income in the same period. ICICI Banks asset quality has shown a turnaround as its NPAs have continued to decline over the last eleven quarters led by contraction in slippages. This has led to a sharp reduction in the provisions and an increase in the profitability. Going forward, we expect the NPAs to decline further which will lead to lower NPA provisions and hence aid the profit growth. Led by a pick-up in the business growth and an improvement in the margins the RoEs are likely to expand to about 15.1% by FY2015 while the RoA would improve to 1.7%. This would be driven by a 21% CAGR in profits over FY2012-15. The stock trades at 1.9x FY2014E BV. Moreover, given the improvement in the profitability led by lower NPA provisions, a healthy growth in the core income and improved operating metrics we recommend Buy with a price target of Rs1,320.

Sharekhan

February 2013

sharekhan top picks Name CMP (Rs) Larsen & Toubro Remarks: 1,535 FY12 22.1 PER (x) FY13E 19.6 FY14E 17.4 FY12 18.1 RoE (%) FY13E 17.7 FY14E 17.3 Price target 1,790 Upside (%) 17

Larsen & Toubro (L&T), the largest engineering and construction company in India, is a direct beneficiary of the strong domestic infrastructure development and industrial capital expenditure (capex) boom. L&T continues to impress us with its good execution skills, reporting decent numbers throughout the year despite the slowdown in the industrial capex cycle. We have also seen order inflow traction in recent quarters. Despite challenges like deferral of award decisions and stiff competition, the company has given respectable guidance of a 15-20% growth in revenues and order inflow for FY2013. We believe the company will manage to meet its guidance. A sound execution track record, bulging order book and strong performance of its subsidiaries reinforce our faith in L&T. With the company entering new verticals, namely solar and nuclear power, railways, and defence, there appears a huge scope for growth. At the current market price, the stock is trading at 17.4x its FY2014E consolidated earnings.

Oil India Remarks:

526

9.2

8.5

7.9

27.0

28.2

26.8

600

14

Oil India Ltd (OIL) has several hydrocarbon discoveries across reserves in Rajasthan and the north-eastern region of India. The total 1P (proven) and 2P (proven and probable) reserves of the company stood at 505 million barrels (mmbbls) and 944mmbbls in March 2012. In addition to the huge oil reserves, the companys reserve-replacement ratio (RRR) is quite healthy at 1.42x which implies a comfortable level of accretion of oil reserves through new discoveries. Recent proposal by the oil ministry to partially deregulate the diesel prices and the proposal by the Rangarajan Committee to increase the price of gas up to $8.0-8.5 per mmbtu augurs well for the company and will significantly increase the earnings of the company going ahead. Further, OIL has cash of around Rs10,935 crore (Rs182 per share) as of March 2012 and offers a healthy dividend pay-out (a dividend yield of 4.3%) which provides comfort to the investor. The key risks remain any adverse movement in the price of crude oil and failure in proper utilisation of the huge cash. We remain bullish on OIL because its huge reserves and healthy RRR would provide a reasonably stable revenue growth outlook and its stock is available at an attractive valuation. The stock is likely to be rerated on account of the partial deregulation of diesel prices. The fair value works out to Rs600 per share (based on the average fair value arrived at using the DCF, PE and EV/EBIDTA valuation methods).

Sharekhan

February 2013

sharekhan top picks Name CMP (Rs) Relaxo Footwears Remarks: 809 FY12 24.3 PER (x) FY13E 18.7 FY14E 13.9 FY12 20.3 RoE (%) FY13E 20.4 FY14E 20.6 Price target 885 Upside (%) 9

Relaxo Footwears is present in the Indian organised footwear market and is involved in the manufacturing and trading of footwear through its retail and wholesale networks. The companys top brands, namely Hawaii, Sparx, Flite and Schoolmate, have an established presence among their respective segments. The company has displayed an impressive growth rate in its top line and bottom line in the last couple of years and is expected to maintain the performance going forward. With an established distribution set-up and aggressive plans of opening own retail outlets called Relaxo Retail Shoppe, the company should be able to gain market share in the coming years. The softening rubber prices should provide a boost to the companys margins and profitability. We believe a rise in the raw material prices and a continuous slowdown in the discretionary spending remain the key risks to our volume and profitability estimates. At the current market price, the stock trades at 18.7x its FY2013E EPS of Rs43.2 and 13.9x its FY2014E EPS of Rs58.3.

Relaince Remarks:

893

14.6

14.2

13.7

11.5

10.6

9.9

1,010

13

Reliance Industries Ltd (RIL) has a strong presence in the refining, petrochemical and upstream exploration business. The refining division of the company is the highest contributor to the companys earnings and is operating efficiently with a better gross refining margin (GRM) compared with its peers in the domestic market due to the ability of its plant to refine more of heavier crude. However, the gas production from the Krishna-Godavari-D6 field has fallen significantly in the past one year. With the government approval for additional capex, we believe production will improve going ahead. In case of the upstream exploration business, the company has recently got the nod for further investments in exploration at the Krishna-Godavari basin, which augurs well for the company and could address the issue of falling gas output. Further, the new gas pricing formula recommended by the Rangarajan panel augurs well for the company and could provide further upside to the earnings. The key concerns remain a lower than expected GRM, declining profitability of the petrochemical division and the companys inability to address the issue of falling gas output in the near term. At the current market price the stock is trading at PE of 13.7x its FY2014E EPS.

Sharekhan

February 2013

sharekhan top picks Name CMP (Rs) Sun Pharma Remarks: 720 FY12 28.8 PER (x) FY13E 25.4 FY14E 21.4 FY12 21.3 RoE (%) FY13E 19.1 FY14E 19.0 Price target 775 Upside (%) 8

The combination of Sun Pharma and Taro offers an excellent business model for Sun Pharma, as has been reflected in the 50% Y-o-Y growth in revenues and a 55% growth in the profit in H1FY2013. Though Taro may not show a similar performance in the next quarter, but we expect a better performance from Sun Pharma going forward mainly driven by (1) the resumption of sales from the US based subsidiary Caraco Pharma post-USFDA clearance, (2) contribution from newly acquired Dusa Pharma and URL Pharma in the USA, and (3) the launch of key products in the US and emerging markets including India. Sun Pharma seeks to acquire the remaining equity in Taro and, if successful, that will not only help achieve better synergy but also boost earnings from the first year itself. We expect 22% and 16% revenue and PAT CAGR respectively over FY2012-1E. With a strong cash balance, Sun Pharma is well positioned to capitalise on the growth opportunities. Its debt-free balance sheet insulates it from the negative impact of volatile currency. Due to provisions of Union Budget 2012-13, which imposed Alternate Minimum Tax on partnership-based units availing of various tax concessions, Sun Pharmas earnings are likely to reduce by 9% in FY2013. At the current market price, Sun Pharma is trading at 25.4x FY2013E and 21.4x FY2014E EPS respectively. We maintain our Buy recommendation on the stock with a price target of Rs775, which implies 23x FY2014E EPS.

United Phosphorus Remarks:

132

11.0

8.4

8.1

13.3

15.2

13.8

171

30

United Phosphorus Ltd (UPL) is the leading global producer of crop protection products, intermediates, specialty chemicals and other industrial chemicals. It is the largest manufacturer of agro chemicals in India, it manufactures a wide range of products including insecticides, fungicides, herbicides, fumigants, PGR and rodenticides. UPL ranks amongst the top 5 post-patent agro chemical companies in the world. It has 23 manufacturing sites (nine in India, four in France, two in Spain, three in Argentina, one each in UK, Vietnam, Netherlands, Italy, and China) and capability in applied R&D. The business environment for the agro chemical industry is likely to witness a gradual improvement, driven by strong agri-commodity prices and a low base effect. Europe is also witnessing a recovery in growth as the environment is becoming favourable for agriculture. The company is already recording a good growth in India and the Rest of the World markets due to the favourable weather conditions. With the acquisition of SIB and DVA Agro Brazil it has established a strong foothold in one of the largest markets for agro-chemicals. While these acquisitions will be the key growth driver over the next two to three years, they will also reduce the seasonality in the business, as UPL now has a reasonable presence in both the northern and the southern hemisphere. The performance of UPL in Q3FY2013 was ahead of our estimate and its margin was largely in line with our estimate. The commentary of the management also indicated a revival in demand along with a growth in volume in Latin America and North America. We have broadly maintained our earnings estimates for the company and rolled over our target multiple to the FY2015 estimate. Consequently, we have increased our price target to Rs171 and maintained our Buy rating on the stock.

Sharekhan

February 2013

sharekhan top picks Name CMP (Rs) Zee Entertainment Enterprises Remarks: 231 FY12 37.9 PER (x) FY13E 31.2 FY14E 25.4 FY12 18.1 RoE (%) FY13E 19.2 FY14E 20.7 Price target 280 Upside (%) 21

Among the key stakeholders of the domestic TV industry, we expect broadcasters to be the prime beneficiary of the mandatory digitisation process initiated by the government. The broadcasters would benefit from higher subscription revenues at the least incremental capex as the subscriber declaration improves in the cable industry. Zee TV climbed to the top position in the Hindi GEC (general entertainment channel) hierarchy in the fourth week of 2013, after almost 19 weeks. Zee TV's upward crawl to the No. 1 position was driven by Zee Cine Awards, which got a whopping 3.9 Television Viewer Rating (TVR), contributing 31 gross rating points, as Zee TV collected 237 points in the week ended January 26, 2013. Zee TVs return to the number 1 spot among the GECs is a positive development for ZEEs advertisement revenues and the companys ability to command premium advertisement rates compared with its competitors. ZEEs earnings are expected to grow at a CAGR of 25% over FY2013-15. Further, strong cash levels would drive the management to reward the shareholders which would act as a positive trigger for the stock. At the current market price of Rs236, the stock trades at 26x on FY2014E and 21x FY2015 earnings estimates. We maintain our Buy rating on the stock with a price target of Rs280.

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

Disclaimer This document has been prepared by Sharekhan Ltd.(SHAREKHAN) This Document is subject to changes without prior notice and is intended only for the person or entity to which it is addressed to and may contain confidential and/or privileged material and is not for any type of circulation. Any review, retransmission, or any other use is prohibited. Kindly note that this document does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. SHAREKHAN will not treat recipients as customers by virtue of their receiving this report. The information contained herein is from publicly available data or other sources believed to be reliable. While we would endeavour to update the information herein on reasonable basis, SHAREKHAN, its subsidiaries and associated companies, their directors and employees (SHAREKHAN and affiliates) are under no obligation to update or keep the information current. Also, there may be regulatory, compliance, or other reasons that may prevent SHAREKHAN and affiliates from doing so. We do not represent that information contained herein is accurate or complete and it should not be relied upon as such. This document is prepared for assistance only and is not intended to be and must not alone betaken as the basis for an investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. The investment discussed or views expressed may not be suitable for all investors. We do not undertake to advise you as to any change of our views. Affiliates of Sharekhan may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. 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 law, regulation or which would subject SHAREKHAN 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. SHAREKHAN & affiliates may have used the information set forth herein before publication and may have positions in, may from time to time purchase or sell or may be materially interested in any of the securities mentioned or related securities. SHAREKHAN may from time to time solicit from, or perform investment banking, or other services for, any company mentioned herein. Without limiting any of the foregoing, in no event shall SHAREKHAN, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. Any comments or statements 2013 February made herein are those of the analyst and do not necessarily reflect those of SHAREKHAN.

Sharekhan