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March 30, 2013

Sharekhan Top Picks

Political uncertainties and the Cyprus issue added to the post-Budget selling pressure in the domestic equity market in March this year. Though the benchmark indices have declined marginally by around 0.5-0.6% since our last update on March 1, 2013, but the damage in the broader markets has been much severe and the CNX Mid-Cap Index has lost close to 2% during the same period. Our strategy to tilt the flavour of our Top Picks basket in favour of the front-line large-cap stocks enabled us to post better returns (the Top Picks basket is down 0.3%) than the market in this period. HCL Technologies and HDFC Bank, the two stocks added in the last shuffle, have given a positive average return of 5.8% since March 1, 2013. This month, we are making a lone change by replacing Relaxo Footwear with Bajaj Corp keeping the fourth quarter results in mind. We expect Bajaj Corp to post a strong performance for Q4FY2013 on the back of a continued double-digit growth in the volume offtake of its key products. It is also among the cheapest stocks in our universe of consumer stocks.

Absolute outperformance
180.0% 150.0% 120.0% 90.0% 60.0% 30.0% 0.0% YTD CY2013 CY2012 CY2011 CY2010 CY2009 -30.0% -60.0% Since Jan 2009

Constantly beating Nifty and Sensex (cumulative returns)

280.0% 260.0% 240.0% 220.0% 200.0% 180.0% 160.0% 140.0% 120.0% 100.0% Mar-10 Mar-11 Mar-12 Sep-09 Sep-10 Sep-11 Sep-12 Dec-09 Dec-10 Dec-11 Dec-12 Mar-13 Jun-09 Jun-10 Jun-11 Jun-12

Sharekhan (Top Picks)

Sensex

Nifty

Sharekhan

Sens ex

Nif ty

Name Bajaj Corp Federal Bank GCPL HCL Technologies HDFC Bank ICICI Bank Larsen & Toubro Oil India Reliance Industries Sun Pharma Zee Entertainment Enterprises
* CMP as on March 28, 2013

CMP* (Rs) 224 481 779 796 631 1,045 1,365 507 774 818 211

FY12 27.7 10.6 46.4 22.0 28.7 18.6 19.7 8.8 12.7 32.7 34.6

PER (x) FY13E 20.2 9.7 39.5 14.9 22.1 14.7 17.4 8.2 12.3 27.0 28.5

FY14E 16.2 8.1 28.9 13.8 17.5 12.7 15.5 8.0 11.9 23.1 23.2

FY12 29.9 14.4 26.3 28.9 18.7 11.2 17.7 19.8 11.5 21.3 18.1

RoE (%) FY13E 37.2 14.1 23.2 33.4 20.7 13.0 17.3 19.6 10.6 20.2 19.2

FY14E 41.9 15.0 27.4 28.5 22.1 13.8 17.4 18.0 9.9 19.6 20.7

Price target 303 590 712 1,320 1,790 600 1,010 280

Upside (%) 35 23 13 26 31 18 30 33

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sharekhan top picks Name CMP (Rs) Bajaj Corp Remarks: 224 FY12 27.7 PER (x) FY13E 20.2 FY14E 16.2 FY12 29.9 RoE (%) FY13E 37.2 FY14E 41.9 Price target 303 Upside (%) 35

Bajaj Corp is the third largest player in the hair oil segment and has emerged as the dominant player in the premium light hair oil (LHO) category with its Almond Drops hair oil. With consumers upgrading to the LHO category, we expect the strong volume growth momentum to continue in the coming quarters. With the prices of the key inputs stabilising, we expect the GPM to improve in the coming quarters. The companys thrust on enhancing the distribution reach in rural India and improving the market share every year has helped it clock a good sales volume growth for the past few quarters. Any initiative to expand its limited product portfolio or strengthen its core business would be the key upside trigger for the stock. At the CMP, the stock is trading at 20.2x its FY2013E EPS of Rs11.1 and 16.2x its FY2014E EPS of Rs13.8.

Federal Bank Remarks:

481

10.6

9.7

8.1

14.4

14.1

15.0

590

23

Federal Bank is an old private bank with a network of over 1,000 branches and a dominant presence in south India. Under a new management the bank is working on a strategy to gain pan-Indian presence, shift the loan book to better-rated corporates, increase the fee income, become more efficient and improve the asset quality. The asset quality of the bank has remained steady after showing some strain initially. The slippages from the SME and retail accounts have declined substantially while the slippages from the corporate accounts remain stable. Going forward, with the initiatives undertaken the recoveries could pick up and the NPAs may decline. Federal Banks loan growth has slowed over the past few quarters as the bank is cautious in view of the weakness in the economy. However, the loan growth is likely to be in line with the industry while risk adjusted margins may improve, thereby driving the operating performance. The banks return ratios are likely to go up led by an increase in the profits. We expect a RoE of ~16% and a RoA of around 1.2% by FY2015 led by a 17% CAGR in the earnings. We have price target to Rs590 (1.4x on average of FY2014E and FY2015E book value [BV]) and maintain Buy rating on the stock.

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March 2013

sharekhan top picks Name CMP (Rs) GCPL Remarks: 779 FY12 46.4 PER (x) FY13E 39.5 FY14E 28.9 FY12 26.3 RoE (%) FY13E 23.2 FY14E 27.4 Price target Upside (%) -

Godrej Consumer Products Ltd (GCPL) is a major player in the Indian fast-moving consumer goods (FMCG) market with a strong presence in the personal care, hair care and home care segments in India. The recent acquisitions (in line with the 3x3 strategy) have immensely improved the long-term growth prospects of the company. On the back of strong distribution network, and advertising and promotional support, we expect GCPL to sustain the market share in its core categories of soap and hair colour in the domestic market. On the other hand, continuing its strong growth momentum, the household insecticide business is expected to grow by ~20% YoY. In the international markets, the Indonesian and Argentine businesses are expected to achieve a CAGR revenue growth of around 25% and 35% respectively over FY2012-15. This along with the recently acquired Darling Group would help GCPL to post a top-line CAGR of ~24% over FY2012-15. Due to the recent domestic and international acquisitions, the companys business has transformed from a commodities soap business into the business of value-added personal care and home care products. Therefore, we expect its OPM to be in the range of 16-18% in the coming years. Overall, we expect GCPLs bottom line to grow at a CAGR of above 25% over FY2012-15. We believe the increased competitive activity in the personal care and hair care segments and the impact of high food inflation on the demand for its products are the key risks to the companys profitability. At the CMP, the stock trades at 39.5x its FY2013E EPS of Rs19.7 and 28.9x its FY2014E EPS of Rs27.0.

HCL Technologies Remarks:

796

22.0

14.9

13.8

28.9

33.4

28.5

HCL Technologies Ltd (HCL Tech) is a global information technology (IT) services company providing software-led IT solutions, remote infrastructure management services and BPO services. The company has a leading position in remote infrastructure management services which has helped it win large IT outsourcing contracts. Through the Axon plc acquisition the company has gained strong SAP consulting footing. In the current environment, we believe that HCL Technologies is well placed in terms of its Business strategy of consciously targeting the re-bid market. The recently won contracts is testimony to HCL Techs capability to gain a larger share in the growing rebid market. The results of which are evident in the consistent outperformance in terms of volume and revenue growth. The company has overcome any apprehensions on the margin front by consistently improving margins despite headwinds. Going forward, gradual and consistent improvement in operating margins will aid further re-rating of the stock. We maintain our Buy recommendation on the stock.

Sharekhan

March 2013

sharekhan top picks Name CMP (Rs) HDFC Bank Remarks: 631 FY12 28.7 PER (x) FY13E 22.1 FY14E 17.5 FY12 18.7 RoE (%) FY13E 20.7 FY14E 22.1 Price target 712 Upside (%) 13

HDFC Bank is expected to continue strong growth in advances due to strong presence in the retail segments. While the credit demand has moderated in corporate segment, it continues to remain reasonably strong in retail which will benefit bank. The banks current and savings account (CASA) ratio is among the highest in the sector which should stable net interest in margins (~4.2% levels). Any reduction in the policy rates by RBI would improve the credit demand and will be positive from margins perspective. HDFC Banks asset quality is among the best in the sector and is expect to sustain it due to strong credit origination practices and marginal exposure to the troubled segment. Further the higher provisions provide comfort on asset quality. We expect HDFC Bank to deliver earnings compound annual growth rate (CAGR) of 27% over (FY2012-15) leading to return on equity (RoE) and return on assets (RoA) of 23% and 1.8% respectively. We believe the bank will continue to command premium over peers due to strong and consistent growth. We have a target price of Rs712 for the stock.

ICICI Bank Remarks:

1,045

18.6

14.7

12.7

11.2

13.0

13.8

1,320

26

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

Sharekhan

March 2013

sharekhan top picks Name CMP (Rs) Larsen & Toubro Remarks: 1,365 FY12 19.7 PER (x) FY13E 17.4 FY14E 15.5 FY12 17.7 RoE (%) FY13E 17.3 FY14E 17.4 Price target 1,790 Upside (%) 31

Larsen & Toubro (L&T), the largest engineering and Construction Company in India, is a direct beneficiary of the strong domestic infrastructure development and industrial capital expenditure (capex) boom. L&T continues to impress us with its good execution skills, reporting decent numbers throughout this year despite the slowdown in the industrial capex cycle. Also we have seen order inflow traction in recent quarters. Despite challenges like deferral of award decisions and stiff competition, the company has given robust guidance of 15-20% growth in revenue and order inflow for FY2013. We believe the company will manage to meet its guidance. Sound execution track record, bulging order book and strong performance of its subsidiaries reinforce our faith in L&T. With the company entering new verticals, namely solar and nuclear power, railways, and defence, there appears a huge scope for growth. At the CMP, the stock is trading at 15.5x its FY2014E standalone earnings.

Oil India Remarks:

507

8.8

8.2

8.0

19.8

19.6

18.0

600

18

Oil India Ltd (OIL) has several hydrocarbon discoveries across reserves in Rajasthan and the north-eastern region of India. The total 1P (proven) and 2P (proven and probable) reserves of the company stood at 473 million barrels (mmbbls) and 941mmbbls as on March 2012. In addition to the huge oil reserves, the companys reserve-replacement ratio (RRR) is quite healthy at 1.23x which implies a comfortable level of accretion of oil reserves through new discoveries. Recent proposal by Oil ministry to partially deregulate diesel and proposal by Rangarajan committee to increase gas upto$8-$8.5 per mmbtu augurs well for the company and will significantly increase earnings of the company going ahead. Further, OIL has cash of around Rs10,935 crore (Rs182 per share) as on March 2012 and offers a healthy dividend pay-out (dividend yield of 4.3%), which provides comfort to the investor. The key risks remain any adverse movement in the price of crude oil and failure in proper utilisation of the huge cash. We remain bullish on OIL because its huge reserves and healthy RRR would provide a reasonably stable revenue growth outlook and its stock is available at an attractive valuation and likely rerating of the company on account of partial deregulation of diesel. The fair value works out to Rs600 per share (based on the average fair value arrived at using the DCF, PE and EV/EBIDTA valuation methods).

Sharekhan

March 2013

sharekhan top picks Name CMP (Rs) Reliance Industries Remarks: 774 FY12 12.7 PER (x) FY13E 12.3 FY14E 11.9 FY12 11.5 RoE (%) FY13E 10.6 FY14E 9.9 Price target 1,010 Upside (%) 30

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 concern remains in terms of a lower than expected GRM, 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 (CMP) the stock is trading at PE of 11.9x its FY2014E earnings per share (EPS).

Sun Pharma

818

32.7

27.0

23.1

21.3

20.2

19.6

Remarks:

The combination of Sun Pharma and Taro offers an excellent business model for Sun Pharma, as has been reflected in the 44% YoY revenue and 48% profit growth in M9FY2013. Though Taro may not show a similar performance in the next quarter, but we expect a better performance from Sun Pharma going forward mainly driven by (1) the resumption of sales from the US based subsidiary Caraco Pharma post USFDA clearance, (2) contribution from newly acquired Dusa Pharma and URL Pharma in US and (3) launch of key products in US and emerging markets including India. We expect 21% and 16% revenue and PAT CAGR respectively over FY2012-15E. With a strong cash balance, Sun Pharma is well positioned to capitalise on the growth opportunities. Its debt-free balance sheet insulates it from the negative impact of volatile currency. Due to provisions of Union Budget 2012-13, which provided for Alternate Minimum Tax (ALT) on partnership based units availing various tax concessions, Sun Pharmas effective tax rate is likely to be higher at 18.5% in FY2013 and 19% in FY2014 (v/s 11.4% in FY2012). At the CMP, Sun Pharma is trading at 23x and 21x FY2014E and FY2015E estimated EPS respectively. We maintain our Buy recommendation on the stock.

Sharekhan

March 2013

sharekhan top picks Name CMP (Rs) Zee Entertainment Enterprises Remarks: 211 FY12 34.6 PER (x) FY13E 28.5 FY14E 23.2 FY12 18.1 RoE (%) FY13E 19.2 FY14E 20.7 Price target 280 Upside (%) 33

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 has climbed to top position in the Hindi GEC (general entertainment channel) hierarchy in the fourth week of 2013, after almost 19 weeks. Zee TV's upward crawl to the No. 1 position was driven by Zee Cine Awards rated a whopping 3.9 TVR, contributing 31 GRPs (gross rating points), as n Zee TV collected 237 points in the week ended 26 January 2013. Zee coming back to the number 1 spot among the GEC space is a positive development for ZEEs advertisements revenues traction and companys ability to command premium ads rates than competitors. ZEELs earnings are expected to grow at a CAGR of 25% over FY2013-15. Further, strong cash levels would drive the managements inclination to reward the shareholders which would act as a positive trigger for the stock. We maintain our Buy rating on the stock with a target price Rs280.

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

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