diwali dhamaka - india...
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India has been one of the best performing market since last Diwali
12.6
0.5
(10.7)
3.6 3.6
(20)
(10)
0
10
20
Nifty
Taiwan
Shanghai
Bovespa
Kospi
(%)
Source: Bloomberg, India Infoline Research
Sectoral performance since last Diwali
45.9 30.8
21.1
18.9
12.4
7.5
4.2
3.6
2.9
(5.4)
(6.7) (8.7)
(20) 0 20 40 60
BSE FMCG
BSE Pharma
BSE Auto
BSE Bank
BSE‐200
BSE Realty
BSE IT
BSE Small‐Cap
BSE Cap Goods
BSE Oil & Gas
BSE Power
BSE Metal (%)
Source: Bloomberg, India Infoline Research
Theme Report November 12, 2012
Amar Ambani research@indiainfoline.com
India Strategy
Diwali Dhamaka
Nifty: 5,686Sensex: 18,684
The Indian stock market has been consolidating after the September run up, which was courtesy the UPA government’s renewed vigour for policy action, coupled with additional global quantitative easing. India faced an imminent fear of country downgrade by leading rating agencies, which explains the government’s suddenly found dynamism in hiking diesel price and opening up FDI in many sectors, despite severe opposition. While downgrade fears may have subsided for the time being, they have not been dispelled completely. This gives hope that phase‐II of reforms will be unleashed in the winter session of parliament. Addressing the fiscal deficit may be next on the agenda. Although, welfare spending may not come down in the budget before elections, DTC, GST, disinvestment, telecom auction and direct subsidy through Aadhaar are likely to be taken up. Other important areas include Land Acquisition Bill and National Investment Board to revive capex. The interest rate cycle has also peaked. CRR has been cut during the last two review meets and a repo rate cut is highly anticipated in January 2013. The market is attractively poised to increase equity positions. The open‐ended QE3 may open the doors wider for increased portfolio flows in the medium term into emerging markets with decisive governments (Also read our report: ‘A Time for Midcaps’). With festivities round the corner, here is a useful shopping list. Our research team recommends nine investment ideas for your portfolio. 8 out of the 11 stocks given last Diwali achieved their price targets and all 11 combined delivered a return of 28% till date (assuming equal weights). We had also recommended Gold Bees, which delivered a return of 18.8% till date. Wishing you and your families a Shubh Diwali and a bright and prosperous Samvat 2069! Concerns
US fiscal cliff event risk
Parliamentary clearance hurdle for next set of reforms
Significantly higher fiscal deficit reported
Recommendation snapshot
Company Sector Market Cap
(Rs bn) CMP (Rs) Target (Rs) Dr. Reddy's Pharma 300 1,769 1,980
GCPL FMCG 236 692 792
ICICI Bank Banking 1,221 1,059 1,340
IPCA Pharma 54 428 492
Karur Vysya Bank Banking 64 469 530
Mahindra Satyam IT 127 108 129
NBCC Real Estate 17 142 198
Radico Khaitan Breweries 17 127 145
Swaraj Engines Auto Ancillary 5 431 548
Source: India Infoline Research
India Strategy – Diwali Dhamaka
2
Performance of Diwali Dhamaka 2011 stocks Reco (Rs) Target (Rs) Returns (%) CMP (Rs) Returns (%)ITC 204 232 13.7 288 41.0
GCPL 404 486 20.3 694 71.8
Lupin 467 520 11.3 584 25.1
Sun Pharm 487 580 19.1 694 42.5
TCS 1,048 1,180 12.6 1,323 26.2
HCL Tech 412 500 21.4 614 49.0
ICICI 870 1,058 21.7 1,058 21.7
HDFC Bank 487 575 18.1 640 31.3
M&M 801 900 12.4 906 13.1
Hero Moto 2,052 1,910 (6.9) 1,910 (6.9)
Hindalco 122 113 (7.1) 113 (7.1)
Total* 12.4 28.0
Nifty 5,049 5,686 12.6 5,686 12.6
Manappuram NCD3 993 1,015 13.9
Muthoot N4 996 1,000 13.3
Muthoot N6 971 981 13.9
Gold Bees 2,538 3,015 18.8
*Assuming equal weights Source: India Infoline Research
Sector: Pharmaceutical
Sector view: Positive
Sensex: 18,684
52 Week h/l (Rs): 1,818/1,500
Market cap (Rscr) : 30,208
6m Avg vol (‘000Nos): 363
Bloomberg code: DRRD IN
BSE code: 500124
NSE code: DRREDDY
FV (Rs): 2
Price as on Nov 09, 2012
Company rating grid
Low High
1 2 3 4 5
Earnings Growth
Cash Flow
B/S Strength
Valuation appeal
Risk
Share price trend
50
70
90
110
130
Nov‐11 Mar‐12 Jul‐12 Nov‐12
Dr Reddy's Sensex
Share holding pattern
‐
20
40
60
80
100
Dec‐11 Mar‐12 Jun‐12 Sep‐12
Promoters Institutions Others%
Rating: BUYTarget: Rs1,980
CMP: Rs1,769
Upside: 11.9%
November 12, 2012
Research Analyst:
Bhavika Thakker research@indiainfoline.com
Dr. Reddy’s Laboratories
One of the Best bet to play on US business Dr. Reddy’s (DRDY) has strong presence in the US in generics as well in OTC segment. The company has a sturdy track record of monetising one‐off (FTFs and PIVs) opportunities. We believe the trend will continue and the growth will remain robust with niche generic launches in next two years. DRDY has a strong US drug portfolio of 63 ANDAs pending for approval with the USFDA, of which 33 are Para IVs and 7 have ‘First To File’ status. In launched product, DRDY has ~24 Rx products ranking among the top 3 in the category. Unlike other generic players from India, DRDY also has a good traction in OTC business with products like Ranitidine, Famotidine and Omeprazole taking total to 11 drugs in OTC segment. In US, the growth in H1FY13 has been better than expected; we believe new H2 launches including two undisclosed limited competition opportunities will drive growth in FY13. The launch of products like Quetiapine, Clopidogrel, Fexofenadine etc will help to sustain growth in FY14 and beyond.
Improving PSAI segment to abet growth DRDYs’ troubled PSAI segment (26% of revenue), is now on mode of recovery. The recent quarters’ stellar performance substantiate our belief that worst is over in the PSAI segment. We believe the growth in active Ingredients business will be led by strong order book and new customer orders. Additionally, growth would also aided by Mexico facility which was under the import alert since June 2011. The plant generated ~US$60m in annual revenue, of which 50‐60% was from the US market. Company’s focus in enhancing specialty revenue is again depicted by its Intention to acquire OctoPlus N.V.; a service based specialty pharmaceutical company. DRDY has ~560 cumulative DMF filings as on date.
Biologics; a long term growth driver In long term biologics is going to play major role in pharma sector. We are confident that Dr Reddy's, an early mover in the biologic segment, is definitely at advantageous position to cash in the opportunity. Biologics contributed about 5% to DRDY’s domestic sales in FY12. The company has three major biological products in domestic market; Reditux, Grafeel and Cresp. We believe real value would be extracted after 7‐8 years of gestation period.
One of the attractive bet in large cap space In next two years, we believe the company will gain maximum from the patent cliff. Robust Domestic and International generic market growth along with improving outlook of PSAI (muted growth in PSAI segment was a challenge in the past) provides us comfort. We expect core Revenue and PAT to witness a CAGR of 14% and 16% over FY12‐14E, respectively. We recommend BUY with a target price of Rs1,980.
Ipca Laboratories
2
Financials Income statement Y/e 31 Mar (Rs m) FY11 FY12 FY13E FY14E
Revenue 68,445 86,882 90,880 114,453
One offs 6,524 11,263 12,180 6,331
Operating profit 15,532 24,311 24,564 24,744
Depreciation (3,981) (5,181) (5,617) (6,281)
Interest expense (246) (1,056) (1,031) (362)
Other income 523 1,323 1,615 1,893
Profit before tax 11,828 19,397 19,532 19,993
Taxes (1,839) (5,035) (3,223) (3,299)
Adj. profit 9,989 13,009 16,309 16,694 Balance sheet Y/e 31 Mar (Rs m) FY11 FY12 FY13E FY14E
Equity capital 846 848 848 848
Reserves 39,473 49,042 61,929 75,084
Net worth 40,319 49,890 62,777 75,932
Non Current Liab 7,227 17,438 19,598 16,036
Current Liab 42,085 45,914 53,673 61,268
Total liabilities 89,631 113,242 136,048 153,235
Fixed assets 24,833 29,404 37,296 38,909
Intangible assets 16,648 13,848 10,562 12,668
Investments 9 9 9 9
Current Assets 42,399 53,929 57,450 61,191
Inventories 15,992 19,433 20,706 24,308
Sundry debtors 17,611 25,368 27,030 25,929
Other curr assets 8,796 7,058 7,643 8,884
Curr Investments - 2,070 2,070 2,070
Cash 5,742 16,052 30,731 40,457
Total assets 89,631 113,242 136,048 153,235
Cash Flow Statement Y/e 31 Mar FY11 FY12 FY13E FY14E
Profit before tax 11,828 19,397 19,532 19,993
Depreciation 3,981 5,181 5,617 6,281
Tax paid (1,839) (5,035) (3,223) (3,299)
Working capital ∆ (6,472) (10,381) (1,193) (1,463)
Oper cashflow 7,498 9,162 20,733 21,512 Capital expenditure (14,318) (6,952) (10,223) (10,000)
Free cash flow (6,820) 2,210 10,510 11,512
Equity raised (5,221) (2,079) - -
Investments 3,571 - - - Debt financing/disposal 8,044 12,891 7,591 1,754
Dividends paid (2,217) (2,712) (3,422) (3,540)
Net ∆ in cash (2,643) 10,310 14,679 9,726
Key ratios Y/e 31 Mar FY11 FY12 FY13E FY14E
Growth matrix (%) Revenue growth 10.6 30.9 5.0 17.2 Op profit growth 12.3 56.5 1.0 0.7 EBIT growth 12.5 69.4 0.5 (1.0) Net profit growth 30.1 30.2 32.0 20.5
Profitability ratios (%) OPM 22.7 28.0 27.0 21.6 EBIT margin 17.6 23.5 22.6 17.8 Net profit margin 14.6 15.0 17.9 14.6 RoCE 14.7 20.2 16.5 14.1 RoNW 25.6 28.8 29.0 24.1 RoA 12.2 13.0 13.3 11.7
Per share ratios EPS 59.0 76.7 96.2 98.4 Dividend per share 11.3 13.7 17.1 17.7 Cash EPS 82.6 107.3 129.3 135.5 Book value per share 238.3 294.2 370.1 447.7
Valuation ratios (x) P/E 30.0 23.1 18.4 18.0 P/CEPS 21.4 16.5 13.7 13.1 P/B 7.4 6.0 4.8 4.0 EV/EBIDTA 19.4 12.4 11.8 11.1
Payout (%) Dividend payout 22.2 20.8 21.0 21.2 Tax payout 15.5 26.0 16.5 16.5
Liquidity ratios Debtor days 94 107 109 83 Inventory days 85 82 83 78 Creditor days 224 193 216 195
Leverage ratios Interest coverage 49.1 19.4 20.0 56.2 Net debt / equity 0.0 0.0 (0.2) (0.3) Net debt / op. profit 0.1 0.1 (0.5) (1.0)
Du-Pont Analysis Y/e 31 Mar FY11 FY12 FY13E FY14E
Tax burden (x) 0.84 0.67 0.84 0.84 Interest burden (x) 0.98 0.95 0.95 0.98 EBIT margin (x) 0.18 0.24 0.23 0.18 Asset turnover (x) 0.83 0.87 0.74 0.80 Financial leverage (x) 2.10 2.23 2.18 2.06 RoE (%) 25.6 28.8 29.0 24.1
Sector: FMCG
Sector view: Positive
Sensex: 18,684
52 Week h/l (Rs): 745/370
Market cap (Rscr) : 23,549
6m Avg vol (‘000Nos): 377
Bloomberg code: GCPLIN
BSE code: 532424
NSE code: GODREJCP
FV (Re): 1
Price as on Nov 09, 2012
Company rating grid
Low High
1 2 3 4 5
Earnings Growth
Cash Flow
B/S Strength
Valuation appeal
Risk
Share price trend
50
100
150
200
Nov‐11 Mar‐12 Jul‐12 Nov‐12
GCPL Sensex
Share holding pattern
-
20
40
60
80
100
Sep-11 Dec-11 M ar-12 Jun-12 Sep-12
Promoters Institutions Others%
Rating: BUYTarget: Rs792
CMP: Rs692
Upside: 14.5%
November 12, 2012
Research Analyst: Vanmala Nagwekar
research@indiainfoline.com
Godrej Consumer Products
Favourable revenue mix change in the domestic business Post the merger of the erstwhile Godrej Sara Lee (Household Insecticides ‐ HI) business in FY10, GCPL’s domestic revenues have more than doubled in the past two years. Prior to the merger, Soaps segment contributed ~68% to GCPL’s revenues in FY09, which has come down to ~36% in FY12 while insecticides business now accounts for 45%. Soaps being the matured category in India with penetration levels of 90%+ and offering a low growth potential, the change in revenue mix augured well for GCPL. The management is looking at revenue synergies of ~Rs15‐20bn and cost synergies of ~Rs2‐2.5bn per year by FY15 from the merger. We expect the domestic business to witness revenues and earnings CAGR of ~21%/20% over FY12‐14.
Insecticides business to be the key growth driver The ~Rs30bn domestic HI market is an attractive high‐growth market with low penetration levels of ~30%, rational competition and minimal (almost zero) possibility of any new entrants. GCPL’s HI business, growing at ~16% revenue CAGR over the past three years consists of three key brands namely Good Knight and Jet ‐ the mosquito repellant brands and HIT in the aerosol segment catering to all types of pest. The HI category is witnessing a major premiumisation, with the electric and aerosol segments outpacing the low‐priced coil segment. GCPL being the market leader in the non‐coil segments is expected to be the biggest beneficiary. We expect this segment to witness revenue CAGR of 22.5% over FY12‐14.
3x3 strategy working extremely well GCPL’s 3x3 strategy ‐ presence in emerging markets in Asia, Africa and Latin America, through three core categories – personal wash, hair care and home care is working very well. In FY10, the international business mix was skewed towards developed markets, mainly the UK. With a series of acquisitions in FY11, GCPL’s international business is now an emerging‐market play on Indonesia, Africa and South America. GCPL is actively scouting for suitable acquisitions in the international market and has done ten acquisitions in last five years. The two key metrics, which GCPL follows are i) the acquisition has to be EPS accretive and ii) the time‐frame to achieve breakeven. We expect GCPL’s strategy of deriving synergies and cross‐selling benefits out of the acquisitions made in the recent past to result in steady growth going ahead.
Strong earnings visibility, maintain BUY With strong growth momentum in both domestic and international businesses and successful acquisitions, GCPL management is confident of achieving 26% revenue CAGR over the next 10 years. Around 10% growth is envisaged through the inorganic route which translates into a 10x jump in revenues by 2021. GCPL’s successful acquisition integration in the past makes us confident of the management’s ability to derive synergy benefits. We expect GCPL to witness revenue/earnings CAGR of ~27/35% respectively over FY12‐14. At the current market price of Rs692, the stock is trading at 24.5x FY14E EPS of Rs28.3. GCPL has traded in the range of 18x to 28x over the past one year (avg 23.1x). Given the strong earnings growth prospects, we see headroom for further expansion of PE multiple. We maintain Buy with a 9‐mth TP of Rs792.
Godrej Consumer Products
2
Financials Income statement Y/e 31 Mar (Rs m) FY11 FY12 FY13E FY14E
Revenue 36,936 48,662 63,150 78,622
Operating profit 6,531 8,554 11,114 13,877
Depreciation (499) (644) (794) (919)
Interest expense (436) (658) (625) (595)
Other income 522 520 585 632
Profit before tax 6,118 7,771 10,280 12,994
Taxes (1,382) (2,261) (2,364) (3,119)
Minorities and other ‐ (245) (245) (245)
Adj. profit 4,736 5,266 7,670 9,631
Exceptional items 411 2,002 ‐ ‐
Net profit 5,147 7,267 7,670 9,631
Balance sheet Y/e 31 Mar (Rs m) FY11 FY12 FY13E FY14E
Equity capital 324 340 340 340
Reserves 16,928 27,812 33,809 41,510
Net worth 17,252 28,152 34,150 41,850
Minority interest ‐ 1,128 1,373 1,618
Debt 14,688 15,640 12,640 9,640
Def. tax liab (net) 86 111 111 111
Total liabilities 32,025 45,030 48,273 53,219
Fixed assets 3,629 4,321 4,127 4,107
Intangible assets 27,228 32,973 32,973 32,973
Def. tax asset (net) 72 116 116 116
Net working capital (1,173) 977 2,142 3,880
Inventories 4,394 7,839 10,286 12,806
Sundry debtors 3,840 4,725 5,852 7,065
Other current assets 3,540 3,911 4,386 5,011
Sundry creditors (3,331) (7,702) (10,286) (12,806)
Other current liab. (9,615) (7,796) (8,096) (8,196)
Cash 2,269 6,644 8,916 12,144
Total assets 32,025 45,030 48,273 53,219
Cash flow statement Y/e 31 Mar (Rs m) FY11 FY12 FY13E FY14E
Profit before tax 6,118 7,771 10,280 12,994
Depreciation 499 644 794 919
Tax paid (1,382) (2,261) (2,364) (3,119)
Working capital ∆ 1,689 (2,150) (1,165) (1,738)
Operating cashflow 6,923 4,005 7,545 9,057
Capital expenditure (25,612) (7,081) (600) (900)
Free cash flow (18,689) (3,076) 6,945 8,157
Equity raised 4,524 4,326 (0) (0)
Investments 670 ‐ ‐ ‐
Debt financing/disposal 14,319 953 (3,000) (3,000)
Dividends paid (1,966) (1,820) (1,918) (2,175)
Other items 360 1,737 (245) (245)
Net ∆ in cash (783) 2,120 1,782 2,737
Key ratios Y/e 31 Mar FY11 FY12 FY13E FY14E
Growth matrix (%)
Revenue growth 81.0 31.7 29.8 24.5
Op profit growth 60.1 31.0 29.9 24.9
EBIT growth 52.1 28.6 29.4 24.6
Net profit growth 39.5 11.2 45.7 25.6
Profitability ratios (%)
OPM 17.7 17.6 17.6 17.7
EBIT margin 17.7 17.3 17.3 17.3
Net profit margin 12.8 10.8 12.1 12.2
RoCE 31.2 21.9 23.4 26.8
RoNW 35.3 23.2 24.6 25.3
RoA 15.7 10.0 12.1 13.7
Per share ratios
EPS 14.6 15.5 22.5 28.3
Dividend per share 5.0 4.6 4.9 5.5
Cash EPS 16.2 17.4 24.9 31.0
Book value per share 53.3 82.7 100.4 123.0
Valuation ratios (x)
P/E 47.3 44.7 30.7 24.5
P/CEPS 42.8 39.8 27.8 22.3
P/B 13.0 8.4 6.9 5.6
EV/EBIDTA 36.2 28.6 21.5 16.8
Payout (%)
Dividend payout 41.5 34.6 25.0 22.6
Tax payout 22.6 29.1 23.0 24.0
Liquidity ratios
Debtor days 38 35 34 33
Inventory days 43 59 59 59
Creditor days 33 58 59 59
Leverage ratios
Interest coverage 15.0 12.8 17.4 22.8
Net debt / equity 0.7 0.3 0.1 (0.1)
Net debt / op. profit 1.9 1.1 0.3 (0.2)
Du‐Pont Analysis Y/e 31 Mar (Rs m) FY11 FY12 FY13E FY14E
Tax burden (x) 0.77 0.68 0.75 0.74
Interest burden (x) 0.93 0.92 0.94 0.96
EBIT margin (x) 0.18 0.17 0.17 0.17
Asset turnover (x) 1.22 0.92 0.99 1.12
Financial leverage (x) 2.26 2.32 2.04 1.85
RoE (%) 35.3 23.2 24.6 25.3
Sector: Banking
Sector view: Neutral
Sensex: 18,684
52 Week h/l (Rs): 1102 / 641
Market cap (Rscr) : 121,763
6m Avg vol (‘000Nos): 3,930
Bloomberg code: ICICIBC IB
BSE code: 532174
NSE code: ICICIBANK
FV (Rs): 10
Price as on Nov 09, 2012
Company rating grid
Low High
1 2 3 4 5
Earnings Growth
RoA Progression
B/S Strength
Valuation appeal
Risk
Share price trend
70
90
110
130
Nov‐11 Mar‐12 Jul‐12 Nov‐12
ICICI Bank Sensex
Share holding pattern
‐
20
40
60
80
100
Dec‐11 Mar‐12 Jun‐12 Sep‐12
Institutions Others
%
Rating: BUYTarget: Rs1,340
CMP: Rs1,059
Upside: 26.5%
November 12, 2012
Research Analyst: Rajiv Mehta
Bhavna Sinyal research@indiainfoline.com
ICICI Bank
Impressive NIM performance to continue; FY12-14 NII CAGR at 23% ICICI Bank has witnessed a material improvement in NIM over the past one year driven by cyclical factors. Margin improved despite the headwinds of decline in retail loans contribution, increase in the share of international book and decline in average CASA ratio. Key improvement drivers were strong asset re‐pricing and a steep correction in wholesale funding rates (in the more recent quarters). With retail term deposits rates having started to decline, we believe that CASA ratio is near cyclical bottom and would improve in the medium term. The wholesale rates are expected to remain benign driven by comfortable system liquidity, which in turn would be supported by central bank easing and weak credit demand. Loan mix of ICICI Bank would also move favourably with international book remaining flattish and domestic retail loan growth improving. We therefore expect bank’s blended NIM to remain above 3% in ensuing quarters underpinning a strong NII CAGR of 23% (v/s loan CAGR of 17%) over FY12‐14. Resilient asset quality; credit cost guidance retained at 75bps ICICI Bank’s absolute gross NPL has been flat over the past two years while substantially declining as a percentage from 5% to 3.5%. Bank’s retail gross NPL declined by 23% in aforementioned time aided by low slippages and significant upgrades/recoveries. Overall also, fresh delinquencies have been in the manageable range of Rs7‐9bn (slippage ratio of 1.3‐1.5%) over the past few quarters (excluding the chunky Deccan Chronicle slippage of ~Rs5bn in Q2 FY13). Except for GTL and 3i infotech, ICICI Bank has not seen significant restructuring and the outstanding restructured assets stand at marginal 1.6% of advances. The pipeline is also non‐perturbing with the bank having a negligible share in CDR referrals. ICICI Bank has been providing substantially against fresh NPLs maintaining PCR at 78‐80% and net NPLs at 0.6‐0.8%. Despite increasing anxiety around potential creation of stress assets in the system, the bank has maintained full‐year credit cost guidance at 75bps (73bps in H1 FY13; 68bps in FY12), implying resilient asset quality outlook. Core RoA to sustain above 1.5%; capitalization is robust ICICI Bank’s core RoA (excluding subsidiary dividends) has seen structural improvement of 15‐20bps over the past few quarters aided by handsome margin improvement and stable asset quality. Notwithstanding muted fee income growth, we expect core RoA of the bank to remain above 1.5% in FY13 and FY14 supported by a strong NII performance. With Tier‐1 capital at 12.8%, ICICI Bank is one of the well‐capitalized banks in the industry. Re-rating to continue; Top pick in Banking Over the past 3/6 months, ICICI Bank has marginally outperformed peers and the Bankex aided by consistent earnings beat. Adjusting for the value of subsidiaries, the bank trades at 1.4x FY14 P/adj.BV, which is attractive for a bank delivering RoA of 1.5%+. More so, valuation discount of more than 50% to HDFC Bank is enticing in an improving market sentiment. We expect a continuous valuation re‐rating to drive a significant stock outperformance over the next 9‐12 months.
ICICI Bank
2
Financials Income statement Y/e 31 Mar (Rs m) FY11 FY12 FY13E FY14E
Interest income 259,741 335,427 403,372 442,358
Interest expense (169,572) (228,085) (264,340) (279,821) Net interest income 90,169 107,342 139,032 162,537 Non‐interest income 66,479 75,028 81,030 93,995
Total op income 156,648 182,369 220,062 256,532 Total op expenses (66,172) (78,505) (91,850) (106,547) Op profit (pre‐prov) 90,476 103,864 128,211 149,985
Total provisions (21,807) (14,064) (20,552) (23,152)
Profit before tax 68,668 89,801 107,659 126,834
Taxes (16,093) (23,382) (29,068) (34,879)
Net profit 52,575 66,419 78,591 91,954
Balance sheet Y/e 31 Mar (Rs m) FY11 FY12 FY13E FY14E
Total cash & equivalents 340,901 362,293 331,114 389,263
Investments 1,346,860 1,595,600 1,866,853 2,202,886
Advances 2,163,659 2,537,277 2,943,241 3,487,740 Total int‐earning assets 3,851,419 4,495,170 5,141,208 6,079,889
Fixed assets 47,443 46,147 53,069 61,029
Other assets 163,475 195,154 218,572 240,430
Total assets 4,062,337 4,736,471 5,412,849 6,381,348
Net worth 550,909 604,052 659,273 723,986
Deposits 2,256,021 2,555,000 3,014,899 3,632,954
Borrowings 1,095,543 1,401,649 1,541,814 1,803,922 Total int‐bearing liabs 3,351,564 3,956,649 4,556,713 5,436,876 Other non‐int‐bearing liabs 159,863 175,770 196,862 220,486
Total liabilities 3,511,427 4,132,418 4,753,576 5,657,362 Equity + Total liabilities 4,062,337 4,736,471 5,412,849 6,381,348
Key ratios Y/e 31 Mar FY11 FY12 FY13E FY14E
Growth matrix (%)
Net interest income 11.1 19.0 29.5 16.9
Total op income 0.5 16.4 20.7 16.6 Op profit (pre‐provision) (7.0) 14.8 23.4 17.0
Net profit 28.0 25.5 21.6 17.0
Advances 19.4 17.3 16.0 18.5
Deposits 11.7 13.3 18.0 20.5
Total assets 11.8 16.6 14.3 17.9
Profitability ratios (%)
NIM 2.5 2.6 2.9 2.9
Non‐int inc/Total inc 42.4 41.1 36.8 36.6
Return on Avg Equity 9.7 11.2 12.4 13.3
Return on Avg Assets 1.3 1.5 1.5 1.6
Per share ratios (Rs)
EPS 44.7 56.1 68.2 79.7
Adj.BVPS 457 508 553 605
DPS 14.0 16.0 18.0 21.0
Other key ratios (x)
Credit/Deposits 95.9 99.3 97.6 96.0
Cost/Income 42.2 43.0 41.7 41.5
CASA 45.1 43.5 43.0 44.5
CAR 19.5 18.5 17.9 16.6
Tier‐I capital 13.2 12.7 12.6 11.9
Gross NPLs/Loans 4.6 3.7 3.7 3.5
Total prov/Avg loans 1.0 0.4 0.8 0.7
Net NPLs/Net loans 1.1 0.7 0.8 0.8
Tax rate 23.8 26.6 27.0 27.5
Dividend yield 1.3 1.5 1.7 2.0
Sector: Pharmaceutical
Sector view: Positive
Sensex: 18,684
52 Week h/l (Rs): 496/233
Market cap (Rscr) : 5,388
6m Avg vol (‘000Nos): 217
Bloomberg code: IPCA IN
BSE code: 524494
NSE code: IPCALAB
FV (Rs): 2
Price as on Nov 09, 2012
Company rating grid
Low High
1 2 3 4 5
Earnings Growth
Cash Flow
B/S Strength
Valuation appeal
Risk
Share price trend
50
100
150
200
Nov‐11 Mar‐12 Jul‐12 Nov‐12
IPCA labs Sensex
Share holding pattern
‐
20
40
60
80
100
Dec‐11 Mar‐12 Jun‐12 Sep‐12
Promoters Institutions Others%
Rating: BUYTarget: Rs492
CMP: Rs428
Upside: 15.0%
November 12, 2012
Research Analyst:
Bhavika Thakker research@indiainfoline.com
IPCA Laboratories
Robust domestic market growth to persist Ipca Lab has one of the best franchise in domestic market. The company is a
fully integrated pharmaceutical company with balanced focus at domestic and
international market. Ipca has outperformed Indian Pharmaceutical Market
(IPM) by ~600 bps, with a CAGR of ~20% over FY05‐12. Traditionally, Ipca was a
market leader in the therapeutic segments like Anti‐malarial. But now, Ipca,
with a market share of 1.7% and ~5000 market representatives(MR), thrives
hard to out pace IPM each year in all possible chronic categories. We believe
the companies’ strategies like growing share of chronic therapeutic segments
in revenue mix, focus on brand building and new launches along with
expansion in the field force, will help Ipca to keep growth momentum upbeat.
We expect 15% revenue CAGR over FY12‐15 in domestic formulations. Superior business mix bode well with the strategy of diversification Ipca has a strong franchise in the Indian branded business coupled with high
margin exports. The company derives 52% of the revenues from export market.
It has built a strong international formulation business with presence in 110
countries across various geographies. Again, the mix in the export countries is
also balanced with revenues from generic business in US, Europe and Africa
and branded sales form emerging countries like Russia South/Central American
and Western African countries. We believe this is a superior business mix in
terms of margin and top line, which bodes well with the strategy of
diversification. Vertical integration at its best; operating leverage to flow in IPCA is one of India's largest API producers with leadership in 15 APIs. IPCA's
API basket bodes well for the company in terms of vertical integration benefit
(~90% of the drugs are vertically integrated) along with revenues from outside
sales. The company enjoys 50‐70% market share in these APIs along with
decent margins unlike peers. We believe growing business with vertical
integration will help company to remain competitive in long run.
US business to aid in export growth Ipca has been facing capacity issues for the last few quarters. Export business,
which was restrained due to capacity constraint, now will flourish following the
Indore SEZ approval. With Indore SEZ approval, we expect further
enhancement in margins to 22.7% by FY14E. According to management, the
full utilization of new capacity at Indore can add ~Rs4bn incremental annual
sales. We expect Indore facility to contribute ~Rs750‐1000mn of revenues by
FY14.
Attractive valuations; Recommend BUY Ipca has a strong franchise in Indian branded business (55% of total business) coupled with high margin exports. We estimate Revenue and PAT CAGR of 20% and 31% over FY12‐14, respectively. We believe the valuations are still attractive at 11.3x FY14E EPS. We recommend BUY.
Ipca Laboratories
2
Financials Income statement Y/e 31 Mar (Rs m) FY11 FY12 FY13E FY14E
Revenue 18,998 23,587 28,296 33,617
Operating profit 3,735 5,135 6,310 7,631
Depreciation (558) (671) (849) (1,009)
Interest expense (294) (413) (496) (481)
Other income 84 120 141 168
Profit before tax 2,967 4,170 5,106 6,309
Taxes (784) (881) (1,225) (1,514) Minorities and other 6 7 ‐ ‐
Adj. profit 2,189 3,297 3,881 4,795
Exceptional items 434 (526) ‐ ‐
Net profit 2,623 2,771 3,881 4,795
Balance sheet Y/e 31 Mar (Rs m) FY11 FY12 FY13E FY14E
Equity capital 252 253 253 253
Reserves 10,265 12,288 15,427 19,307
Net worth 10,516 12,541 15,680 19,559
Debt 5,457 6,349 7,092 6,874
Total liabilities 15,973 18,889 22,772 26,433
Fixed assets 7,920 10,130 12,415 14,231
Intangible assets 20 20 20 20
Investments 810 1,023 1,023 1,023
Net working capital 7,111 7,589 8,944 10,457
Inventories 4,664 6,699 7,923 9,413
Sundry debtors 3,672 3,491 4,188 4,975
Other current assets 1,927 1,788 1,950 1,950
Sundry creditors (1,786) (2,369) (2,842) (3,377)
Other curr liabilities (1,366) (2,019) (2,274) (2,504)
Cash 112 127 370 703
Total assets 15,973 18,889 22,772 26,433
Cash Flow Statement Y/e 31 Mar FY11 FY12 FY13E FY14E
Profit before tax 2,967 4,170 5,106 6,309
Depreciation 558 671 849 1,009
Tax paid (784) (881) (1,225) (1,514)
Working capital ∆ (324) (476) (1,356) (1,513)
Operating cashflow 2,417 3,484 3,374 4,291
Capital expenditure (1,736) (2,882) (3,134) (2,824)
Free cash flow 681 603 240 1,467
Equity raised (295) ‐
Investments (485) (212) ‐ ‐
Debt financing/disposal
119 892 744 (218)
Dividends paid (461) (469) (741) (916)
Other items 446 (798)
Net ∆ in cash 4 14 243 333
Key ratios Y/e 31 Mar FY11 FY12 FY13E FY14E
Growth matrix (%) Revenue growth 21.3 24.2 20.0 18.8 Op profit growth 12.0 37.5 22.9 20.9 EBIT growth 12.7 40.5 22.2 21.2 Net profit growth 8.6 50.6 17.7 23.6
Profitability ratios (%) OPM 19.7 21.8 22.3 22.7 EBIT margin 17.2 19.4 19.8 20.2 Net profit margin 11.5 14.0 13.7 14.3 RoCE 21.8 26.3 26.9 27.6 RoNW 22.8 28.6 27.5 27.2 RoA 12.4 15.5 15.2 15.9
Per share ratios EPS 17.4 26.1 30.7 38.0 Dividend per share 3.2 3.2 5.3 6.7 Cash EPS 21.8 31.4 37.4 45.9 Book value per share 83.5 99.3 124.1 154.8
Valuation ratios (x) P/E 24.6 16.4 13.9 11.3P/CEPS 19.6 13.6 11.4 9.3P/B 5.1 4.3 3.4 2.8EV/EBIDTA 15.9 11.7 9.6 7.9
Payout (%) Dividend payout 21.1 14.2 19.1 19.1 Tax payout 26.4 21.1 24.0 24.0
Liquidity ratios Debtor days 71 54 54 54 Inventory days 90 104 102 102 Creditor days 34 37 37 37
Leverage ratios Interest coverage 11.1 11.1 11.3 14.1 Net debt / equity 0.5 0.5 0.4 0.3 Net debt / op. profit 1.4 1.2 1.1 0.8
Du-Pont Analysis Y/e 31 Mar FY11 FY12 FY13E FY14E
Tax burden (x) 0.74 0.79 0.76 0.76
Interest burden (x) 0.91 0.91 0.91 0.93
EBIT margin (x) 0.17 0.19 0.20 0.20
Asset turnover (x) 1.08 1.11 1.11 1.12
Financial leverage (x) 1.84 1.84 1.81 1.71
RoE (%) 22.8 28.6 27.5 27.2
Sector: Banking
Sector view: Neutral
Sensex: 18,684
52 Week h/l (Rs): 482 / 322
Market cap (Rscr) : 5,019
6m Avg vol (‘000Nos): 114
Bloomberg code: KVB IB
BSE code: 590003
NSE code: KARURVYSY
A
FV (Rs): 10
Price as on Nov 09, 2012
Company rating grid
Low High
1 2 3 4 5
Earnings Growth
RoA Progression
B/S Strength
Valuation appeal
Risk
Share price trend
80
90
100
110
120
Nov‐11 Mar‐12 Jul‐12 Nov‐12
Karur Vysya Bank Sensex
Share holding pattern
‐
20
40
60
80
100
Jun‐12 Sep‐11 Dec‐11 Mar‐12
Promoters Institutions Others%
Rating: BUYTarget: Rs530
CMP: Rs469
Upside: 13.1%
November 12, 2012
Research Analyst: Bhavna Sinyal Rajiv Mehta
research@indiainfoline.com
Karur Vysya Bank
Inclination towards secured lending; CASA ratio to improve Diversified across Corporate (39%), Commercial (36%), Agri (16%), and Retail (9%) segments, KVB’s loan book witnessed robust 33% CAGR over FY09‐12. We expect the trend of higher‐than‐industry credit growth to continue in coming years; build a 23.5% loan CAGR over FY12‐14. The strong growth will be largely driven by collateralized working capital loans in SME segment and secured retail loans (housing, vehicle and gold loans). Tamil Nadu accounts for 46% of the total business and 51% of total branches. KVB intends to significantly expand its presence in Gujarat and Maharashtra in addition to strengthening its foothold in Tamil Nadu and AP. Bank targets to add 100 branches in FY13 (82 branches added in FY12) and this should drive a structural improvement in CASA ratio in FY14. Sanguine asset quality; NIM to remain above 3% in longer term KVB’s asset quality has improved with GNPA ratio declining from 1.95% in FY09 to 1.26% in H2 FY13. Net NPL/Networth and delinquency ratio stood at 2.9% and ~1% in FY12, one of the lowest in the industry. Outstanding restructured assets stood at 2.6% of total advances, down from 4.2% in FY10. Exposure to power sector is 7%, of which to SEBs is 4%. Keeping in view bank’s conservative approach in lending and effective credit monitoring, the risk of negative surprises in slippages is relatively lower. We estimate slippage ratio at 1.2‐1.3% for FY13/14. PCR at 75%+ lends comfort in current challenging environment.
NIM has trended in a narrow band of 3‐3.4% over FY09‐12. Emphasis on lower‐yielding but better quality assets and a decline in CASA ratio resulted in margin compression during H1 FY13. We expect NIM to remain above 3% in the longer term driven by bank’s focus on relatively better yielding SME and retail loans, improvement in C/D ratio, resilient asset quality and CASA improvement. NII CAGR is estimated at robust 25% over FY12‐14. Distribution scale-up to increase C/I ratio; RoA to drop Cost/Income ratio ranged between 41‐44% in the past three years manifesting an efficient operating structure. Significant branch expansion is likely to increase cost/income ratio in ensuing quarters. However, we believe that these investments would payoff through a strong NII and fee income growth in the longer term. Factoring a higher opex growth and conservative provisioning, we estimate KVB’s RoA to decline to 1.34% in FY13. Even at this level, it would be higher than most peers. Relatively strong performance to continue KVB’s performance has been resilient in the current credit cycle ‐ strong credit growth, stable asset quality, lower volatility in NIM, brisk fee income growth and healthy RoA (sustained at 1.4‐1.6%). Further, bank’s capitalization is robust with Tier‐1 capital at 12.7%. At current valuation of 1.5x FY14E P/adj.BV, we believe that KVB offers an attractive upside in the next 9‐12 months.
Karur Vysya Bank
2
Financials Income statement Y/e 31 Mar (Rs m) FY11 FY12 FY13E FY14E
Interest income 22,177 32,704 42,756 50,262
Interest expense (14,508) (23,532) (31,155) (35,817)
Net interest income
7,669 9,171 11,601 14,445
Non‐interest income
2,643 3,501 4,202 5,084
Total op income 10,312 12,673 15,803 19,529
Total op expenses (4,306) (5,416) (7,094) (8,797)
Pre‐provs op. profit 6,006 7,257 8,708 10,732
Provisions for loan losses
(49) (191) (535) (909)
Other provisions (344) (747) (250) (400)
Profit before tax 5,613 6,320 7,923 9,423
Taxes (1,457) (1,302) (2,298) (2,733)
Net profit 4,156 5,017 5,625 6,690
Balance sheet Y/e 31 Mar (Rs m) FY11 FY12 FY13E FY14E
Total cash & equivalents
17,745 20,354 20,777 21,678
Investments 77,318 105,061 131,326 164,158
Advances 178,145 239,492 295,772 365,279
Total int‐earning assets
273,207 364,907 447,876 551,114
Fixed assets 2,106 2,448 2,816 3,238
Other assets 6,936 8,993 10,342 11,893
Total assets 282,248 376,349 461,034 566,246
Net worth 21,145 27,082 30,701 35,248
Deposits 247,219 321,116 396,578 489,774
Borrowings 5,299 19,726 24,065 30,082
Total int‐bearing liabs
252,517 340,842 420,643 519,856
Non‐int‐bearing liabs
8,586 8,425 9,689 11,142
Total liabilities 261,103 349,267 430,332 530,998
Equity + Total liabilities
282,248 376,349 461,033 566,246
Key ratios Y/e 31 Mar FY11 FY12 FY13E FY14E
Growth matrix (%)
Net interest income 35.8 19.6 26.5 24.5
Total op income 27.0 22.9 24.7 23.6
Op profit (pre‐provision)
29.7 20.8 20.0 23.2
Net profit 23.7 20.7 12.1 18.9
Advances 32.5 34.4 23.5 23.5
Deposits 28.3 29.9 23.5 23.5
Total assets 28.7 33.3 22.5 22.8
Profitability ratios (%)
NIM 3.2 2.9 2.9 2.9
Non‐int inc/Total inc 25.6 27.6 26.6 26.0
Return on Avg Equity 22.3 20.8 19.5 20.3
Return on Avg Assets 1.7 1.5 1.3 1.3
Per share ratios
EPS 38.9 46.8 52.5 62.4
Adj.BVPS 196.8 245.3 272.6 310.1
DPS 12.0 14.0 16.0 18.0
Other key ratios (%)
Credit/Deposits 72.1 74.6 74.6 74.6
Cost/Income 41.8 42.7 44.9 45.0
CASA 23.3 19.2 22.5 25.0
CAR 14.4 14.3 14.0 12.8
Tier‐I capital 13.1 13.1 12.1 11.2
Gross NPLs/Loans 1.5 1.3 1.5 1.6
Credit Cost 0.0 0.1 0.2 0.3
Net NPLs/Net loans 0.1 0.3 0.5 0.6
Tax rate 26.0 20.6 29.0 29.0
Dividend yield 2.6 3.0 3.4 3.8
Sector: IT
Sector view: Neutral
Sensex: 18,684
52 Week h/l (Rs): 116/62
Market cap (Rscr) : 12,728
6m Avg vol (‘000Nos):
4,528
Bloomberg code: SCS.IN
BSE code: 500376
NSE code: SATYAMCOMP
FV (Rs): 2
Price as on Nov 09, 2012
Company rating grid
Low High
1 2 3 4 5
Earnings Growth
Cash Flow
B/S Strength
Valuation appeal
Risk
Share price trend
80
100
120
140
160
Nov‐11 Mar‐12 Jul‐12 Nov‐12
Mahindra Satyam Sensex
Share holding pattern
0
20
40
60
80
100
Sep‐11 Dec‐11 Mar‐12 Jun‐12
Promoters FIIs Others
Rating: BUYTarget: Rs129
CMP: Rs108
Upside: 19.4%
November 12, 2012
Research Analyst:
Aniruddha Mehta research@indiainfoline.com
Mahindra Satyam
Improved growth profile on the back of better deal participation, win rates Revenue growth profile for Mahindra Satyam has improved impressively over past many quarters. A reduced overhang in terms of legal issues, S&M investment and inherent strength in certain verticals/services (eg Manufacturing, ERP, analytics), we believe, has resulted in better traction. Improved deal participation, higher win ratio and strong client additions in the past year further validate the same. While larger deals wins (US$50mn+) are still to fructify, decent traction in key verticals/services should continue.
OPM performance impressive; decent margin levers prevail going ahead Though the strong OPM expansion (~620bps over past one year) was supported by weaker rupee, a material portion was also on the back of strong operational management. Focused improvement in the employee pyramid as well as operational efficiency gains through SG&A leverage, sub‐contractor cost optimization and utilization have been the key reasons for the same. Going forward we expect levers of employee pyramid and SG&A leverage to continue to support the margin. Also as legal issues dwindle, the legal expenses are expected to normalize over a period of time.
Improved performance reflecting in better operating metrics On the back of improving revenue performance and strong operational management, Satyam’s operating metrics too are picking up. Robust client mining/hunting has resulted in Top5/Top10 clients growing faster than the company (2.7%/3.1% versus 1.8% cqgr over last four quarters) as well as strong client additions (135 additions in trailing four quarters). On the back of improved DSO (92 currently versus 100+in FY11), the operating cash generation too is on the up‐move. On the employee front, employee additions continued to be good with attrition trending down meaningfully to 13.1% (15.6% in Q2 FY12). Overall the legal issues are lower now with the final settlement of US investor lawsuit. For the incremental legal issues including the UK based institutional investor lawsuit (initial claim of US$150mn), the company has further provided for Rs2.56bn in Q4 FY12.
Positive synergies to play out post merger with Tech M; Valuation attractive We expect the positive synergies between Satyam & Tech M to play out more effectively post the merger. Better deal participation, expanded clientele and broader services/vertical presence should help the combined entity to effectively compete with larger peers leading to lowering of the growth differential. Also better diversification of verticals and client/s are expected to bode well for the combined entity. Operationally too, synergies from combined sales engine, client management and delivery are added positives. Considering the increased scale (estimated FY13 revenues base of ~US$2.6bn), decent traction at both Tech M and Satyam and the merger synergies, we expect the valuation gap with larger peers to narrow.
Mahindra Satyam
2
Financials Income statement Y/e 31 Mar (Rs m) FY11 FY12 FY13E FY14E
Revenue 51,450 63,956 77,414 84,327
Operating profit 4,551 10,213 16,420 16,751
Depreciation (1,847) (1,577) (1,842) (2,135)
Interest expense (97) (118) (119) (80)
Other income 2,942 4,189 2,903 3,269
Profit before tax 5,549 12,708 17,362 17,805
Taxes (578) (852) (4,527) (4,629)
Minority interest (33) 84 (84) (58)
Adj. profit 4,938 11,940 12,750 13,117
Exceptional items (6,411) 1,094 ‐ ‐
Net profit (1,473) 13,034 12,750 13,117
Balance sheet Y/e 31 Mar (Rs m) FY11 FY12 FY13E FY14E
Equity capital 2,353 2,354 2,354 2,354
Reserves 14,896 27,519 40,269 53,387
Net worth 17,249 29,873 42,623 55,741
Minority interest 234 150 234 292
Debt 315 234 234 234
uspense a/c (net) 12,304 12,304 12,304 12,304 Deferred Tax Liability 68 15 15 15
Total liabilities 30,170 42,576 55,410 68,586
Fixed assets 9,499 10,095 12,253 13,618
Investments 4,348 972 972 972 Net working capital 16,323 31,509 42,186 53,996 Inventories 592 146 177 193
Sundry debtors 11,588 14,018 16,968 18,483
Cash 27,538 28,519 40,762 53,377
Other curr assets 7,649 15,889 17,037 17,626
Sundry creditors (15,463) (6,701) (8,111) (8,835)
Other curr liab (15,581) (20,362) (24,647) (26,848)
Total assets 30,170 42,576 55,410 68,586 Cash flow statement Y/e 31 Mar (Rs mn) FY11 FY12 FY13E FY14E
Profit before tax 5,549 12,708 17,362 17,805Depreciation 1,847 1,577 1,842 2,135Tax paid (578) (852) (4,527) (4,629)Working capital ∆ 5,089 (14,205) 1,567 805Operating cashflow
11,907 (772) 16,243 16,115
Capital expenditure
(1,481) (2,173) (4,000) (3,500)
Free cash flow 10,426 (2,945) 12,243 12,615Equity raised (87) (410) (0) 0Investments 1,920 3,376 ‐ ‐Debt financing/(disposal)
(107) (81) ‐ ‐
Other/Excepnl items
(6,382) 1,041 ‐ ‐
Net ∆ in cash 5,770 981 12,243 12,615
Key ratios Y/e 31 Mar FY11 FY12 FY13E FY14E
Growth matrix (%)
Revenue growth (6.1) 24.3 21.0 8.9
Op profit growth (18.0) 124.4 60.8 2.0
EBIT growth 62.2 127.2 36.3 2.3
Net profit growth (498.5) 141.8 6.8 2.9
Profitability ratios (%)
OPM 8.8 16.0 21.2 19.9
EBIT margin 11.0 20.1 22.6 21.2
Net profit margin 9.6 18.7 16.5 15.6
RoCE 18.2 35.3 35.7 28.8
RoNW 27.4 50.7 35.2 26.7
RoA 8.4 18.2 16.2 13.6
Per share ratios
EPS (1.3) 11.1 10.8 11.1
Cash EPS 5.8 11.5 12.4 13.0
Book value per share 14.7 25.4 36.2 47.4
Valuation ratios
P/E (x) ‐ 9.8 10.1 9.8
Price/Book (x) 7.4 4.3 3.0 2.3
EV/EBITDA (x) 22.2 9.8 5.3 4.5
Payout Ratio
Tax Payout 10.4 6.7 26.1 26.0
Liquidity Ratio
Debtor days 82 80 80 80
Creditor days 110 38 38 38
Du Pont Analysis Y/e 31 Mar FY11 FY12 FY13E FY14E
Tax burden (x) 0.89 0.94 0.73 0.74
Interest burden (x) 0.98 0.99 0.99 1.00
EBIT margin (x) 0.11 0.20 0.23 0.21
Asset turnover (x) 0.88 0.98 0.98 0.88
Financial leverage (x) 3.25 2.78 2.18 1.96
RoE (%) 27.4 50.7 35.2 26.7
Sector: Real Estate
Sector view: Negative
Sensex: 18,684
52 Week h/l (Rs): 157 / 73
Market cap (Rscr) : 1,715
6m Avg vol (‘000Nos): 199
Bloomberg code: NBCC IN
BSE code: 534309
NSE code: NBCC
FV (Rs): 10
Price as on Nov 09, 2012
Company rating grid
Low High
1 2 3 4 5
Earnings Growth
Cash Flow
B/S Strength
Valuation appeal
Risk
Share price trend
60
90
120
150
Apr‐12 Jun‐12 Aug‐12 Oct‐12
NBCC Sensex
Share holding pattern
85
90
95
100
Jun‐12 Sep‐12
Promoters Institutions Others%
Rating: BUYTarget: Rs198
CMP: Rs142
Upside: 39.4%
November 12, 2012
Research Analyst: Kalpit Oza
research@indiainfoline.com
National Building Const. Co.
Debt-free PSU + large cash balance + positive OCF Majority of the companies operating in the real estate/infra sector are loaded with substantial debt which depresses their profitability during revenue slowdown. Debt‐free status for National Building Construction Company (NBCC) has helped the company to expand its size significantly over a period of time and leaves scope for leveraging as and when required. That apart, the company has large cash balance of Rs13bn, including Rs7bn advances from clients. Excluding advances, the cash on books is 35% of its current market capitalization. Further, unlike most peers, NBCC has been generating positive operating cash flows, highlighting its impressive operating efficiency. Robust order book provides revenue visibility NBCC’s huge order book of Rs149.8bn, 4.3x FY12 revenues, provides strong revenue growth visibility for the next 2‐3 years. Over the years, the company has developed expertise in three segments viz. a) project management consultancy, b) civil infrastructure for power sector and c) real estate development. This lends a better revenue profile through order book diversification and reduces dependency risk. Furthermore, under PMC segment, NBCC plans to diversify geographically by undertaking overseas projects. This, we believe, will help the company capture significant growth opportunities present in the overseas market. We expect the company to witness 14% revenue CAGR over FY12‐14 aided by the sale of 0.22msf Okhla (Delhi) commercial property from H2 FY13 and revenue recognition of Kidwai Nagar real estate development from H1 FY14. Management has guided for revenue of Rs39bn for FY13, 12.5% growth over FY12. Multiple levers to profitability expansion We like the company’s strategy of focusing on high value orders (Rs 1bn or above) in PMC and civil infrastructure for power segment. Stringent pre‐qualification requirements coupled with high financial barriers in these high value projects ensure limited competition. Besides, projects having a high order value have a smaller percentage of overhead cost offering a higher profit margin. Further, margin expansion over the next two years will be driven by higher contribution from high margin real estate division. We expect OPM to expand by 100bps over the next two years, translating into 15.5% earnings CAGR over FY12‐14. Attractive valuation in view of sound fundamentals NBCC, unlike many peers, has strong set of financials with a) Negative net debt, b) 20%+ return ratios, c) negative working capital cycle and d) consistent positive free cash flow generation for the past 5 years. We believe, current valuations do not factor in the high growth visibility and robust financials of the company and is attractively priced. Hence we recommend BUY.
NBCC
2
Financials Income statement Y/e 31 Mar (Rs m) FY11 FY12 FY13E FY14E
Revenue 31,461 34,477 38,614 44,406
Operating profit 1,326 1,473 1,776 2,220
Depreciation (32) (20) (21) (23)
Interest expense (12) (19) ‐ ‐
Other income 857 1,403 1,500 1,500
Profit before tax 2,140 2,837 3,255 3,697
Taxes (693) (997) (1,074) (1,220)
Adj. profit 1,447 1,840 2,181 2,477
Exceptional items (43) 61 247 ‐
Net profit 1,403 1,902 2,428 2,477
Balance sheet Y/e 31 Mar (Rs m) FY11 FY12 FY13E FY14E
Equity capital 900 1,200 1,200 1,200
Preference capital
Reserves 5,641 6,755 8,615 10,512
Net worth 6,541 7,955 9,815 11,712
Debt ‐ ‐ ‐ ‐
Total liabilities 6,541 7,955 9,815 11,712
Fixed assets 236 233 262 289
Investments 1,726 2,236 2,736 3,236
Deferred tax asset 52 84 100 100
Net work. capital (10,417) (9,850) (12,695) (14,599)
Inventories 4,095 4,501 5,290 6,083
Sundry debtors 5,675 8,522 10,579 12,166
Loans &Advances 5,993 5,545 6,348 7,300
Other cur. liabilities (26,181) (28,417) (34,911) (40,148)
Cash 14,945 15,251 19,412 22,687
Total assets 6,541 7,955 9,815 11,712
Cash flow statement Y/e 31 Mar (Rs m) FY11 FY12 FY13E FY14E
Profit before tax 2,140 2,837 3,255 3,697
Depreciation 32 20 21 23
Tax paid (693) (997) (1,074) (1,220)
Work. capital ∆ 3,555 (568) 2,845 1,904
OCF 5,034 1,292 5,047 4,405
Capital exp. (16) (17) (50) (50)
Free cash flow 5,018 1,275 4,997 4,355
Equity raised (47) 3 ‐ ‐
Investments 776 (510) (500) (500)
Dividends paid (281) (491) (568) (580)
Other items (42) 29 231 ‐
Net ∆ in cash 5,424 306 4,160 3,275
Key ratios Y/e 31 Mar FY11 FY12 FY13E FY14E
Growth matrix (%)
Revenue growth 10.0 9.6 12.0 15.0
Op profit growth 36.1 11.1 20.6 25.0
EBIT growth 18.5 32.8 14.0 13.6
Net profit growth 24.2 27.2 18.5 13.6
Profitability ratios (%)
OPM 4.2 4.3 4.6 5.0
EBIT margin 6.8 8.3 8.4 8.3
Net profit margin 4.6 5.3 5.6 5.6
RoCE 35.8 39.4 36.6 34.3
RoNW 24.1 25.4 24.5 23.0
RoA 5.7 6.4 6.3 6.0
Per share ratios
EPS 16.1 15.3 18.2 20.6
Dividend per share 3.1 3.5 4.0 4.1
Cash EPS 16.4 15.5 18.3 20.8
Book value per share 72.7 66.3 81.8 97.6
Valuation ratios
P/E 8.8 9.3 7.8 6.9
P/CEPS 8.6 9.2 7.7 6.8
P/B 2.0 2.1 1.7 1.5
EV/EBIDTA ‐1.6 1.2 ‐1.3 ‐2.5
Payout (%)
Dividend payout 19.4 26.7 26.0 23.4
Tax payout 32.4 35.1 33.0 33.0
Liquidity ratios
Debtor days 66 90 100 100
Inventory days 48 48 50 50
Creditor days (70) (59) (60) (60)
Leverage ratios
Interest coverage 186.2 148.5 ‐ ‐
Net debt / equity (2.3) (1.9) (2.0) (1.9)
Net debt / op. profit (11.3) (10.4) (10.9) (10.2)
Du-Pont Analysis Y/e 31 Mar (Rs m) FY11 FY12 FY13E FY14E
Tax burden (x) 0.68 0.65 0.67 0.67
Interest burden (x) 0.99 0.99 1.00 1.00
EBIT margin (x) 0.07 0.08 0.08 0.08
Asset turnover (x) 1.24 1.20 1.12 1.07
Financial leverage (x) 4.21 3.97 3.89 3.85
RoE (%) 24.1 25.4 24.5 23.0
Sector: Alcoholic Beverages
Sector view: Neutral
Sensex: 18,684
52 Week h/l (Rs): 144/192
Market cap (Rscr) : 1,687
6m Avg vol (‘000Nos): 309
Bloomberg code: RDCK IN
BSE code: 532497
NSE code: RADICO
FV (Rs): 2
Price as on Nov 09, 2012
Company rating grid
Low High
1 2 3 4 5
Earnings Growth
Cash Flow
B/S Strength
Valuation appeal
Risk
Share price trend
80
100
120
Nov‐11 May‐12 Nov‐12
Radico Sensex
Share holding pattern
0
20
40
60
80
100
Dec‐11 Mar‐12 Jun‐11 Sep‐12
Promoters FIIs Others
Rating: BUYTarget: Rs145
CMP: Rs127
Upside: 14.0%
November 12, 2012
Research Analyst:
Bhavesh Gandhi research@indiainfoline.com
Radico Khaitan
Premium brands’ share to rise over FY12-14 Radico’s two premium brands Magic Moments vodka and Morpheus brandy have clocked a strong 25% and 112% volume cagr respectively over FY10‐12 resulting in a combined 31% vol cagr over the same period. Other mainline brands reported a slower 9.5% cagr which implied that premium brands’ share of total volumes rose to 15% in FY12 from 10% in FY10. We expect the momentum to continue as indicated by the 20% yoy growth in premium brands in H1 FY13 and project premium brands’ share at 19% of total volumes by end of FY14. Margins to improve on premiumisation focus Radico operating margin has been about 15% in the past two years as revenue mix was more aligned towards regular, economy brands. However, as share of higher priced brands like Magic Moments vodka, After Dark whisky and Morpheus brandy increases over the next 2‐3 years, we believe this would support margin expansion; we model ~175bps margin expansion over FY12‐14 which would drive 18% EBIDTA cagr during the same period. Multiple factors to drive secular growth in spirits Spirits sales totaled ~247mn cases in CY11 which is likely to post ~10% cagr and reach 395mn cases in CY16; importantly, single malt scotch whisky and vodka are expected to lead volumes between CY12‐16 with 19% cagr each while brandy would sport 13% cagr over the same period. Radico has brand presence in above segments which would provide a sustainable platform for volume growth in the faster growing segments of the spirits market. We expect above consumption theme to be supported by multiple drivers such as 1) growth in per capita income which doubled from US$540 in FY07 to US$1,100 in FY12 and would boost demand for lifestyle products including premium alcoholic beverages 2) Favourable demographics with more than 60% of population in the 15‐45 age group; ~485mn people in the drinking age with ~150mn to be added to this target group and 3) under penetrated market with per capita consumption at just 0.9ltrs per annum compared to world average of 4.6ltrs. Stable leverage, improved return ratios warrant a re rating: BUY With the launch of After Dark, Radico has a foot in the premium end of whisky market which along with Magic Moments vodka and Morpheus brandy round up its premium portfolio. We expect these to accelerate the portfolio premiumization trend on the back of ~27% volume cagr over next 2 years. Consequently, we build in improved OPM and ~30% PAT cagr over the same period. Encouragingly, leverage is expected to remain in comfortable territory at 0.7x in FY14 while RoE/RoCE is likely to inch up from FY12 levels. The stock trades at 9.6x FY14 EV/EBIDTA which is at the lower end of its historic 1‐yr fwd trading range and above factors justify a valuation re rating in our view; recommend BUY.
Radico Khaitan
2
Financials Income statement Y/e 31 Mar (Rs m) FY11 FY12 FY13E FY14E
Revenue 9,965 11,439 12,724 14,316
Operating profit 1,490 1,721 2,036 2,405
Depreciation (271) (329) (329) (350)
Interest expense (335) (611) (812) (848)
Other income 111 214 224 236
Profit before tax 995 994 1,119 1,442
Taxes (267) (233) (291) (375)
Adj. profit 728 761 828 1,067
Exceptional items ‐ (125) ‐ ‐
Net profit 728 636 828 1,067
Balance sheet Y/e 31 Mar (Rs m) FY11 FY12 FY13E FY14E
Equity capital 265 265 265 265
Reserves 6,240 6,687 7,393 8,339
Net worth 6,514 6,952 7,659 8,604
Debt 4,912 6,219 6,769 7,069
Def tax liability 498 563 563 563
Total liabilities 11,923 13,735 14,991 16,236
Fixed assets 4,242 4,431 4,262 4,312
Intangibles 662 640 640 640
Investments 709 591 591 591
FC translation a/c ‐ 268 ‐ ‐
Net working cap 6,311 7,805 9,477 10,672
Inventories 1,275 1,774 1,987 2,236
Sundry debtors 3,191 3,478 3,974 4,471
Cash 89 210 660 749
Other curr assets 3,503 5,199 5,726 6,442
Sundry creditors (1,040) (1,187) (1,325) (1,490)
Other current lia (712) (1,669) (1,523) (1,714)
Total assets 11,923 13,735 14,991 16,236
Cash flow statement Y/e 31 Mar (Rs m) FY11 FY12 FY13E FY14EProfit before tax 995 994 1,119 1,442
Depreciation 271 329 329 350
Def.tax lia 47 66 ‐ ‐
Tax paid (267) (233) (291) (375)
Working capital ∆ (1,235) (1,378) (1,244) (1,106)
Other op items ‐ (125) ‐ ‐
Operating CF (189) (347) (87) 311
Capital exp (519) (764) 87 (400)
Free cash flow (708) (1,111) ‐ (89)
Equity raised (58) (76) ‐ ‐
Investments 185 118 ‐ ‐
Debt fin/disp 450 1,307 550 300
Dividends paid (108) (122) (122) (122)
Net ∆ in cash (238) 116 428 89
Key ratios Y/e 31 Mar FY11 FY12 FY13E FY14E
Growth matrix (%)
Revenue growth 19.3 14.8 11.2 12.5
Op profit growth 14.5 15.5 18.3 18.1
EBIT growth 22.9 20.7 20.3 18.6
Net profit growth 75.3 (12.6) 30.1 28.9
Profitability ratios (%)
OPM 15.0 15.0 16.0 16.8
EBIT margin 13.3 14.0 15.2 16.0
Net profit margin 7.3 6.7 6.5 7.5
RoCE 11.7 12.5 13.4 14.7
RoNW 11.7 11.3 11.3 13.1
RoA 5.6 5.1 4.8 5.7
Per share ratios
EPS 5.5 4.8 6.2 8.1
Dividend per share 0.7 0.8 0.8 0.8
Cash EPS 7.5 8.2 8.7 10.7
BV per share 49.1 52.4 57.8 64.9
Valuation ratio (x)
P/E 23.1 26.5 20.3 15.8
P/CEPS 16.8 15.4 14.6 11.9
P/B 2.6 2.4 2.2 2.0
EV/EBIDTA 14.5 13.3 11.3 9.6
Payout (%)
Dividend payout 14.8 16.0 14.7 11.4
Tax payout 26.8 23.4 26.0 26.0
Liquidity ratios
Debtor days 117 111 114 114
Inventory days 47 57 57 57
Creditor days 38 38 38 38
Leverage ratios
Interest coverage 4.0 2.6 2.4 2.7
Net debt / equity 0.7 0.9 0.8 0.7
Net debt / op. profit 3.2 3.5 3.0 2.6
Du‐Pont Analysis Y/e 31 Mar (Rs m) FY11 FY12 FY13E FY14E
Tax burden (x) 0.73 0.77 0.74 0.74
Interest burden (x) 0.75 0.62 0.58 0.63
EBIT margin (x) 0.13 0.14 0.15 0.16
Asset turnover (x) 0.77 0.76 0.74 0.77
Financial leverage (x) 2.09 2.23 2.34 2.29
RoE (%) 11.7 11.3 11.3 13.1
Sector: Auto Component
Sector view: Positive
Sensex: 18,684
52 Week h/l (Rs): 477 / 349
Market cap (Rscr) : 535
6m Avg vol (‘000Nos): 7
Bloomberg code: SWE IB
BSE code: 500407
NSE code: SWARAJENG
FV (Rs): 10
Price as on Nov 09, 2012
Company rating grid
Low High
1 2 3 4 5
Earnings Growth
Cash flow
B/S Strength
Valuation appeal
Risk
Share price trend
75
95
115
Nov‐11 Mar‐12 Jul‐12 Nov‐12
Swaraj Eng Sensex
Share holding pattern
‐
20
40
60
80
100
Dec‐11 Mar‐12 Jun‐12 Sep‐12
Promoters Institutions Others%
Rating: BUYTarget: Rs548
CMP: Rs431
Upside: 27.1%
November 12, 2012
Research Analyst: Prayesh Jain Naman Jain
research@indiainfoline.com
Swaraj Engines
Strong parentage in the form of M&M Swaraj Engines Ltd (SEL) manufactures five types of engines from 20HP to 50HP for tractors manufactured by Punjab Tractors under the brand Swaraj Tractors. In July 2007 M&M acquired 63. 33% stake in Punjab Tractors which had 33.2% stake in SEL. M&M being the largest tractor manufacturer in the country provides strong parentage for SEL’s long term growth. M&M’s construction equipment business and powerol businesses provide additional opportunities for SEL.
Dependent on tractor business but unfazed in current slowdown Despite a 4.7% yoy fall in tractor industry volumes in H1 FY13, SEL engine sales during the same period increased 6.4% yoy. The growth would have been higher but capacity constraints (100% + utilization levels) did not allow it to meet requirements of Swaraj Tractors. Going ahead, tractor industry volumes are expected to recover in H2 FY13 on pick up in monsoons towards the end of the season. Under mechanization, lower availability of labour, higher MSPs and robust rural income will continue to support tractor demand in FY14 providing further opportunities for SEL.
Expanding capacity at opportune time SEL is expanding its engine manufacturing capacity from 42,000 units per annum in FY12 to 75,000 units in two phases. During Phase I, the capacity has been raised to 60,000 units, which has commenced operations. In phase II, the capacity will be raised by additional 15,000 units. Total investments will be to the tune of Rs940mn, which will be met through internal accruals. This expansion will enable the company to meet the latent demand of Swaraj Tractors and also allow it to capture the other aforementioned opportunities.
Robust earnings, strong cash flows, debt free, attractive valuations Following 29% revenue CAGR during FY09‐12, we expect SEL to witness 15.4% CAGR during FY12‐14E. Stable margins will ensure a 13% PAT CAGR during FY12‐14E. Despite the capex spend, we expect the company to generate Rs828mn worth of free cash‐flow during FY12‐14E. Furthermore, the company is debt free and is likely to earn RoE in excess of 27% during FY13E and FY14E. Given such robust earnings profile, we find the valuations attractive at P/E of 7.9x FY14E EPS of Rs53.8. With Rs13 per share of dividend in FY12, the stock offers dividend yield of 3.1%.
Company background SEL was set up in 1986 in technical and financial collaboration with Kirloskar Oil Engines Ltd for manufacture of diesel engines for fitment into "Swaraj" tractors for Punjab Tractors Ltd (now a subsidiary of M&M). Subsequently, SEL has also become supplier of hi‐tech engine components to SML Isuzu Ltd, the erstwhile Swaraj Mazda Ltd. SEL's engine business currently constitutes around 95% of company's product revenue and balance 5% represents value of hi‐tech engine components being supplied to SML Isuzu for assembly of commercial vehicle engines. The company has consistently delivered strong financials (especially since it came into the fold of Mahindra group) and had achieved a rare feat of declaring maiden dividend in the very first full year of operations.
Swaraj Engines
2
Financials Income statement Y/e 31 Mar (Rs m) FY11 FY12 FY13E FY14E
Revenue 3,606 4,486 5,083 5,970
Operating profit 603 694 791 934
Depreciation (45) (43) (100) (104)
Interest expense (0) (1) 0 0
Other income 82 122 140 150
Profit before tax 639 773 831 980
Taxes (204) (245) (258) (304)
Adj. profit 435 528 573 676
Balance sheet Y/e 31 Mar (Rs m) FY11 FY12 FY13E FY14E
Equity capital 124 124 124 124
Reserves 1,398 1,739 2,114 2,578
Net worth 1,522 1,863 2,238 2,702
Def tax liab (net) 19 32 28 30
Total liabilities 1,541 1,895 2,266 2,732
Fixed assets 245 505 1,256 1,190
Intangible assets
Investments 578 811 811 811
Net working capital (43) (119) (164) (206)
Inventories 351 334 379 445
Sundry debtors 81 119 135 159
Other curr assets 104 167 177 187
Sundry creditors (359) (435) (501) (589)
Other curr liabilities (220) (304) (354) (408)
Cash 763 697 551 1,113
Total assets 1,541 1,895 2,266 2,732
Cash flow statement Y/e 31 Mar (Rs m) FY11 FY12 FY13E FY14EProfit before tax 639 773 831 980
Depreciation 45 43 100 104
Tax paid (204) (245) (258) (304)
Working capital ∆ (80) 75 46 42
Operating cashflow 400 646 719 822
Capital expenditure (52) (303) (663) (50)
Free cash flow 347 343 56 772
Equity raised (16) (26) (24) (26)
Investments (1) (233) ‐ ‐
Debt raised/repaid ‐ ‐ ‐ ‐
Dividends paid (124) (161) (174) (186)
Other items (8) 13 (4) 2
Net ∆ in cash 199 (66) (146) 562
Key ratios Y/e 31 Mar FY11 FY12 FY13E FY14E
Growth matrix (%)
Revenue growth 27.7 24.4 13.3 17.4
Op profit growth 21.6 15.1 14.0 18.1
EBIT growth 16.9 20.9 7.4 17.9
Net profit growth 16.5 21.4 8.6 17.9
Profitability ratios (%)
OPM 16.7 15.5 15.6 15.6
EBIT margin 17.7 17.2 16.3 16.4
Net profit margin 12.1 11.8 11.3 11.3
RoCE 45.8 45.0 39.9 39.2
RoNW 31.6 31.2 28.0 27.4
RoA 22.9 22.2 19.9 19.7
Per share ratios
EPS 35.0 42.5 46.2 54.4
Dividend per share 10.0 13.0 14.0 15.0
Cash EPS 38.6 46.0 54.2 62.8
Book value per share 122.6 150.0 180.2 217.5
Valuation ratios (x)
P/E 12.2 10.0 9.2 7.8
P/CEPS 11.1 9.3 7.9 6.8
P/B 3.5 2.8 2.4 2.0
EV/EBIDTA 7.5 6.6 6.1 4.6
Payout (%)
Dividend payout 28.5 30.6 30.3 27.6
Tax payout 32.0 31.6 31.0 31.0
Liquidity ratios
Debtor days 8 10 10 10
Inventory days 36 27 27 27
Creditor days 36 35 36 36
Leverage ratios
Net debt / equity (0.5) (0.4) (0.2) (0.4)
Net debt / op. profit (1.3) (1.0) (0.7) (1.2)
Du‐pont analysis Y/e 31 Mar (Rs m) FY11 FY12 FY13E FY14E
Tax burden (x) 0.68 0.68 0.69 0.69
Interest burden (x) 1.00 1.00 1.00 1.00
EBIT margin (x) 0.18 0.17 0.16 0.16
Asset turnover (x) 1.90 1.89 1.77 1.74
Financial leverage (x) 1.38 1.40 1.40 1.39
RoE (%) 31.6 31.2 28.0 27.4
Recommendation parameters for fundamental reports:
Buy – Absolute return of over +10%
Market Performer – Absolute return between ‐10% to +10%
Sell – Absolute return below ‐10%
Published in 2012. © India Infoline Ltd 2012 This report is for the personal information of the authorised recipient and is not for public distribution and should not be reproduced or redistributed without prior permission. The information provided in the document is from publicly available data and other sources, which we believe, are reliable. Efforts are made to try and ensure accuracy of data however, India Infoline and/or any of its affiliates and/or employees shall not be liable for loss or damage that may arise from use of this document. India Infoline and/or any of its affiliates and/or employees may or may not hold positions in any of the securities mentioned in the document. The report also includes analysis and views expressed by our research team. The report is purely for information purposes and does not construe to be investment recommendation/advice or an offer or solicitation of an offer to buy/sell any securities. The opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. Investors should not solely rely on the information contained in this document and must make investment decisions based on their own investment objectives, risk profile and financial position. The recipients of this material should take their own professional advice before acting on this information. India Infoline and/or its affiliate companies may deal in the securities mentioned herein as a broker or for any other transaction as a Market Maker, Investment Advisor, etc. to the issuer company or its connected persons. This report is published by IIFL ‘India Private Clients’ research desk. IIFL has other business units with independent research teams separated by 'Chinese walls' catering to different sets of customers having varying objectives, risk profiles, investment horizon, etc and therefore, may at times have, different and contrary views on stocks, sectors and markets. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to local law, regulation or which would subject IIFL and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. IIFL, IIFL Centre, Kamala City, Senapati Bapat Marg, Lower Parel (W), Mumbai 400 013. For Research related queries, write to: Amar Ambani, Head of Research at amar@indiainfoline.com or research@indiainfoline.com For Sales and Account related information, write to customer care: info@5pmail.com or call on 91‐22 4007 1000
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