diwali dhamaka - india...

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 [email protected]

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

http://content.indiainfoline.com/wc/research/researchreports/India_Strategy_251012.pdf

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

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130

Nov‐11 Mar‐12 Jul‐12 Nov‐12

Dr Reddy's Sensex

Share holding pattern

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20

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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 [email protected]

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


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


Sensex: 18,684

52 Week h/l (Rs): 745/370



Bloomberg code: GCPLIN

BSE code: 532424

NSE code: GODREJCP

FV (Re): 1


Company rating grid

Low High

1 2 3 4 5

Earnings Growth

Cash Flow

B/S Strength

Valuation appeal

Risk

Share price trend

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GCPL Sensex


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20

40

60

80

100

Sep-11 Dec-11 M ar-12 Jun-12 Sep-12


Rating: BUYTarget: Rs792

CMP: Rs692

Upside: 14.5%

November 12, 2012

Research Analyst: Vanmala Nagwekar

[email protected]

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


Revenue 36,936 48,662 63,150 78,622


Depreciation (499) (644) (794) (919)

Interest expense (436) (658) (625) (595)

Other income 522 520 585 632


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


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


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


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


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


6m Avg vol (‘000Nos): 3,930

Bloomberg code: ICICIBC IB

BSE code: 532174

NSE code: ICICIBANK

FV (Rs): 10


Company rating grid

Low High

1 2 3 4 5

Earnings Growth

RoA Progression

B/S Strength

Valuation appeal

Risk

Share price trend

70

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130


ICICI Bank Sensex


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Institutions Others

%

Rating: BUYTarget: Rs1,340

CMP: Rs1,059

Upside: 26.5%

November 12, 2012

Research Analyst: Rajiv Mehta

Bhavna Sinyal [email protected]

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


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)


Taxes (16,093) (23,382) (29,068) (34,879)

Net profit 52,575 66,419 78,591 91,954


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


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


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


Sensex: 18,684

52 Week h/l (Rs): 496/233



Bloomberg code: IPCA IN

BSE code: 524494

NSE code: IPCALAB

FV (Rs): 2


Company rating grid

Low High

1 2 3 4 5

Earnings Growth

Cash Flow

B/S Strength

Valuation appeal

Risk

Share price trend

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IPCA labs Sensex


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CMP: Rs428

Upside: 15.0%

November 12, 2012

Research Analyst:

Bhavika Thakker [email protected]

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


Revenue 18,998 23,587 28,296 33,617


Depreciation (558) (671) (849) (1,009)


Other income 84 120 141 168


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



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


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


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


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


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


EBIT margin (x) 0.17 0.19 0.20 0.20

Asset turnover (x) 1.08 1.11 1.11 1.12


RoE (%) 22.8 28.6 27.5 27.2

Sector: Banking


Sensex: 18,684

52 Week h/l (Rs): 482 / 322



Bloomberg code: KVB IB

BSE code: 590003

NSE code: KARURVYSY

A

FV (Rs): 10


Company rating grid

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Earnings Growth

RoA Progression

B/S Strength

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Karur Vysya Bank Sensex


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20

40

60

80

100

Jun‐12 Sep‐11 Dec‐11 Mar‐12



CMP: Rs469

Upside: 13.1%

November 12, 2012

Research Analyst: Bhavna Sinyal Rajiv Mehta

[email protected]

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


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)


Taxes (1,457) (1,302) (2,298) (2,733)

Net profit 4,156 5,017 5,625 6,690


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


Equity + Total liabilities

282,248 376,349 461,033 566,246


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


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


Sensex: 18,684

52 Week h/l (Rs): 116/62


6m Avg vol (‘000Nos):

4,528

Bloomberg code: SCS.IN

BSE code: 500376

NSE code: SATYAMCOMP

FV (Rs): 2


Company rating grid

Low High

1 2 3 4 5

Earnings Growth

Cash Flow

B/S Strength

Valuation appeal

Risk

Share price trend

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160


Mahindra Satyam Sensex


0

20

40

60

80

100

Sep‐11 Dec‐11 Mar‐12 Jun‐12

Promoters FIIs Others


CMP: Rs108

Upside: 19.4%

November 12, 2012

Research Analyst:

Aniruddha Mehta [email protected]

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


Revenue 51,450 63,956 77,414 84,327


Depreciation (1,847) (1,577) (1,842) (2,135)


Other income 2,942 4,189 2,903 3,269


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


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


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 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


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


OPM 8.8 16.0 21.2 19.9

EBIT margin 11.0 20.1 22.6 21.2


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


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



Du Pont Analysis Y/e 31 Mar FY11 FY12 FY13E FY14E

Tax burden (x) 0.89 0.94 0.73 0.74


EBIT margin (x) 0.11 0.20 0.23 0.21

Asset turnover (x) 0.88 0.98 0.98 0.88


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



Bloomberg code: NBCC IN

BSE code: 534309

NSE code: NBCC

FV (Rs): 10


Company rating grid

Low High

1 2 3 4 5

Earnings Growth

Cash Flow

B/S Strength

Valuation appeal

Risk

Share price trend

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Apr‐12 Jun‐12 Aug‐12 Oct‐12

NBCC Sensex


85

90

95

100

Jun‐12 Sep‐12



CMP: Rs142

Upside: 39.4%

November 12, 2012

Research Analyst: Kalpit Oza

[email protected]

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


Revenue 31,461 34,477 38,614 44,406


Depreciation (32) (20) (21) (23)

Interest expense (12) (19) ‐ ‐

Other income 857 1,403 1,500 1,500


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


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 ‐ ‐ ‐ ‐


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



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


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



OPM 4.2 4.3 4.6 5.0

EBIT margin 6.8 8.3 8.4 8.3


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


Cash EPS 16.4 15.5 18.3 20.8


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 (%)


Tax payout 32.4 35.1 33.0 33.0

Liquidity ratios



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


EBIT margin (x) 0.07 0.08 0.08 0.08

Asset turnover (x) 1.24 1.20 1.12 1.07


RoE (%) 24.1 25.4 24.5 23.0

Sector: Alcoholic Beverages


Sensex: 18,684

52 Week h/l (Rs): 144/192



Bloomberg code: RDCK IN

BSE code: 532497

NSE code: RADICO

FV (Rs): 2


Company rating grid

Low High

1 2 3 4 5

Earnings Growth

Cash Flow

B/S Strength

Valuation appeal

Risk

Share price trend

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Nov‐11 May‐12 Nov‐12

Radico Sensex


0

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40

60

80

100


Promoters FIIs Others


CMP: Rs127

Upside: 14.0%

November 12, 2012

Research Analyst:

Bhavesh Gandhi [email protected]

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


Revenue 9,965 11,439 12,724 14,316


Depreciation (271) (329) (329) (350)


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



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


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 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


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


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


OPM 15.0 15.0 16.0 16.8

EBIT margin 13.3 14.0 15.2 16.0


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


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 (%)


Tax payout 26.8 23.4 26.0 26.0

Liquidity ratios

Debtor days 117 111 114 114



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


EBIT margin (x) 0.13 0.14 0.15 0.16

Asset turnover (x) 0.77 0.76 0.74 0.77


RoE (%) 11.7 11.3 11.3 13.1

Sector: Auto Component


Sensex: 18,684

52 Week h/l (Rs): 477 / 349

Market cap (Rscr) : 535


Bloomberg code: SWE IB

BSE code: 500407

NSE code: SWARAJENG

FV (Rs): 10


Company rating grid

Low High

1 2 3 4 5

Earnings Growth

Cash flow

B/S Strength

Valuation appeal

Risk

Share price trend

75

95

115


Swaraj Eng Sensex


‐

20

40

60

80

100




CMP: Rs431

Upside: 27.1%

November 12, 2012

Research Analyst: Prayesh Jain Naman Jain

[email protected]

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


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



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


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


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


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



OPM 16.7 15.5 15.6 15.6

EBIT margin 17.7 17.2 16.3 16.4


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


Cash EPS 38.6 46.0 54.2 62.8


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 (%)


Tax payout 32.0 31.6 31.0 31.0

Liquidity ratios




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


EBIT margin (x) 0.18 0.17 0.16 0.16

Asset turnover (x) 1.90 1.89 1.77 1.74


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 [email protected] or [email protected] For Sales and Account related information, write to customer care: [email protected] or call on 91‐22 4007 1000

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