on high on returns recommendationsbreport.myiris.com/ksbl/stabania_20130228.pdffebruary 28, 2013...

February 28, 2013

Karvy Top Picks Institutional Equities

India Research

Stock Recommendations

Company Reco TP Upside

(Rs) (%)

ACC BUY 1,602 23

Bajaj Auto BUY 2,460 24

CESC BUY 366 27

Cipla HOLD 405 12

Dr. Reddys BUY 2,170 23

HDFC Bank HOLD 685 5

ICICI Bank BUY 1,520 43

ITC BUY 320 10

JK Lakshmi BUY 200 59

Jyothy Labs BUY 210 34

Kolte‐Patil Deve BUY 180 84

KVB BUY 600 26

M&M BUY 1150 28

Maruti Suzuki BUY 2,022 34

Oil India BUY 610 16

Page Ind BUY 3,861 18

SBI BUY 2,870 31

UltraTech BUY 2,300 21

V‐Guard BUY 558 16

Source: Karvy Institutional Research

Analysts Contact

R. Murali Krishnan

022 6184 4301

[email protected]

Institutional Research

022 6184 4000

High On quality ‐ high on returnsOur top picks are meticulously selected from large‐caps and quality mid‐

caps within our coverage universe. Whilst stock selection is supported by

moderate economic recovery they are best in class in terms of earnings,

economies of scale and positioning relative to their respective sectors and

the broader Benchmark indices.

Restrained pickup in economic activity expected in FY14

Monetary Policy easing is likely to play a key role in moderate revival of

economic activity in 2HFY14. We forecast Repo rate cut to an extent of 125‐

150bps during FY14 which should stimulate the investment cycle from

2HFY14. Ease in interest rates and fiscal consolidation would further boost

private investments. We estimate FY14 GDP growth to moderately expand

by 30bps YoY to 5.7% impacted by slowdown in Services sector. Due to

sluggish demand for exports, trade sector is expected to weigh heavily on

performance in Services sector. Slow and uncertain pickup in global economy

is expected to continue to hamper the growth on the domestic front.

However, strong focus on fiscal consolidation in FY14 is likely to maintain

economy in the slowdown phase.

Twin deficits risks to moderate in FY14

In this budget, steps are likely to be taken for fiscal consolidation by cutting

down the revenue expenditure. This is expected to lower the probability of

sovereign rating downgrades. Government is likely to take steps in lowering

the CAD gap by providing stimulus to the export sensitive sectors and

curbing imports in valuables. We expect the risks pertaining to twin deficits

to be lowered in the FY14 as compared to the current year.

Karvy top picks universe encapsulates the consumption theme

We prefer top down stock selection approach in the large cap space and

bottom up stock picking in the mid‐ cap space. Our stock selection is backed

with strong fundamentals, superior corporate governance and a steady

management track record which has helped consistently deliver strong

growth/ shown resilience in earnings and stock price performance. Large

caps companies that are comfortably leveraged and attractively valued

would be our preferred play. Average FY15E P/E of the mid‐cap stocks is ~

10x which is at a 18% discount to the BSE Sensex P/E of 12.3x.

Our Recommendations

Our high‐conviction sectors from a relative valuations perspective from our

large‐cap portfolio are Automobiles, Banking, Consumer Durables and Building

Materials. Amongst Mid‐Cap our high convictions picks are largely end‐user

consumption driven.

Risks to our call

In our view the predominant risks to the market are: 1) elevated interest rates and

RBIʹs exit policy on hard policy rates, 2) global economic recovery, and 3)

consequential flows into Emerging Markets.

2

Economy

Economy

Persistent slowdown in IIP

IIP in Q3FY13 witnessed an uptick after 5 consecutive quarters of the downhill

performance mainly due spike in Oct’12 numbers. Uptick in October IIP reading

was mainly driven by the late Diwali effect. We expect Jan’13 IIP to show tad

positive growth as compared to decline in production growth in last two months.

This is reflected by 8.0% YoY growth in auto production and 5.9% growth in

electricity generation for month of January. Commercial vehicles, major

component in capital goods sector, plunged for third consecutive month by more

than 20.0% YoY; indicating that capital goods sector is expected to continue to

decline in Jan’13

On an average IIP in FY13 is likely to remain in range of 0.5%‐1.2%. Observing

the trend of the lagged relation between IIP and persistent high inflation, IIP is

expected to remain sticky and below 5.0% in the Q4FY13

GDP growth expected to moderate to 5.7% in FY14 from

5.3% in FY13

We estimate FY13 GDP at 5.3% which is expected to be largely driven by

weakness in Services sector. Services sector is estimated to grow by 6.4% as

compared to 8.9% growth in FY12. Due to sluggish demand for exports, trade

sector is expected to weigh heavily on performance in Services sector. However

our estimate is higher than CSO estimate of 5.0% based on our slightly positive

outlook in the Industry sector as compared to CSO. CSO estimates Industry at

3.1% YoY while we estimate it at 4.5%

While fiscal consolidation and global slowdown is likely to continue to adversely

impact the economic activity. We expect FY14 growth to moderately improve to

5.7% mainly driven by ease in monetary policy. Moderate improvement in

H2FY14 is expected as impact of monetary policy transmission is likely to be

witnessed in second half

GDP expected to slow down to 5.3%

(%) FY12 FY13

Real GDP 6.5 5.3

Agriculture 2.8 2.1

Industry 3.4 4.5

Services 8.9 6.4

Nominal GDP 15.0 13.1

Source: CSO, Karvy Institutional Research

Receipts side of the government balance sheet

Our expectation of Net Tax Revenue is optimistic on back of assumption of

nominal GDP growth of 13.1%

Service tax revenue expected to be higher than budgeted on back of higher

incidence of tax and widening tax base. Service tax imposed on railway and

passenger freight from Oct’12 onwards is expected to boost the collections in

the subsequent period

Analysts Contact

Kruti Shah

022 ‐ 6184 4320

[email protected]

3

Economy

Budgeted increase of 29.0% YoY in Excise duty is highly optimistic with

average IIP growth of 0.8% in first nine months of FY13. We have projected

excise collection to increase by less than half the estimate

With lukewarm response of 2G spectrum sale government was able to fetch

only INR94.1bn from B.E. of INR400bn. While government is able to garner

only INR81.8bn of disinvestment proceeds for the first nine months against the

target of INR300.0bn

Revenue Budget Expectation V/S Our Expectations

(Rs Cr) BE FY13 YoY (%) Our Exp Absolute Diff% of B.E. YoY

Net Tax Revenue 771,071 20.1 734,503 (36,568) 95.3 14.4%

Corporate Tax 373,227 13.9 363,725 (9,502) 97.5 11.0%

Income Tax 195,786 13.9 195,083 (703) 99.6 13.5%

Customs 186,694 22.0 168,300 (18,394) 90.1 10.0%

Excise Duty 194,350 29.0 171,793 (22,557) 88.4 14.0%

Service Tax 124,000 30.5 126,350 2,350 101.9 33.0%

Non Tax Revenue 164,614 32.0 139,520 (25,094) 84.8 11.9%

Other Non Tax Revenue 94,094 76.3 69,000 (25,094) 73.3 50.0%

Source: India Budget, Karvy Institutional Research

Fiscal Targets

Fiscal deficit is expected at 5.9% of GDP, with the assumption of Nominal GDP

growth of 13.1%, as against budget expectation of 5.2%. The shortfall in revenue

side of the balance sheet is likely to push the deficit higher. However Govt. has

curbed planned expenditure to the extent of INR930bn which is likely to cover the

shortfall on revenue front

Fiscal Deficit Target FY13

Budget Estimates Karvy Estimates

Fiscal deficit 5.2% 5.9%

Primary deficit 1.9% 2.5%

Revenue Deficit 3.5% 4.2%

Source: India Budget, Karvy Institutional Research

Currency under pressure

With the upcoming budget, pressure on rupee is expected to build in along with

persistent high twin deficits and no major policy actions taken to tackle the

burgeoning deficits. Pressure on foreign exchanges reserves is also in turn likely to

impact rupee liquidity. We expect INR to hover in the band of 54‐58 in the near

term

Tight Liquidity conditions

Currently, liquidity position is tight as witnessed by LAF remaining on an average

above 1.0% of NDTL in month of February. Liquidity is likely to further tighten in

Mar’13 due to seasonality and reduction in government plan expenditure in the

last quarter. Call rates are hovering above Repo rate while short term t‐bills have

eased down after the rate cut in Jan’13. Yield curve is slightly upwards slopping as

compared to flattish curve observed in Jan’13

4

Economy

Top Picks’ Price Performance

CMP Mkt Cap Absolute Return (%) Relative to Sensex Return (%)

Company (Rs) Rs bn 1m 3m 6m 12m YTD 1m 3m 6m 12m YTD

ACC LTD 1,298 244 ‐2.1 ‐6.1 ‐3 2.4 ‐9.3 3.3 ‐8.7 ‐9.9 ‐3.7 ‐7.2

BAJAJ AUTO LTD 1,922 556 ‐7.6 5.5 12.3 9 ‐9.8 ‐2.2 2.9 5.4 2.9 ‐7.7

CESC LTD 287 36 ‐13.7 2.7 ‐9 12.1 ‐9.6 ‐8.3 0.2 ‐15.9 6 ‐7.5

CIPLA LTD 362 290 ‐9.1 ‐5.3 ‐1.4 15.2 ‐12.7 ‐3.7 ‐7.8 ‐8.3 9.1 ‐10.6

DR. REDDYʹS LABORATORIES 1,769 300 ‐9 0.5 5.5 8.6 ‐3.3 ‐3.6 ‐2 ‐1.4 2.5 ‐1.2

HDFC BANK LIMITED 651 1,545 ‐2.1 ‐1.6 9.2 24.1 ‐4 3.3 ‐4.2 2.3 18 ‐1.9

ICICI BANK LTD 1,064 1,224 ‐9.3 4.5 11.5 14.2 ‐6.5 ‐3.9 1.9 4.6 8.1 ‐4.4

ITC LTD 291 2,294 ‐3 1.3 9.7 38.9 1.4 2.4 ‐1.3 2.8 32.8 3.5

JK LAKSHMI CEMENT LTD 126 15 ‐14.1 ‐6 29.1 109.9 ‐22.3 ‐8.7 ‐8.5 22.2 103.8 ‐20.1

JYOTHY LABORATORIES LTD 157 25 4.5 ‐11.9 1.3 60.5 ‐3.7 9.5 ‐13.3 ‐6.7 51 ‐2

KARUR VYSYA BANK LTD 478 51 ‐9.4 3.8 18.9 24.3 ‐14.9 ‐4 1.2 12 18.2 ‐12.8

KOLTE‐PATIL DEVELOPERS LTD 98 7 ‐16.3 22 138.4 131.6 ‐13.7 ‐10.9 19.4 131.5 125.5 ‐11.6

MAHINDRA & MAHINDRA LTD 866 532 ‐4 ‐6.1 13.6 18.6 ‐7.1 1.4 ‐8.7 6.7 12.5 ‐5

MARUTI SUZUKI INDIA LTD 1,404 406 ‐12.2 ‐5.9 18 9.3 ‐5.8 ‐6.8 ‐8.4 11.1 3.2 ‐3.6

OIL INDIA LTD 525 315 ‐1.6 15.6 9.6 2.7 12.7 3.8 13 2.6 ‐3.4 14.8

PAGE INDUSTRIES LTD 3,285 37 ‐4.2 ‐1.9 9.7 33.6 ‐4.1 1.2 ‐4.4 2.8 27.5 ‐2

STATE BANK OF INDIA 2,198 1,475 ‐12.5 5.1 16.1 ‐0.3 ‐7.8 ‐7.1 2.5 9.2 ‐6.4 ‐5.7

ULTRATECH CEMENT LTD 1,903 522 ‐0.7 1.9 10.4 35.7 ‐4.2 4.7 ‐0.7 3.5 29.6 ‐2.1

V‐GUARD INDUSTRIES LTD 454 14 ‐11.2 ‐12.3 6.9 128.1 ‐10 ‐5.8 ‐14.9 ‐0.1 122 ‐7.8

NSE CNX NIFTY INDEX 5,761 38,605 (5.2) 2.2 7.0 6.1 (2.4)

S&P BSE SENSEX INDEX 19,015 31,739 (5.4) 2.6 6.9 6.1 (2.1)

Source: Bloomberg, Karvy Institutional Research

Karvy Top Picks

Cement

ACC

Bloomberg: ACC INReuters: ACC.BO BUY

Institutional Equities

India Research

Recommendation

CMP: Rs1,298

Target Price: Rs1,602

Upside (%) 23%

Stock Information Market Cap. (Rs bn / US$ mn) 244/4,507

52‐week High/Low (Rs) 1,545/1,104

3m ADV (Rs mn /US$ mn) 461/8.5

Beta 0.8

Sensex/ Nifty 19,015/5,761

Share outstanding (mn) 188

Stock Performance (%) 1M 3M 12M YTD

Absolute (2.1) (6.1) 2.4 (9.3)

Rel. to Sensex 3.5 (8.5) (3.5) (7.4)

Performance

Source: Bloomberg

Analyst Contact Rajesh Kumar Ravi

022 6184 4313

[email protected]

900

1,100

1,300

1,500

1,700

15,500

17,500

19,500

21,500

Feb‐12

Apr‐12

May‐12

Jun‐12

Jul‐12

Sep‐12

Oct‐12

Nov‐12

Jan‐13

Feb‐13

Sensex (LHS) ACC (RHS)

Steady Growth We expect ACC’s sales volume CAGR to remain lower at ~4% YoY in CY11‐

13E compared to 12% growth in CY11 due to its high exposure (~31%) in

over‐capacity southern region and lack of any near‐term capex by ACC,

while industry capacity is expected to grow by 6% in CY11‐14E. However,

we estimate that the ensuing supply discipline should more than

compensate for its lower volume growth. ACC should also benefit from its

pan‐India presence, strong distribution and logistics infrastructure,

increased brand visibility, large availability of low‐cost linkage coal (~50%).

We factor in EBITDA & PAT CAGR of 18% & 20%, respectively for CY11‐

14E period.

Installed Capacity to Grow by 4 mn MT to ~34 mn MT in CY15E: ACC is

increasing its capacity in the high demand potential eastern markets. At its

Jamul (Chhattisgarh) site, ACC’s 0.6 mn MT existing old clinker unit is being

replaced by a 2.8 mn MT unit. Meanwhile, the Company is adding

decentralized grinding units in the region to boost installed capacity to ~34 mn

MT by CY15E, which would entail total capex of ~Rs. 33 bn over next three

years. These expansions will increase ACC’s capacity in eastern market to 34%

from 24% currently. The Company should be able to meet these capex through

internal accruals and should remain a net cash company.

Outlook & Valuation

ACC should deliver strong EBITDA/PAT CAGRs of 17%/20% in CY11‐14E,

driven by 8% realization CAGR, which would help operating margin

expansion of 190 bps (despite 7% opex CAGR in the same period). With

EBITDA per MT rising to ~Rs. 1149 in CY14E, ACC’s RoE should expand to

~20% in CY13E. We re‐iterate our “BUY” recommendation on the stock with a

target price of Rs. 1,602 valuing the stock at 9.0x its Jun’14E EBITDA (implying

replacement cost of US$160 per MT).

Key Trigger: Recovery in cement prices in peak construction period (H1CY13).

Key Financials (Standalone)

Y/E Dec (Rs mn) CY10 CY11 CY12P CY13E CY14E

Net Sales 79,758 95,986 113,600 127,384 142,266

EBITDA 18,124 18,590 21,956 26,340 30,244

EBITDA margin (%) 22.7 19.4 19.3 20.7 21.3

PAT (Rs) 10,380 10,355 12,859 15,360 17,910

EPS (Rs) 55.2 55.1 68.4 81.7 95.3

YoY growth (%) (35.4) (0.2) 24.2 19.4 16.6

RoE (%) 16.6 15.2 17.4 19.2 20.0

RoCE (%) 14.8 14.1 15.9 17.5 18.5

P/E (x) 23.5 23.6 19.0 15.9 13.6

EV/EBITDA (x) 11.6 11.6 9.6 7.7 6.4

EV/mt (US$) 133 136 133 128 121

Source: Company, Karvy Institutional Research

Automobiles

Bajaj Auto

Bloomberg: BJAUT INReuters: BAJA.BO BUY


India Research

Recommendation

CMP: Rs1,922


Upside (%) 25%


52‐week High/Low (Rs) 2,229/1,423

3m ADV (Rs mn /US$ mn) 923/17.1

Beta 0.9




Absolute (3.7) 8.5 9.9 (7)

Rel. to Sensex (1.8) 1.2 2.3 (8)

Performance

Source: Bloomberg

Analyst Contact Mitul Shah

+91 22 6184 4312

[email protected]

1,1501,3501,5501,7501,9502,1502,350

15,500

17,500

19,500

21,500

Feb‐12

Apr‐12

May‐12

Jun‐12

Jul‐12

Sep‐12

Oct‐12

Nov‐12

Jan‐13

Feb‐13

Sensex (LHS) Bajaj Auto (RHS)

Rising Volume & Better Realisation in

Overseas Markets to Drive Growth

Bajaj Auto’s (BAL) strategy of launching new vehicle at regular interval has

been paying off well. The new products are not the refurbished old models,

but truly value‐added products with better features i.e. Pulsar 200NS,

Discover 125ST & Discover 100T. We expect the new launches would help

the Company in gaining domestic market share and strong double‐digit

export growth in FY14E. We expect 1.4%, 15% & 13.2% YoY volume growth

in FY13E, FY14E & FY15E, respectively and margin improvement of 220 bps

YoY in FY14E. Reducing dependence on domestic market and rising exports

would act as key growth driver, while leading to expansion of valuation

multiples for the Company.

Strong Exports & Favourable Currency – Key Profitability Driver: Strong

exports (1/3rd of total volume) provide BAL with a good hedge against

domestic slowdown. Again, the countries like Africa, Bangladesh & Egypt are

relatively less susceptible to global meltdown. Hence, shortfall from Sri Lanka

will be adequately compensated by growth in other markets. BAL has hedged

$700 mn in the range of Rs. 53‐62/$ for FY14, which is ~2/3rd of its net currency

exposure. Moreover, the current exchange rate provides better opportunity of

future hedging at higher rates, which has led us to earning upgrade by 8.4%

and margin expansion of 220 bps YoY to 20.6% in FY14E. BAL’s operating

margin is highest in the industry and its RoE & RoCE range between 40‐50%. It

generates ~ Rs. 30‐32 bn cash every year, with almost negligible yearly capex of

~Rs. 3‐4 bn.

Expect Healthy Return Ratio & Cash Flow in FY14E: High export realisation,

rising contribution of three‐wheeler segment and launch of high value

products (New 100T) would translate into 200 bps rise in margin & 43% RoE

in FY14E, which may lead to expansion in BAL’s multiple to 15x1 year

forward P/E. Its Cash & Cash Equivalent stood at Rs. 53.74 bn at Q3FY13‐end.

Outlook & Valuation

The stock currently trades at P/E of 12x FY15E. We reiterate our “BUY”

recommendation on Bajaj Auto with price target of Rs. 2,460 per share, valuing

stock at 15xFY15E and adding Rs. 60/share for stake in KTM.

Key Financials

Y/E Mar (Rs mn) FY11 FY12 FY13E FY14E FY15E

Net Sales 165,768 197,696 208,902 256,529 290,997

EBITDA 33,808 38,441 38,483 52,743 56,369

Adj. Net Profit 27,998 30,099 31,218 41,618 46,284

EPS (Rs.) 96.8 104.0 107.9 143.8 160.0

PER (x) 19.9 18.5 17.8 13.4 12.0

P/BV 11.3 9.2 7.3 5.4 4.1

EV/ EBITDA 16.5 14.1 14.1 10.3 9.8

ROCE (%) 51.5 46.1 39.5 41.6 36.0

ROE (%) 61.0 48.3 41.1 42.8 36.7


Power

CESC

Bloomberg: CESC INReuters: CESC.BO BUY


India Research

Recommendation

CMP: Rs287

Target Price: Rs366

Upside (%) 27%

Stock Information Market Cap. (Rs bn / US$ mn) 36/663

52‐week High/Low (Rs) 347/243


Beta 0.9




Absolute (13.7) 2.7 12.1 (9.6)

Rel. to Sensex (8.8) 0.2 5.6 (7.7)

Performance

Source: Bloomberg

Analyst Contact Rupesh Sankhe

022 6184 4315

[email protected]

200

250

300

350

15,500

17,500

19,500

21,500

Feb‐12

Apr‐12

May‐12

Jun‐12

Jul‐12

Sep‐12

Oct‐12

Nov‐12

Jan‐13

Feb‐13

Sensex (LHS) CESC (RHS)

Improvement in Retail Biz, Rerating for Power

Biz; Maintain “BUY CESC has outperformed Power Index ~18% since Jan’12 owing to tariff

approval and permitting FDI in multi‐brand retail. Still, we believe that

the stock is trading at attractive levels and trading below its book value.

We believe that CESC’s earnings from power business would decline

further, as its retail business has started showing positive EBITDA at the

store levels.

Regulated Biz with Assured RoE: Operating under regulated business

model provides CESC with strong and steady income flow. Currently, it

caters to Kolkata region with a capacity of 1,225MW having assured RoE at

15.5% & RoE of 15% on generation and distribution respectively. The equity

base of regulated business is likely to grow to Rs. 34 bn by FY14E from Rs. 26

bn in FY11. We continue to expect capacity at 2,450MW by FY14E.

Progress on Chandrapur & Haldia to Trigger Growth: Signing of FSAs with

Coal India will benefit CESC’s under‐construction projects mainly 600MW

Chandrapur (COD likely in May’13) & 600MW Haldia project (COD likely in

Jun’14). Currently, CESC has LoA of 5.6 MTPA with Coal India.

Retail Biz Likely to turnaround by FY15E: Spencer’s average sales have

increased from Rs. 1,087/sq ft in YTD 9M FY`12 to Rs. 1,230/ sq ft in YTD 9M

FY13, marking a growth of 13.15%. Same stores sales have increased from Rs.

1,124/sq ft in YTD 9M FY12 to Rs. 1,303/ sq ft in YTD 9M FY13, registering a

growth of 16%. Spencer`s Retail has made a store level EBITDA of Rs. 51/sq ft

per month in Q3FY13. We expect CESC to earn PAT by FY15E with the

rerating of its power business.

Outlook & Valuation

At the CMP, the stock is trading at 0.6xFY14 Adj.BV, which in our view does

not reflect the true strength in its core assured RoE power business, progress

on expansion and likely turnaround of retail business. At CMP of Rs. 287, the

stock is trading at FY13E & FY14E P/E multiples of 6.2x & 5.8x, respectively

and P/BV multiples of 0.5x for FY14E. We reiterate our “BUY”

recommendation on the stock with SOTP‐based target price of Rs. 366.

Key Financials (standalone)

Y/E Mar (Rs mn) FY10 FY11 FY12 FY13E FY14E

Net Sales 33,584 40,105 48,289 53,592 57,650

Op. Profits 8,727 11,315 13,232 14,292 15,160

OPM (%) 26.0 28.2 27.4 26.7 26.3

Adjusted Net Profit 4,233 4,781 5,543 5,879 6,225

YoY Gr. (%) 7.4 12.9 16.0 6.1 5.9

EPS (Rs) 33.7 38.1 44.1 46.8 49.6

RoE (%) 10.6 10.5 10.2 9.4 9.2

ROCE (%) 10.0 11.2 11.5 10.2 9.4

EV/EBIDTA (x) 6.5 5.6 5.3 6.1 6.4

PE (x) 8.5 7.6 6.5 6.2 5.8

P/B (x) 0.85 0.75 0.60 0.56 0.52


Pharmaceuticals

Cipla

Bloomberg: CIPLA INReuters: CIPL.BO HOLD


India Research

Recommendation

CMP: Rs362

Target Price: Rs405

Upside (%) 12%



3m ADV (Rs mn /US$ mn) 842/15.6

Beta 0.5




Absolute (9.1) (5.3) 15.2 (12.7)

Rel. to Sensex (3.9) (7.6) 8.6 (10.8)

Performance

Source: Bloomberg

Analyst Contact Rahul Sharma

022 ‐ 6184 4310

[email protected]

250

300

350

400

450

15,500

17,500

19,500

21,500

Feb‐12

Apr‐12

May‐12

Jun‐12

Jul‐12

Sep‐12

Oct‐12

Nov‐12

Jan‐13

Feb‐13

Sensex (LHS) CIPLA (RHS)

Upsides priced in

Cipla is in the midst of makeover with the changes in the senior

management for key geographies. Sizeable ARV business, which is being

secured, would negatively impact the margins, going forward. We reiterate

our “HOLD” recommendation on the stock.

Launch of Combination Inhalers: Exploring High Margin Opportunities:

Cipla has launched Dymista, and as per industry data, the prescriptions for

Dymista have doubled in Jan’13, which could be a meaningful opportunity

for the Company, as we have factored US$35 mn in FY14E. The Company

has also roped in Franz Peters (ex‐Head at Teva Pharma) to spearhead the

inhaler opportunity in the European markets. The Company is hopeful of

launch of Seretide in Europe in next 1 to 1½ year.

Focus on Profitable Business to Remain Muted; Scale‐up in Indore SEZ

Remains a Mirage: Going forward, Cipla’s plan to defocus on low profitable

business will remain muted, as the Company has received huge orders for

ARV products in South Africa. The 9 month figures of Indore SEZ have been

disappointing with revenues of Rs. 4 bn, while the overheads costs is

expected to plague the Company.

Outlook & Valuation

Contraction in core EBDITAM in FY14E on back of higher cost pressures on

gross margins, increased staff and overheads we downgrade our EDBITAM

to 23.8%. We remove the option value of Rs 20 for Medpro and factor

additional other income due to deferment of Medpro acquisition. We

upgrade our EPS by 3.3 % to Rs 19.9 and downgrade our price target from Rs

426 to Rs 405 based on 20.3x FY 2014E. We reiterate our HOLD rating on the

stock.

Key Financials


Net sales 56,057 63,194 69,775 82,887 96,815

EBITDA 13,106 12,709 15,819 22,495 22,996

Net Profit 9,733 9,497 11,240 16,105 16,000

EPS(Rs) 12.1 11.8 14.0 20.1 19.93

EPS growth (%) 25.7 ‐2.4 18.4 43.3 ‐0.6

EBITDA margin (%) 23.4 20.1 22.7 27.1 23.8

PER(x) 29.8 30.6 25.8 18.0 18.1

EV/EBITDA (x) 21.9 22.7 17.7 12.2 11.7

RoCE (%) 21.5 17.2 19.1 25.5 21.6

RoE (%) 21.8 15.8 16.3 20.1 17.2


Pharmaceuticals

Dr. Reddyʹs Lab

Bloomberg: DRRD INReuters: REDY.BO BUY


India Research

Recommendation

CMP: Rs1,769


Upside (%) 23%


52‐week High/Low (Rs) 1,970/1,526

3m ADV (Rs mn /US$ mn) 791/14.6

Beta 0.7




Absolute (9) 0.5 8.6 (3.3)

Rel. to Sensex (3.8) (2) 2.4 (1.2)

Performance

Source: Bloomberg

Analyst Contact Rahul Sharma

022 ‐ 6184 4310

[email protected]

1,4001,5001,6001,7001,8001,9002,000

15,50016,50017,50018,50019,50020,500

Feb‐12

Apr‐12

May‐12

Jun‐12

Jul‐12

Sep‐12

Oct‐12

Nov‐12

Jan‐13

Feb‐13

Sensex (LHS) Dr. Reddy's (RHS)

Strong Revenue Visibility

Dr. Reddy’s Laboratories (DRL) has been under pressure on account of

margins contraction. However, with several growth engines – i.e. scale‐up

in low competition opportunities, launch of two niche products in the US,

decent traction in domestic formulations, PSAI lock‐ins in place and among

the low impact companies due to the New Pricing Policy – we believe that

the Company will gain its pride of place in the foreseeable future.

New Launches to Address Contraction in EBDITA Margin: The Company’s

contraction in EBDITA margin has been on account of no new launches in the

US markets and margin pressure in the API space, which the Company

would address with new launches. The launch of two oncology injections is

expected in FY14E – which have not been factored – are expected to give upside

in excess of US$50 mn.

Launch of Propecia: Dr. Reddy’s Labs’ current market share during

exclusivity is 70%, which would enable the Company to get revenues to

the tune of Rs. 756 mn in Q4FY13E and higher margins.

Atorvastatin’s market share has increased to 15% in Q4FY13E from 8‐

14% in the previous quarter. This advantage in market share ramp‐up

should also help in FY14 numbers.

Metaprolol’s market share has gone up from 2‐2.5% in Q3FY13 to 15% in

Jan’13, which would enable the Company to get better gross margins in

Q4FY13E. We expect revenues to ramp up to US$36 mn in FY14 from this

product.

Outlook & Valuation

Better traction in domestic formulations and PSAI segments coupled with

forward covers of US$600 mn at Rs. 55‐57 would aid margins. On the back of

ramp‐up in niche opportunities and regular launches of complex products,

we reiterate our “BUY” recommendation on the stock with a price target of

Rs. 2,170 per share based on 19.7x FY 2014E (EPS RS 109.9) – including an

option value of Rs. 2 for Propecia.

Key Financials


Net sales 70,277 74,692 96,738 112,537 125,350

EBITDA 14,771 16,498 24,507 25,788 28,961

Net Profit 1,068 10,762 14,263 15,085 18,660

EPS(Rs) 6.3 63.6 84.1 88.8 109.9

EPS growth (%) N.A 905.3 32.2 5.6 23.7

EBITDA margin (%) 21.0 22.1 25.3 22.9 23.1

PER(x) 279.1 27.8 21.0 20.5 16.6

EV/EBITDA (x) 20.6 19.3 12.9 12.5 10.7

RoCE (x) 4.0 19.4 23.8 19.8 21.3

RoE (%) 2.5 24.2 27.6 23.7 24.2


Banking

HDFC Bank

Bloomberg: HDFCB INReuters: HDBK.BO HOLD


India Research

Recommendation

CMP: Rs645

Target Price: Rs685

Upside (%) 5%

Stock Information Market Cap. (Rs bn / US$ mn) 1,545/28,562


3m ADV (Rs mn /US$ mn) 1,861/34.4

Beta 1.0


Share outstanding (mn) 2,372


Absolute (2.1) (1.6) 24.1 (4)

Rel. to Sensex 3.5 (4.1) 17.0 (2)

Performance

Source: Bloomberg

Analysts Contact

Hatim Broachwala, CFA

022‐6184 4329

[email protected]

Paresh Jain

022 6184 4324

[email protected]

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600

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Apr‐12

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Jun‐12

Jul‐12

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Nov‐12

Jan‐13

Feb‐13

Sensex (LHS) HDFC Bank (RHS)

Quality at a Price

HDFC Bank has one of the best banking models with superior deposit

franchise and relatively un‐risked lending, which is getting reflected in its

asset quality.

Superior Asset Quality – Credit Cost Likely to be Higher: HDFC Bank’s

asset quality has shown tremendous resilience in last 2‐3 years, while its

slippages have declined to 1% in FY12, which is better than the reasonable

expectations by its Management. The Bank’s gross NPA remains stable at 1%

with no major restructured asset. We believe that it would be very difficult for

the Bank to further improve on this front, given its composition of its loan

book. Hence, we factor higher credit cost going ahead, assuming it does not

heavily utilizes its floating provision.

Sustaining Business Momentum: HDFC Bank’s credit growth remains

strong and it continues to grow 4‐5% above the industry’s growth rate.

However, the growth has off late come more from the Retail Segment,

whereas the Corporate Segment has relatively slowed down. The Bank’s

CASA – which used to be >50% – has declined to ~45% in Q3FY13.

Best‐in‐Class NIMs: Despite difficult conditions, backed by its strong deposit

franchise, the Bank has been able to maintain the NIMs (calculated) of 4.5%,

which is best in the industry. Its cost of funds is one of the lowest at 5.4%. Its

Management has guided to maintain its NIMs at current levels. Despite

decline in CASA, the Bank has been able to maintain its NIMs on the back of

shift in portfolio mix from corporate to retail.

Outlook & Valuation

At the CMP, the stock trades at 20.2x & 17.6x FY14E & FY15E earnings, and at

3.7x & 3.2x P/ABV FY14E & FY15E, respectively. Based on its historical mean

valuation and implying 3.4x P/ABV FY15E, we reiterate our “HOLD”

recommendation on HDFC Bank with target price of Rs. 685 per share.

Key Financials


Net interest income 1,05,431 1,22,967 1,50,409 1,75,843 2,02,672

Operating Profit 77,254 89,505 1,12,340 1,29,328 1,46,609

PAT 39,264 51,671 65,982 75,065 86,086

EPS (Rs) 16.9 22.0 28.1 32.0 36.7

ABV (Rs) 111.0 132.1 154.1 176.5 201.7

P/E (x) 38.2 29.3 22.9 20.2 17.6

P/ABV (x) 5.8 4.9 4.2 3.7 3.2

Gross NPA (%) 1.0 1.0 1.0 1.2 1.3

Net NPA (%) 0.2 0.2 0.3 0.3 0.3

ROE (%) 16.7 18.7 20.3 19.7 19.4

ROA (%) 1.6 1.7 1.8 1.7 1.6


Banking

ICICI Bank

Bloomberg: ICICIBC INReuters: ICBK.BO BUY


India Research

Recommendation

CMP: Rs1,071


Upside (%) 43%


52‐week High/Low (Rs) 1,232/767

3m ADV (Rs mn /US$ mn) 3,324/61.5

Beta 1.3




Absolute (9.3) 4.5 14.2 (6.5)

Rel. to Sensex (4.1) 1.9 7.6 (4.5)

Performance

Source: Bloomberg

Analysts Contact


022‐6184 4329

[email protected]

Paresh Jain

022 6184 4324

[email protected]

500

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900

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Jan‐13

Feb‐13

Sensex (LHS) ICICI Bank (RHS)

On a Strong Footing

ICICI Bank has magnificently restructured its balance sheet both on the

liability as well as the asset fronts. As a result, its profitability parameters

are now comparable to peers. We believe its substantial valuation discount

to its peers is unjustified.

Substantial Improvement in Asset Quality: There has been substantial

improvement in the asset quality of the Bank with gross NPA improving over

180 bps in last ten quarters vis‐à‐vis industry trend of further deterioration. Its

restructured book at just 1.5% of loan book seems to be at comfortable zone.

As per the Bank’s Management, the credit cost – including restructuring related

provisioning – would remain within 0.75% of loan book in FY13E.

Revival in Balance‐sheet Growth: Picking up the pace, the Bank’s balance‐

sheet growth has started growing marginally above the industry compared to

flattish numbers reported last year. Though the Bank’s retail credit has shown

the initial signs of revival, it has shifted significantly away from the unsecured

retail credit. It has now built a strong CASA base of 40.9% in Q3FY13 from

28.7% in FY09.

Improved NIMs – To Sustain at Current Levels: NIMs for the Bank has

improved by 50bps over last three years to 3.1%, with push from domestic as

well as international segment. Its Management has guided stable NIMs ahead.

We believe with CASA at comfortable levels, it won’t be very difficult for the

Bank to maintain the NIMs at current levels.

Outlook & Valuation

At the CMP, the stock – after adjusting for subsidiaries – trades at 11.7x & 9.7x

FY14E & FY15E earnings, and at 1.4x & 1.3x P/ABV FY14E & FY15E,

respectively. Based on 15% premium to historical mean valuation gap to

HDFC Bank implying 2x P/ABV FY15E for parent & Rs. 200 for its stake in

subsidiaries, we reiterate our “BUY” recommendation on ICICI Bank with

target price of Rs. 1,520 per share.

Key Financials


Net interest income 90,169 107,342 137,599 153,966 176,069

Operating Profit 90,476 103,866 130,525 140,610 166,584

PAT 51,514 64,653 82,264 85,553 103,251

EPS (Rs) 44.7 56.1 71.4 74.2 89.6

ABV (Rs) 457.4 498.5 555.7 606.2 663.3

P/E (x) 19.5 15.5 12.2 11.7 9.7

P/ABV (x) 1.9 1.7 1.6 1.4 1.3

Gross NPA (%) 4.5 3.6 3.2 2.7 2.5

Net NPA (%) 1.1 0.7 0.7 0.5 0.6

RoE (%) 9.7 11.3 13.1 12.4 13.7

RoA (%) 1.3 1.5 1.6 1.5 1.6

Source: Company, Karvy Institutional Research, Valuation after adjusting for subsidiaries

FMCG

ITC

Bloomberg: ITC INReuters: ITC.BO BUY


India Research

Recommendation

CMP: Rs291

Target Price: Rs320

Upside (%) 10%



3m ADV (Rs mn /US$ mn) 2,206/40.8

Beta 0.8




Absolute (3) 1.3 38.9 1.4

Rel. to Sensex 2.6 (1.2) 30.9 3.6

Performance

Source: Bloomberg

Analyst Contact Naveen Trivedi

022‐6184 4316

[email protected]

180

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Jan‐13

Feb‐13

Sensex (LHS) ITC (RHS)

Dominant Player in Cigarette Biz with Better

Prospects in Non‐cigarette Biz

ITC is a dominant player in cigarette business – with >80% market share –

that accounts for ~44% of net sales and >80% of PBIT of the Company. It has

maintained 16‐18% growth in cigarette business in past several quarters

despite pressure on volume. We believe ITC would sustain similar growth in

cigarette business, going forward. Besides, ITC’s non‐cigarette business –

with ~70% contribution of FMCG & Agribusiness – is expected to grow by

19% CAGR in FY12‐15E compared to 17% CAGR recorded in FY09‐12 period.

Cigarette Segment to Sustain Momentum: ITC’s dominance in cigarette space

would continue due to extensive portfolio, large distribution network, and

brand loyalty amid suitable backward integration. Strong pricing power

coupled with foray into 64mm segment would aid ITC in maintaining healthy

growth momentum, unless there are some unfavorable governmental

guidelines/policies on tobacco consumption. We believe that growth in

cigarette business would drive ITC’s overall profitability, with rise in

PBIT/stick to 109 paisa by FY15E from ~80 paisa in FY12P.

Non‐Cigarette Biz to grow at 19% CAGR in FY12‐15E: We expect ITC’s non‐

cigarette business to show 19.1% CAGR in FY12‐15E vs. 16.7% CAGR in

FY09‐12. Its FMCG business – which has grown 15x in last 8 years – is likely to

clock ~21% CAGR in FY12‐15E owing to better foothold of the existing

portfolio, foray into newer segments and aggressive marketing strategy.

Meanwhile, we expect ITC to clock 14% & 21% CAGR in Paperboard &

Agribusiness segments, respectively in FY12‐15E period. We expect

non‐cigarette business to contribute ~25% to ITC’s total PBIT in FY15E,

compared to 19% in FY12.

Outlook & Valuation

We use DCF valuation instead relative valuation, as relative valuation seems to

be not feasible without any apparent comparison for ITC. Our DCF valuation

assumes 18% and 16% FCF growth during first and second 5 years post FY15E.

We reiterate our “BUY” recommendation on the stock with target price of Rs.

320 per share.

Key Financials


Net Revenues 222,737 261,795 302,334 355,033 413,141

EBIDTA 74,208 88,376 105,234 124,721 144,659

EBITDA Margins (%) 33.3 33.8 34.8 35.1 35.0

Adjusted Net Profit 49,558 62,580 73,542 88,074 102,261

EPS (Rs) 6.3 8.0 9.4 11.3 13.1

YoY Growth (%) 20.5 26.3 17.5 19.8 16.1

RoE (%) 30.1 32.2 32.7 33.7 33.7

RoCE (%) 44.2 44.7 46.0 46.9 46.9

P/E (x) 46.1 36.5 31.0 25.9 22.3

EV/EBITDA (x) 29.8 24.9 20.9 17.4 14.8

P/BV (x) 13.8 11.7 10.2 8.7 7.5


Cement

JK Lakshmi Cement

Bloomberg: JKLC INReuters: JKLC.BO BUY


India Research

Recommendation

CMP: Rs126

Target Price: Rs200

Upside (%) 59%




Beta 1.0




Absolute (14.1) (6) 109.9 (22.3)

Rel. to Sensex (9.2) (8.3) 97.8 (20.6)

Performance

Source: Bloomberg


022 6184 4313

[email protected]

50

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Feb‐13

Sensex (LHS) JK Lakshmi Cement

Fresh Ambition, Fresh Upside

Doubling of its cement capacity to 10.5 mn MT during FY13‐15E period by

JK Lakshmi Cement (JKLC) should drive its industry leading volume

CAGR 13% in FY12‐15E period, while strong demand and ensuing supply

discipline would help its realization CAGR of ~6.5% during this period.

Subsequently, fuel cost pressure is expected to remain moderate on

account of ~100% captive power sources for cement production and

increased usage of pet coke, which has seen price moderation over the last

one year.

Capacity set to double: JKLC’s capacity is set to rise by 5.2 mn MT by

FY15E/early FY16E. These expansions are Brown‐field expansion of 0.5 mn

MT in north by FY14E, Green‐field expansion of 2.7 mn MT in east by FY15E,

Green‐field expansion of 0.5 mn MT in west by FY15E and revival of Udaipur

Cement Works’ 1.5 mn MT capacity in north by FY15E/ early FY16E.

Fairly Comfortable Balance Sheet despite Large Capex: Despite doubling of

capacity in three year period, we do not expect JKLC’s balance sheet to

unduly stretch, as strong operating cash flow of Rs. 14 bn would fund most

of its capex of ~Rs. 17 bn during FY13‐15E period. Hence, we expect net debt‐

equity to peak out in FY14E.

Outlook & Valuation

JKLC currently sells ~90% of its cement in the northern and western regions,

where demand is expected to remain strong. Driven by strong volume and

price growths along‐with fuel/power cost efficiency, we expect EBITDA &

PAT CAGR of 29% & 39% during FY12‐15E period. Subsequently, JKLC’s

RoCE should expand by 500 bps driven by strong operating profit growths,

while its RoE is expected to remain flat owing to increase in near‐term capital

costs. At 5.2x its Sept’14E EBITDA, we arrive at a fair value of Rs. 200

(implied replacement cost of US$85 per MT, which is at ~50% discount to the

large cap cement companies). We recommend “BUY”.



Net Sales 26,162 32,567 38,924 44,002 50,131

EBITDA 6,288 9,388 11,287 12,391 14,051

EBITDA margin (%) 24.0 28.8 29.0 28.2 28.0

PAT (Rs) 2,109 3,850 4,399 5,062 6,245 EPS (Rs) 8.9 16.2 18.5 21.3 26.2

RoE (%) 12.9 20.3 19.7 19.4 20.3

RoCE (%) 8.9 13.6 15.3 16.4 18.5

P/E (x) 27.8 15.2 13.3 11.6 9.4

EV/EBITDA (x) 13.7 9.1 7.3 6.4 5.3

EV/MT (US$) 81.1 83.5 84.3 91.2 50.6


FMCG

Jyothy Laboratories

Bloomberg: JYL INReuters: JYOI.BO BUY


India Research

Recommendation

CMP: Rs157

Target Price: Rs210

Upside (%) 34%




Beta 0.7




Absolute 4.7 (11.5) 58.5 (3.5)

Rel. to Sensex 10.7 (13.7) 49.4 (1.4)

Performance

Source: Bloomberg


022‐6184 4316

[email protected]

60

110

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210

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Feb‐13

Sensex (LHS) Jyothy Lab (RHS)

Multiple Triggers to Unlock

Jyothy Laboratories (Jyothy) has come out well from the phase marked

with great pressure in terms of acquisition of Henkel India (Henkel), slow

growth in core business owing to distribution restructuring and interest

obligation. On the back of distribution restructuring and its short‐term

adverse impact on performance, the stock has corrected by 20% in the past

4‐months. However, we believe the ensuing quarters’ better performance

would drive the stock in the near to medium term. As distribution

restructuring is over, Jyothy’s overall performance is expected to improve

substantially from Q4FY13 onwards, with which Jyothy’s valuation

discount compared to its peers would shrink further.

Expect Strong Sales Growth Traction: In core business, “Exo” has shown

strong ~50% growth in last four quarters vs. 30% growth in Jyothy’s

standalone business. We expect “Exo” to continue to show strong growth on

account of pan‐India launch plan by FY13‐end. Besides, we believe that

Jyothy Consumer (JCPL) – formerly Henkel – has added 6‐7 strong brands to

its portfolio. We see strong potential of these acquired brands and with

aggressive marketing efforts, we expect strong performance in FY14‐FY15E.

Anticipate Strong Operational Performance: Distribution restructuring

would save Jyothy’s operational cost by 600 bps – 400bps through

rationalization of distribution margin and 200bps saving by moving from

own depot to C&F. Its Management expects additional 200bps saving

through better raw material sourcing and packaging. We expect Jyothy

would initially invest large part of this saving through higher A&P, which

will boost its business. However, we expect Jyothy’s EBITDA margin would

expand by 200‐250bps in FY14‐15 period.

Outlook & Valuation

We value Jyothy on 19x P/E on 24‐month forward earnings. Our target P/E is

at 30% discount to its peers to recompense any delay in execution. We

reiterate our “BUY” recommendation on the stock with a target price of Rs.

210 per share.

Key Financials


Net Revenues 6,174 9,130 12,568 15,231 18,187

EBIDTA 727 842 1,628 2,302 2,848

EBITDA Margins (%) 11.8 10.2 13.0 15.1 15.7

Adjusted Net Profit 688 536 821 1,371 1,875

EPS (Rs) 4.3 3.3 5.1 8.5 11.6

% Growth (22.0) 10.7 38.3 67.0 36.7

RoE (%) 10.9 8.8 13.5 22.4 29.7

RoCE (%) 10.4 7.1 14.4 21.1 26.7

P/E (x) 36.6 46.9 30.6 18.3 13.4

EV/EBITDA (x) 30.9 35.8 18.4 12.7 10.1

P/BV (x) 4.0 4.1 4.1 4.1 4.0


Real Estate

Kolte Patil Developers

Bloomberg: KPDLReuters: KOLT.BO BUY


India Research

Recommendation

CMP: Rs98

Target Price: Rs180

Previous Target: Rs106

Upside (%) 84%



3m ADV (Rs mn /US$ mn) 139/2.62.6

Beta 1.0 1.0




Absolute (16.3) 22.0 131.6 (13.7)

Rel. to Sensex (11.5) 18.9 118.3 (11.8)

Performance

Source: Bloomberg

Analyst Contact Parikshit Kandpal

022‐6184 4311

[email protected]

0

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Feb‐13

Sensex (LHS) Kolte Patil Developers

This is what good looks like

The share price of Kolte Patil Developers (KPDL) has appreciated 64% since

our coverage dated 16.10.2012 outperforming the BSE Realty Index by 42%.

As highlighted in our note, “multiple triggers” have led to a partial

“multiple re‐rating” and over course of FY14‐15E we see further expansion

playing out. Despite a recent run‐up, we believe that the stock still offers

84% upside to reach our increased DCF‐based target of Rs. 180 per share (20%

discount to NAV of Rs. 225).

Multiple Triggers – Multiple Re‐rating: We see (i) residential sales of 6.5 mn

sqft – (Rs. 21 bn in value and Rs. 3.2 bn terms of profit) – over past 18 months

entering into revenue recognition throwing enormous surplus cash‐flows; (ii)

7‐8 mn square feet of new launches over next 12‐18 months providing visibility

beyond FY15E; and (iii) D/E – 0.2x leaving scope for future land acquisition to

replenish sales delivery. In true sense, KPDL is witnessing strong

transformation with recent talent acquisition (VP‐Marketing joining from

Prestige Estates, Head Business Development joining from HCC Realty),

Mumbai foray and Bangalore expansion, whilst in Pune the Company is

consolidating its market share beyond 11‐12% (3 mn sqft).

Focus on Strengthening Corporate Governance & Sharing Profits: We see

major corporate governance improvement with changes in Internal Auditors

and we believe that with growing size, the KPDL may change its statutory

auditors as well. Besides, the Company is one of few realty companies which

have a stated dividend policy of distributing 15‐25% of annual profits.

Strong Balance Sheet – Undemanding Valuation: Despite a strong balance

sheet D/E‐0.2x (Net debt Rs.800mn), valuation seems to be undemanding at

5.4x FY14EPS. KPDL has a very conservative approach to debt, which reflects

in strong PE partnership with ICICI Venture, IL&FS & Portman Holdings (3rd

largest US developer) with no guaranteed IRRs structure. Besides, KPDL’s new

land acquisitions have been largely Joint Developments Agreements (JDAs).

Outlook & Valuation

We value KPDL on NAV based target of Rs180 (giving a 20% NAV discount).

At CMP the KPDL trades at 5.4xFY14E EPS. We maintain our “BUY”

recommendation on the stock.

Key Financials


Net Sales 2,028.6 2,492.4 7,017.9 9,470.0 7,648.1

Growth % 37.4 22.9 181.6 34.9 ‐19.2

EBIDTA 845.7 677.1 1,774.1 2,711.1 2,625.5

EBIDTA margins % 41.7 27.2 25.3 28.6 34.3

PAT 479.1 340.8 939.5 1,334.7 1,228.1

EPS (Rs/share) 6.3 4.5 12.4 17.6 16.2

RoCE % 3.9 5.1 12.7 18.7 18.2

P/E(x) 15.8 20.9 8.0 5.4 6.0


Banking

Karur Vysya Bank

Bloomberg: KVB INReuters: KARU.BO BUY


India Research

Recommendation

CMP: Rs478

Target Price: Rs600

Upside (%) 26%




Beta 0.7




Absolute (9.4) 3.8 24.3 (14.9)

Rel. to Sensex (4.2) 1.2 17.2 (13.1)

Performance

Source: Bloomberg

Analysts Contact Paresh Jain

022 6184 4324

[email protected]


022‐6184 4329

[email protected]

300350400450500550600

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Feb‐13

Sensex (LHS) Karur Vysya Bank (RHS)

Riding High on Growth – Key Segments to

Boost Credit Growth

Karur Vysya Bank (KVB) has reported strong growth in balance sheet with

balanced profit growth of above 20% during FY10‐FY12 period. Managing

its asset quality watchfully, The Bank has reduced it NPAs over past few

years. Its profitability continues to remain superior to most of its peers. Business Growth to Surpass Industry Growth: The business growth of KVB

continues to remain above industry growth rate. Its loan book grew 34% in

FY12, while the overall banking industry grew by 18%. We expect the Bank

to continue its high growth momentum in FY12‐15E as well. The key

segments likely to contribute the credit growth for the Bank are: SME,

Agricultural & Personal Loans.

NIMs – Expected to Remain Stable: We believe KVB’s NIMs to remain

stable in the range of 3.1%‐3.2% in FY13E. Meanwhile, we expect yield on

advances to decline in H2FY13E owing to decline in policy rates, this is

expected to get offset by decline in cost of funds.

Impeccable Asset Quality: The Bank’s asset quality continues to remain

healthy and its Management doesn’t expect any negative surprise. We

believe that the Bank’s slippages would marginally increase, going forward,

as it will be difficult for the Bank to improve asset quality further.

Consequently, we expect its gross NPA & net NPA to show marginal uptick

from current levels of 1.3% & 0.4%, respectively. The Bank is currently

having a healthy provision coverage ratio of 75%. It has an outstanding

restructured loan book of Rs. 9 bn, which constitutes 3.3% of its loan book.

Outlook & Valuation

At CMP, the stock trades at 7.3x & 5.8x FY14E & FY15E earnings, and at 1.5x

& 1.3x P/ABV FY14E & FY15E, respectively. Based on 20% premium to its

mean valuation and implying 1.5x P/ABV FY15E, reiterate our “BUY”

recommendation on Karur Vysya Bank with target price of Rs. 600 per share.

Key Financials


Net Interest Income 7,669 9,171 11,693 15,040 18,316

Operating profit 5,628 6,995 8,065 11,081 13,648

PAT 4,156 5,017 5,888 7,506 9,365

EPS (Rs) 44.9 46.8 54.9 70.0 87.4

ABV (Rs) 222.7 246.8 285.0 335.4 402.2

P/E (x) 10.6 10.2 8.7 6.8 5.5

P/ABV (x) 2.1 1.9 1.7 1.4 1.2

Gross NPA (%) 1.3 1.3 1.3 1.4 1.6

Net NPA (%) 0.1 0.3 0.4 0.4 0.4

ROE (%) 22.3 20.8 20.2 22.1 23.1

ROA (%) 1.7 1.5 1.4 1.5 1.5


Automobiles

Mahindra & Mahindra

Bloomberg: MM INReuters: MAHM.BO BUY


India Research

Recommendation

CMP: Rs866


Upside (%) 33%



3m ADV (Rs mn /US$ mn) 1,167/21.6

Beta 1.1




Absolute 1.4 (4.3) 20.0 (3.6)

Rel. to Sensex 3.5 (10.7) 11.8 (4.6)

Performance

Source: Bloomberg


+91 22 6184 4312

[email protected]

5506507508509501,050

15,500

17,500

19,500

21,500

Feb‐12

Apr‐12

May‐12

Jun‐12

Jul‐12

Sep‐12

Oct‐12

Nov‐12

Jan‐13

Feb‐13

Sensex (LHS) M&M (RHS)

Stellar Performance of UVs & Tractors in FY15

Backed by General Elections; Maintain “BUY”Mahindra & Mahindra (M&M) has maintained undisputed leadership in

domestic UV segment, with its current market share standing at >45%,

which fell by 900 bps YoY to 47.5% in YTD’13, due to success of Ertiga,

Duster & other UVs. We expect M&M’s market share in UV segment to

decline further by 200 bps to 45.5% in FY15E. However, we observed a

strong positive co‐relation between PV sales and election period, with the

PV sales recording higher volume during the election year and a year prior

to that.

UV Segment to Record 31% CAGR; Diesel price Hike to have Trivial

Impact: The usage of UVs for election campaigning has increased over last

decade, which coupled with rising preference of SUVs over Sedan is expected

to result in high double digit CAGR of 31% in UV space over FY12‐FY15E. We

believe that, M&M will be the biggest beneficiary of outperformance in UV

space over next two years, despite losing some market share in the segment.

Its premium SUV i.e. XUV500 has been a runaway success and is considered

to be India’s most appealing vehicle, which has been developed and

manufactured indigenously. We believe that diesel price hike would have

marginal impact on PV sales in the near‐term, but would not have major

impact on buying behaviour of consumer.

Tractor Segment to Back on Track: We have also observed positive co‐

relation between tractor volume and election period. Farm segment always

benefits from election money‐flow, which coupled with relief to farmers from

government would result in strong demand for tractors in FY15E, which will

benefit M&M on volume and margin front as well, going forward.

Outlook & Valuation

Our FY13E, FY14E & FY15E EPS estimates stand at Rs. 54, Rs. 64.7 and Rs. 78,

respectively. We reiterate our “BUY” recommendation on M&M, while

maintaining our SOTP‐based target price of Rs. 1,150 per share, valuing

M&M’s core business at EV/EBIDTA of 8xFY15E to Rs. 902 and valuing

subsidiary to Rs. 305 per share, post taking 20% holding discount. We exclude

Rs. 57 per share as value erosion in other auto business.



Net Sales 234,434 318,526 411,488 489,909 579,293

EBITDA 34,375 37,698 48,757 58,501 70,835

Net Profit 25,220 26,439 33,813 40,425 49,094

EPS (Rs.) 42.0 43.1 55.1 65.6 79.7

PER (x) 20.6 20.1 15.7 13.2 10.9

P/BV 5.0 4.4 3.6 3.0 2.4

EV/ EBITDA 15.0 14.0 11.0 9.1 7.3

RoCE (%) 20.8 18.7 20.1 20.6 21.2

RoE (%) 26.7 22.7 24.4 24.2 24.2


Automobiles

Maruti Suzuki

Bloomberg: MSIL INReuters: MRTI.BO BUY


India Research

Recommendation

CMP: Rs1,404


Upside (%) 44%


52‐week High/Low (Rs) 1,639/1,051

3m ADV (Rs mn /US$ mn) 1,261/23.3

Beta 0.9




Absolute (2.5) 0.6 14.1 1.2

Rel. to Sensex (0.6) (6.1) 6.3 0.1

Performance

Source: Bloomberg


+91 22 6184 4312

[email protected]

8501,0501,2501,4501,6501,850

15,500

17,500

19,500

21,500

Feb‐12

Apr‐12

May‐12

Jun‐12

Jul‐12

Sep‐12

Oct‐12

Nov‐12

Jan‐13

Feb‐13

Sensex (LHS) Maruti Suzuki (RHS)

Volume & Margins to Witness Accelerated

Growth; BUY Maruti Suzuki India (MSIL) is India’s most preferred brand by customers

with highest recall value, due to its most promising products and after sales

service. One of MSIL’s key strengths is wide range of products at every price

points for every class of customers. Though, over the years MSIL’s market

share declined due to intensifying competition, its strategy of regularly

launching completely new products has been paying off well. High booking

for Swift, D’zire & Ertiga even during period of uncertainty of production at

Manesar plant, indicates customer’s overwhelming faith on MSIL and its

products.

New Launches & Diesel Plant – To Meet Sturdy Demand for Diesel

Vehicles: MSIL has launched over 12 new products over past 3‐4 years and it

plans to launch new compact SUV in fastest growing UV space in FY15E,

which would be key growth driver, going forward. In addition to SPIL & Fiat

tie‐ups, MSIL’s captive diesel plant would be operational by next year, which

would help the Company in capitalizing sturdy demand for diesel vehicles.

Increasing Focus on Localisation – Expect Margins to Improve: MSIL’s focus

on increasing localisation (78% to 86%), expanding export base would lead to

lower its currency exposure, which acted negatively in past 3‐4 quarters.

Moreover, additional cost advantage of localised product coupled with

economy of scale would lead to marked improvement in margins. Moreover,

recent depreciation of Yen against USD would act as a game changer for the

Company, as every 1% change in Yen/USD translates into ~20 bps benefit on

MSIL’s margins. We believe that favourable currency would kick in MSIL’s

margins to double digit & RoE to 15% in FY15E, which may lead stock’s re‐

rating closer to its historical average P/E of 16x1, year forward.

Outlook & Valuation

Maintaining our revenue and EPS estimate, we expect MSIL to post an EPS of

Rs. 62.2, Rs. 99.6 & Rs. 125 in FY13E, FY14E & FY15E, respectively. Our

combined estimate (MSIL & SPIL) stands at EPS of Rs. 135 in FY15E. Valuing

the stock at 15xFY15E (combined EPS of Rs. 135), we reiterate “BUY” on MSIL

with a target price of Rs. 2,022 per share.

Key Financials


Net Sales 366,508 356,962 428,839 509,843 603,581

EBITDA 36,788 28,188 32,804 47,990 58,620

Net Profit 22,592 15,996 18,801 30,082 37,764

EPS (Rs.) 78.2 55.4 62.2 99.6 125.0

PER (x) 18.0 25.4 23.1 14.4 11.5

P/BV 2.9 2.7 2.1 1.9 1.6

EV/ EBITDA 10.4 13.9 11.8 7.9 6.1

ROCE (%) 16.7 10.6 10.1 13.0 14.4

ROE (%) 17.4 10.9 10.4 13.5 15.0


Oil & Gas

Oil India

Bloomberg: OINL INReuters: OILI.BO BUY


India Research

Recommendation

CMP: Rs525

Target Price: Rs610

Upside (%) 16%




Beta 0.5




Absolute (1.6) 15.6 2.7 12.7

Rel. to Sensex 4.0 12.7 (3.2) 15.1

Performance

Source: Bloomberg

Analyst Contact Vinay Nair

022 6184 4319

[email protected]

400

450

500

550

600

15,500

17,500

19,500

21,500

Feb‐12

Apr‐12

May‐12

Jun‐12

Jul‐12

Sep‐12

Oct‐12

Nov‐12

Jan‐13

Feb‐13

Sensex (LHS) Oil India (RHS)

Left Behind in the Rally despite Low ValuationRecently, the stocks of oil PSUs rallied strongly on the back of fuel policy

reforms, thus nearing our target prices. However, Oil India (OIL) has been

relatively an under performer amongst the PSUs consequent to Offer for

Sale (OFS) with floor price of Rs. 510 per share. We believe that OIL is

valued much cheaper than its mean P/E at 8.5x vis‐à‐vis ONGC at 10x FY14E.

We expect the valuation gap to shrink, going forward as policy reforms

unfold further.

Reforms Equally Benefits OIL & ONGC: Assuming an average of Rs. 3 per

liter phased hike in diesel price in FY14E, our EPS assumptions stand at Rs. 33

for ONGC & Rs. 64 for OIL. We have assumed crude oil price and INR at $110

per barrel and Rs. 54 per Dollar, respectively and subsidy burden at Rs. 1,320

bn for FY14E. Our net realization assumptions stand 21% higher YoY at Rs.

3,504/bl for OIL and 19%YoY higher at Rs. 2,984/bl for ONGC in FY14E.

Volumes Growth unlikely to be Catalyst for both; Realization Triggers

better for OIL: ONGC doesn’t have an edge against OIL in terms of volume

growth as both the legacy fields have peaked out. The annual capex is mere

taking care of sustainability of outputs at current level. The triggers are more

confined to realization of crude per barrel. Further correction by 5% in crude

price and stronger INR at Rs. 52 is expected to result in flat EPS for ONGC

since OVL take a hit on its earnings and ~7% higher EPS for OIL. Besides, delta

for OIL is expected to be higher on gas price hike, since it is realizing $1.5/

Mmbtu lower than ONGC.

Outlook & Valuation OIL is trading at 12% discount to its mean of 9.5x and 15% discount to ONGC

consequent to its cheaply priced OFS. ONGC is currently fairly valued at its

mean P/E of 10x FY14E. We expect the valuation gap to shrink, as policy

reforms unfold further in the form of phased hike in diesel price. Even if the

monthly diesel price hike is put to a halt due to inflationary concerns and

political pressures, OIL’s downside is relatively lower at 6% from CMP, as

against 16% downside in ONGC. Arriving at a valuation of Rs. 610 at median

P/E 9.5 x FY 14E EPS of Rs. 64, we have upgraded our recommendation on OIL

to “BUY”.

Key Financials


Net Sales 86,114 98,632 104,806 120,481 120,209

EBITDA 46,032 46,747 51,575 63,936 63,285

EBITDA margin (%) 53.5 47.4 49.2 53.1 52.6

PAT 28,876 34,469 30,878 38,667 37,919

PAT margin (%) 33.5 34.9 29.5 32.1 31.5

EPS (Rs) 48 57.3 59.5 64.3 63.1

P/E (x) 11.4 9.5 9.2 8.5 8.7

EV/EBITDA (x) 3.9 3.9 3.1 2.3 2.2

P/BV (x) 0.8 0.7 0.6 0.6 0.5

RoCE (%) 18.9 19.0 15.5 20.2 24.2

RoE (%) 18.5 19.5 16.4 17.4 15.4


Textile & Apparel

Page Industries

Bloomberg: PAG INReuters: PAGE.BO BUY


India Research

Recommendation

CMP: Rs3,285


Upside (%) 18%


52‐week High/Low (Rs) 3,610/2,424


Beta 0.6




Absolute (4.2) (1.9) 33.6 (4.1)

Rel. to Sensex 1.2 (4.3) 25.9 (2)

Performance

Source: Bloomberg

Analyst Contact Rahul Singh

+91‐40‐44857911

[email protected]

1,700

2,200

2,700

3,200

3,700

15,500

17,500

19,500

21,500

Feb‐12

Apr‐12

May‐12

Jun‐12

Jul‐12

Sep‐12

Oct‐12

Nov‐12

Jan‐13

Feb‐13

Sensex (LHS) Page Industries

Well‐positioned in High Growth Segments

Strong market presence with global brand ‘Jockey’ in its portfolio makes

Page Industries (Page) the market leader in Indian branded inner‐wear

segment. Its license has been extended up to 2030 by Jockey International

and renewed license agreement includes the rights for the UAE, in

addition to the existing markets of India, Sri Lanka, Nepal & Bangladesh.

We expect top‐line and earnings growth at a CAGR of 24% & 26% over

FY12‐FY15E.

To Lead Growth in Premium Innerwear Market: Page caters to middle and

premium segments of men’s and women’s category with an approximate

market share of 21% & 12%, respectively. We believe that the premium

innerwear market is likely to grow at 28‐30% with a base of Rs. 37 bn, and the

Company would lead the growth due to brand recognition, product

innovation, and reach across over 1,200 cities, over 400 distributors and

>23,000 retail outlets along with 100 EBOs.

High Volume Growth with Improving Realizations on Product‐mix: We

expect the Company to maintain 18‐19% volume growth for FY13‐FY15, as

witnessed in FY12, with average realizations improving on high growing

value‐added products like leisure wear etc. Moreover, with ~18% price hike

across products in early FY12, we are expecting 5‐6% realization hike in

FY14E. The Company is undergoing capacity expansion with total installed

capacity to reach 150 mn pieces by Dec’13E & ~155‐160 mn pieces by CY15E

to keep up pace with demand.

Outlook & Valuation

We expect Page to deliver EBITDA/PAT CAGRs of 25%/26% in FY12‐15E

period, driven by high volume growth coupled with moderate price hikes. At

CMP of Rs. 3,285 per share, the stock is trading at 26.1x and 20.4x FY14E and

FY15E earnings respectively. We recommend “BUY” with target price of Rs.

3,861 per share valuing at 24.0x FY15E EPS.

Key Financial


Net Sales 4,916 6,834 8,446 10,507 13,104

EBITDA 904 1,330 1,605 2,049 2,588

EBITDA margin (%) 18.4 19.5 19.0 19.5 19.8

PAT 585 900 1,095 1,403 1,794

EPS (Rs) 52.5 80.7 98.1 125.8 160.9

YoY growth (%) 47.8 53.7 21.7 28.1 27.9

RoE (%) 52.6 62.1 58.2 57.8 54.8

RoCE (%) 27.0 32.7 34.1 35.9 37.7

P/E (x) 62.6 40.7 33.5 26.1 20.4

P/Sales (x) 7.5 5.4 4.3 3.5 2.8

EV/EBITDA (x) 41.7 28.2 23.5 18.4 14.5


Banking

State Bank of India

Bloomberg: SBIN INReuters: SBI.BO BUY


India Research

Recommendation

CMP: Rs2,198


Upside (%) 31%


52‐week High/Low (Rs) 2,552/1,802

3m ADV (Rs mn /US$ mn) 5,277/97.6

Beta 1.2




Absolute (12.5) 5.1 (0.3) (7.8)

Rel. to Sensex (7.5) 2.4 (6) (5.8)

Performance

Source: Bloomberg

Analysts Contact


022‐6184 4329

[email protected]

Paresh Jain

022 6184 4324

[email protected]

1,6001,8002,0002,2002,4002,600

15,500

17,500

19,500

21,500

Feb‐12

Apr‐12

May‐12

Jun‐12

Jul‐12

Sep‐12

Oct‐12

Nov

‐12

Jan‐13

Feb‐13

Sensex (LHS) SBI (RHS)

Best Play Post Likely Turnaround in Economy

State Bank of India (SBI) is by far the largest bank of India and it is the

best play or the domestic economy. It is one of the largest players in almost

every lending segment. With expected turnaround in the economy, we

expect SBI to be the biggest beneficiary.

Credit Cost to Move Southwards: SBI has witnessed huge pressure on its

asset quality with its gross NPA increasing by over 200 bps during last two

years. Resultantly, the Bank has accounted for higher credit cost, while

keeping provision coverage stable. With expectations of gradual recovery in

the economy, we expect incremental slippages and credit cost to start

trending downwards.

Pressure on NIMs is Likely to Continue: SBI’s NIMs (domestic) underwent a

significant compression of ~70 bps over last four quarters. Pressure on its

NIMs is expected to continue, going forward on account of slowdown

witnessed in high‐yielding SME segment and discounts offered in the retail

segment.

Overall Growth to Remain Moderate: Overall slowdown in SBI’s corporate

credit is a cause of concern. The Bank has significantly tightened its lending

standards for mid‐corporate and SME segment, which has seen higher

slippages. SBI’s Management has hinted at marginal improvement in new

project proposals. We believe that majority of incremental growth will be

driven by retail and large corporate segments.

Outlook & Valuation

At the CMP, the stock – after adjusting for subsidiaries – trades at 6.2x & 5.0x

FY14E & FY15E earnings, and at 1.3x & 1.1x P/ABV FY14E & FY15E,

respectively. Based on 10% discount to its historical mean valuation implying

1.5x P/ABV FY15E for parent & Rs. 560 for its stake in subsidiaries, we

reiterate our “BUY” recommendation on SBI with target price of Rs. 2,870 per

share.

Key Financials


Net interest income 325,264 432,910 448,206 514,463 584,498

Operating Profit 253,356 315,735 334,115 384,043 456,965

PAT 82645 117073 154025 176688 221045

EPS (Rs) 130.1 174.5 229.5 263.3 329.4

ABV (Rs) 829.0 1,015.4 1,043.7 1,259.7 1,540.3

P/E (x) 12.6 9.4 7.2 6.2 5.0

P/ABV (x) 2.0 1.6 1.6 1.3 1.1

Gross NPA (%) 3.3 4.5 5.4 5.2 5.0

Net NPA (%) 1.6 1.8 2.6 2.2 1.9

ROE (%) 12.6 15.7 17.1 17.1 18.5

ROA (%) 0.7 0.9 1.1 1.1 1.2

Source: Company, Karvy Institutional Research, Valuation after adjusting for subsidiaries

Cement

UltraTech

Bloomberg: UTCEM INReuters: UTCEM.BO BUY


India Research

Recommendation

CMP: Rs1,903


Upside (%) 21%


52‐week High/Low (Rs) 2,154/1,255


Beta 0.6




Absolute (0.7) 1.9 35.7 (4.2)

Rel. to Sensex 5.0 (0.7) 27.9 (2.1)

Performance

Source: Bloomberg


022 6184 4313

[email protected]

850

1,350

1,850

2,350

15,500

17,500

19,500

21,500

Feb‐12

Apr‐12

May‐12

Jun‐12

Jul‐12

Sep‐12

Oct‐12

Nov‐12

Jan‐13

Feb‐13

Sensex (LHS) Ultartech Cement (RHS)

Growing Unrestricted

We prefer India’s largest cement manufacturer i.e. UltraTech Cement

(UTCEM) on account of its improving cost efficiency, moderating fuel cost

pressure and incremental upcoming capacities. We believe that the

Company’s cost‐efficiency would improve, going forward, as its capex is

partially targeted towards improving logistics and other infrastructure as

well as towards increased use of higher captive thermal and waste heat

power.

Increased Capacity to Drive Volume Growth: UTCEM’s domestic capacity

is expected to rise by ~20% to 59 mn MT by H1FY14E after 9.2 mn MT

expansion at Chhattisgarh & Karnataka, and 1 mn MT de‐bottlenecking in

Gujarat. Hence, the Company seems to be better placed to gain from demand

recovery over the next two years thereby driving its 7% volume CAGR in

FY12‐15E period, which is the highest amongst its comparable peers.

Expect EBITDA & PAT CAGR of 19% & 16% in FY12‐15E: We expect

UTCEM’s EBITDA & PAT CAGR of 19% & 16% in FY12‐15E driven by 8%

CAGR realization in FY12‐15E and higher volume growths in FY14‐15E

period. Further, increased usage of pet coke, benefits from the plant

modernization exercise should drive the UTCEM’s operating cost efficiency,

going forward. We expect UTCEM net D:E ratio to remain closer to zero

despite the Rs. 120 bn capex plan in FY12‐14E period.

Outlook & Valuation

With its pan‐India presence, strong brand equity and distribution reach, we

believe UTCEM should continue trade at ~15‐20% premium to replacement

cost of US$160 per MT. We recommend “BUY” on the stock with a raised

target price of Rs. 2,300 valuing at 9.5x its Sept’14E EBITDA.

Key Triggers: Recovery in cement prices in peak construction period

(H1CY13E) and commissioning of its plants in H1FY14E.

Key Financials


Net Sales 133,228 183,131 206,554 240,681 280,694

EBITDA 26,764 41,474 49,023 58,255 69,481

EBITDA margin (%) 20.1 22.6 23.7 24.2 24.8

PAT 14,096 24,602 27,968 32,247 38,757

EPS (Rs) 51.4 89.8 102.0 117.7 141.4

YoY growth (%) (41.4) 74.5 13.7 15.3 20.2

RoE (%) 18.5 20.9 19.8 22.3 19.4

RoCE (%) 13.7 14.7 14.6 15.2 15.9

P/E (x) 37.0 21.2 18.6 16.2 13.5

EV/EBITDA (x) 29.9 25.4 19.4 12.4 10.5

EV/mt (US$) 192 191 190 157 152


Electrical & Electronic Equipment

V‐Guard Industries

Bloomberg: VGRD INReuters: VGUA.BO BUY


India Research

Recommendation

CMP: Rs454

Target Price: Rs558

Upside (%) 16%




Beta 0.8




Absolute (11.2) (12.3) 128.1 (10)

Rel. to Sensex (6.2) (14.5) 115.0 (8)

Performance

Source: Bloomberg


022‐6184 4316

[email protected]

120220320420520620

15,500

17,500

19,500

21,500

Feb‐12

Apr‐12

May‐12

Jun‐12

Jul‐12

Sep‐12

Oct‐12

Nov‐12

Jan‐13

Feb‐13

Sensex (LHS) V‐Guard Inds (RHS)

Re‐rating PotentialV‐Guard Industries (V‐Guard) is focusing more on non‐South Indian

geographies to become one of India’s leading household electrical and

electronic appliances players. The Company plans to increase the

dealership network to ~10,000 by FY13E‐ end, while most of the new

dealers will be added in non‐South India. We expect operational

performance would improve in the coming quarters which will drive the

stock.

Robust growth in Top‐line & Bottom‐line: V‐guard has been consistently

showing strong sales and PAT growth in the past several quarters. The

Company’s sales, EBITDA & PAT have shown 38%, 49% and 71% YoY

growth, respectively in 9MFY13. We believe that aggressive marketing along

with consistent new launches would sustain the momentum of growth in

high earnings. We expect V‐Guard’s sales, EBITDA & PAT to grow by 32%,

37% and 48% CAGR, respectively in FY12‐14E.

Improvement in Cash Conversion Cycle: V‐Guard has improved its cash

conversion cycle to 71 days in Q2FY13 vs. 94 days in Q2FY12 due to better

inventory management and increase in creditor days through vendor

financing. However, the debtor‐days remained same at ~46 and the

management is planning to decrease through channel financing after

successful implementation of vendor financing. Its Management is planning

to decrease the conversion cycle by 5 days per quarter in the ensuing four

quarters through better inventory management, debtor days reduction,

channel financing and vendor financing.

Outlook & Valuation

We believe that V‐Guard will register 35% and 30% revenue growth in FY13E

& FY14E, respectively. We expect the net income to grow by 55% and 39% in

FY13E & FY14E, respectively. We believe that consistent improvement in

fundamentals would further re‐rate the stock. We give 16x P/E multiple on

12‐month forward earnings. We reiterate our “BUY” recommendation on the

stock with a target price of Rs. 558 per share.

Key Financials


Net Sales 4,541 7,263 9,934 13,386 17,398

EBIDTA 504 728 933 1,344 1,746

EBIDTA Margin % 11.1 10.0 9.4 10.0 10.0

PAT 255 426 508 787 1,091

EPS (Rs) 8.5 14.3 17.0 26.4 36.5

YoY Growth (%) 46.8 67.4 19.1 54.9 38.6

ROE (%) 19.0 27.2 26.6 32.7 35.0

ROCE (%) 22.5 23.8 26.2 35.5 39.0

P/E (x) 53.2 31.8 26.7 17.2 12.4

EV/EBITDA (x) 28.4 20.4 15.6 10.8 8.3

P/BV (x) 9.6 7.9 6.4 5.0 3.8


Institutional Equities Team Rangachari Muralikrishnan

Head – Institutional Equities /

Research / Strategy +91‐22 61844301 [email protected]

K. Anant Rao Head ‐ Sales‐Trading & Derivatives +91‐22 61844303 [email protected]

Uday Raval Karvy Inc. USA +1 212 2674334 [email protected]

INSTITUTIONAL RESEARCH

Analysts Industry / Sector Desk Phone Email ID

Amey Chalke Research Associate ‐ Pharmaceuticals +91 ‐22 61844325 [email protected]

Dwaipayan Poddar Chief Technical Strategist +91‐22 61844372 [email protected]

Hatim Broachwala, CFA Banking +91‐22 61844329 [email protected]

Kruti Shah Economist +91‐22 61844320 [email protected]

Manoj Kumar Manish Derivatives and Quant Analyst +91‐22 61844327 [email protected]

Maruti Kadam Research Associate +91‐22 61844326 [email protected]

Mitul Shah Automobiles +91‐22 61844312 [email protected]

Naveen Trivedi FMCG +91‐22‐61844316 [email protected]

Paresh Jain BFSI +91‐22 61844324 [email protected]

Parikshit Kandpal Infra / Real Estate / Strategy +91‐22 61844311 [email protected]

Rahul Sharma Pharmaceuticals +91‐22 61844310 [email protected]

Rahul Singh MidCap +91‐40‐44857911 [email protected]

Rajesh Kumar Ravi Cement & Logistics +91‐22 61844313 [email protected]

Rupesh Sankhe Power/Capital Goods +91‐22 61844315 [email protected]

Varun Chakri Research Associate +91 22 61844326 [email protected]

Vinay Nair Oil & Gas +91‐22 61844319 [email protected]

INSTITUTIONAL SALES

Dinesh Bajaj Sales +91‐22 61844341 [email protected]

R. Sriram Sales +91‐22 61844340 [email protected]

Shabbir Dahodwala Sales (USA) +1‐212‐2674334 [email protected]

Tejash Gandhi Sales +91‐22 61844345 [email protected]

INSTITUTIONAL SALES TRADING & DEALING

Bhavesh Gandhi Institutional Dealer +91‐22 61844368 /69 [email protected]

Prashant Oza Institutional Dealer +91‐22 61844370 /71 [email protected]

Parag Shah Sales Trader +91‐22 61844364 /65 [email protected]

Sriram Jagdish Sales Trader +91‐22 61844366 /67 [email protected]

Gurdarshan Singh Kharbanda Sales Trader +91‐22‐61844368 / 69 [email protected]

PRODUCTION

Asim Kumar Mohapatra Editor +91‐22 61844318 [email protected]

Vijayalaxmi L. Moolya Production +91‐22 61844328 [email protected]

For further enquiries please contact:

[email protected]

Tel: +91‐22‐6184 4300

Disclosures Appendix

Analyst certification

The following analyst(s), who is (are) primarily responsible for this report, certify (ies) that the views expressed herein

accurately reflect his (their) personal view(s) about the subject security (ies) and issuer(s) and that no part of his (their)

compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this

research report.

Disclaimer

The information and views presented in this report are prepared by Karvy Stock Broking Limited. The information

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Stock Ratings Absolute Returns Buy : > 15%Hold : 5‐15%Sell : < 5%

on high on returns recommendationsbreport.myiris.com/ksbl/stabania_20130228.pdffebruary 28, 2013...

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