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India Strategy
Is India losing the plot ?
"If I were asked under what sky the human mind has most fully developed some of its choicest gifts, has most deeply pondered over the greatest problems of life, and has found solutions of some of them which well deserve the attention even of those who have studied Plato and Kant, I should point to India. Max Muller
INDIA STRATEGY
Contents
Prologue ... 3 Economic growth : stuck in a rut ... 4 Fisc (barely) under control, but rates will not fall easily ... 5 Reforms are on, but 6 Consumption is sagging .. 7 Capex cycle is critical, wont revive soon .... 8 CAD = volatility in asset markets ... 9 Portfolio stance & top picks.... 10 Top picks : Valuation summary .. 14 Top picks : company profiles ICICI Bank .. . 16 LIC Housing Finance..... 17 Ambuja Cement ... 18 Bharti Airtel .... 19 BPCL ....... 20 Cairn India 22 HCL Tech. 23 ITC .... 24 Lupin 25 Navneet Publications ... 26 NTPC .... 27 Pidilite Industries ... 28 Power Grid ... 29 Shree Cement ...... 30
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INDIA STRATEGY
Prologue
India vs. India
India is slowly, but surely, straining its tryst with destiny. The countrys macros are increasingly dependent on capricious global fund flows and commodity prices. For some time now, investors have been hoping to see an internal evolution (even if gradual) that may meet Indias myriad structural challenges, ranging from falling self sufficiency in energy and stagnating manufacturing competitiveness to fiscal discipline and stumbles on policy and governance. Their hopes have been met only half way, given the political uncertainties of an election year and the emerging possibility of a fragmented mandate.
Meanwhile, global liquidity may not continue to gush with the momentum of the past few years. Despite credible arguments on both sides of the argument, the post-crisis easy money era may well be on its last legs. We recognize that Indias macros and markets are now uncomfortably dependent on global liquidity, given the slowdown in domestic flows and ebbing retail investor confidence. The recent crack in the Rupee is but one indicator. We dont foresee a major crack in the stock market, with valuations at affordable levels. But volatility will remain high, for sure. Our India strategy is cautious, and derives from six key observations : Economic growth is stuck in a rut, needs big levers to recover The fisc may be contained, interest rate cuts will be back ended Reforms will continue, but may not be meaningful Consumption is poised to sag, even as valuations are flattering Investment cycle revival is crucial, but is not happening soon Macro imbalances imply increased volatility in asset markets Historically, such sluggish phases in the economy have known to lead on to a bottom. But in this case, the classic ingredients for a bottom are yet to fully show up : an extended period of indifferent economic growth, investor disillusionment and capitulation. As elections close in and the economy rambles on, we may yet see fundamental events that set the direction for a durable change in economic or political trajectory. Till then, there is volatile drift, but no direction for sure. India is struggling with its most consistent enemy : India !
Dipen Sheth, Head of Research dipen.sheth@hdfcsec.com +91-22-6171-7339 Sameer Narang, Economist sameer.narang@hdfcsec.com +91-22-6171-7327
TOP PICKS ICICI Bank, LIC Housing Finance, Ambuja Cement, Bharti Airtel, BPCL, Cairn India, HCL Tech, ITC, Lupin, Navneet Publications, NTPC, Pidilite, Power Grid, Shree Cement
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INDIA STRATEGY
2008-09
2009-10
2010-11
2011-12
2012-13
Source : CSO
Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13
8.6% 7.9% 7.7% 5.8% 5.9% 7.5% 9.8% 7.4% 8.6% 9.7% 8.9% 9.3% 10.1% 7.5% 6.5% 6.0% 5.1% 5.4% 5.2% 4.7% 4.8%
2013-14f
INDIA STRATEGY
Fisc (barely) under control, but rates will not fall easily
While the headline numbers suggest that the fiscal deficit has been admirably contained at ~4.8%, Rupee depreciation, revenue shortfalls, election year compulsions and (now) the Food Security Bill threaten the fiscal balance over the medium term.
Subsidy strain : Our estimate is that the total under-recovery by PSU oil refiners has already shot up by ~Rs 300bn on an annualized basis. This is among the reasons why government has been quick to revise gas prices upwards, increasing pro-forma profits for ONGC and OIL (which can now be tapped, as it were, to foot the rising under-recovery bill). An eye on elections : We think Governments hurry to push through the Food Subsidy Bill is driven by election considerations more than noble intent. This measure can structurally weaken government finances over the medium term (though not in FY14E). The poor record of the existing PDS program does not inspire. We estimate a virtual doubling of the food subsidy (Rs 900bn now) in 34 years if the stated FSB measures are executed as per plan. The inflation conundrum : Meanwhile, WPI inflation is at a 43month low at 4.7% (May-13), with sluggishness in real demand. However, the wedge between Consumer Inflation (over 9%) and WPI has widened. Food inflation has fallen, but cereal prices are running high. This is likely to come off a bit, given a good monsoon and a high base. We think WPI will inch up slightly owing to rupee depreciation. A cut of 25-50 bps in policy rates is possible, though the weak Rupee means that this could be back-ended in FY14. Fiscal deficit
FY13RE
-5.2
WPI
12% 10% 8% 6% 4% 2% 0% -2% % YoY
Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13
FY14BE
FY05
FY06
FY07
FY08
FY10
FY11
FY09
FY12
INDIA STRATEGY
INDIA STRATEGY
Consumption is sagging
We think the writing on the wall suggests that a sag in consumption growth is in the offing. This is likely to lead to a moderation in a hitherto resilient component of the economy. Mild respite will accrue from a decent monsoon, moderating inflation and demographics.
Private final consumption expenditure (PFCE) growth fell by over 700 bps YoY to just 3.8% in 4QFY13. Discretionary demand is showing early signs of cracking if auto volumes are any indicator. The Consumer Durables sub-category within IIP de-grew 8.6% in Apr-13 (the fifth consecutive month of de-growth). Our volume growth estimates for most FMCG cos are being tapered down even as this note goes into print. A good monsoon and impending pre-election spending by government could translate into buoyant consumption in rural India, but urban consumption pain continues with stagnating services growth, high consumer inflation, falling consumer confidence and poor job creation in urban centres. PFCE
9.5 8.3 9.8 9.3 10.0 7.8 6.7 6.6 5.9 9.2 7.3 6.3 11.0 10.3 7.0 5.5 6.6 6.3 9.2 11.0 4.3 3.5 4.2 3.8
% YoY
Source : CSO
IIP
% YoY
Source : CSO
Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13
Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13
8.0 7.1
7.4 7.9
10.9
INDIA STRATEGY
FY11
FY12
FY13
FY14BE
Non-plan
Plan
Total
% YoY
Real GFCF
Nominal GFCF
Source : CSO
Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13
INDIA STRATEGY
Source : RBI
May-05
May-06
May-07
May-08
May-09
May-10
May-11
May-12
Source : DGCIS
May-13
As consumer inflation persisted and real interest rates stayed negative, Indian households increasingly diverted savings to their centuries-old cultural preference : gold. Government has tried plugging this demand via import duties and trade restrictions. Jewellery demand will persist even if investment demand (~37% of total gold demand in FY13) falls in the wake of falling gold prices. Gold and oil will continue to be key variables in Indias CAD.
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
FY14E
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
INDIA STRATEGY
Financials
Given the sluggish macros, continued pains in asset quality and only a back ended possibility of a cut in interest rates, we are cautious on PSU banks despite relatively attractive valuations. Instead, we prefer private banks and mortgage lenders despite their relatively higher valuations.
We are believers in the continuing structural changes in ICICI Banks business. Key drivers are in place : high and stable CASA, measured opex structure and controlled asset quality. Managements focus on profit growth vs balance sheet growth makes us positive on the stock. Our SoTP is Rs 1,318. LIC Housing Finance stands out for its specialisation, growth visibility and safety. With improving affordability and low mortgage penetration, LICHFs business enjoys sustainable tailwinds, which its brand strength capitalises on. Incremental spreads are better than overall spreads, indicating that NIMs are mending. Asset quality is not a concern, provisioning should fall. Our TP at 2x FY14E ABV is Rs 287.
INDIA STRATEGY
TOP PICKScontd
IT Services, Pharma
With a weak rupee, we think dollar-oriented revenues and earnings will remain robust. Hence we continue to back IT Services and Pharma (despite increasing signs of regulatory headwinds building up in both sectors). India has traditionally enjoyed a clear competitive edge in these industry segments. Also they are characterized by high corporate governance standards, skill-based competitive moats, relatively lower capital intensity, clean cash flows and reasonable dividend payouts. Valuations look compelling in IT services. This is owing to the proximity of the US Immigration Bill, which we feel is a formidable (but surmountable) hurdle.
HCL Techs growth rates have surged past those of peers, driven by its focus on ramping up Infrastructure Managed Services and building non-linearity in its business model by taking up outcomebased and fixed price contracts. Our interactions with IT majors suggest that IMS momentum take time to build, hence HCL Tech will enjoy early mover advantages for some time. At under 11x FY15E (Jun) EPS, it remains a clean and compelling BUY. Post the Rupee weakness, the pharma terrain (barring a few exceptions) looks so attractive that outperformance, rather than absolute returns, is the criterion. Here, we feel that Lupin offers the most dependable US revenue growth visibility given its strong launch pipe, excellent regulatory compliance and recent spate of product approvals (22 over the last year). Expect a rerating from current valuation of ~21x FY15E EPS, as currency and business tailwinds converge.
FMCG
Consumption is showing initial signs of tiring, which makes the high valutions in FMCG look vulnerable. We think open offers by multinational parents of GlaxoSmithKline Consumer and HUL represent several years of growth premium which may not play out as hoped for, in the medium term. Volume growth is slated to ease off in most FMCG categories over FY14/15E. Under the circumstances, it is imperative to identify a category where lower volume growth is more than made up by pricing power. Marketshare skew is our tool for this purpose.
ITC is the obvious choice here, since it is the undisputed cigarette leader. A fat and specific (rather than ad valorem) duty structure on cigarettes makes even small price changes translate to disproportionate EBIT growth. ITCs rapidly maturing FMCG portfolio, particularly foods, only adds to our confidence. We believe cigarettes will continue to witness structural changes in India over the longer term (driven by demographics, uptrading from beedis and the chewing tobacco ban). BUY with a TP of Rs 350 (25x FY15E EPS). Pidilite is a niche category leader with a very robust new product development record. Known mostly as the owner of the adhesive brand Fevicol, the company is posting consistently high growth rates in waterproofing and construction chemicals (both are large under-penetrated, unorganised categories in India). Hence, we are not fighting shy of assigning a high multiple (25x) to its FY15E EPS. Our TP is Rs 320. 11
INDIA STRATEGY
TOP PICKScontd
Cement
Cement offers a domestically shielded commodity play owing to the large under-penetration of housing in India. While cement demand and pricing does get partly influenced by infrastructure spending, the underlying secular demand provided by housing remains robust in India. Even so, there are regional imbalances.
We like Ambuja Cement for its efficient operations, strong (75%) exposure to North and West (likely to gain demand disproportionately post a good monsoon), cash richness with accelerating cash flows and sustainable valuation premium. ACEM trades at 10.1/7.7x CY13/CY14 EBITDA and USD 144/t. The stock remains our preferred large cap pick given its favorable regional exposure, despite continued weakness in its key markets of North and West. We have a TP of Rs 213 (9x FY15 EV/EBITDA, US$ 160/t). Shree Cement has embarked on a new regional foray in East India. From a capacity of 13.5 mTPA as at Jun-12, Shree Cement will have ~21.5 mTPA by Jun-15 with no dilution (in line with its remarkable history of being a continuous and consistent compounder of capital). Execution challenges are visible (and likely to be met), while its regional exposure avoids the vulnerable prices of South completely. SRCM trades at 7.0/5.6x FY14/15 EV/EBITDA and US$94/t on FY15 exit capacity (21.5mTPA). We have a TP of Rs 5,280 (7x FY15 EV/EBITDA for cement, US$ 115/t and 4.5x FY15 EV/EBITDA for power).
Power
Multiple pain points are visible in competitive bidding based power projects ranging from project cost, time over-runs, environmental clearance delays for mining, disputes over pass through of higher (imported) coal prices, fuel shortages (coal/gas) and falling merchant power prices. Hence, we prefer utilities with regulated returns that offer clearer visibility.
NTPC offers the prospect of stable, regulated returns in turbulent times. We remain positive on the stock as valuation at 1.4x one year forward P/B provides comfort. Concerns regarding coal availability are factored in. However, the possible upsides from higher domestic coal availability and/or favourable changes in regulations/policy are being ignored. Our TP is Rs 185/sh is based on 1.7x FY15E standalone BV, a 30% discount to average long term multiple. Powergrid Corp is also a preferred stock in the power space, as along with a stable and inherently less risky business model, the company continues to deliver on execution. Valuation at 1.7x FY14E BV is attractive. PGCIL remains on track to meet our full year capex estimate of Rs 200bn in FY14. Our TP of Rs 138 is based on 1.9x FY15E BVPS. Equity dilution/govt. stake sale are overhangs.
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INDIA STRATEGY
TOP PICKScontd
Telecom
After years of internecine competition, suffocating regulation and alleged mis-governance, telecom is waking up to better times. Auction discovered spectrum prices are likely to fall, directly driving RoCEs in the business, while pricing can only improve from a battered base and high affordability as competition recedes. The impending entry of Reliances Jio Infocomm does provide a concern.
Bharti Airtel is well poised to benefit from industry tailwinds (rising tariffs, declining spectrum charges) in its domestic business. Our estimates indicate high senstivity to RPM assumptions. Ex spectrum payouts, FCF yields look attractive at 7.5% over FY14-15E. Despite missing guidance, the Africa business is on a steady growth path. The weak rupee is a concern, but the impact is ~Rs 2/sh for every rupee rise in the USD. Our DCF-based TP is Rs 363 (incl. regulatory impact of Rs 57).
Education
Indias education challenge is well documented, but several regulatory hurdles remain in the way of a meaningful and scalable build-out of a bricks-and-mortar private education model. The high cost of real estate is an additional hurdle for new entrants.
Navneet Publications is a relatively hidden gem in the Education space with an intelligent and appropriate business model that capitalizes on known soft spots in education : the need for high quality textbooks and the absence of regulation in supplementary literature. For over 50 years, this supplementary, guide and workbook publisher has built a strong customer franchise in the two prosperous states of Gujarat and Maharashtra. We think it is on the cusp of bigger things. Our TP of Rs 88/sh assigns 14x to FY15E earnings, given the high return ratios and changes playing out in the business.
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INDIA STRATEGY
OTHERS
COMPANY Ambuja Cement # Bharti BPCL Cairn India HCL Tech ** ITC Lupin Navneet Publications NTPC Pidilite Power Grid Shree Cement ** CMP (Rs) 189 301 367 294 800 339 851 60 144 269 108 4,554 TP (Rs) 213 363 593 414 881 350 893 88 185 320 138 5,280 BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY Reco Mkt cap (Rs bn) 290 1,144 265 561 561 2,665 381 14 1,188 138 498 159 Core EPS (Rs/sh) FY13 10.2 5.4 36.5 63.1 55.9 9.6 29.4 4.5 11.1 8.3 8.4 260.6 FY14E 10.2 10.1 47.2 60.4 68.0 11.6 34.8 5.4 11.8 10.4 10.3 349.6 FY15E 13.5 15.8 49.1 58.6 73.4 14.0 40.2 6.3 12.1 12.7 11.5 420.8 FY13 18.5 55.8 5.5 4.6 14.3 35.2 29.0 13.2 13.0 32.5 12.8 17.5 Adj PER (x) FY14E 18.5 29.9 4.3 4.9 11.8 29.2 24.4 11.1 12.2 25.9 10.4 13.0 FY15E 13.9 19.1 4.1 5.0 10.9 24.2 21.1 9.4 11.9 21.1 9.4 10.8 FY13 10.0 7.3 4.4 3.1 9.4 23.0 15.5 8.3 9.4 22.7 10.6 9.1 EV/EBITDA (x) FY14E 9.8 6.1 3.4 2.4 7.6 19.0 12.7 7.0 9.7 17.7 9.2 7.0 FY15E 7.4 4.9 3.2 2.3 6.7 15.7 10.8 5.9 9.3 14.1 8.3 5.7 FY13 18.7 4.3 16.8 25.1 32.7 37.8 28.5 27.7 12.1 29.0 15.6 28.8 RoE (%) FY14E 16.8 7.5 19.1 22.2 32.2 40.7 26.6 28.4 12.0 30.1 17.1 29.5 FY15E 19.6 10.2 17.3 18.5 28.6 44.0 25.3 28.7 11.4 30.3 16.9 27.2
* Adjusted for embedded value # Dec year end ** June year end
14
INDIA STRATEGY
15
TOP PICKS
ICICI Bank
BUY
5 JUL 2013
Levers in place
ICICI Bank (ICICIBC) has put key business drivers in place : better NIM (stable CASA), a measured opex structure and controlled loan loss provisions. Managements continued focus on profit growth vs balance sheet growth makes us positive on the stock. High CRAR, coupled with capital repatriation from subsidiaries and large branch network, offers headroom for sustainable, granular and steady growth. ICICBC trades at 1.7x FY14E ABV. Maintain BUY with SOTP of Rs 1,318/sh.
Drivers in place : Over the past few years, ICICIBC has put in place crucial building blocks for quality profit growth. It has managed to improve (and now sustain) its CASA proportion at ~40% (hence NIMs have improved to ~3.3%). The bank has improved asset quality with reduction in the unsecured portfolio and tilting asset mix towards the corporate segment. Further, it has expanded branch network ~3x since 1QFY08 and is wellcapitalized (CRAR is ~18.7%, Tier I is 12.8%). Profitable growth : We expect ICICIBC to deliver ~16% loan book CAGR over FY13-15E, driven by both corporate and retail segments. With stable CASA (and NIMs), controlled opex and asset quality in check (credit cost ~75bps) we expect PAT CAGR to touch 18%. Improvement in return ratios : We think ICICI Banks improved core earnings (driven by balance sheet growth, stable margins and better asset quality) can drive RoA to ~1.8% and RoE to ~15% in the core business (FY14E). Capital repatriation : We believe capital repatriation from foreign subsidiaries is a long term positive. Over the last couple of quarters, the bank has repatriated $100mn from UK sub and CAD $75mn from Canada sub (May 2013). Despite this repatriation, both the subs remain highly capitalized (UK 30.8% and Canada 33.2%). View & SOTP : ICICIBC is well set for sustained, steady and quality growth. Capital repatriation from foreign subsidiaries will unleash headroom. The stock trades at 1.7x FY14E ABV net of embedded value. We have a BUY rating with SOTP of Rs 1,318.
(Rs mn) FY12 FY13 FY14E FY15E Net Interest Income 107,342 138,664 166,560 193,010 103,865 131,992 160,000 185,105 PPOP 64,653 83,255 98,625 115,839 PAT 56.1 72.2 85.3 99.9 EPS (Rs) 12.8 14.7 15.3 16.0 Core ROAE (%) 1.49 1.67 1.77 1.85 Core ROAA (%) Adj. BVPS (core) 393.6 447.9 503.7 565.7 2.28 1.97 1.70 1.46 P/ABV (x) # P/E (x) 16.0 12.3 10.0 8.3
# Adjusted for embedded value
3,864
FINANCIAL SUMMARY
HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters
TOP PICKS
5 JUL 2013
BUY
755
FINANCIAL SUMMARY
(Rs mn) Net Interest Income PPOP PAT EPS (Rs) ROAE (%) ROAA (%) Adj. BVPS (Rs) P/ABV (x) P/E (x) FY12 14,020 13,870 9,142 18.1 18.6 1.6 110.8 2.1 13.0 FY13 15,448 14,524 10,232 20.3 16.8 1.5 122.9 1.9 11.6 FY14E 20,866 19,225 13,485 26.7 19.2 1.6 143.6 1.6 8.8 FY15E 25,652 23,318 16,388 32.5 20.0 1.6 168.9 1.4 7.3
Sameer Narang sameer.narang@hdfcsec.com +91 -22- 6171-7327 Darpin Shah darpin.shah@hdfcsec.com +91 -22- 6171-7328
HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters
Ambuja Cement
INDUSTRY CMP (as 4 Jul 13) Target Price
Nifty Sensex KEY STOCK DATA Bloomberg No. of Shares (mn) MCap (Rs bn)/(US$ mn) 6m avg traded value (Rsmn) STOCK PERFORMANCE (%) 52 Week high / low 3M Absolute (%) Relative (%) Promoters FIs & Local MFs FIIs Public & Others Source : BSE 12.6 7.7 Rs 223/162 6M (8.5) (6.6) 12M 7.7 (3.4) 50.59 8.55 30.07 10.79 ACEM IN 1,544
291/48,43
TOP PICKS
5 JUL 2013
BUY
485
HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters
Bharti Airtel
BUY
INDUSTRY CMP (as on 4 Jul 13) Target Price
Nifty Sensex KEY STOCK DATA Bloomberg No. of Shares (mn) MCap (Rs bn)/(US$ mn) 6m avg traded value (Rsmn) STOCK PERFORMANCE (%) 52 Week high / low 3M Absolute (%) Relative (%) Promoters FIs & Local MFs FIIs Public & Others Source : BSE 10.1 5.2 Rs 371/216 6M (7.9) (6.0) 12M (7.9) (19.0) 68.55 8.59 17.24 5.62 BHARTI IN 3,997
1,204/20,020
TOP PICKS
5 JUL 2013
1,645
1p (or 2.8%) increase in RPM (coupled with 1.4% decline in minutes) improves Bhartis earnings by 6% in FY15E. We have assumed a 25% reduction in reserve price. Additional 25% reduction in spectrum reserve price would add Rs 18/share to TP (6% of CMP).
We estimate avg. FCF yield for Bharti at a healthy 7.5% (ex spectrum payouts) over FY14-15E. Valuations look attractive at 6.1/4.9x FY14/15E on EV/EBITDA basis. Our DCF-based TP is Rs 363, including regulatory impact of Rs 57.
FINANCIAL SUMMARY
(Rs mn) Net Sales Growth (%) EBIDTA EBIDTA margin (%) Net profit EPS (Rs.) P/E (x) EV/EBITDA RoE (%) FY12 FY13 FY14E FY15E 715,058 797,729 894,963 980,737 20.0 11.6 12.2 9.6 237,123 246,204 281,454 320,697 33.2 30.9 31.4 32.7 42,593 20,504 40,211 63,042 11.2 5.4 10.1 15.8 26.9 55.8 30.0 19.1 7.6 7.3 6.1 4.9 9.1 4.3 7.5 10.2
HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters
TOP PICKS
BPCL
5 JUL 2013
BUY
6m avg traded value (Rsmn) STOCK PERFORMANCE (%) 52 Week high / low 3M Absolute (%) Relative (%) Promoters FIs & Local MFs FIIs Public & Others Source : BSE (0.8) (5.7)
517
HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters
$ $ $
26,273
5.0
182
34.97 41,260 3,340 131,882 37,800 5,937 53,887 (90,080) (26,000) (60,000) (2,565) 5.0 5.0 1.0 1.0 5.0 1.0 1.0 1.0 1.0 1.0 285 23 182 52 41 75 (125) (36) (83) (4) 593
TOP PICKS
Cairn India
BUY
5 JUL 2013
Exploration upsides
Cairn India is poised to gain from INR depreciation. The current weakness in the stock reflects near term concerns over oil prices and lack of confidence on volume increase. Considering its past production record, we believe production rampup from Cairns Rajasthan fields is attainable even if it is delayed due to the inherent nature of the business. Co intends to step up exploration activity, which can lead to ~65% reserve accretion and ~50% upside to production volumes. With a cash rich balance sheet and 4% dividend yield, our TP is Rs 414/sh. This can rise materially if exploration upsides fructify. Cairn plcs anticipated exit (holds 10.3%) is an overhang.
Cairn India is currently producing 175 kbpd from Rajasthan fields. Management guides for an exit rate of 200-215 kbpd by Mar-14. Increase in production will be primarily from Bhagyam and Aishwariya fields.
Gross mboe model 1,061 66 11 695
6m avg traded value (Rsmn) STOCK PERFORMANCE (%) 52 Week high / low 3M Absolute (%) Relative (%) Promoters FIs & Local MFs FIIs Public & Others Source : BSE
835
Company has an aggressive exploration program for the next three years. It has indicated exploration potential of 695 mmboe (65% of current recoverable reserves). The new reserves should help to improve production from 215 kbpd to 300 kbpd in future. Cairn Indias NPV increases by Rs 6.7/sh with INR depreciation by Rs 1 (vs USD), while NPV decreases by Rs 3.9/sh for every dollar decline in crude price. Our target price of Rs 414 assumes Brent crude at $100/bbl, INR/USD at 59 (includes exploration upside Rs 80/sh, cash Rs 83/share). We value Cairns Rajasthan assets on NPV basis (applying 12.5% discount rate) at Rs 244/sh. This implies EV/BoE of $7.44/bbl. Furthermore, we value 695 mmboe exploration upside at Rs 80/sh (50% discount to Rajasthan implied EV/BoE). Management has guided for 20% dividend payout. At the declared dividend of Rs 11.5/sh for FY13, Cairn India offers a dividend yield of ~4%. Our SOTP is Rs 414.
Implied EV/BOE $7.44 $2.15 $6.13 $3.72 Value per share 244 4 2 83 80 414
VALUATION Rajasthan MBA Field Ravva Field Cambay Field Cash at end-FY13 Rajasthan exploration upside Total value
Working Interest NPV for own share 70.00% 7,896 22.50% 141 40.00% 66 70.00% 2,587
HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters
TOP PICKS
HCL Tech
BUY
5 JUL 2013
6m avg traded value (Rsmn) STOCK PERFORMANCE (%) 52 Week high / low 3M Absolute (%) Relative (%) Promoters FIs & Local MFs FIIs Public & Others Source : BSE 7.6 2.7
Rs 810/471 6M 26.1 28.0 12M 65.4 54.3 61.99 6.56 24.32 7.13
Over the last three years, HCL Tech has achieved an impressive ramp up of its Infrastructure Managed Services (IMS) portfolio ahead of industry peers. An improvement in utilisation, non-linearity and increased contribution of fixed projects to the revenue mix and currency tailwinds have aided the margin expansion of ~500 bps over two years. We think revenue momentum is likely to persist, given the well balanced service mix as well as vertical mix. Valuations are compelling (10x on FY15E). Strong return ratios (ROE ~33%) and improving cash conversion (OCF/PAT > 1 for 3QFY13) are other positives. BUY with a TP of Rs 881 (12x FY15E EPS).
Strong competence in IMS : HCL Tech derives the highest proportion of revenues from Infrastructure Managed Services (~30% of revenues) in its peerset. IMS is an underpenetrated service line and offers scope for robust growth over the next three years. We have modeled IMS revenues to grow by 35/23/17% for FY13E/14E/15E (June yr-end). Scope for Non-linearity to aid margins : IMS also offers scope for non-linearity as projects are predominantly delivered on a fixed price basis. HCL Tech derives ~53% of revenues from fixed price projects. IMS EBIDTA margins have
expanded by ~400bps YoY (in 3QFY13) aided by non-linearity. Well-balanced service mix : HCL Techs service mix comprises Enterprise Apps ~19%, IMS ~30%, Engineering design services ~17%, ADM ~29.7% and BPO ~4.3%. It is present across both Run the business and Change the Business segments. Hence it has higher revenue predictability vs peerset. Favorable pricing enables market share gains : HCL Techs lower pricing has enabled higher new deal wins in the re-bid market. We model 13/11.5% USD revenue growth for FY14/15E. View : Dividend payout ratio of ~31% is another positive. BUY, our TP is Rs 881 (12x FY15E EPS). FINANCIAL SUMMARY
YE Jun (Rs mn) Net Sales Growth (%) EBITDA EBIDTA Margin(%) PAT Diluted EPS (Rs) P/E (x) EV / EBITDA (x) RoE (%) FY12 209,630 32.2 39,896 19.0 25,013 35.7 22.4 13.9 26.1 FY13 256,668 22.4 57,218 22.3 39,278 55.9 14.3 9.6 32.7 FY14E 310,155 20.8 68,241 22.0 47,796 68.0 11.7 7.7 32.2 FY15E 339,353 9.4 73,340 21.6 51,596 73.4 10.9 6.8 28.6
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TOP PICKS
5 JUL 2013
ITC
BUY
2398
FMCG achieved breakeven in 4QFY13 as guided by the management. The food sub-segment is shining, which is reflected in 13% market share in noodles (in 3 years of launch), leadership in the mass market wheatflour category (Aashirwad) as also in premium cream biscuits (Dark Fantasy). We are enthused by ITCs plans to enter new categories (dairy, chocolates, personal products) and feel it is likely to create top-class product niches in most segments it enters. BUY with SOTP-based one year TP of Rs 350. This implies 25x FY15E EPS.
FY12 FY13 FY14E FY15E 265,518 316,275 374,231 446,738 17.6 19.1 18.3 19.4 92,098 111,743 135,289 163,798 34.7 35.3 36.2 36.7 62,581 76,081 91,601 110,656 8.0 9.6 11.6 14.0 42.6 35.2 29.2 24.2 27.9 23.1 19.1 15.8 35.6 37.8 40.7 44.0
Valuation
FINANCIAL SUMMARY
(Rs mn) Net Sales Growth (%) EBIDTA (in Rs Mn) EBIDTA margin (%) Net profit EPS (Rs.) P/E (x) EV/EBITDA RoE (%)
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TOP PICKS
Lupin Labs
5 JUL 2013
BUY
660
Rs 854/496 6M 40.7 42.6 12M 58.2 47.1 46.84 14.33 28.80 10.03
FINANCIAL SUMMARY
YE Mar (Rs mn) Net Sales Growth (%) EBIDTA EBIDTA margin (%) Net profit EPS (Rs.) P/E (x) EV/EBITDA RoE (%) FY12 68,204 20.8 14,447 20.4 7,717 17.3 30.6 17.2 23.8 FY13 FY14E FY15E 94,116 113,713 131,378 39.5 19.6 14.4 22,200 27,419 31,488 23.5 23.8 23.6 13,142 15,549 18,102 29.4 34.8 40.5 25.5 24.4 21.0 15.4 13.9 11.9 28.5 26.6 25.5
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Navneet Publications
INDUSTRY PUBLICATIONS Rs 60 CMP (as on 4 Jul 13) Target Price Rs 88
Nifty Sensex KEY STOCK DATA Bloomberg No. of Shares (mn) MCap (Rs bn)/(US$ mn) 6m avg traded value (Rsmn) STOCK PERFORMANCE (%) 52 Week high / low 3M Absolute (%) Relative (%) Promoters FIs & Local MFs FIIs Public & Others Source : BSE (5.2) 6M (9.3) (0.3) (11.2) Rs 71/53 12M 4.4 (6.8) 61.80 9.82 6.36 22.02 NPI IN 238
14/236
TOP PICKS
5 JUL 2013
BUY
Hidden gem
5,837 19,411
Navneet Publications (NPL) is a leader in supplementary education books for 50+ years in two prosperous states of India (Gujarat and Maharashtra). NPL has posted modest earnings growth of 11% CAGR over FY09-12. Nevertheless, it is poised for strong earnings CAGR of 19% over FY13-15E (11% over FY09-12 and 38% in FY13) with multiple growth levers in its publication business. Its stationery segment, too, is likely to be helped by currency tailwinds. The company has clean cash flows, consistent dividend payout. BUY with a TP of Rs 88, based on 14x FY15E EPS which is justified given Navneet's high return ratios.
Publication segment - Multiple growth levers: NPLs publication segment accounts for 57-58% of revenue, 75-80% of EBITDA and EBIT. It enjoys ~30/27% EBITDA/EBIT margins and ROCE of 3335%. Maharashtra state contributes 55% of segment revenue and Gujarat rest 45%.
Stationery segment on road to recovery: Stationery contributes 42-43% of revenue and 20-25% of EBITDA and EBIT with single digit RoCEs. It has been a drag for over 3-4 years until FY12 with revenues averaging ~Rs2.4bn and EBIT of ~Rs 250mn (10% margin). However, led by strong export orders from large retail chains in developed markets, the segment registered strong 28% YoY revenue growth to Rs 3.26bn and 71% EBIT growth to Rs 441mn (13.5%). Exports doubled (~35% of segment) in FY13. Outlook and Valuations: With robust earnings CAGR of 19%, expanding ROE, dividend yield of 3% (~50% payout), NPL is trading at attractive P/E of 11.1x/9.4x FY14/15E EPS. BUY with a TP of Rs 88 (14x FY15E EPS). FINANCIAL SUMMARY
(Rs mn) Net Sales Growth (%) EBIDTA EBIDTA margin (%) Net profit EPS (Rs.) P/E (x) EV/EBITDA RoE (%) FY12 6,189 12.9 1,313 21.2 768 3.3 18.2 11.8 22.5 FY13 8,057 30.2 1,913 23.7 1,080 4.5 13.2 8.2 27.7 FY14E 9,269 15.0 2,245 24.2 1,287 5.4 11.1 7.0 28.4 FY15E 10,660 15.0 2,640 24.8 1,519 6.3 9.4 5.9 28.7
NPLs core publications business is poised for strong growth over FY14-15E driven by syllabus change, common curriculum evolution, expansion in Andhra Pradesh and Delhi-NCR, government orders for supplementary books and traction in its digital learning (e-sense) business. E-sense enjoys high operating leverage and achieved EBIDTA break even in FY13. HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters
TOP PICKS
NTPC
BUY
5 JUL 2013
Concerns priced in
NTPC offers the prospect of stable, regulated returns in turbulent times. We remain positive on the stock as valuation at 1.4x one year forward P/B provides comfort. Concerns regarding coal availability are factored in. However, the possible upsides from higher domestic coal availability and/or favourable changes in regulations/policy are being ignored. At CMP, NTPC is valued at 2.1x FY14E regulated equity of Rs 360 bn (adjusted for cash, investments and CWIP) which is at the lower end of its trading range. Our TP is Rs 185/sh is based on 1.7x FY15E standalone BV, a 30% discount to average long term multiple.
We are positive on NTPC given (1) 62% (5.7GW) of capacity to be added in 12th Five Year Plan is being added in FY13 and FY14 lending high visibility to capacity addition and (2) Current valuations ignore the possibility of improved fuel availability in the medium to long term through companys captive mines and/or from Coal India. NTPC has been reallocated three captive coal blocks expected to start production from FY1617. NTPC's earnings are less volatile as it is able to earn at least 15.5% RoE under the regulated utility model, unlike private players which need to tie up power through a bidding route. NTPC is able to make higher than regulated RoE due to its efficient operations and incentives based on plant availability. Reported RoEs are lower as capital is stuck in CWIP. CERC will be coming up with its tariff regulations for 2014-19, by Mar 14. We expect the regulator to take a favourable stance towards developers given the current stress in the power sector. However, pending finalisation we see near term sentimental overhang. NTPC is trading at 1.4x one year forward book value (40% discount to historical average). Lower coal availability due to company's inability to secure imported coal remains the key risk as it lowers plant availability and, in turn, RoEs. FINANCIAL SUMMARY
(Rs bn) Net sales Growth (%) EBITDA EBITDA Margin (%) Adj. net profit Adj. EPS P/E EV/EBITDA P/B RoE (%) FY12 620.5 11.3 140.5 22.6 83.3 10.1 14.3 11.3 1.6 11.8 FY13 656.7 5.8 171.1 26.1 89.2 10.8 13.3 9.4 1.5 11.6 FY14E 739.7 12.6 163.8 22.1 97.1 11.8 12.2 9.7 1.4 11.7 FY15E 768.2 3.8 174.7 22.7 99.7 12.1 11.9 9.3 1.3 11.3
977
Rs 178/136 6M (9.3) (7.5) 12M (10.5) (21.6) 75.00 10.47 9.37 5.16
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Pidilite Industries
INDUSTRY CMP (as on 4 Jul 13) Target Price
Nifty Sensex KEY STOCK DATA Bloomberg No. of Shares (mn) MCap (Rs bn)/(US$ mn) 6m avg traded value (Rsmn) STOCK PERFORMANCE (%) 52 Week high / low 3M Absolute (%) Relative (%) Promoters FIs & Local MFs FIIs Public & Others Source : BSE 2.4 (2.5) Rs 297/154 6M 16.1 18.0 12M 61.3 50.2 70.06 5.64 13.61 10.69 PIDI IN 513
138/2,293
TOP PICKS
5 JUL 2013
BUY
68
Uncertainty prevails with regard to Pidilites synthetic elastomer plant (capital employed Rs 3.6bn, 20% of TCE). The company has decided to explore induction of a strategic partner for the project. We think that any decision to further invest in this plant is likely to be return dilutive and poses significant risk. Also, global subsidiaries (capital employed Rs 2.76bn) continue to remain EPS dilutive.
Pidilite dominates the white glue segment with ~70% market share of the organized adhesive market with its Fevicol brand (~33% of FY13 revenue). With competition mainly from small regional players, Fevicol commands a price premium (8-10%). With a five year CAGR of 25%, construction chemicals contribute ~18% to sales. Dr Fixit accounts for 80% of segment revenues (with ROFF as the secondary brand). Applications span a wide range : waterproofing, sealing, flooring, concrete treatment & plastering. We think this segment will persist as the key growth driver in the medium term, given emerging needs.
With core domestic business set for sustainable growth (est. 18% revenue CAGR over FY13-15E) and consistently superior return ratios (domestic ROCE ~50%+), we believe valuations will sustain. BUY TP of Rs 320 (25x FY15E EPS).
FY12 31,266 17.7 4,926 15.8 3,244 6.4 42.0 27.6 27.7 FY13 36,781 17.6 6,005 16.3 4,240 8.3 32.5 22.7 29.0 FY14E 43,000 16.9 7,589 17.7 5,332 10.4 25.9 17.7 30.1 FY15E 50,934 18.5 9,346 18.4 6,531 12.7 21.1 14.1 30.3
FINANCIAL SUMMARY
(Rs mn) Net Sales Growth (%) EBIDTA (in Rs Mn) EBIDTA margin (%) Net profit EPS (Rs.) P/E (x) EV/EBITDA RoE (%)
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Powergrid
BUY
5 JUL 2013
389 Rs 125/95
6M (6.4) (4.5)
HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters
Shree Cement
INDUSTRY CMP (as 4 Jul 13) Target Price
Nifty Sensex KEY STOCK DATA Bloomberg No. of Shares (mn) MCap (Rs bn)/(US$ mn) 6m avg traded value (Rsmn) STOCK PERFORMANCE (%) 52 Week high / low 3M Absolute (%) Relative (%) Promoters FIs & Local MFs FIIs Public & Others Source : BSE 12.7 7.8 Rs 5,384/2,790 6M (0.9) 1.0 12M (48.5) 37.3 64.79 5.64 7.77 21.80 SRCM IN 35
159/2,638
TOP PICKS
5 JUL 2013
BUY
Capital compounder
From a capacity of 13.5 mTPA as at Jun-12, Shree Cement will have ~21.5 mTPA by Jun-15 with no dilution (in line with its remarkable history of being a continuous and consistent compounder of capital). This capacity will be spread across North (17.5 mTPA in Ras and Beawar, Rajasthan) and East (4 mTPA in Aurangabad, Bihar and Raipur, Chhatisgarh). We expect a 12% volume CAGR over FY13-15E (Shree follows June year end).
Driven by higher utilizations in North, pricing should be strong for key players in the region over FY14-15E. We expect EBITDA CAGR of 20% for FY13-15E driven by ~12% volume CAGR and 7% pricing improvement. SRCM trades at 7.0/5.6x FY14/15 EV/EBITDA and US$94/t on FY15E exit capacity. Best in class metrics and return ratios : Trailing 8 quarter cement EBITDA at Rs 1,070/t despite weakness in Oct 12 to Mar-13 period underlines Shrees strong operational efficiencies (implied cement cost/t at Rs 2,600/t). Further, the co has been a consistent leader in capex and operational efficiencies. With an expected Rs 2.5bn in EBITDA in FY13, merchant power capacity (400MW) provides a meaningful diversification. We value this at 4.5x FY15 EV/EBITDA (Rs 10bn).
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FINANCIAL SUMMARY
YE Jun (Rs mn) Net Sales Growth (%) EBIDTA EBIDTA margin (%) Net profit FY12* 58,981 70.8 16,940 28.7 5,438 FY13 56,359 (4.4) 15,951 28.3 9,261 FY14E 67,004 18.9 19,805 29.6 12,186 349.8 13.0 7.0 29.4 109.3 FY15E 78,239 16.8 23,197 29.6 14,520 421.1 10.8 5.6 27.1 93.5
EPS (Rs.) 177.5 265.8 P/E (x) 25.6 17.5 EV/EBITDA 8.8 9.0 RoE (%) 21.0 29.3 Source: Company, HDFC sec Inst Research EV/T (US$) 166.3 141.2 * 15 Month period ending June 2012
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INDIA STRATEGY
Rating Definitions BUY NEUTRAL SELL : : : Where the stock is expected to deliver more than 10% returns over the next 12 month period Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period Where the stock is expected to deliver less than (-)10% returns over the next 12 month period
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