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Model Portfolio Series IV 10th August 2012
 

Model Portfolio Series IV 10th August 2012

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India's economic fundamentals have deteriorated in the near term leaving the country with weaker growth. The country is grappling with problems of rising inflation and booming fiscal and current ...

India's economic fundamentals have deteriorated in the near term leaving the country with weaker growth. The country is grappling with problems of rising inflation and booming fiscal and current account deficits. Global macro-economic environment seems equally gloomy. European debt crisis has been escalating with more and more countries finding it difficult to re-finance their government debt without the assistance of third parties. China's growth has also moderated along with other Asian countries. Against the backdrop of weak global growth and high global commodity prices, the Indian economy has taken a severe beating due to weak domestic political climate. Indian government has failed to reduce the fiscal deficit and to device structural reforms to open supply-side bottlenecks. Rising subsidy bills, slow decision making on behalf of the government due to scandals and back-tracking on reforms due to influence of regional political parties have curtailed the growth potential. Any significant economic reform or any serious effort to curtail the fiscal deficit seems unlikely in the face of general elections due in May 2014.
The weakness in the Indian economy is reflected in the Indian equity market as well. Over the last two years, the equity market has given a negative return of nearly 4% while in the last year, it gave a negative return of nearly 8%. Thus, investment in the equity market has been quite difficult. We expect the market to consolidate in a broad range in the remaining part of the year, giving us the opportunity to accumulate stocks at reasonable prices. Thus, we have attempted to create a model portfolio to generate superior returns over the market. Given the weak domestic and global economic environment, we prefer to keep more than 70% of out portfolio in liquid funds. The funds would be deployed as and when the time will be ripe.

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    Model Portfolio Series IV 10th August 2012 Model Portfolio Series IV 10th August 2012 Document Transcript

    • EQUITY RESEARCH Model Portfolio (Series IV) 10th August 2012 BackdropIndias economic fundamentals have deteriorated in the near term leaving the country with weaker growth. Thecountry is grappling with problems of rising inflation and booming fiscal and current account deficits. Global macro-economic environment seems equally gloomy. European debt crisis has been escalating with more and morecountries finding it difficult to re-finance their government debt without the assistance of third parties. Chinasgrowth has also moderated along with other Asian countries. Against the backdrop of weak global growth and highglobal commodity prices, the Indian economy has taken a severe beating due to weak domestic political climate.Indian government has failed to reduce the fiscal deficit and to device structural reforms to open supply-sidebottlenecks. Rising subsidy bills, slow decision making on behalf of the government due to scandals and back-tracking on reforms due to influence of regional political parties have curtailed the growth potential. Any significanteconomic reform or any serious effort to curtail the fiscal deficit seems unlikely in the face of general elections duein May 2014.The weakness in the Indian economy is reflected in the Indian equity market as well. Over the last two years, theequity market has given a negative return of nearly 4% while in the last year, it gave a negative return of nearly8%. Thus, investment in the equity market has been quite difficult. We expect the market to consolidate in a broadrange in the remaining part of the year, giving us the opportunity to accumulate stocks at reasonable prices. Thus,we have attempted to create a model portfolio to generate superior returns over the market. Given the weakdomestic and global economic environment, we prefer to keep more than 70% of out portfolio in liquid funds. Thefunds would be deployed as and when the time will be ripe. research@bmastock.com 033 40110153 BMA Wealth Creators Equity Research
    • Model Portfolio Update IdeaWe, have thus come up with a long term portfolio. The portfolio aims to guide the investors to gain moderatereturn through investments in capital markets. This is not a fund management exercise, so investors cancustomize this Model Portfolio according to their choice. The investor can expect the risk of significant pricefluctuation.Recommendation Approach: For fundamental recommendation, we follow bottom up approach of stockselection. We conduct detailed fundamental analysis of individual companies before giving recommendations.Sometimes we may recommend stocks based on technical analysis for short term trading. We also wish torecommend short positions depending on market condition. Positon on futures and options strategies may alsobe included.Current Positions Position of the Portfolio as on 10-August 2012 Entry Date Company Entry Price Wt % 10-Aug-2012 ING Vysya Bank Limited 384.95 5.0% 10-Aug-2012 Colgate-Palmolive (India) Limited 1178.35 5.0% 10-Aug-2012 IL&FS Transportation Networks Ltd. 164.70 5.0% 10-Aug-2012 Larsen & Toubro Limited 1423.95 2.5% 10-Aug-2012 Ingersoll-Rand (India) Limited 455.50 5.0% Sector Allocation Company AllocationPortfolio HighlightsCurrent market value of the portfolio is Rs 2,25,000Total cash in the portfolio is Rs 775,000. BMA Wealth Creators Equity Research
    • Model Portfolio UpdateING Vysya Bank Limited Target - Rs. 450/-Target - 55Investment RationaleHealthy CASA ratio: Despite turbulent movement in interest rates, ING VysyaBank has been able to maintain its CASA over last year. Its CASA – as aproportion to aggregate deposit – has increased by over 720 bps to 34.2%over last 7 years. The CASA per branch has increased to INR 229 bn in FY12from INR 149 bn in FY08. KEY MARKET DATA Sector BankingDiversified Asset book as well as liability structure – Advances book is BSE Code 531807well diversified across segments viz. Corporate (43%), SME (32%), Retail NSE Code INGVYSYA(20%) as well as across sectors reducing the concentration risk. Asset mix is CMP (as on 10.08.12) 384.95also much better than peer banks in the corporate banking as well as 52 Wk. High/Low 399.90/275.00business banking segments. Corporate banking book is well diversified with Sensex/Nifty 17557.70/5320.40NBFCs accounting for 26.3% while telecom accounts for 14.8%. All the othersectors account for less than 10% exposures which translate into below 4% of Shares outstanding (Cr.) 150.82the total book. Face Value 10 Market cap (Rs. Cr.) 5660.27Improving Asset Quality with Low Slippage, Higher Provisioning for Bad Daily avg. Volume 18510600Assets: To improve the asset mix, the bank majorly lent to services related Free Float (%) 59.99%business in the sectors related to consumption in the economy. It lent mainlytowards working capital requirement which ensured timely repayments ING Vysya Bank vs. Niftykeeping the asset quality intact. This has reduced the slippage ratio to 0.7% inFY12 from 2.3% in FY10. In addition to this, ING Vysya Bank has beenconsistently provisioning higher for their bad assets which has reduced theNet NPA to 0.18% hiking the provision coverage ratio to 90.7%.Improvement in Profitability and Efficiency: The management tooksignificant steps to boost the profitability after it took over in 2006 which hasresulted in volume growth, improving the efficiency. Business per branch hasrisen from INR 751 mn in FY08 to INR 1,135 mn in FY12 while profit perbranch has risen from INR 4 mn to INR 8.8 mn in the corresponding period.Employee efficiency has also improved with business per employee growingfrom INR 55.8 mn in FY08 to INR 81.3 mn in FY12 while profit per employeerising from INR 0.29 mn to INR 0.63 mn during the corresponding period. SHAREHOLDING PATTERN As on 30th June,2012Improving Trend in NIMs: Bank has been able to improve NIMs on the backof improving CASA and better balance sheet management. Promoters 43.73% FIIs 26.91%Financial Snapshot DIIs 13.91% Public 15.45% FY11 FY12 Y-o-Y %Interest Earned 2693.93 3856.93 43.17%Total Income 3348.65 4526.46 35.17%Expenditure 3030.24 4070.10 34.32%Net Profit 318.41 456.36 43.32%P/B 1.92 12.97 -EPS 26.45 31.85 20.42% BMA Wealth Creators Equity Research
    • Model Portfolio UpdateING Vysya Bank LimitedCompany Background Diversified Loan BookING Vysya Bank Limited is an entity formed with the culmination of theerstwhile Vysya Bank Limited, a premier bank in the Indian Private sector anda global financial powerhouse, ING of Dutch origin during October 2002. It waspreviously known as the Vysya Bank Limited and it was in 2002 that the namewas changed.The Bank operates in four segments: Treasury, Retail Banking, WholesaleBanking and Other Banking Operations. The Treasury segment includes thenet interest earnings on investments of the bank in sovereign bonds, corporatedebt, and mutual funds; income from trading; income from derivative, andforeign exchange operations and the central funding unit. The Retail bankingsegment includes the business with individuals and small businesses throughthe branch network and other delivery channels, such as automated tellermachine (ATM) and Internet banking. The wholesale banking segment Break-down of Consumer Bankingprovides loans and transaction services to corporate, emerging corporate andinstitutional customers.The bank has continued to introduce new personalized services in order tomake banking easier for its customers. On the wholesale banking front, INGVysya launched ‘ING Coverage’, integrated banking solutions and on theretail banking front, the bank has launched ‘ING Zwipe’ a new savingsaccount targeted at the young mobile customers.Industry OverviewThe Rs 64 trillion (US$ 1.22 trillion) Indian banking industry has madeexceptional progress in last few years, even during the times when the rest ofthe world was struggling with financial meltdown. Break-down of Corporate Segment (%)Recently, the RBI took a few important steps to make the Indian Bankingindustry more robust and healthy. This includes de-regulation of savings rate, Gems & Jewellery 8.4guidelines for new banking licenses and implementation of Basel Norm III. Rental Discounting 7.2Since March 2002, Bank index (Index tracking the performance of leading food Processing 6.8banking sector stocks) has grown at a compounded annual rate of about 31%. Auto 6After a very successful decade, a new era seems to have started for the IndianBanking Industry. According to a Mckinsey report, the Indian banking sector is Contractor 5.9heading towards being a high-performing sector. Textiles 5.3 Iron & Steel 4.6If we look at 5 years historical performance of different types of players in the Service Enterprises 3.1banking industry, as far as net interest income is concerned, private banks are Pharma 2ahead in the race by reporting 24.2% growth, followed by pubic banks (21.4%) Other Manufacturing 9.2and then by foreign banks (14.8%). We can say that the current position of Trader 32.7ROA, Net NPA and CAR of different kinds of players in the industry indicatesthat going ahead; private banks will face relatively lesser problems as Others 8.8compared to public banks. BMA Wealth Creators Equity Research
    • Model Portfolio Update ING Vysya Bank LimitedInvestment Concerns Company PerformanceGrowth and Asset Quality levered to Economic Conditions: Developmentof the banking industry is correlated to the economic growth of the country. Aslowdown in economic activity could impact loan growth and, hence, is likely topose a risk to our estimates.Changes in Regulatory Norms could affect Business Dynamics: A changein regulations governing private banks is likely to impact business dynamicsand, hence, could impact our estimates.High Interest Rate Scenario: Increasing NPA concerns due to high interestrate and deteriorating asset quality across the sector on the back of economicscenario may cause reduction in upgrades and recoveries and may hurt theasset quality of bank in the near-term. FY09 FY10 FY11 FY12 FY13ENet Interest Income (NII) 649.62 829.84 1,006.52 1,208.35 1549.30NII Growth 25% 28% 21% 20% 28%EBITDA 424.81 641.95 635.47 767.9 1011.32EBITDA Margins 84.15% 79.47% 80.60% 85.63% 82.46%Profit Before Tax 294.65 371.51 483.87 654.17 862.80Profit After Tax 188.78 242.22 318.65 456.3 598.10Earnings Per Share 18.06 19.76 25.85 29.67 39.54 FY09 FY10 FY11 FY12 FY13E Equity 1702.89 2330.92 2624.29 3979.79 4477.42 Debt 3185.32 3671.39 4146.91 5696.49 6493.68 Cash/Deposit Ratio 8.94 8.12 8.05 6.37 7.68 Number of shares 10.26 11.997 12.099 15.012 15.025 FY09 FY10 FY11 FY12 FY13ENIM 2.84 3.21 3.25 3.30 3.41Book Value 155.94 187.04 201 255 286Int Expended/Int Earned 71 62.84 65.64 68.67 65.27Price to Earnings Ratio 21.32 19.48 14.89 12.97 9.74Price to Book Value Ratio 2.47 2.06 1.92 1.51 1.35ValuationAt the current market price of Rs 384.95, the stock is trading at 9.74x FY2013E earnings estimate. We expectING Vysya to outperform due to its healthy CASA ratio, stable NIMs, .and one of the best asset qualities indomestic banking space. We recommend a Buy on the stock with a price target of Rs 450. At our price targetthe stock will be valued at 11.38x FY2013E earnings. BMA Wealth Creators Equity Research
    • Model Portfolio Update Colgate-Palmolive (India) Limited Target - Rs. 1350/- Target - 55Investment RationaleMarket leader with excellent financial matrix: Colgate is one of the fewFMCG companies with real pricing power with dominant and increasingmarket share across oral hygiene products. The company has continued toachieve excellent business results year after year despite difficult economicconditions coupled with fierce competition, and high inflationary marketconditions resulting in higher input cost. The company achieved a healthy KEY MARKET DATAdouble-digit sales growth during the year 2011-12. Cash generation has Sector FMCGtherefore been excellent, and has also been aided by its move to tax free BSE Code 500830location of Baddi (Himachal Pradesh). Apart from the strong growth in profits, NSE Code COLPALthe balance sheet metrics with fixed asset turns of over 4x, ROCE of over CMP (as on 10.08.12) 1178.35100% is remarkable as well. 52 Wk. High/Low 1252.00/889.75Innovation to drive growth: The Companys growth is sparked by the Sensex/Nifty 17557.70/5320.40innovative products that it brings to the market. During 2011-12, innovative Shares outstanding (Cr.) 13.6products like Colgate Sensitive Pro-Relief (the only product that provides Face Value 1instant relief from hypersensitivity), variants of Plax Mouth Wash with Market cap (Rs. Cr.) 16236.86sensorial and functional benefits, were successfully launched further Daily avg. Volume 72400enhancing the broad range of oral care benefits that Colgate provides to the Free Float (%) 50.00%consumers. During 1Q FY13, the company launched Colgate 360 batterytoothbrush with dual action brush head and Colgate Max fresh toothbrush with Colgate Palmolive vs. Niftymulti height bristles.New Projects for sustainable development: To support the growthmomentum and to cater to the increasing requirement of the products, thecompany acquired a plot of land from Gujarat Industrial DevelopmentCorporation on long-term lease for setting up a new Toothpastemanufacturing facility. In April 2012, the company acquired land in AndhraPradesh on a long term lease for setting up a toothbrush manufacturingfacility. Both the manufacturing facility is expected to be operational in theyear 2013. SHAREHOLDING PATTERNP&G entry in toothpaste likely to be delayed: P&G has indicated that it willnot enter new categories in emerging markets, but continue to focus on As on 30th june,2012existing products. This delayed entry in toothpaste category is a significant Promoters 51.00%positive for Colgate. The fear of margin contraction due to increasedaggression in the category is also likely to be wiped off. FIIs 21.16% DIIs 5.98%Financial Snapshot Public 21.86% FY11 FY12 Y-o-Y % Net Sales 2220.56 2623.85 18.16% Total Expenditure 1801.41 2158.05 19.80% Interest 1.61 1.51 -6.21% Profit After Tax 402.58 446.47 10.90% P/Ex 39.81 35.89 - EPS 29.60 32.83 10.91% BMA Wealth Creators Equity Research
    • Model Portfolio UpdateColgate-Palmolive (India) LimitedCompany Background ProductsCPIL was incorporated in 1937 as a wholly owned subsidiary of its US parent. Oral CareCurrently the parent company holds 40.06% stake in the company. The Toothpastesproducts of the group include soaps, shampoos, cosmetics and toilet Toothbrushespreparations, toothpaste, tooth powder, toothbrushes, shaving brushes, fatty Toothpowderacids, glycerin and calcium phosphate. Whitening Products MouthwashThe company launched ‘Colgate Dental Cream’ in the same year as it wasincorporated in 1937. This was followed in 1948 by the launch of Colgate Personal Caretoothbrushes and toothpowder. In the early 1950s the company launched Bodywashthree more brands, ‘Palmolive’ shaving cream, ‘Halo’ shampoo and ‘Charmis’ Liquid Hand Washcold cream. The company offered 60% of its shareholding to the public Shave Prepsthrough an IPO in 1978. Skin Care Hair CareColgate is one of the few FMCG companies with real pricing power with Household Caredominant and increasing market share across oral hygiene products (51% inthe toothpaste segment, 48% in the tooth-powder market and 30% in the Surface Caretoothbrush market) and 4.6 mn outlets providing it the widest distribution reach From the Dentistamong peers. Several market surveys have rated Colgate as India’s most Gingivitis Treatmenttrusted brand and it is backed by a strong parent, which is the largest oral care Sensitivity Treatmentplayer globally. Tooth Whitening Fluoride Therapy Mouth Ulcer TreatmentIndustry Overview Speciality CleaningThe Indian Fast Moving Consumer Goods (FMCG) sector is booming from lastseveral years and given steady returns to its investors despite slowdown in theeconomy. The India Brand Equity Foundation (IBEF) estimates a total marketsize in excess of US$13.1 billion for FMCG industry in 2012. There is stiffcompetition among domestic companies, unorganized segment and MNCcompanies to increase their sales year-on-year, due to which they operate onlow operational cost and margins.Key drivers for growth in FMCG sector include rapid increase in the rate ofurbanization, rise in disposable incomes enabling the companies to focus onpremium product brands, constant innovation in existing products, penetrationto rural markets with strong distribution channels, rise in rural non-agriculturalincome and benefits from government welfare programs which contributes totop-line growth for FMCG companies.According to Nielsen’s research report entitled “Consumer 360”, the IndianFMCG market is estimated to grow to USD 100 billion by 2025 from USD 13billion in 2012. According to report, the key areas driving this growth would beincrease sales and acceptance of branded products, regular consumption ofFMCG goods, etc. BMA Wealth Creators Equity Research
    • Model Portfolio Update Colgate-Palmolive (India) LimitedInvestment Concerns Company PerformanceCompetition from New entrants: P&Gs entry in the oral care market with itsCrest/Oral B brand and heightened competitive intensity from HUL and Daburcould hit the company hard.Increase in raw material price: Higher packaging cost due to rise in crudeprices along with flavours like mint and menthol may push raw material costfurther. Further risks arise from down trading by consumers in response torecent price hikes, which could hurt the company’s top line.Deficient Rainfall: Colgate’s substantial turnover is derived from the ruralmarket. Deficient rainfall could impact agricultural activity which in turn couldhit rural demand. FY09 FY10 FY11 FY12 FY13ESales Revenue 1,694.81 1,962.46 2,220.56 2623.85 3023.40Sales Revenue Growth 15% 16% 13% 18% 18%EBITDA 369.36 523.87 555.81 629.21 670.07EBITDA Margins 22% 27% 25% 24% 23.98%Profit Before Tax 345.31 484.80 519.95 588.39 698.00Profit After Tax 290.22 423.26 402.58 446.47 365.75Earnings Per Share 21.34 31.12 29.60 32.83 39.00 FY09 FY10 FY11 FY12 FY13EEquity 216.30 326.11 384.05 435.39 593.06Debt 4.69 4.59 0.05 0 0Debt-Equity ratio 0.02 0.02 0.01 0.00 0.00Number of shares 13.6 13.6 13.6 13.6 13.6 FY09 FY10 FY11 FY12 FY13ECurrent Ratio(x) 0.91 1.05 1.12 1.12 1.12Book Value 15.90 23.98 28.24 32.01 45Interest Coverage Ratio 314.92 324.20 323.94 390.66 -Price to Earnings Ratio 55.22 37.86 39.81 35.89 30.21Price to Book Value Ratio 74.11 49.14 41.73 36.81 26.19ValuationAt the current market price of Rs 1178.35, the stock is trading at 30.21x FY2013E earnings estimate. We expectColgate Palmolive to outperform due to its market leadership in the oral care category and its focus oninnovation to drive growth. We recommend a Buy on the stock with a price target of Rs 1350. At our price targetthe stock will be valued at 34.62x FY2013E earnings. BMA Wealth Creators Equity Research
    • Model Portfolio UpdateIL&FS Transportation Networks Ltd. Target - Rs. 250/-Target - 55Investment RationaleLargest Private sector BOT Road Asset Portfolio: ITNL is the largestplayer in road BOT segment in India and has 23 projects worth 11,860 lanekms under its portfolio. At present, ITNL has 4 annuity projects worth 1,024lane kms and 6 toll based projects worth 3,326 kms, totaling 4,350 lane kmsunder operational phase. All the remaining projects are in different phases of Sector Infrastructureexecution, and are scheduled to be operational between years 2012 - 2014 BSE Code 533177 NSE Code IL&FSTRANSDiversified surface transport player with pan India presence: ITNL has 23road projects spread across the length and breadth of the country. The CMP (as on 10.08.12) 164.70company has bagged projects in difficult areas like J&K, Meghalaya and 52 Wk. High/Low 231.00/142.55Jharkhand which indicates company’s ability to execute these projects. Sensex/Nifty 17557.70/5320.40Besides that company is also diversified across other segments like railways Shares outstanding (Cr.) 19.43(metro), airports, and bus terminals Face Value 10 Market cap (Rs. Cr.) 3200.12Cash flow profile: ITNL has a good mix of annuity and toll projects, whichpositions it well to benefit from any upside in toll collection. At the same time, Daily avg. Volume 79319the company is able to enjoy stable cash flows from annuity projects. Its Free Float (%) 30%annuity portfolio is amongst the largest in the country, both in terms of projectsize and lane km, lending stability to cash flows IL&FS Transportation vs. NiftyAcquisition is EPS accretive: ITNL, through its subsidiary, ITNLInternational Pvt Ltd (Singapore based) has acquired a 49% equity stake inthe Chongqing Yuhe Expressway Co (Chongqing Yuhe), China. The stretchspans across 58kms, of which 27.1kms is tolled at five locations (towardsvarious exits). For the remaining 31.6kms, the company would receive anassured subsidy of around $22 million from the Chongqing Municipality with aminimum 5% increment in annuity every year. Also the company would getindemnified for any reduction in assured subsidies and any increase in taxrate from 15% in the next ten years. Thus this project offers significantrevenue and growth visibility in the coming yearsSignificant order book provides growth visibility: IL&FS Transportationorder backlog stands at Rs 12000 crores which provides significant revenue SHAREHOLDING PATTERNvisibility and growth prospects for the company in FY13E & FY14E. The As on 30th June,2012company has seen substantial growth in its order book mainly due to theincrease in project awarded by the NHAI and is expected to witness similar Promoters 72.46%project awards in the coming years FII 3.28%Financial Snapshot DII 3.61% Others 20.65% FY11 FY12 Y-o-Y %Net Sales 4048.23 5605.62 38.47%Total Expenditure 2893.91 4140.07 43.06%Interest 498.06 728.21 46.21%Profit After Tax 449.74 538.88 19.82%P/Ex 7.11 5.94 --EPS 23.15 27.74 38.47% BMA Wealth Creators Equity Research
    • Model Portfolio UpdateIL&FS Transportation Networks Ltd.Company Background State wise distribution of its capital projectsIL&FS Transportation Networks Ltd is one of the largest BOT road operators inIndia. The company undertakes complete project management from bid 6%evaluation to designing to O&M post construction. The company has, over the 11% 21% 2%years, acquired a position of leadership in the roads sector and has expanded 3%its scope of activities to Ports, Railways and Urban Transport Sectors. Itgenerates its revenue from annuity receipts, toll collections, operations & 5% 4%maintenance activities and advisory & project management fees. 11%ITNL is a pioneer in the road BOT space and has been involved in thedevelopment and operation of roads and highways for the past two decades. 29% 2% 6%The company has an established track record of having successfully bid,developed and operated road BOT projects on a commercial basis. The Himachal Pradesh Haryana J&K Jharkhandcompany’s portfolio has witnessed a solid growth in last 10 years where in its Kerala Maharashtraportfolio has grown from 190 lane kms in 2001 to 11860 lane kms in 2012. Madhya Pradesh Meghalaya Rajasthan Uttar Pradesh Andhra PradeshIndustry Overview Phases of NHDP PHASE 1:The infrastructure deficit in the Indian economy presents a substantial need for Golden Quadrilateral, NS – EWinfrastructure creation. The Government has well understood that the lack of corridor, port connectivity and othersinfrastructure is a stumbling block for an unhindered double-digit growth and Length : 7398 kmshas instituted several measures conducive for the growth of this sector. The PHASE II:XIIth five Year plan (2012-2017) reinforces the Government’s focus on NS – EW corridor and other nationalinfrastructure creation and upgradation. It envisages a total investment of Rs. highways41 trillion in the infrastructure segment in order to attain a 10% economic Length : 6647 kmsgrowth. PHASE III: Upgrading and four – laning ofThe Indian road network comprises expressways, national highways, state national highwayshighways, major district roads and rural and other roads. National Highways Length : 12109 kmsare the key constituents of Indias road network since they carry 40% of the PHASE IV:total road traffic although they constitute only 2% of the total road network. Improvement of national highwaysActivity in the road space is picking up as a result of increased project award Length : 14799 kmsby the National Highway Authority of India (NHAI). The authority has awarded PHASE V:projects spread over more than 6,491 km in FY12. This follows from 5,000 Six laning of existing four lanekms of project awards in FY11. The overall target for FY13 is even higher at highways8,800 km. In the recently held meeting on infrastructure sector chaired by the Length: 6500 kmsPrime Minister, the target for road sector award was set at 9,500 km in FY13. PHASE VI: ExpresswaysOver the years, the size of projects awarded by the authority has increased, Length : 1000 kmsboth in terms of length and project cost. Project award is expected to remain PHASE VII:robust over the next few years, given the number of projects in the pipeline. Ring Roads, bypasses, flyoversWe expect momentum in project award to continue, given the government’s Length: 700 kmsambitious target. BMA Wealth Creators Equity Research
    • Model Portfolio Update IL&FS Transportation Networks Ltd.Investment Concerns Rising Debt LevelsHigh debt burden: ITNL’s debt-equity stood at 3.8x in FY12. The increase indebt at consolidated level is mainly on account of drawdown happening fromsanctioned debt in accordance with construction progression. ITNL’s businessmodel is vulnerable to interest rate fluctuations and any hike in interest ratescould increase the company’s interest costsExecution risk: Delay in completion of construction of road may result in costoverrun or may raise requirement of additional finance. Extended constructionperiod will also cause loss of toll revenues for this extended period, asconstruction period is part of total concession period. FY09 FY10 FY11 FY12 FY13ESales Revenue 1,225 2,408 4,048 5,606 7,657Sales Revenue Growth 239% 97% 68% 38% 37%EBITDA 287 879 1,233 1,589 1,907EBITDA Margins 23% 36% 30% 28% 25%Profit Before Tax 78 524 674 785 887Profit After Tax 29 338 450 539 603Earnings Per Share 1.72 17.41 23.15 27.74 31.03 FY09 FY10 FY11 FY12 FY13EEquity 921 1,704 2,274 2,684 3,107Debt 1,854 3,322 5,467 10,269 12,812Debt-Equity ratio 2.01 1.95 2.40 3.83 4.12Number of shares 17.14 19.43 19.43 19.43 19.43 FY09 FY10 FY11 FY12 FY13ECurrent Ratio(x) 1.96 2.93 2.39 2.45 2.41Book Value 53.74 87.69 117.06 138.18 159.93Interest Coverage Ratio 1.44 2.69 2.33 2.08 2.01Price to Earnings Ratio 95.76 9.46 7.11 5.94 5.31Price to Book Value Ratio 3.06 1.88 1.41 1.19 1.03ValuationA well-balanced mix of toll and annuity road projects, rich experience of its parent company and a strong order-book that provides future visibility gives a positive outlook for the company. In the current competitiveenvironment, IL&FS Transportation is much better placed than other road development players with betterproject evaluation methods and IL&FS group background. We place IL&FS Transport in our preferred picks andassign a Buy rating on ITNL with a target price of Rs. 250 based on 8x FY13E earnings. BMA Wealth Creators Equity Research
    • Model Portfolio UpdateLarsen & Toubro Limited Target - Rs. 1665 /-Target - 55Investment RationaleIncreased outlay for infrastructure in 12th Five year Plan: The IndianPlanning Commission, has envisaged a total investment of ~$1 trillion ininfrastructure in its 12th Five Year plan (almost double the investment in 11thFive Year Plan). L&T is the largest E&C company in India and one of thelargest in the world. Infrastructure contributes nearly 40% of the order book of Sector Infrastructure Cons.the company. Given the prospects of increased infrastructure investment inIndia in the medium-term, we expect L&T to capitalize on the same BSE Code 500510 NSE Code LTOrder inflow robust at Rs19,594 crore: The order inflow of the company is CMP (as on 10.08.12) 1423.95robust at Rs19,594 crore. The management believes that the companys 52 Wk. High/Low 1723.00/969.15performance is on track to achieve its guidance of a 15-20% growth in both Sensex/Nifty 17557.70/5320.40inflows and revenues in FY13. The current order book stands at Rs.1,53,095 Shares outstanding (Cr.) 61.24crore. The majority of the orders are received from the private players from thetransportation, building and factory segments. Going forward, the company Face Value 2expects good traction from the new markets like West Asia and South-East Market cap (Rs. Cr.) 87202.70Asia Daily avg. Volume 2178634 Free Float (%) 90%Value Unlocking Going Forward: The L&T board has approved therestructuring of the company and implementation of the plan is underway. As Larsen & Toubro vs. Niftyper the plan, the engineering and infrastructure giant will be divided into ninevirtual companies, each of which will have full fledged management team of itsown and will also manage its own profit and loss account. Some of thecompanies formed out of L&T will be listed on the bourses before 2015. Eachof them is worth a billion dollars in revenues or has the potential to reach theresoon.Tight rates hit industrial, construction expenditure; reversal to aidinvestments: Sustained rate tightening by the regulator had impactedindustrial capex over the last 6-8 quarters. With a more than 350bps increasein rates, project investments across manufacturing, mining, power andconstruction space have experienced a substantial decline. All three majorsectors like manufacturing, mining and construction saw growth dipping below SHAREHOLDING PATTERNthe 10-year average growth rate. With the rate hike cycle expected to reverse As on 30th June,2012in the next 12-15 months, industrial and construction capex is set to see anuptick, leading to a favorable ordering cycle for L&T which gets substantial Promoters --business from rate sensitive clients. FII 14.07%Financial Snapshot DII 38.41% Others 47.52% FY11 FY12 Y-o-Y %Net Sales 52043.78 64313.11 23.58%Total Expenditure 43735.55 54367.77 24.31%Interest 1931.42 2894.41 49.86%Profit After Tax 4447.66 4682.29 5.28%P/Ex 19.49 18.62 --EPS 73.05 76.46 4.67% BMA Wealth Creators Equity Research
    • Model Portfolio UpdateLarsen & Toubro LimitedCompany BackgroundLarsen & Toubro (L&T) is the country’s largest engineering and construction Order Book BreakupCompany, with a dominant presence in Indias infrastructure, power,hydrocarbon, machinery and railway related projects. The company along withits group companies provides integrated design, engineering, procurement,construction and project management services to various sectors.Considered as the bellwether of the Indian engineering sector, L&T isrenowned for its strong execution capabilities and professional management.The company’s proven track record of nearly six decades in executingcomplex and diverse projects has helped to establish a very strong brandimage. With a customer base spanning across 30 countries, the company hassignificantly increased its global footprint, along with a notable presence in theMiddle East. Revenue & PAT TrendThe company is present in multiple operating segments such as Engineering &Construction (E&C), Electrical & Electronics (E&E), Machinery & IndustrialProducts (MIP) and others. The E&C division of L&T undertakes engineeringdesign and construction of buildings, factories, infrastructure, industrial andpower transmission & distribution, while the E&E segment is engaged inmanufacturing of electrical standard products, systems and equipment. TheMIP division of L&T is focused on manufacturing industrial valves, constructionand hydraulic equipment, machinery for mining, paper and rubber processingindustry. Through its subsidiaries like L&T Finance, L&T Infrastructure Financeand L&T Infotech, L&T has also diversified into financial services and theIT/ITeS sector.Industry OverviewEngineering and Construction industry forms the backbone of any economy asit is intensely linked with many other core sectors. The Indian engineeringsector, is the largest segment of the Indian industry and also the largestforeign exchange earner for the country.The various core sectors of the country, in particular, Power, TransportationInfrastructure, Hydrocarbon, Fertiliser, Defence, etc, faced multiple challengesin FY12 due to policy delays. Consequently the commitments on capitalexpenditure and fresh investments were deferred, impacting the growth inthe order inflow of the industry during 2011-2012.Despite the prevailing economic uncertainties, the year 2012-2013 holdsprospects of gradual build-up in the growth momentum of the Indian economy.Infrastructure development assumes prominence in the Governments budgetproposals for the year 2012-2013. Thus the near term prospects look bright forthe sector with a revival in the Indian Economy. BMA Wealth Creators Equity Research
    • Model Portfolio Update Larsen & Toubro LimitedInvestment ConcernsPolicy inaction: Many projects in sectors like ports, airports, defence andfertilizers are at various stages of regulatory approval, which would be followedby financial closure. A significant delay in granting necessary approvals wouldpostpone the order pipeline. Also, a sizeable portion of revenues of thecompany is derived from power sector, which is facing fuel crisis, SEBs issues,environmental issues, etc. This might defer new projects and execution of theexisting ones.Further deterioration in macro environment may lead to a subdued orderbook: A suppressed macro environment, both domestically and globally, maylead to a slowdown in order awards, which, in turn, would hammer the revenuevisibility going forward FY09 FY10 FY11 FY12 FY13ESales Revenue 40,377 43,833 52,044 64,313 73,960Sales Revenue Growth 38% 9% 19% 24% 15%EBITDA 6,440 9,152 8,922 9,656 10,621EBITDA Margins 15.95% 20.88% 17.14% 15.01% 14.75%Profit Before Tax 5,184 7,481 6,800 6,974 7,630Profit After Tax 3,758 5,442 4,448 4,682 5,097Earnings Per Share 64.16 90.37 73.05 76.46 83.23 FY09 FY10 FY11 FY12 FY13EEquity 13,988 20,991 25,051 29,387 33,546Debt 20,370 24,607 24,841 36,156 37,602Debt-Equity ratio 1.46 1.17 0.99 1.23 1.12Number of shares 58.57 60.22 60.885 61.24 61.24 FY09 FY10 FY11 FY12 FY13ECurrent Ratio(x) 1.18 1.21 1.12 1.07 1.12Book Value 238.82 348.58 411.44 479.86 547.78Interest Coverage Ratio 9.03 8.24 8.38 9.22 9.53Price to Earnings Ratio 22.19 15.76 19.49 18.62 17.11Price to Book Value Ratio 5.96 4.09 3.46 2.97 2.60ValuationL&T has continuously evolved to effectively benefit from emerging trends and opportunities. The company hasacquired higher adaptability, enabling it to seize macro opportunities and wither volatility better than its peers.With the global downturn in the recent past, the company has taken several measures to accelerate its growthmomentum. The stock currently trades at 18.62 times its FY12 earnings. We expect the company to deliver asuperior performance and assign a price target of Rs. 1665 based on 20x FY13E earnings. BMA Wealth Creators Equity Research
    • Model Portfolio Update Ingersoll-Rand (India) Limited Target - Rs. 575/- Target - 55Investment RationaleCapacity Expansion: The Air Solutions provider, IRL has planned to invest$100 million (over Rs 450 crore) in the next three years to set up a new plant,increase its existing capacities and expand its reach in India. The company issetting up a new plant in Chennai in south India at an approximate cost ofaround Rs 100 crore. It has also forayed into the Cold Chain Consultancy KEY MARKET DATAsegment in August 2011. This Cold market size is estimated to be around Rs Sector Non Electric Equip.800 crore and is growing at the rate of 20-22%. Further, it would invest around BSE Code 500210Rs 50 crore in the next two to three years at its existing Narola plant in NSE Code INGERRANDAhmedabad. This additional capex in Narola plant will be for newer and higherrange of compressors. The company is also planning to set up new CMP(as on 10.08.12) 455.50manufacturing unit in Chennai with the CAPEX of $22 million and it is 52 Wk. High/Low 548.8/354.05expected to become operational by Q1-FY14. This would be INGR’s third Sensex/Nifty 17557.70/5320.40manufacturing unit after Naroda (Gujarat) and Sahibabad (Uttar Pradesh). Shares outstanding (Cr.) 31.57Other than this, it is running two technology centers in Bangalore andChennai. Thus, with the support of technology of the parent company, IRL Face Value 10(India) will be ready to manufacture and supply every range and capacity of Market cap (Rs. Cr.) 1441.33compressors. Daily avg. Volume 7753.7Boosting Quarter: In Q1FY13, the company has posted an EPS of Rs 7.18. Free Float (%) 29.94This has been a big jump from the previous quarter EPS of 6.57, as the newfactory production has started. Next year, with 100% capacity coming into Ingersoll Rand vs. Niftyoperation, IRL is expected to clock a topline of Rs 690-700 crore and abottom-line of Rs 92-99 crore.Zero Debt & Strong Cash-flow: IRL’s debt book stands clear with zero debt.Further, the company had cash and bank balance of Rs 450.61 crore as onJune 2012. This translates into cash per share of Rs 143. The company isexpected to utilize this cash by way of acquisition and/or distribution to theshareholders in the form of dividend/buyback. Further, it will also act asadditional benefit and would support the company in times of hardeninginterest rates.Regular Dividend Model: IRL has a continuous track-record of regulardividend since last 21 years. Moreover since last nine years, the company hasmaintained a rate of 60% dividend on face value of Rs10. Thus, along with thecapital appreciation and growth benefit, the investor stands to gain the regular SHAREHOLDING PATTERNdividend benefit. This makes the company, a further safe bet for investment. As on 30th June, 2012Financial Snapshot Promoters 74.00% FIIs 2.87% FY11 FY12 Y-o-Y % DIIs 4.34%Net Sales 492.74 592.02 20.15% Public 18.79%Total Expenditure 440.54 534.08 21.23%Interest 0.54 0.47 -12.96%Profit After Tax 68.62 82.76 20.61%P/Ex 21.95 20.41 -EPS 20.75 22.32 7.57% BMA Wealth Creators Equity Research
    • Model Portfolio UpdateIngersoll-Rand (India) LimitedCompany Background Business SegmentIngersoll-Rand (India) Limited engages in the manufacture and sale ofcompressors in India and internationally. It offers reciprocating compressors, Ingersoll-Rands Main focus area iscentrifugal compressors, system components, and air conditioner bus Air Solution Segmentpackages. The company’s products are primarily used in the automotive,metals, cement, textiles, and pharmaceutical sectors. It also offers contractmanufacturing services to its associate companies. Main Products of the company are Air Compressors andIngersoll-Rand (India), a 74% subsidiary of Ingersoll Rand Company, U.S., has Stationary Generatorsits presence in India since 1921. The company established its firstmanufacturing plant in India in 1965 and became a public limited company in1977. Its manufacturing facilities in Ahmedabad are ISO 9001:2008 certifiedand those Sahibabad ISO 9001:2000, ISO 14001:2004 & OHSAS 18001:2007 Company Performancecertified.Ingersoll Rand’s products are known in the market for their quality andreliability. With strong sales presence in over 15 locations across the countryand with an all wide national distributor network, the company is a dominantplayer in its business of providing solutions for infrastructure development,industry and climate control.Worldwide, Ingersoll Rand Corporation is moving from a product-centricapproach towards a solutions-centric approach. It is no longer an engineeringcompany offering world-class products but one that provides customers withsolutions based on these products. In India, Ingersoll Rand is working in threekey areas of productivity by leveraging its local manufacturing operations inAhmedabad and Sahibabad, innovating through its engineering R&D centers Industry Performancein Bangalore and Chennai, and growing through the expanded footprint in thecountry.Besides compressors, Ingersoll Rand offers the widest range and technologiesfor air treatment and filtration solutions, storage solutions and energy savingscontrols solutions as well as energy saving compressed air modular piping anddistribution solutions for increasing the overall efficiency of the entire system,besides reducing maintenance costs and downtime.These products growth is fuelled by the increased demand in domesticconsumption as well as exports. Ingersoll Rand is well positioned to leveragethe opportunities. BMA Wealth Creators Equity Research
    • Model Portfolio Update Ingersoll-Rand (India) LimitedInvestment Concerns Stabilization & GrowthLack of Diversification: IRL’s excessive concentration in the Air solutionsproviding segment, results in lack of diversification. This makes the company’sgrowth highly dependent on a single product.High Degree of Competition: Market for Air solution products continues to behighly competitive.Rising Material Cost: Escalation in raw material cost and other inputs canlead to reduced profitability. FY09 FY10 FY11 FY12 FY13ESales Revenue 373.90 356.55 492.74 592.02 693.20Sales Revenue Growth -23% 5% 38% 20% 17%EBITDA 107.06 79.15 106.43 128.75 69.90EBITDA Margins 28.63% 22.20% 21.61% 21.75% 10.08%Profit Before Tax 102.73 73.15 101.15 123.24 142.30Profit After Tax 67.2 47.7 68.62 82.76 95.50Earnings Per Share 20.27 14.01 20.75 22.32 30.30 FY09 FY10 FY11 FY12 FY13EEquity 747.39 772.67 819.24 813.95 900.45Debt 0 0 0 0 0Debt-Equity ratio - - - - -Number of shares 3.157 3.157 3.157 3.157 3.157 FY09 FY10 FY11 FY12 FY13ECurrent Ratio(x) 6.63 6.87 6.72 6.81 6.80Book Value 236.74 244.75 259.5 257.82 267.42Interest Coverage Ratio 605.29 40.54 188.31 263.21 110.95Price to Earnings Ratio 22.47 32.51 21.95 20.41 15.03Price to Book Value Ratio 1.92 1.86 1.76 1.77 1.70ValuationAt the current market price of Rs 455.50, the stock is trading at a P/E of 15.03x FY13E earnings estimate. Witheconomies of scale, new product launches and technological innovations, the top-line’s growth is expected to betranslated into bottom-lines growth, going forward. Currently, the company does not have any debt on its booksand we expect it to use internal accruals to fund its ongoing expansion. We recommend a Buy on the stock with aprice target of Rs 575 based on 19x FY13E earnings. BMA Wealth Creators Equity Research
    • Model Portfolio UpdateDisclaimer: This document is for private circulation only. Neither the information nor any opinion expressed constitutes an offer, or any invitation to make an offer, tobuy or sell any securities or any options, future or other derivatives related to such securities. BMA Wealth Creators Ltd. Or any of its associates or employees doesn’texcept any liability whatsoever direct or indirect that may arise from the use of the information herein. BMA Wealth Creators Ltd. and its affiliates may trade for theirown accounts as market maker, block positional, specialist and/or arbitrageur in any securities of this issuer (s) or in related investments, may be on the opposite side ofpublic orders. BMA Wealth Creators Ltd. and its affiliates, directors, officers, employees, employee benefit programs may have a long or short position in any securitiesof this issuer (s) or in related investments no matter content herein may be reproduced without prior concert of BMA. While there report has been prepared on the basisof published/other publicly available information considered reliable, we are unable to accept any liability for the accuracy of its contents. BMA Wealth Creators Limited 29-5A Dr. Ambedkar Sarani, Viswakarma II Topsia Road, Kolkata-700046, Tel (033) 40110099, research@bmastock.com, www.bmawc.com BMA Wealth Creators Equity Research