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Market Strategy - October 2010
1. Please refer to important disclosures at the end of this report.
Investment wisdom distilled
In a recent report, “Finding Alpha returns at 20,000 Sensex”, we had discussed
proven strategies for picking stocks that could give positive returns, even if the Sensex
remained range-bound due to the current premium valuations. Continuing that
discussion, in this month’s strategy, we have added more colour to the perennial
themes of High RoE Businesses and Deep Value Sectors. We have also introduced a
couple of new themes viz., companies where promoters have increased their stakes
and depressed margin companies.
High RoE companies, cheap relative to Sensex
When it comes to leaders in any sector, we prefer to compare their valuations with the
Sensex, because on purely peer comparison they will usually look expensive
(justifiably). On this criteria, viz., inherently high-RoE leaders that are trading at a
lower premium to the Sensex than their 5-year averages, we have included 2 stocks
that we expect to give alpha returns going forward.
RIL, for instance, has historically traded at 18.5% discount to Sensex P/BV, but is
currently trading at 33% discount, which we believe is too less, considering 34%
earnings CAGR over FY2010-12E due to KG Basin ramp-up as well as improved
outlook on ROICs and cash redployment due to shale gas, broadband and power
ventures. United Phosporous is also one of the leading companies in its sector,
operating in a high RoE, high entry-barrier business and trading at a substantial 33%
discount to the Sensex P/E, while over FY2005-08 it used to trade at equal to Sensex
valuations.
High RoE companies, cheap relative to Peers / historical valuations
Looking at the IT sector, we find that although the Tier 1 stocks are already trading at
reasonably high valuations, some of the next-rung stocks are trading at a significant
discount to the Tier 1 stocks due to near-term, company-specific overhang – a perfect
recipe for our next Alpha category. In the case of our top pick from this space,
Mphasis, for instance, we believe the current 40% discount to Tier 1 IT companies
does not reflect its parentage of one of the largest IT companies globally (HP-EDS),
which is driving rapid growth and bringing it closer to Top Tier status.
In the Cap goods space, we like Blue Star, given its high RoE profile of over 40% and
cyclical upturn in sales (22% CAGR expected over FY2010-12E). Moreover, the stock is
trading at 10% discount to Voltas, even though Voltas has a high exposure to the
Middle East markets where growth visibility is relatively lower at present, while Blue
Star is a domestic-focused player. The bearings industry is expected to strong growth
on the back of the expected uptick in the industrial and auto segments. In this space,
we like Fag Bearings, the second largest player in the industry, with strong MNC
parentage and 30-33% RoCE. The stock is trading at an attractive 10.0x CY2012E
P/E, which is at a 15% discount to peers.
Value stocks
Value investing is a perennial strategy, working especially well in stocks trading below
book value. Here, we have covered Electrosteel Casting, where we believe the market
is not factoring substantial potential upsides from its Coal and Iron ore mines – the
stock is trading at just 0.7x FY2012E BV, providing substantial margin of safety. In the
case of Finolex Cables, valuations are unjustifiably depressed due to temporary forex
losses and in our view, fail to capture the underlying profitability of the company’s
cable business as well as the significant market value of its investments in group
company Finolex Industries.
From the real estate sector, our Top Pick is Anant Raj. We are positive on this stock
due to its strong balance sheet, inexpensive valuations (trades at 1.2x FY2011E P/BV
and 29% discount to our one year forward NAV) and generating ~54% of its GAV
from Office and Retail sectors which are witnessing strong traction.
Market Strategy
October 12, 2010
Top Picks
Company CMP (Rs) TP (Rs)
High ROIC & Cheap relative to Sensex
RIL 1,048 1,260
United Phosphorous 182 228
High ROIC & Cheap relative to Peers
Blue Star 477 589
FAG Bearing 859 1,035
Mphasis 660 872
Value Stocks
Anant Raj 149 178
Electrosteel Casting 47 72
Finolex Cables 59 85
Value Unlocking
Alembic 62 74
GE Shipping 324 396
Buyback / Promoters increasing stake
LMW 2,490 2,819
Surya Roshni 113 143
Turnaround Stocks
Denso India 103 136
ICICI Bank 1,127 1,350
Note: Investment period – 12 Months
BSE Sensex (20,250) and Price as on October 8, 2010
Angel Portfolio
Sector Weightage(%) Stocks
Auto &
Ancillaries
8.0 Maruti, FAG Bearings,
Denso
Banking 26.0 SBI, Axis Bank, ICICI
Bank, HDFC Bank
FMCG 3.0 ITC
Hotels 3.0 Taj GVK
Infra &
Cap
Goods
15.0 Blue Star, L&T, LMW,
Nagarjuna
Construction
Media 3.0 Jagran Prakashan
Metals 6.0 Electrosteel Castings,
Tata Sponge
Oil & Gas 10.0 Reliance Industries
Pharma 6.0 Cipla, Aurobindo
Pharma
Real Estate 3.0 Anant Raj Industries
2. October 12, 2010 2
Market Strategy
Value Unlocking
We find substantial value unlocking potential in the two stocks we have included under
this category – Alembic and GE Shipping. We believe that de-merger of Alembic into
Alembic and Alembic Pharma is a long term positive as it unlocks value for both the
businesses and paves the way to rope in future investors. In the case of GE Shipping,
the stock is trading at cheap valuations of 0.7x FY2012E BV, not capturing the
improvement in Tanker Freight rates recently. Moreover, the company intends to list its
97.62% subsidiary, Greatship Ltd (GIL) by 2HFY2011E through fresh equity issuance.
We believe this will unlock potential value of the Offshore business, which globally
trades at higher multiples than the Shipping business due to high earnings visibility.
Buyback / Promoters increasing stake
Empirically and intuitively, in companies where buybacks have been announced or
promoters have increased their stake, this has generally been a good lead indicator of
improvement in earnings and hence, stock returns. Taking this as a starting point,
amongst various such stocks, we have picked Lakshmi Machine Works and Surya
Roshni, where we believe the fundamentals are poised for significant improvement,
which valuations still don’t reflect.
Turnaround stocks
Lastly, stocks covered under this category are those where we believe the companies
are set for a material improvement / revival in their operating margins and sustainable
RoEs. For instance, in case of ICICI Bank, we believe the management’s focus on
improving CASA share and exiting unprofitable loan segments will drive a material
improvement in the company’s sustainable RoEs from 9.7% in FY2010 to 15.5% in
FY2012E, with further improvement likely in FY2013E as well. We expect this to drive a
substantial rerating of the stock.
Denso India is a subsidiary of the US $30bn global auto ancillary major, Denso Corp.,
which has strong relations with global auto majors, viz. Suzuki, Honda and Toyota.
Given the company’s MNC profile and strong product range, current margins are too
low and are expected to show material improvement. We have factored in 7.3%
EBITDA margins in FY2012E vs. 4.8% in FY2010, the drivers being localization,
increased bargaining power and measures by Bank of Japan to curb further Yen
appreciation. Moreover, the stock is available at cheap valuations of 1.1x FY2012E BV.
Invest in Alpha stocks
We remain bullish on India’s growth prospects and attractiveness for receiving
continued foreign investments. Looking at Sensex valuations of 16.1x FY2012E EPS,
valuations while not cheap, are not stretched either. Hence we maintain an overweight
stance in our model portfolio on sectors such as banking, infrastructure and Cap
goods. At the same time, we recommend the top picks discussed in this note, for
generating Alpha returns.
3. October 12, 2010 3
Market Strategy
Top Picks
High ROIC & Cheap relative to Sensex
Reliance Industries (CMP: Rs.1,048/ TP: Rs.1,260/ Upside: 20%)
RIL’s stock price has borne the brunt of negative news flows on account of slower
ramp-up of KG Basin gas, subdued refining and petrochemical margins and
concerns over the redeployment of the cash flows. However, we believe that the
current price has discounted the worst case scenario and there is potential upside
for the stock from the current levels.
We expect RIL’s profitability to register 34% CAGR over FY2010-12E driven by
improvement in refining margins coupled with ramp up of oil and gas production
at the KG Basin. Moreover, increase in the share of E&P in the profit matrix will in
turn reduce exposure to cyclical segments.
We expect the company's foray in the newer ventures (such as shale gas,
Broadband and power) along with discovery and monetisation of its upstream
portfolio to keep it on high-growth orbit going ahead. Moreover, the same is also
likely to resolve the concerns over the redeployment of the cash flows. On the
valuation front, the stock is relatively under-valued trading at 1.8x FY2012E P/BV.
Moreover, RIL is trading at ~33% discount to Sensex in terms of FY2012E P/BV,
even though estimated RoIC for FY2012E continues to be as high as 18.0%.
Hence, we maintain a Buy on RIL, with a Target Price of Rs1,260, translating into
an upside of 20% from current levels.
One-year forward Premium/Discount to Sensex P/BV
Source: Company, Angel Research
Comparison with Sensex
Earnings growth (FY2010-12E CAGR) FY2012E P/BV
Company 34.0 1.8
Sensex 19.7 2.7
Source: Company, Angel Research
Key Financials
Y/E Sales OPM PAT EPS ROE P/E P/BV EV/EBITDA EV/Sales
March (Rs cr) (%) (Rs cr) (Rs) (%) (x) (x) (x) (x)
FY2011E 234,754 17.4 22,718 69.5 15.0 15.1 2.1 9.2 1.6
FY2012E 243,596 20.0 28,530 87.2 16.4 12.0 1.8 7.2 1.4
Source: Company, Angel Research
(60.0)
(40.0)
(20.0)
-
20.0
40.0
60.0
Apr-04
Oct-04
Apr-05
Oct-05
Apr-06
Oct-06
Apr-07
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Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
Oct-10
(%)
Prem/Disc to Sensex P/BV Avg Prem/Disc to Sensex P/BV(sinceFY2005)
4. October 12, 2010 4
Market Strategy
United Phosphorous (CMP: Rs.182/ TP: Rs.228/ Upside: 25%)
United Phosphorus (UPL) figures among the Top-5 generic Agrichemical players in
the world, with a presence across major markets like the US, EU, Latina America
and India.
Total off-patent market is worth US $29bn, of which a mere US $16bn is currently
being catered by the generic players. Furthermore, 61% of the same is controlled
by the five largest generic players including UPL. Further, given the high entry
barriers by way of high investments, entry of new players is also restricted. Thus,
amidst this scenario and on account of having a low cost base, we believe that UPL
enjoys an edge over competition and is placed in sweet spot to leverage the
upcoming opportunities in the global Generic space
Over FY2010-12E, we expect UPL to post 9% and 22% CAGR in Sales and PAT,
respectively. We expect RoCE and RoE to improve from 14% and 19% in FY2010
to 20% each in FY2012E.
At current valuations of 10.3x FY2012E EPS, the stock is attractively valued. Over
FY2005-08, UPL traded in-line with Sensex P/E, however post global meltdown
and deterioration in core business, stock has been trading at discount. With
improvement in earning and RoEs, current P/E discount of 33% against Sensex is
unwarranted, hence we maintain our Buy recommendation on the stock with
Target Price of Rs228.
Comparison with Sensex
Earnings growth (FY2010-12E CAGR) FY2012E PE
United Phosphorous 18.7 10.3
Sensex 19.7 16.1
Source: Angel Research
One year forward Premium/Disc to Sensex P/E
Source: C-Line, Angel Research
Key Financials
Y/E Sales OPM PAT EPS ROE P/E P/BV EV/EBITDA EV/Sales
March (Rs cr) (%) (Rs cr) (Rs) (%) (x) (x) (x) (x)
FY2011E 5,830 20.3 652 14.1 19.3 12.9 2.2 7.6 1.5
FY2012E 6,406 21.3 814 17.6 19.9 10.3 1.9 6.3 1.3
Source: Company, Angel Research
(50)
(40)
(30)
(20)
(10)
0
10
20
30
40
Apr-04
Aug-04
Dec-04
Apr-05
Aug-05
Dec-05
Apr-06
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Dec-06
Apr-07
Aug-07
Dec-07
Apr-08
Aug-08
Dec-08
Apr-09
Aug-09
Dec-09
Apr-10
Aug-10
(%)
Prem / Disc to Sensex P/E Avg Prem/Disc to Sensex P/E (Since FY2005)
5. October 12, 2010 5
Market Strategy
High ROIC & Cheap relative to Peers
Blue Star (CMP: Rs.477/ TP: Rs.589/ Upside: 23%)
Blue Star operates in a high value add space, as indicated by its high RoE profile
of over 40%. The company is poised for strong growth in the years to come, based
on positive business outlook across all its segments and a healthy order book of
Rs1,976cr, which is 1.1x FY2010 sales of the Electro Mechanical Projects and
Packaged Air Conditioning Systems (EMPPACS) segment. The acquisition of DS
Gupta Construction will complement the company’s service bouquet, which would
now have a strong presence in the plumbing and fire fighting space.
Going ahead, we expect the demand from the traditional IT and office segments to
improve, driving the growth of the company. We expect the sales to grow at a
CAGR of 22.3% over FY2010-12E.
At the CMP, the stock is trading at reasonable valuations of 15.4x FY2012E EPS,
compared to a P/E of 17.2x for Voltas, even though Voltas has a high exposure to
the relatively weaker Middle East markets, while Blue Star is a domestic-focused
player. We believe that this is a good entry point into the stock, keeping in view its
strong growth prospects. We have valued the stock at P/E of 19x FY2012E EPS and
arrived at a target price of Rs589.
Blue Star trading at a Discount to Peers
FY2012E PE FY2012E RoE (%) FY2010-2012E PAT Growth
Blue Star 15.4 40.4 18.8
Voltas 17.2 29.1 23.7
Source: Company, Angel Research; * Note: Blue Star's peers include only Voltas
Key Financials
Y/E Sales OPM PAT EPS ROE P/E P/BV EV/EBITDA EV/Sales
March (Rs cr) (%) (Rs cr) (Rs) (%) (x) (x) (x) (x)
FY2011E 3,061 10.5 222 24.6 40.1 19.4 7.0 13.4 1.4
FY2012E 3,778 10.7 279 31 40.4 15.4 5.6 10.7 1.1
Source: Company, Angel Research
FAG Bearing (CMP: Rs.860/ TP: Rs.1,035/ Upside: 20%)
FAG Bearing (FAG) is India’s second largest player in the Indian bearing industry
with a total market share of ~15%, and a market leader in the spherical roller
bearing segment with a market share of ~55%. FAG is a member of the Schaeffler
Group, Germany, a global leader in rolling element bearing segment and one of
the most prominent player in the industry. We believe that the robust demand in
the auto and industrial segments will aid FAG in registering a CAGR of ~17% in
net sales and ~25% in net profit over CY2009-12E.
We believe that there is likely to be a substantial uptick in the industrial segment in
the next three-four quarters driven by increase in demand from capital good
companies. Also auto segment is likely to grow driven by 12.3% CAGR in auto
sector volumes. The company has a strong customer base (Maruti, M&M, Tata
Motors, GM, Ford, Daimler Chrysler, etc.) in this segment.
The company’s net asset turnover remains high (over ~6x in CY2010E) due to
largely depreciated assets. Its strong business model enables it to record robust
and consistent RoCE in the range of 30-33%. Cash flow generation is also
expected to remain healthy. On the valuation front, the stock is attractively priced
6. October 12, 2010 6
Market Strategy
at 10.0x CY2012E EPS vs. the peer average of 11.7x CY2012E EPS. We rollover to
CY2012E and recommend a Buy on the stock, with a Target Price of Rs1,035,
valuing the stock at 12x CY2012E earnings.
Relative valuations
CY2012E P/E 5-year average P/E CY2012E P/E Peer average
FAG Bearings 10.0 9.7 11.7
Source: Bloomberg, Company, Angel Research
Peer valuations
Company CMP (Rs) Mcap (Rs cr) EPS (Rs) RoE (%) P/E (x) P/BV (x) EV/EBITDA (x)
FAG 860 1,429 53.7 19.3 16.0 3.1 9.3
SKF 587 3,097 29.2 21.6 20.1 4.3 12.0
Timken 164 1,046 6.9 13.2 24.0 3.2 17.3
NRB 54 264 6.6 16.9 8.3 1.4 5.1
Source: Company, Angel Research; Note: Valuation on TTM basis
Key Financials
Y/E Sales OPM PAT EPS ROE P/E P/BV EV/EBITDA EV/Sales
March (Rs cr) (%) (Rs cr) (Rs) (%) (x) (x) (x) (x)
CY2010E 1,049 18.3 118 70.9 22.9 12.1 2.5 6.3 1.1
CY2011E 1,185 18.0 128 76.7 20.4 11.2 2.1 5.4 1.0
CY2012E 1,326 17.4 143 86.3 19.2 10.0 1.8 4.7 0.8
Source: Company, Angel Research
Mphasis (CMP: Rs.660/ TP: Rs.872/ Upside: 32%)
The company steered the pricing headwind from HP’s renegotiation exercise very
prudently by making up the cuts in application services with higher price points in
Infrastructure services. The major pricing review overhang is done and, going
forward, management expects a stable pricing arrangement with HP given that the
50% of rate card pricing will remain fixed and 50% will be market driven
Management is focused on enhancing the company’s growth trajectory in the
Non-HP business going forward. This initiative coupled with the effective rate card
implementation, which has witnessed cost optimisation, would see improved
operational performance for Mphasis going ahead.
Mphasis has strong cash position of Rs1,487cr as on July 2010, which would help
it to go for acquisitions of strategic fit in the size of US $50mn–$100mn annual
revenue run rate.
Considering the company’s parentage of one of the largest IT companies globally
(HP-EDS), driving rapid growth and bringing it closer to Top Tier status, we expect
Mphasis to be rerated from the FY2012E P/E of 10.8x that it is currently trading at.
We value the stock at 14.3x FY2012E EPS of Rs60.9 (at 35% discount to Infosys’
target PE of 22x and in line with target multiple for HCL Tech) and maintain our
Buy rating on the stock with a Target Price of Rs872.
Relative valuations
FY2012E P/E 5-year average P/E
Avg FY2012E P/E
for Tier 1 cos.
Mphasis 10.8 11.6 18.3
Source: Company, Angel Research
7. October 12, 2010 7
Market Strategy
Peer valuations
FY2012E FY2012E FY2012E FY2010-FY12E FY2012E FY2012E
P/BV(x) P/E(x) EV/EBITDA EPS CAGR(%) ROCE(%) ROE(%)
Infosys 5.2 21.4 13.8 14.5 25.4 24.2
TCS 6.1 20.1 13.4 15.6 41.5 33.8
Wipro 4.1 18.0 11.4 16.6 17.6 24.4
HCL Tech 3.3 13.8 7.8 33.2 17.1 23.8
Mphasis 2.4 10.8 6.0 8.4 43.6 24.1
Source: Company, Angel Research
Key Financials
Y/E Op Inc. NIM PAT EPS ABV ROA ROE P/E P/ABV
March (Rs cr) (%) (Rs cr) (Rs) (Rs) (%) (%) (x) (x)
FY2011E 6,083 25.4 1,237 58.9 30.5 11.2 3.1 7.2 1.8
FY2012E 7,101 24.2 1,279 60.9 24.1 10.8 2.4 6.0 1.4
Source: Company, Angel Research
Value Stocks
Anant Raj Industries (CMP: Rs.149/ TP: Rs.178/ Upside: 19%)
There had been various litigation surrounding Huaz khas project resulting in delay
of launch which has been sorted out. The management has indicated that the
project is back on track and would be launched soon after Diwali. The said
property is of 0.27mn sq ft and going rates in vicinity is in range of
Rs25,000-30,000/sq. ft. We expect this project to contribute Rs400cr of profit over
FY2011-13E i.e 30% of our profit estimates.
We believe, the Indian Office sector is in the recovery phase of the property cycle.
We have begun to see an improvement in the absorption of new supply in 1H
2010 in most key metros. Recent trends in the top seven cities of India indicate that
absorption levels have improved significantly (vis-à-vis prior years), and in a few
cases they have exceeded the new supply by 1.5x. NCR, Pune and Chennai have
shown the maximum improvement. Anant Raj Industries (ARIL) has already
constructed some 3mn sq. ft. of ready leasable assets in the NCR region. The
company currently has two projects (retail mall of 0.75mn sq. ft. in Delhi and IT
Park of 1.1mn sq. ft. in Manesar), which we believe will start generating rental
income from FY2011E itself. Further, ARIL has five operational hotels, most of
which are located in Delhi.
ARIL remains our top pick in the real estate sector, given a strong balance sheet,
inexpensive valuations (trades at 1.2x FY2011E P/BV) and generating
approximately 54% of its GAV from Office and Retail sectors which are witnessing
strong traction. The stock is trading at a discount of 29% to our one year forward
NAV of Rs209. Hence we maintain a Buy on stock with a Target Price of Rs178
(15% discount to our one-year forward NAV).
8. October 12, 2010 8
Market Strategy
ARIL’s Valuation summary
1 Yr forward NAV (Rs per share)
Commercial 128
Hospitality 52
Residential 46
Other 11
Total 237
Add: Net Cash 9
Less: Present value of taxes (38)
NAV/share (Rs) 209
Target Price (Rs) 15% discount to NAV 178
Source: Company, Angel Research
Key Financials
Y/E Sales OPM PAT EPS ROE P/E P/BV EV/EBITDA EV/Sales
March (Rs cr) (%) (Rs cr) (Rs) (%) (x) (x) (x) (x)
FY2011E 491 52.7 209 6.6 5.6 22.4 1.2 16.4 8.6
FY2012E 995 58.2 434 13.8 10.6 10.8 1.1 8.2 4.8
Source: Company, Angel Research
Electrosteel Castings (CMP: Rs47/ TP: Rs.72/ Upside: 54%)
Electrosteel’s (ECL) backward integration initiatives through coking coal mine at
Parbatpur (Jharkhand), which is already operational, is expected to result in
expansion of EBITDA margin by 329bp over FY2010-12E.
The company is also awaiting final environmental clearance for its iron ore mine at
Kodolibad (Jharkhand), which will further lower costs, but has not been factored in
our estimates.
ECL is venturing into steel-making through its associate Electrosteel Steels, which is
setting up a 2.2mn tonne steel plant expected to begin progressive commissioning
from October 2010E. The plant is expected to be fully commissioned by June
2011E.
Currently, the stock trades at 0.8x FY2011E and 0.7x FY2012E P/BV. On a P/E
basis, the stock trades at 7.2x FY2011E and 6.9x FY2012E earnings. We maintain
a Buy on the stock, valuing the Core business at 8x FY2012E FDEPS and its
investments in the Steel business at 1x Book Value.
SOTP Valuation
(Rs)
FY2012E EPS 6.7
Multiple (x) 8
Value Per share 53
Steel business 19
Target Price 72
Source: Company, Angel Research
9. October 12, 2010 9
Market Strategy
Key Financials
Y/E Sales OPM PAT EPS ROE P/E P/BV EV/EBITDA EV/Sales
March (Rs cr) (%) (Rs cr) (Rs) (%) (x) (x) (x) (x)
FY2011E 1,706 26.2 246 6.5 14.2 7.2 0.8 5.5 1.5
FY2012E 1,818 28.0 254 6.7 13.1 6.9 0.7 4.9 1.4
Source: Company, Angel Research
Finolex Cables (CMP: Rs.59/ TP: Rs.85/ Upside: 45%)
Finolex Cables is poised for strong growth over the next few years, owing to entry
in the verticals of High Tension (HT) and Extra High Voltage (EHV) Cables and
market share expansion in the existing Low Tension (LT) Cables segment.
The rapid ramp up of production at the Roorkee plant has already started
delivering results. The company has further increased the capacity at this plant by
50%. The proximity to the growing North Indian markets and tax benefits from this
plant are expected to boost the turnaround of the company.
Company’s derivatives losses are expected to decline going ahead. By FY2012E,
these losses are estimated to decline to Rs 24cr from Rs76cr in FY2010.
We believe attractive valuations of 6.3x FY2012E EPS and 1.1x FY2012E BV
provides a good entry point for investors. We have valued the stock at 9x FY2012E
EPS which result into target price of Rs85. Moreover, the company has a holding in
Finolex Industries, which has a book value of Rs152cr but a market value of
Rs483cr. This is not captured in our target price, providing further upside potential.
Market Value of investment in Finolex Industries
FY12 Net Worth
(Rs cr)
Market Cap
(Rs cr)
P/BV
Book Value of
Investment (Rs cr)
Market Value of
Investment (Rs cr)
827 896 1.1 152 483
Source: Company, Angel Research
Key Financials
Y/E Sales OPM PAT EPS ROE P/E P/BV EV/EBITDA EV/Sales
March (Rs cr) (%) (Rs cr) (Rs) (%) (x) (x) (x) (x)
FY2011E 2,050 10.1 91 5.9 13.4 9.9 1.3 4.4 0.4
FY2012E 2,458 10.2 143 9.3 18.5 6.3 1.1 3.7 0.4
Source: Company, Angel Research
Value Unlocking
Alembic (CMP: Rs.62/ TP: Rs.74/ Upside: 19%)
Alembic has announced de-merger of its Pharma business (comprises its domestic
formulation, international generic and API businesses) into a separate company
named Alembic Pharma.
With this, Alembic plans to insulate its relatively high-margin Pharma business
from the loss-making Pen-G business (API facility at Vadodara). Alembic also plans
to develop its 70 acre land asset going forward.
We believe that de-merger of the company into two - Alembic and Alembic
Pharma - is a long term positive as it unlocks value for both the businesses and
paves the way to rope in future investors. We recommend Buy on the stock valuing
Alembic on a SOTP basis with a Target Price of Rs74 implying an upside of 19%
from current levels.
10. October 12, 2010 10
Market Strategy
SOTP Valuation
Rs
Alembic Pharma (PE 10x FY2012E EPS) 47
Alembic's 30% stake in Alembic Pharma (20% holding company discount) 11
Alembic API business (EV/Sales @ 0.6x FY2012E Sales) 5
Land bank (70 acre @ Rs2.2cr per acre) 11
Per Share Value 74
Source: Company; Angel Research
Key Financials
Y/E Sales OPM PAT EPS ROE P/E P/BV EV/EBITDA EV/Sales
March (Rs cr) (%) (Rs cr) (Rs) (%) (x) (x) (x) (x)
FY2011E 1,266 12.4 74.8 5.6 18.9 11.1 1.9 7.7 0.9
FY2012E 1,393 12.0 84.8 6.4 18.5 9.8 1.7 7.0 0.8
Note: Alembic estimates currently includes the demerged pharma business
GE Shipping (CMP: Rs.324/ TP: Rs.396/ Upside: 22%)
As per Clarksons, 13% and 14% of the existing fleet of crude and product tankers
will be added in CY2010E respectively. However, accelerated phase out of single
hull tankers, which account for 12% of the existing global tanker fleet, will relieve
supply-side pressures and keep the freight rates at current sustainable levels over
the medium term. GE Shipping (Gesco) will be a key beneficiary of higher tanker
freight rates as it derives around 46% of its consolidated revenues from the Tanker
Segment.
The company intends to list its 97.62% subsidiary, Greatship Ltd (GIL) by
2HFY2011E through fresh equity issuance. We believe this will unlock potential
value of the Offshore business, which globally trades at higher multiples than the
Shipping business due to high earnings visibility. We have valued Gesco's Offshore
business at 5.0x FY2012E EV/EBIDTA which is at a discount to Great Offshore
(5.6x FY2012E EV/EBITDA) and fetches Rs107/share.
We value Gesco on SOTP basis, with its Shipping business contributing
Rs289/share (15% discount to NAV) and its Offshore business contributing
Rs107/share (5.0x FY2012E EV/EBIDTA). Based on our Target Price of Rs396, the
implied EV/EBITDA, P/BV, P/E multiple works out to 6.2x, 0.9x, and 5.9x
respectively, on FY2012E basis. Thus, on account of trading at a significant
discount to its global peers, we recommend a Buy on stock.
Valuation summary
Particulars Value ( Rs cr)
Shipping segment
Tanker segment 3,212
Bulk segment 567
NAV- discounted @ 15% 3,779
Offshore segment
Offshore FY2012E EBIDTA 561
EV (at EV/EBIDTA of 5.0x) 2,778
Less debt (5,300)
Add Cash 3,900
Add Advances 920
Total 6,077
Value per share 396
Source: Company, Angel Research
11. October 12, 2010 11
Market Strategy
Key Financials
Y/E Sales OPM PAT EPS ROE P/E P/BV EV/EBITDA EV/Sales
March (Rs cr) (%) (Rs cr) (Rs) (%) (x) (x) (x) (x)
FY2011E 2,985 37.7 686 45.0 11.5 7.2 0.8 7.4 2.8
FY2012E 3,833 40.2 1,028 67.5 15.5 4.8 0.7 5.5 2.2
Source: Company, Angel Research
Buyback / Promoters increasing stake
Lakshmi Machine Works (CMP: Rs.2,490/ TP: Rs.2,819/ Upside: 13%)
Lakshmi Machine Works (LMW) is the market leader in textile machinery space in
India, the world’s second largest market, giving it strong competitive advantages.
The company has a strong service network, with service centres in each textile hub
of the country, again a strong advantage over its European peers. LMW also has
the advantage of having a huge client base of about 1300 out of the total universe
of 1600 players. LMW has proved its technological prowess by developing its
products using in-house research and development for the past 15 years.
LMW has a strong order book of Rs3,300cr, with the current quoted delivery time
of 8-10 months. We have assumed 60% of the order book to be executed in
FY2011E. As per our estimates, the company has seen strong order inflows in
1QFY2011 of about Rs600cr, which is more than 90% of the total order inflow in
the entire FY2010. Going ahead, we believe that the deferment of orders would
reduce, as yarn demand outlook is strong and spinning players are operating at
high utilization levels of around 95%.
Moreover, the promoters have announced a buyback of shares at a maximum
price of Rs2,045/share, giving a limited downside to the stock price.
We believe reasonable valuations of 13.4x FY2012E EPS provides a good entry
point for investors. We have valued the stock at 15x FY2012E EPS which result into
target price of Rs2,819.
Share buy-back details
Price for buyback Date of announcement Buyback amount (Rs cr) Market Cap (Rs cr)
Rs 2,045 /share 28-Jul-10 230 (Max.) 3,079
Source: Company, Angel Research
Key Financials
Y/E Sales OPM PAT EPS ROE P/E P/BV EV/EBITDA EV/Sales
March (Rs cr) (%) (Rs cr) (Rs) (%) (x) (x) (x) (x)
FY2011E 1,883 14.3 158 127.9 16.2 19.5 3.0 8.4 1.2
FY2012E 2,487 14.8 230 186.1 20.5 13.4 2.6 5.5 0.8
Source: Company, Angel Research
12. October 12, 2010 12
Market Strategy
Surya Roshni (CMP: Rs.113/ TP: Rs.143/ Upside: 25%)
Surya Roshni has completed a large capacity expansion program across all
products in the lighting and steel division. The new capacities are expected to
contribute to strong top-line growth of 23.8% CAGR over FY2010-12E.
The contribution of the high-margin lighting division to sales is expected to
increase from 29.5% to 33.6% over FY2010-12E. This asset-light nature of the
expanded capacity would marginally improve the RoE of the company from 19.7%
to 20.4% over FY2010-12E, despite the reduction in the D/E ratio of the company
from 2.5x to 1.3x over the same period.
The promoters have subscribed to two rounds of warrants, one of which has
already been partially converted. We expect the outstanding warrants also to be
converted into equity, thereby increasing the promoters’ stake to 55.0% by
FY2012E from 29.1% currently. The promoters would infuse Rs133cr into the
company through these warrant conversions.
We believe attractive valuations of 5.7x FY2012E EPS provides a good entry point
for investors. We have valued the stock at 6.6x FY2012E EPS which result into
target price of Rs143.
Preferential allotment plan
Date of
Warrant
allocation
Warrant Conversion
Price (Rs/share)
Expected Year
of conversion
Amount
invested
(Rs cr)
% increase in
promoter stake
14-Dec-09 59 FY2011 37.8 62.2
12-Jul-10 83 FY2012 94.9 40.6
Source: Company, Angel Research
Key Financials
Y/E Sales OPM PAT EPS ROE P/E P/BV EV/EBITDA EV/Sales
March (Rs cr) (%) (Rs cr) (Rs) (%) (x) (x) (x) (x)
FY2011E 2,293 7.2 60 13.6 19.5 8.3 1.4 6.3 0.4
FY2012E 2,751 7.5 87 19.9 20.4 5.7 1.0 5.4 0.4
Source: Company, Angel Research
Turnaround Stocks
Denso India (CMP: Rs.103/ TP: Rs.136/ Upside: 32%)
Denso is a subsidiary of Denso Corp., a US $30bn enterprise, which has strong
relations with global auto majors, viz. Suzuki, Honda and Toyota. Besides strong
relations with global majors, Denso Corp. provides strong financial backing and
technological knowledge to Denso, which will help the company to expand
capacity as well as add new products to its portfolio in the future to cater to the
growing domestic demand.
With the huge spurt in demand for automobiles, OEMs have witnessed a
supply-side constraint from auto ancillary companies. This has resulted in a
considerable increase in the bargaining power of these companies. Denso on the
back of its strong balance sheet is likely to be a preferred supplier going forward.
13. October 12, 2010 13
Market Strategy
On the back of strong growth witnessed by the OEMs, we expect Denso to witness
a 17% CAGR in sales over FY2010-12E. Given the company’s MNC profile and
strong product range, current margins are too low and are expected to show
material improvement. We have factored in 7.3% EBITDA margins in FY2012E vs.
4.8% in FY2010, the drivers being localization, increased bargaining power and
measures by Bank of Japan to curb further Yen appreciation. Consequently, the
company’s net profit is expected to increase at a 49% CAGR over FY2010–12E.
Denso has traded at a five-year average of 9x one-year forward earnings.
Currently, the stock is trading at 6.8x FY2012E EPS and we value the company at
9x FY2012E EPS. We recommend a Buy rating on Denso with a Target Price of
Rs136, implying an upside of 32%.
Improving EBITDA margins to result in higher RoEs
Particulars FY06 FY07 FY08 FY09 FY10 FY11 FY12
Sales (Rs cr) 361 421 466 531 736 884 1016
PAT (Rs cr) 21.0 27.7 27.8 18.1 18.9 21.2 42.1
Operating Margin (%) 11.8 11.6 9.8 6.1 4.8 4.8 7.3
ROE (%) 16.9 18.4 16.2 9.6 9.4 9.9 17.5
Source: Company, Angel Research
Key Financials
Y/E Sales OPM PAT EPS ROE P/E P/BV EV/EBITDA EV/Sales
March (Rs cr) (%) (Rs cr) (Rs) (%) (x) (x) (x) (x)
FY2011E 884 4.8 21.2 7.6 9.9 13.6 1.3 6.4 0.3
FY2012E 1,016 7.3 42.1 15.1 17.5 6.8 1.1 3.3 0.2
Source: Company, Angel Research
ICICI Bank (CMP: Rs.1,127/ TP: Rs.1,350/ Upside: 20%)
The Bank is well-positioned to gain CASA market share on the back of substantial
branch expansion from 955 in 3QFY2008 to 2,016 in 1QFY2011 as well as credit
market share on the back of strong Capital Adequacy at 20.2% (Tier-I at 14.0%).
Net Interest Margins of the Bank are expected to sustain on the back of increase in
CASA ratio to 42.1% in 1QFY2011 from 29% in FY2009.
On the back of an improving economic environment, NPA losses are expected to
start declining. The Bank has also done lower restructuring of loans than PSU
Banks (7.1% of Net Worth v/s 40%+ for most PSU Banks). As a result, we expect
NPA provisions /Assets to decline sharply to 0.5% by FY2012E (from 1.2% in
FY2010)
We expect the bank to deliver strong earnings CAGR of 31.0% over FY2010-12E
and a ROE of 15.5% by FY2012E vs. 9.7% in FY2010. The stock is trading at
attractive valuations of 2.3x FY2012E P/ABV on a standalone basis. Hence, we
maintain a Buy on the stock with a Target Price of Rs1,350 valuing the core bank
at 2.9x FY2012E P/ABV and assigning a value of Rs254 for its subsidiaries.
14. October 12, 2010 14
Market Strategy
Depressed risk-adjusted NIMs to improve going forward
Particulars FY06 FY07 FY08 FY09 FY10 FY11E FY12E
Net Op Inc (Rs cr) 9,224 13,599 17,081 16,875 15,591 16,673 20,992
PAT (Rs cr) 2,540 3,110 4,158 3,423 4,024 5,028 6,906
Risk-adj NIMs* (%) 1.2 1.1 1.2 1.1 1.0 1.5 1.8
ROA (%) 1.1 0.9 0.8 0.9 1.0 1.2 1.4
ROE (%) 14.8 13.4 10.3 9.2 9.7 11.7 15.5
*Risk-adjusted NIMs=(NIMs - provisioning expenses) as % of assets
Key Financials
Y/E Op Inc. NIM PAT EPS ABV ROA ROE P/E P/ABV
March (Rs cr) (%) (Rs cr) (Rs) (Rs) (%) (%) (x) (x)
FY2011E 16,673 2.4 5,028 45.1 487 1.2 11.7 25.0 2.4
FY2012E 20,992 2.5 6,906 61.9 520 1.4 15.5 18.2 2.3
Source: Company, Angel Research
21. October 12, 2010
Research Team Tel: 022 - 4040 3800 E-mail: research@angeltrade.com
Website: www.angeltrade.com
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22. October 12, 2010
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Research Team
Fundamental:
Sarabjit Kour Nangra VP-Research, Pharmaceutical sarabjit@angelbroking.com
Vaibhav Agrawal VP-Research, Banking vaibhav.agrawal@angelbroking.com
Vaishali Jajoo Automobile vaishali.jajoo@angelbroking.com
Shailesh Kanani Infrastructure, Real Estate shailesh.kanani@angelbroking.com
Anand Shah FMCG, Media anand.shah@angelbroking.com
Deepak Pareek Oil & Gas deepak.pareek@angelbroking.com
Sushant Dalmia Pharmaceutical sushant.dalmia@angelbroking.com
Rupesh Sankhe Cement, Power rupeshd.sankhe@angelbroking.com
Param Desai Real Estate, Logistics, Shipping paramv.desai@angelbroking.com
Sageraj Bariya Fertiliser, Mid-cap sageraj.bariya@angelbroking.com
Viraj Nadkarni Retail, Hotels, Mid-cap virajm.nadkarni@angelbroking.com
Paresh Jain Metals & Mining pareshn.jain@angelbroking.com
Amit Rane Banking amitn.rane@angelbroking.com
John Perinchery Capital Goods john.perinchery@angelbroking.com
Srishti Anand IT, Telecom srishti.anand@angelbroking.com
Jai Sharda Mid-cap jai.sharda@angelbroking.com
Sharan Lillaney Mid-cap sharanb.lillaney@angelbroking.com
Naitik Mody Mid-cap naitiky.mody@angelbroking.com
Amit Vora Research Associate (Oil & Gas) amit.vora@angelbroking.com
V Srinivasan Research Associate (Cement, Power) v.srinivasan@angelbroking.com
Mihir Salot Research Associate (Logistics, Shipping) mihirr.salot@angelbroking.com
Chitrangda Kapur Research Associate (FMCG, Media) chitrangdar.kapur@angelbroking.com
Pooja Jain Research Associate (Metals & Mining) pooja.j@angelbroking.com
Yaresh Kothari Research Associate (Automobile) yareshb.kothari@angelbroking.com
Shrinivas Bhutda Research Associate (Banking) shrinivas.bhutda@angelbroking.com
Sreekanth P.V.S Research Associate (FMCG, Media) sreekanth.s@angelbroking.com
Hemang Thaker Research Associate (Capital Goods) hemang.thaker@angelbroking.com
Nitin Arora Research Associate (Infra, Real Estate) nitin.arora@angelbroking.com
Technicals:
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