The document recommends switching investment from R-Power to Reliance Infrastructure and from National Aluminum to Hindalco due to their stronger growth prospects and more attractive valuations. It also recommends buying SBI and reducing position in PNB as SBI is gaining market share while PNB is losing share, and SBI's earnings quality and valuations are superior.

1. Switch Strategy
Investment Advisory Service
Recommendation Buy Reliance Infrastructure and Reduce R-Power
Reco CMP TP Upside
R-Infra Buy 1,026 1,253 22 We recommend a switch to Reliance Infrastructure from R-Power on account of
the following reasons:
R-Power Reduce 145 128 (12)
Strong revenue visibility for Reliance Infrastructure unlike R-Power: Reliance
Infrastructure offers strong near-term growth potential with sustained long-
Key Financials term cash flows with nearly Rs1.6trillion (US $35bn) in assets under
R-Infra R-Power development across the Infrastructure verticals and ownership/control over
FY2011E FY2012E FY2011E FY2012E around 3.8bn tonne coal reserves. On the other hand, R-Power’s total
Net Sales 15,825 19,064 1,348 1,757
planned capacity, only 300MW first unit of Rosa Phase-I is currently
operational, while by the end of FY2011 another 300MW is expected to be
EBITDA 1,898 2,996 6,02 8,89
operational. The company expects to ramp up the capacity to over 3,000MW
PAT 1,463 1,837 5,32 5,81 by the end of FY2012. Thus close to 90% of the company’s planned capacity
EPS 58.7 74.8 2.2 2.4 are expected to be commissioned post FY2012, with no significant near term
revenue visibility for the company.
RoCE 5.9 7.2 1.8 1.7
RoE 7.5 8.2 3.5 3.7
We prefer diversified play: Reliance Infrastructure encompasses various
P/E 17.5 13.7 65.9 60.4
assets, from regulated asset in Power to capital-intensive assets in Infra to
P/BV 1.5 1.2 2.3 2.2 pure service business model in EPC. Therefore, we believe that is primed to
take advantage of the rapid infrastructure growth in India. R-Power is pure
utility player with highly exposed to execution risk in the Indian power sector.
Relative Stock Performance R-power has a limited exposure to merchant power business. The company
has not acquired the entire land as well as fuel for many of the projects
including the Dadri and Shahpur coal Projects.
Attractive Valuations gives further conviction: We have valued Reliance
Infrastructure based on SOTP methodology and arrived at a Target price of
Rs1,253 at1.5x on P/BV, translating into an upside of ~22%. Further, it
should be noted that at current levels the stock is trading at a huge discount
to its peers on P/BV basis even after assigning 20% holding company
discount to its stake in R-Power. Hence, we recommend a Buy on the stock.
On the other hand, R-Power is trading at 60.4x FY2012E P/E, 2.2x FY2012E
P/B & 6.9cr FY2012E EV/MW at Rs145, which is expensive. Based on DCF
Valuation we have arrived at a Target Price of Rs 128. Hence, we recommend
Reduce on the stock.
May 2010 1

2. Switch Strategy
Investment Advisory Service
Recommendation Buy Hindalco and Sell National Aluminium
Reco CMP TP Upside
Hindalco Buy 164 208 22 We recommend a switch to Hindalco from National Aluminum on account of the
Nalco Sell 408 316 (23) following reasons:
Nalco pretty expensive as compared to Hindalco: We have valued Hindalco
Key Financials based on SOTP methodology as it includes Novelis and investment in other
subsidiaries and arrived at a Target price of Rs208 translating into an upside
Hindalco Nalco
of ~22%. Further, Hindalco is trading at 5.6 FY2012E EV/EBITDA which is at
FY2011E FY2012E FY2011E FY2012E a huge discount to Nalco trading at expensive valuations of 11.6x FY2012E
Net Sales 63,898 67,521 5,665 6,376 EV/EBITDA. We recommend a Sell on Nalco, with a Target Price of Rs316 at
EBITDA 8,333 9,325 1,606 2,063
which the stock will trade at 9x FY2012E EV/EBITDA. Even on P/BV basis,
Hindalco is trading at 1.1x FY2012E while Nalco is trading at 2.3x FY2012E.
PAT 3,761 4,027 995 1,221
On a P/E basis also, Hindalco is trading at 7.8x FY2012E earnings, which
EPS 19.7 21.0 15.4 19.0 appears attractive as compared to Nalco which is trading at 21.5x FY2012E
RoCE 10.6 10.3 10.7 13.1 earnings.
RoE 16.2 15.0 9.4 10.8
P/E 8.3 7.8 26.4 21.5
We like Hindalco unlike Nalco for its growth visibility led by low cost
P/BV 1.3 1.1 2.4 2.3 expansion plans: We believe Hindalco is well placed to benefit from its low
EV/EBITDA 6.0 5.6 15.3 11.6 cost capacity expansion which is likely to come on-stream in next 2-4 years.
Hindalco is more than doubling it aluminium metal capacity to 1.3mn tonnes
by FY2012E from current 0.5mn tonnes and increasing it threefold to 1.6mn
tonnes by FY2014E. In addition, it is also increasing its alumina capacity in
Relative Stock Performance
the same proportion which would further lower costs for the company. On the
other hand, Nalco is facing delays for its 0.5mn tonne alumina refinery which
is now expected to come on-stream by 3QFY2011E and full benefit of the
same would be reflected in FY2012E against earlier estimated FY2011E.
Apart from the ongoing expansion plan, there is little clarity on the other
proposed expansion plans as they are in various stages of financial closure
and significant progress is yet to be made.
While we expect turnaround at Novelis but coal supply issues at Nalco likely
to continue: We believe that Novelis operations are on recovery track as
evident from the fact that long term product prices were re-negotiated at
higher levels. On the other hand, Nalco has been facing coal supply issues
Recent FPOs which have disrupted its operations in the past. The company sources its
Peak Price annual coal requirement from Mahanadi Coalfields Ltd (MCL) but the supply
FPO price Discount
prior to FPO
(Rs)
(Rs)
(%) is not evenly distributed which keep the coal stock of the company sufficient
NMDC 300 556 (46.0)
for two-three days production. In our view, any disturbance in coal supply
would increase its dependence on imported or external coal thereby
NTPC 201 236 (14.7)
negatively impacting the margins.
REC 203 271 (25.1)
Divestment of stake in Nalco unlikely at current price: Government holds
87.2% stake and plans to divest upto 10% as per media reports. We believe
the disinvestment is unlikely to happen at current price levels on account of
expensive valuations and the stock may potentially correct down as seen in
the recent FPOs.
May 2010 2

3. Switch Strategy
Investment Advisory Service
Recommendation Buy SBI and Reduce PNB
Reco CMP TP Upside
SBI Buy 2,223 2,596 17 We recommend a switch from PNB to SBI on account of the following reasons:
PNB Reduce 1,006 947 (6)
SBI is gaining while PNB is losing Savings marketshare: Over FY2007-
9MFY2010, SBI was one of very few PSU Banks to have gained Savings
Key Financials marketshare (up 300bp to 23.5%), driven by relatively faster branch
expansion (9.5% CAGR v/s 2-5% for most PSBs) leveraging its tremendous
SBI PNB
trust factor in the country.
FY2011E FY2012E FY2011E FY2012E
On the other hand, strong legacy apart, over the same period PNB lost
Oper. Inc. 45,694 55,200 13,245 15,262
Savings marketshare (down 70bp to 6.9%) in line with relatively slower
NIM 2.6 2.7 3.3 3.2 branch expansion.
PAT 10,284 14,485 4,002 4,566
EPS 162.0 228.2 126.9 144.8 PNB’s asset yields are unsustainably high, posing downside to RoEs, while the
Adj. BV 1,133.3 1,307.6 614.9 728.7 opposite holds true for SBI: Due to strong CASA and Fee Income, SBI’s core
RoA 0.9 1.0 1.2 1.2 RoEs have improved over the past few years and unlike virtually all other PSU
Banks, actual 9MFY2010 RoEs are below core levels (15.8% vs. ~19%) due
RoE 15.9 19.7 22.5 21.6
to low asset yields, providing scope for upside as the CD ratio improves and
P/E 13.7 9.7 7.9 6.9 yields normalise to sectoral averages.
P/ABV 2.0 1.7 1.6 1.4
On the other hand, PNB’s yield on advances increased by 49bp in
9MFY2010 over FY2008 levels, as against an average decrease of 5bp for
Relative Stock Performance PSU Banks. In our view, super-normal RoEs cannot be earned on a
250 sustainable basis through higher than sector average risk-adjusted yield on
assets and tend to decline in subsequent years either through an increase in
200
NPA costs or decline in yields. Accordingly, while we believe the bank can
150 deliver healthy core ROEs of 17-18% in the longer run due to its strong
legacy, however, actual RoEs are unsustainably high at 25.4% and there is
100
risk of downside.
50
0
SBI’s valuations are far more attractive than PNB: Post correction, SBI
Jan-09 May-09 Sep-09 Jan-10 May-10
(excluding value of insurance and capital market subsidiaries), is trading at
just 1.3x FY2012E ABV v/s its 5-year range of 1.3-2.0x and median of 1.6x.
SBI PNB
We believe this provides sufficient margin of safety and attractive upside,
especially in light of its dominant position and reach, strong growth and
superior Earnings quality. We recommend a Buy on the stock, with a Target
Price of Rs2,596.
On the other hand, PNB is trading at 1.4x FY2012E ABV, which is expensive
considering its 5-year range of 1.0-1.5x and median of 1.3x. We believe that
current valuations fairly reflect PNB’s structural positives, but do not provide a
sufficient margin of safety from potential near-term asset quality pressures /
decline in asset yields. We value the Bank 1.3x FY2012E ABV to arrive at a
Target Price of Rs947. Hence, we recommend Reduce on the stock.
May 2010 3