Diwali Picks - Rakesh Jhunjhunwala · 2013-11-02 · Diwali Picks Dear Patrons, Wishing you A Very...

Diwali Picks Microsec Research

Tech Mahindra

ICICI Bank

Tata Steel

Exide Ind Cairn India

Rallis India

GMDC

Axis Bank

Pidilite

Diwali Picks

Dear Patrons,

Wishing you A Very Happy Diwali and Prosperous Samvat 2070!

It is a paradoxical end to Samvat 2069 as Indian markets (Nifty) gained 9.45% between last Diwali to 29/10/13,

whereas economic fundamentals have deteriorated during last one year as GDP expectations which was ~6% last year

were cut down to 4.8% now for FY14. Sensex gained 2245 points between last Diwali and Diwali eve this year.

However, the top 5 stocks that contributed to the maximum gains were: Infosys (568 points), TCS (517 points), ITC (243

points), Sun Pharma (228 points) and Tata Motors (225 points), hence contributing to 79% of the index gains.

Contributors to losing side of Sensex in Index points were: SBI (139 points), L&T (100 points), BHEL (96 points), JSP (70

points) and Tata Steel (52 points). This study is relevant in the sense that INR that depreciated sharply helped IT and

Pharma gain, whereas, laggards depicted the woes of the economy. During the same period Microsec Diwali Picks gave

a return of 12% against Nifty returns of 9 percent.

As Markets reflect the ‘hope’ or ‘expectations’, so does this level of Indexes as we hope for a better India with better

domestic and global macroeconomic indicators. However, past one year has seen major shift in perceptions of social

and political class, which can be a stronger foundations for the year to come. As mentioned above, expectations from

“Samvat 2070” would centre on a better governance, the cornerstone to growth and regain lost milestone. The year

ahead will be a roller‐coaster ride for the markets as key events like India’s General Elections, tapering of US Bond

purchases or may be further quantitative easing from US, and situations in Middle East and its relation with US and

others will hog the limelight. However, currently Nifty is trading 12.70 times FY15 EPS (E) of 490, which we believe

towards next Diwali may trade 14times, giving targets of ~6860 for Nifty.

In this context, we select 9 stocks as Diwali Picks, which are fundamentally better placed and reflects the cyclical sectors

which we believe is set for an upturn. The investment objective is for a year.

Company CMP (29/10/13) Target Price (1 Yr) Upside Potential (%)

Axis Bank 1251.20 1458.00 16.53

Cairn India 315.90 415.00 31.37

Exide Ind 124.00 153.00 23.39

GMDC 105.00 133.00 26.67

ICICI Bank 1075.45 1204.00 11.95

Pidilite Ind 265.00 330.00 24.53

Rallis India 153.85 185.00 20.25

Tata Steel 326.00 410.00 25.77

Tech Mahindra 1523.30 1793.00 17.70

Nifty 6220.90 6860.00 10.27

With Warm Regards & Happy Investing,

Team Microsec Research

- 1 -

Microsec Research 30th October 2013

We rate Axis Bank Limited a BUY. Axis Bank is the third largest Private Sector Bank in

terms of business and profitability. As on 31st March 2013, the Bank’s balance sheet size

crossed over INR3.4 trillions with strong distribution network of 1947 branches and 11245

ATMs spread across the country. It also has overseas offices in Singapore, Hong Kong,

Shanghai, Colombo, Dubai and Abu Dhabi. Axis Bank is one of the few Indian Banks, which

has smartly managed to transform itself into a true financial conglomerate with its presence

in core banking besides, Insurance, Asset Management, Mutual Fund, Broking, Home

Finance etc. areas of investment banking, life and non-life insurance, venture capital and

asset management.

Investment Rationale

Growing profitability boosted Return ratios: The Banks rapid business expansion along with

growing profitability (operating profit has grown at a CAGR of ~21% whereas, Profit after

Tax (PAT) grew at a CAGR of ~24% over the period of FY11-13) has helped the Bank to

manage its return ratio better. In FY13, its Return on Assets (ROA) was at historical high of

1.7% and Return on Equity (ROE) stood at 18.5% despite recent capital infusion of

~INR5537 crores. Moreover, it is better placed amongst its top four private peers in terms of

high returns. As on H1FY14, ROA and ROE stood at 1.65% and 16.64% respectively.

Improving asset quality; Strong coverage ratio: Axis’s thoughtful business strategy and strong

risk management with in-depth analysis of borrowers’ profile enabled it to manage its asset

quality problems. In the current challenging environment, where the banking sector is

suffering from asset quality problems, Axis Bank has been able to maintain its asset quality.

Over the past few quarters, the Bank has maintained its NNPA and GNPA ratios. In Q2FY14,

its GNPA and NNPA stood at 1.19% and 0.37%. It is in better placed amongst its peers in

term of superior asset quality. Moreover, it is in well positioned to tame any time liabilities

with 80% of its Provision Coverage Ratio (PCR).

Higher CASA deposits support margin stability: Notwithstanding challenging environment,

Axis’s NIM has consistently been higher than the industry’s average. In FY13, its NIM

improved by 5bps to 3.18% against industry’s decline by 8bps to ~2.5% primarily because of

the Bank’s low cost deposits base (CASA) which has improved from ~41% in 2011 to ~44%

in 2013. As on H1FY14, CASA ratio stood at 43%. Bank’s key priority towards healthy

growth in Current & Savings account deposits has helped it to cross CASA deposit of over

~INR1.09 trillion in Q2FY14.

Axis Bank Ltd

Sector - Banking

Analyst: Sanjeev Jain

Phone: +91-33-3051-2174

Email Id: [email protected]

Source: ACE Equity, Company, Microsec Research

BUY

Microsec Research30th October, 2013

We rate Cairn India Ltd a ‘BUY’. Our rating underpins the production ramp up from its

Rajasthan field coupled with escalating crude oil prices complimented with depreciating

INR vs. USD and aggressive capex plans are expected to ensure strong business growth in

the future.

Investment Highlights

Production Ramp up is the Key: The production ramp up from its Rajasthan block is the

best possible trigger for the company. Currently the block is operating at the production rate

of 180000bpd which is in line with the envisaged quantum and the exit production of

210000-215000bopd also looks feasible.

Crude Oil Prices: Cairn India is a pure play of crude oil prices as their realization from the

Rajasthan block are calculated by providing discount of ~8-13% to Brent crude oil prices. As

a matter of fact higher the crude oil prices higher the realization for the company. Cairn

India is the key beneficiary for the depreciating INR against USD as well as their realizations

are dollar denominated.

Expansion Plans: Aggressive CapEx plans have been approved by the board of the company

to uplift the current production from the existing block as well as also for new exploration

activities. The company has formulated a comprehensive CapEx programme of drilling > 450

wells over the period of next 3 years. The company targeted over 530 million barrels of gross

recoverable risk prospective resources including gas potential.

Valuation and Outlook: We valued the company on a consolidated basis using EV/EBITDA

method and DCF method where we assigned 75% weightage to the EV/EBITDA

methodology considering the kind of business Cairn India is in and 25% weightage to the

DCF valuation given the fact of the visibility of future free cash flows. We assumed WACC

of 10.97% and a terminal growth rate of 1% for DCF and based on our model we believe we

believe that the projected EV/EBITDA of based on current price is reasonable. Moreover the

scrip is also inexpensive against its domestic as well as international peers in terms of various

valuation parameters.

Cairn India Limited

BUY Sector- Oil & Gas

Analyst: Soumyadip Raha

[email protected]

Promoter &

Promoter

Group, 58.77%

FII, 14.33%

DII, 11.75%

Cairn UK

Holdings

Ltd., 10.27%

Others, 4.88%

Shareholding Pattern

BSE Code 532792

NSE Code CAIRN

Bloomberg Ticker CAIR IN

Reuters Ticker CAIL.BO

Face Value (INR) 10.00

Equity Share Capital (In INR Mn) 4,762.20

Average P/E 6.09x

Beta vs Sensex 0.76

Average Daily Volume 231,201

Dividend Yield 1.9%

PEG Ratio NA

STOCK SCAN

Current Market Price (INR) 315.90

Price Objective(INR) 415.00

Upside Potential(%) 31%

52 Week High (INR) 349.90

52 Week Low (INR) 267.90

Market Capitalization (In INR Mn) 60,344.48

Market Data

Particulars FY2011A FY2012A FY2013A FY2014E FY2015E

Net Sales 10,277.93 11,860.64 17,524.15 18,915.12 19,159.88

Operating Profit 8,254.44 9,254.41 13,033.16 15,703.15 15,687.75

Operating Profit Margins (%) 80.31% 78.03% 74.37% 83.02% 81.88%

Net Profit 6,334.45 7,937.75 11,919.74 14,705.46 14,953.77

Net Profit Margins (%) 61.63% 66.93% 68.02% 77.74% 78.05%

EPS 33.21 41.62 63.11 76.98 78.28

BVPS 210.93 252.81 249.70 313.32 378.24

P/E(x) 10.55 8.02 4.36 4.10 4.04

P/BV(x) 1.66 1.32 1.09 1.01 0.84

EV/EBITDA(x) 7.76 5.68 3.30 3.85 3.85

RoE(%) 15.72% 16.44% 24.99% 24.57% 20.70%

Cairn India's Financial Performance (InINR crores except per share data & %)

Source :Ace Equity,Company data, Microsec Research

80.23

85.23

90.23

95.23

100.23

105.23

110.23

115.23

120.23

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CLOSE(Cairn India Ltd) CLOSE(SENSEX)


We rate Exide Industries Ltd (Exide) a ‘BUY’. Our rating underpins the company’s

distribution network, after sales service, usage of product in different sectors and its R&D

and technological framework. However, slowdown in automobile industry impedes our

optimism bit.


Wide distribution channels, after sales and warranty services. Exide enjoys strong

distribution network in domestic as well as international markets. Currently, the company is

operating from over 200 locations, which has enabled Exide to market as well as provide

after sales services to customers in Tier II & III cities. The Project Kisan initiative has also

enabled Exide to reach its products to all remote locations. In addition, company’s

performance is likely to be supported by warranty and after sales services.

Strong Research and development. The company has managed to carry out the R&D

activities efficiently and likely to do so in the future. The R&D activity has helped the

company in many ways like – development of new and cost efficient products to meet the

diverse requirements of large number of applications in both automotive and industrial

segments. Specific attention had been provided towards development of new raw materials

for development of new formulation, development of new technique in making process

improvements, Value Addition/Value Engineering on existing products through technology,

design and process up-gradation.

Wide usages of battery in different sectors may boost the top line growth. Apart from

Automotive sector, Exide batteries are used in Railway, Telecommunications, Defense,

Mining, Hospitals, lighting of coach, Airlines Signaling and Communications sectors.

Strong Financial growth with sound ratios. The Company has registered a strong financial

growth in FY13. Its Net sales increased by 19.73% to INR6,372 crore and PAT grew by

23.16% to INR549 crore. Its PAT margin, also, improved from 8.38% to 8.62%. ROE of the

company arrived at 19.10%. The company continues to remain debt free. Exide’s financial

ratios are strong and are very much in line with its nearest competitor Amara Raja batteries.

Valuation: At the CMP of INR124, the stock is trading at a P/E of 15.5x its FY14E EPS of

INR8.0 and 12.3x its FY15E EPS of INR10. The company has sound business model and ROE

of 19.10%. We assigned a P/E multiple of 15.3x to its FY15E EPS to arrive at a Target price

of INR153 for a time period of 12-15 months.

Exide Industries Limited

BUY Sector- Auto Ancillary

Analyst: Saroj Singh

[email protected]

Exhibit 1. Exide Industries financial performance (In INR Cr.except per share data and %)

Particulars FY 2010 A FY 2011 A FY 2012 A FY 2013 A FY 2014 E FY 2015 E

Net Sales (post Excise Duty) 3,979 4,766 5,322 6,372 6,946 7,779

Growth (%) 19.79% 11.67% 19.73% 9.00% 12.00%

EBITDA 977 956 751 859 991 1,169

EBITDA Margins (%) 24.56% 20.06% 14.11% 13.47% 14.27% 15.03%

Net Profit 494 619 446 549 678 853

Net Profit Margins (%) 12.40% 12.98% 8.38% 8.62% 9.76% 10.96%

Net Profit Growth (%) 25.39% -27.92% 23.16% 23.34% 25.85%

EPS 6.2 7.3 5.2 6.5 8.0 10.0

BVPS 23 28 32 36 42 50

P/E 20.0 19.7 28.4 19.1 15.5 12.3

P/BV 5.5 5.1 4.7 3.4 2.9 2.5

RoE 33.9% 28.8% 17.6% 19.1% 20.3% 21.8%

Source: Ace Equity, Microsec Research

Current Market Price (INR) 124

Target Price 153.00

Upside Potential 24%

52 Week High/Low (INR) 151/116

Market Capitalization (In INR Cr.) 10,417

Market Data

Promoter

and

Promoter

Group

45.99%

FII

17.48%

DII

15.76%

Others

20.77%

Shareholding

BSE Code 500086

NSE Code EXIDEIND

Bloomberg Ticker EXIDE IN

Reuters Ticker EXIDE.BO


Equity Share Capital (In INR Cr.) 85.00

Beta vs Sensex 0.73

Average Daily Volume 1,305,925

Dividend Yield 1.27%

PEG Ratio 1.14

STOCK SCAN

83.58

88.58

93.58

98.58

103.58

108.58

113.58

118.58

Pri

ce

Period

CLOSE(Exide Industries Ltd) CLOSE(SENSEX)

Microsec Research 30th October, 2013

Investment Highlight

GMDC Ltd

BUY Sector – Mineral & Mining

Uptick in volume to bring growth in revenue: GMDC’s lignite mining volume which contributes a

staggering 80% to the total revenue has been growing a CAGR of 7.25% over FY08-12. However, the

company’s lignite volume declined by 3.88% on YoY basis in FY13 because of lower production from

Tadkeshwar and Mata-no-Madh mines which together contribute ~48% to the overall lignite production.

(30% from Mata-no-Madh and 18% from Tadkeshwar mine). The lignite volume has fallen since last 4

quarters due to scarcity of land for dumping of overburden waste and several mines encountering higher

thickness stones resulting in lowering of speed of mining. Despite this, we believe that the company’s

capacity expansion via brownfield expansion at Mata-no-Madh and Bhavnagar mine, is expected to add

production capacities of 1MT and 2MT, respectively, during FY2014e. Further, GMDC has got through

regulatory hurdles for its upcoming Umarsar mine (production capacity 1MT). We expect the mine to start

production in 2HFY14e.

Lignite based power plant’s operational performance to improve and result in higher profitability: GMDC’s

250MW lignite based power plant at Nani Chher, which had been facing operational issues in past due to

lower PLF and higher fixed cost, has been outsourced to a Korean company, KEPCO at a fixed cost payout

of INR320mn pa till Aug’13 and thereafter payment will be performance based with PLF threshold of 75%.

The KEPCO team is currently controlling plant operations and running at PLF of 50-55% and is expected to

start delivering the required PLF target of 75%. We believe that with the plant likely to achieve

stabilization by FY14e and PLF also expected to rise to around 75%; it would lead to gains for GMDC in

FY14e and FY15e.

Wind power plants continue to support profits; planning to expand it further by 250MW: Currently, wind

power capacity stands at 121 MW and another 29 MW (14 towers of 2.1MW each) is expected to be on-

stream by H2FY14e end. 50 MW of capacity addition during FY14e is largely on track. Hence, this is likely

to support growth in profits going forward.

Valuation: At the CMP of INR105 per share, the stock is trading at EV/EBITDA of 4.16x its TTM EBITDA

of INR789 crore. At current level, GMDC is trading at EV/EBITDA of 4.09x and 3.40x to its FY14e and

FY15e earnings, respectively, which is attractive for a company with 20% expected RoE and debt-free

status. Considering current attractive valuation, we recommend “BUY” on the stock with a target price of

INR133 per share.

We recommend GMDC a “BUY”. GMDC is the largest merchant miner of lignite in India, supplying lignite

to various industrial units, including textiles, chemicals, ceramics, bricks, and captive power plants. The

company operates 5 lignite mines in Gujarat. Apart from lignite, it also produces bauxite, fluorspar, and

manganese ore and operates a 250MW lignite-based power plant. The company also operates a 150MW

wind power plant. With expected uptick in volume to bring growth in revenue, lignite based power plant’s

operational performance to improve and wind power business to support profits, GMDC is a safe play in the

mining sector.

Current Market Price (CMP) 105

Target Price 133


52 Week High Low 222 / 76

Market Cap (INR in Cr) 3339

Market Data

Scrip ID GMDC Ltd

Scrip Code (NSE) GMDCLTD

Scrip Code (BSE) 532181

Bloomberg Ticker GMDC.BO

Reuters Ticker GMDC IN

Industry Mining

Face Value ( INR per share) 2.00

Equity Share Capital ( INR in Cr) 63.60

Avg 5 years P/E (x) 16.53

Avg daily volume (Last 1 Year) 173,096

Beta Vs Sensex 0.66


Stock Scan

Promoters

74.00%

FIIs

5.18%

Other

Institutions

13.95%

Non-

Institutions

6.87%

15000

16000

17000

18000

19000

20000

21000

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GMDC Ltd Sensex

Particulars FY09A FY10A FY11A FY12A FY13A FY14E FY15E

Net Sales 978 1065 1421 1631 1675 1686 2020

Growth -0.3% 9.0% 33.4% 14.7% 2.7% 0.7% 19.8%

EBITDA 455 473 651 760 947 801 963

EBITDA Margin 46.59% 44.37% 45.78% 46.59% 56.55% 47.52% 47.68%

Adj Net Profit 231 280 375 487 601 533 636

Adj Net Profit Margin 23.67% 26.27% 26.39% 29.85% 35.88% 31.62% 31.49%

Adj Net Profit Growth -12.32% 20.94% 34.01% 29.78% 23.44% -11.29% 19.32%

Adjusted EPS 8.8 11.8 15.3 18.9 18.9 16.6 19.8

Adjusted P/E(x) 4.60 11.91 8.95 9.64 8.77 6.32 5.30

BVPS 38.0 81.7 91.0 97.5 79.7 92.8 108.7

P/BV(x) 1.07 1.72 1.51 1.87 2.08 1.13 0.97

ROE 20.4% 20.17% 24.5% 26.2% 26.2% 19.5% 19.8%

EV/EBITDA(x) 3.28 8.93 6.37 6.88 5.59 4.09 3.40

Financial Performance of GMDC Ltd (All figures in INR Crores except % and per share data)

Source: Microsec Research, Company Data

Analyst: Neha Majithia

[email protected]

+033 30512177

Microsec Research 30th October 2013

We rate ICICI Bank Limited a BUY. The Bank was promoted in 1994 by ICICI Ltd, an

Indian financial institution. Presently, ICICI Bank is India’s largest Private Sector Bank with

total assets of INR6.74 trillions at March 31, 2013. The Bank has a strong distribution

network of 3514 branches and 11063 ATMs. ICICI Bank offers a wide range of banking

products and financial services to corporate and retail customers through a variety of

delivery channels and through its specialised subsidiaries in the areas of investment

banking, life and non-life insurance, venture capital and asset management.

Investment Rationale

Strong Balance Sheet and improving returns: ICICI Bank’s continued focus on balancing

growth helped it to strengthen its business size and returns. It has given more than double

return on its behemoth ~INR6.74trillion worth of assets within 5 years. Return on Assets

(ROA) of the Bank stood at 1.57% in FY13 as compared to 0.70% in FY09. Moreover, Bank’s

Return on Equity (ROE) has also improved by 662bps to 14.01% over the same period. We

anticipate that company to deliver ROE of more than 16% within a year, backed by healthy

loan growth coupled with stable credit cost and expenses.

Improving assets quality with healthy PCR: Despite the pressure on asset quality which the

entire banking sector is suffering from, ICICI Bank has improved its asset quality with

healthy Provision Coverage Ratio (PCR). In Q2FY14, It has improved its GNPA by 15bps

QoQ and 46bps YoY to 3.08%. Moreover, the Bank is in well positioned to absorb any

substantial shock with ~73% of its PCR. We believe asset quality to remain impressive going

forward.

Healthy CASA; improving margin: Customer convenience and high quality services backed

by strong distribution and innovative use of technology coupled with focus more toward

retail banking continued to be the bedrock of Bank’s growth strategy. In Q2FY14, the

Bank’s low cost deposits base (CASA ratio) improved by 260bps YoY to 43.30% which has

helped it to improved its Net Interest Margin (NIM) by 4bps QoQ and 31bps YoY to 3.31%.

We believe, ICICI Bank may maintain its margin going forward and may be benefited more

with the improving health of the Indian corporate.

Valuation: At the CMP of INR1075, the stock is trading at TTM P/BV of 1.70x. The current

valuation of 1.59x FY14E and 1.38x FY15E Book Value looks attractive. We recommend a

BUY on the stock with a target price of INR1204 (1.55x FY15E BV) with an upside potential

of ~12% from the current level with an investment horizon of 12 months.

ICICI Bank Ltd

Sector - Banking

BUY

Analyst: Sanjeev Jain

Phone: +91-33-3051-2174

Email Id: [email protected] Source: ACE Equity, Company, Microsec Research


We rate Pidilite Industries a BUY. Pidilite, incorporated in 1959, has been a pioneer in the

Consumer and Specialities Chemicals in India. Pidilite Industries is the market leader in

adhesives and sealants, construction chemicals, hobby colours and polymer emulsions in

India. Its brand named Fevicol has become synonymous with adhesives to millions in India

and is ranked amongst the most trusted brands in India.


Established Brand name: Pidilite has strong brands like Fevicol, Dr.Fixit, Fevi Kwik, m-seal,

hobby ideas, moto max, Fevi stik etc. Fevicol has become the household name in india and

is the largest selling white adhesive brand in india. With established brand name in the field

of adhesives and construction chemical, the prospect of the company appears promising in

the future.

Strong Financials with Consistent Growth: The company’s net sales and profit have grown

at 10 year CAGR growth of 18% and 21% respectively. With Strong ROE of 28.5%,and D/E

ratio of 0.03, the fundamental of the company looks strong.

Strong Growth in H2FY14: The company Net Sales increased by 16.6% to INR2224 crore

and its EBITDA increased by 25.9% to INR419 crore . EBITDA margin of the company

increased from 17.4% to 18.8%. Adjusted PAT EX Forex increased by 20% to INR278 crore.

Valuation

At the CMP of INR265, the Stock is trading at a P/E of 25.6x its FY14E EPS of INR10.0 and

22.5x its FY15E EPS of INR11.8. With Consistent financial growth, Strong ROE and

innovated product line, the prospect of the company looks bright. The Stock has historically

traded at a 3Yr average P/E of 28x as per Bloomberg. We Assign a P/E multiple of 28x to its

FY15E EPS of INR11.8 to arrive at the target price of INR330 for the stock.

Exhibit 1. Pidilite Industries – Historical Financials and Projections


Net Sales 2,657 3,127 3,678 4,311 5,078

Growth (%) 18% 18% 17% 18%

EBITDA 469 493 601 750 884

EBITDA Margins (%) 17.64% 15.76% 16.33% 17.40% 17.40%

Net Profit 310 333 424 513 607


Net Profit Growth (%) 8% 27% 21% 18%

EPS 6.1 6.6 8.3 10.0 11.8

BVPS 21 26 32 40 50

P/E 43.2 40.3 32.0 26.5 22.5

P/BV 12.6 10.2 8.3 6.6 5.3

RoE 31.7% 27.7% 28.5% 27.6% 26.2%

Source: Company, Microsec Research (In INR crore)

Pidilite Industries Ltd – ‘Growing Consistently’

BUY Sector – Consumption

Analyst: Naveen Vyas

Email id: [email protected]

Current Market Price (INR) 265

Target Price 330

% Upside 24.5%

52 Week High / Low (INR) 303/ 188

Market Capitalization (In INR cr) 13,584

Market Data

80.00

100.00

120.00

140.00

160.00

30-Oct 30-Jan 30-Apr 30-Jul

Pidilit e SENSEX

Shareholding

DII

5.28%

Others

11.00%

FIIS

13.66%

Promoters

70.06%


We rate Rallis India Ltd. (Rallis) a ‘BUY’. Rallis, a TATA group company, deals in Agri

business & has emerged as one of the leaders in the industry. It has plants located at Akola,

Ankaleshwar, Bharuch & Ratnagiri. The company is also in Institutional business providing

technical knowhow & bulk of various types of molecules to companies like Bayer Cropscience,

Syngenta, UPL, etc & has launched products for pests control of public health importance.

Besides, the company is also having a significant presence in International Business & Contract

Manufacturing.


Untapped Domestic Agrochemical Market: Rallis India is a well placed agrochemical company

in the Indian market. The company presently holds 10% market share in the industry firmly

placing it to acquire the emerging opportunities in agrochemical market backed by its robust

distribution network, well-known branded farm solutions & frequent launches of new

products in the segment. In the current fiscal, the company has come up with few new

products to strengthen its product gallery which will in turn help the company to garner new

markets. Besides, newly commissioned DAHEJ SEZ facility is expected to boost exports of the

company; thus making it less dependent solely upon the domestic market.

Exploring Hybrid Seeds & Organic Farming: The Hybrid Seed market in India is expected to

grow @10-15% CAGR in future years. The country at present has merely 2mha of the total

40mha available in hybrid seed category for paddy, which leaves the company with enough

room to penetrate deep in this sector. After acquiring Bangalore based seed company

Metahelix Lifescience, Rallis is well groomed to capitalize on the former’s strong & impressive

R&D capabilities & sturdy product pipeline. Rallis has also increased its stake to 27.75% in

Zero Waste Agro Organics Ltd & is concentrating on exploring opportunities in Organic

farming sector.

Good Kharif season & promising Rabi season: The Company posted good Q2FY14 results

owing to good Kharif season & the management is expecting the same outcome for the Rabi

season which would be reflected in the Q3FY14 results. The well spread monsoon has

brighten the prospects of good sowing season for the farmers for both summer & winter crops.

Valuations & Outlook: Rallis India is currently trading at P/E multiple of 25x times at the

current market price of INR 153.85. The TTM EPS of the company is INR 6.12. We expect the

company to post healthy numbers in the future periods also with above mentioned rationales

being fulfilled.

Rallis – Financials at a glance (all data in INR Crores unless specified)

Rallis India Limited

BUY Sector- Agro Chemical Industry

Analyst: Kapil Bhati

[email protected]

Source: Company Data, Microsec Research

Indian

Promoters

50%

Institutions

18%

Non-

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Investment Highlight

Tata Steel Ltd

BUY Sector – Steel & Steel products

Greenfield coupled with brown-field expansions to boost volume growth in Indian Operations: Tata Steel

India is set to deliver strong volume growth over FY14-17e on full ramp-up of 2.9MTPA brown-field plant

at Jamshedpur. Tata Steel commissioned its 2.9MTPA Jamshedpur brown field expansion project in FY13

and it is expected that full benefit will come in FY15. The company is likely to consider another 3MTPA

expansion at Orissa after commissioning of this facility. Further, some of the project facilities are being

constructed keeping in mind the eventual expansion to 6mtpa. The capex for the next 3mtpa phase of this

project would only be 50-60% of the first 3mtpa phase. Accordingly, the highly profitable Indian

operations would drive strong volume growth for several years.

Turnaround in Europe Operations to be the key trigger: With the recent encouraging signs of improving

economic conditions in Europe, the UK in particular, the management expects the demand in Europe

(where it derives 2/3rd of its 27MT of annual capacity) to recover by the end of FY14e. Also, the company’s

restructuring initiatives like launching new products to boost value addition and improve product mix,

write down of $1.6 bn due to weak demand, cost-cutting measures, reducing headcount, shutdown of high

cost facilities, selling of non-core assets and disinvestment of non-profitable subsidiaries have already

started showing positive results for last couple of quarters. We believe the company is poised to capitalize

the improvement in Europe if it translates more strongly into increased demand from steel-intensive

sectors. Following the above measures with the support of recovering demand, we believe the European

operation to post better results in future.

Management’s view of timely capex completion and de-leveraging the balance-sheet a positive move:

With the timely capex completion and company’s strategy to de-leverage the balance sheet by going for

refinancing of debt (which is expected to go record high in FY14e due to the on-going investment in

Odisa phase-I expansion) and selling non-core assets is a positive move.

Tata Steel Odisha unit's phase-I to start operations in Q4FY14e: The work on the first phase of Tata Steel's

Kalinganagar project in Odisha, entailing an investment of the INR25,164 crore, is in full swing and

operations are likely to commence in the last quarter of 2014. We believe that timely commission of the

unit would improve volume growth from Q4FY14e onwards. Tata steel has a major capex programme in

Odisha to set up a 6MT steel plant, which has been planned in a phased manner.

Valuation: At the CMP of INR326 per share, the stock looks attractive at its forward EV/EBITDA of 6.01x

its FY14e EBITDA of INR14,822 crore and EV/EBITDA of 5.44x its FY15e EBITDA of INR17,154 crore.

Hence, we recommend “BUY” on the stock with a target price of INR410 per share.

Analyst: Neha Majithia

[email protected]

+033-30512177

We recommend a “BUY” on Tata Steel Ltd. The company is the world’s sixth-largest steel company with

an existing annual crude steel production capacity of ~30MTPA. Post the Corus acquisition; it has

diversified business spread across Europe, South East Asia and pacific-rim countries. Hence, with

Greenfield and brown-field expansion to boost volume in Indian operations, turnaround in Europe

operations, timely completion of capex and moves to de-leverage the balance sheet bodes well for the

fortune of the company on a longer period of time.

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Tata Steel Ltd Sensex

Scrip ID Tata Steel Ltd

Scrip Code (NSE) TATASTEEL

Scrip Code (BSE) 500470

Bloomberg Ticker TATA IN

Reuters Ticker TISC.BO

Industry Steel/Sponge Iron/Pig Iron

Face Value ( INR per share) 10.00

Equity Share Capital ( INR in Cr) 971.21

Avg 5 years P/E (x) 5.93

Avg daily volume (Last 1 Year) 4,912,400

Beta Vs Sensex 1.25


Stock Scan

Promoters

31.35%

FIIs

13.08%

Other

Institutions

26.39%

Non-

Institutions

26.52%

Others

2.66%

Current Market Price (CMP) 326

Target Price 410


52 Week High Low 448 / 195

Market Cap (INR in Cr) 31661

Market Data

Particulars FY09A FY10A FY11A FY12A FY13A FY14E FY15E

Net Sales 147329 102393 118753 132900 133417 141464 152781

Growth 12.0% -30.5% 16.0% 11.9% 0.4% 6.0% 8.0%

EBITDA 18113 7999 16747 12366 12321 14822 17154

EBITDA Margin 12.29% 7.81% 14.10% 9.31% 9.23% 10.48% 11.23%

Net Profit 4951 -2009 8983 5390 -7058 2691 3470

Adj Net Profit 856 -3693 12028 8752 332 2697 3550

Adj Net Profit Margin 0.58% -3.61% 10.13% 6.59% 0.25% 1.91% 2.32%

Adj Net Profit Growth -95.42% -531.23% -425.69% -27.24% -96.20% 711.71% 31.63%

Adjusted EPS 66.3 -23.2 93.7 55.5 3.4 27.8 36.6

Adjusted P/E(x) 3.11 -27.29 6.62 8.48 91.32 11.74 8.92

BVPS 303.3 257.3 369.2 428.5 351.9 358.9 396.3

P/BV(x) 0.68 2.46 1.68 1.10 0.89 0.91 0.82

ROE 19.1% -9.44% 30.4% 12.9% -19.6% 7.6% 9.2%

EV/EBITDA(x) 3.99 10.68 6.27 6.78 6.76 6.01 5.44

Financial Performance of Tata Steel Ltd (All figures in INR Crores except % and per share data)

Source: Microsec Research, Company Data


We rate Tech Mahindra Ltd (TechM) a ‘BUY’. Our rating underpins integration of Satyam

in its operations, depreciation of INR versus USD, and its attractive valuations vis-à-vis peer

group. However, uncertainty regarding US immigration bill and the company’s contingent

liabilities impede our optimism a bit.


Integration of Satyam boosts prospects: TechM completed the acquisition of Satyam

Computer Services Ltd (Satyam) on 25 June 2013. Satyam, which was already contributing

to the company’s bottom line, helped the company to diversify its revenues at consolidated

levels. As a result, the contribution from Telecom and related services to revenues reduced

to just 48% in Q1 FY2014 compared with more than 80% of the pre merged entity’s top line

in FY2013. Furthermore, complementary services portfolio of the acquired entity will equip

the company with competitive strength while bidding for the large deals. In addition,

elimination of overlapping overheads and effective marketing efforts, being a combined

entity, could lead to expansion of the company’s operating margins, going forward.

Additionally, the integration placed TechM as the fifth largest company in the Indian IT

space.

Depreciation of INR versus USD bodes well: Rise in treasury yields in the US and

expectations to taper the bond buying under QE3 led to a sharp depreciation in INR versus

USD during the latter half of Q2 FY2014. The local currency touched all time low of

INR68.825 per USD during the quarter. Although, post that it rose sharply against the

greenback, at current levels of over INR61 per USD, the Rupee is considerably weaker than

its year earlier levels. As a weak INR results in higher Rupee realizations per USD for

exporters, this factor is likely to aid TechM’s top line growth. Moreover, the factor may help

the company to report notable expansion in operating margins during FY2014E.

Valuation remains attractive: TechM is currently trading at Price-to-Earning (PE) of 15.1x

based on its FY2013 earnings compared with average peer group PE of 18.9x. Furthermore,

based on FY2014E and FY2015E EPS as well, the company is attractively priced. On

FY2015E EPS of INR123.84 and target PE of 14.48x, we arrived at the target price of

INR1,793, upside of 17.7%, for the stock.

TechM – Financials at a glance (all data in INR Crores unless specified)


Net Sales 5,140.20 5,489.70 6,873.10 18,044.59 20,249.40

Growth (%) 11.13% 6.80% 25.20% 162.54% 12.22%

EBITDA 1,038.40 938.40 1,452.80 3,926.86 4,223.19

EBITDA Margins (%) 20.20% 17.09% 21.14% 21.76% 20.86%

Net Profit 646.20 1,099.10 1,307.40 2,692.17 2,877.97


Net Profit Growth (%) -8.11% 70.09% 18.95% 105.92% 6.90%

EPS 51.14 86.25 100.85 115.85 123.84

BVPS 266.08 317.75 423.48 539.33 663.17

P/E 12.50 12.58 9.92 13.15 12.30

P/BV 3.04 2.44 2.69 2.82 2.30

RoE 20.7% 29.6% 27.2% 24.1% 20.6%

EV/EBITDA 9.06 10.56 9.88 9.21 8.57

Tech Mahindra Limited

BUY Sector – Information Technology

Analyst: Nitin Prakash Daga

[email protected] Source: Bloomberg, Microsec Research

Promoter and

Promoter Group

36.46%

FII32.59%

DII15.13%

Non Institutions

15.82%

Shareholding

BSE Code 532755

NSE Code TECHM

Bloomberg Ticker TECHM IB

Reuters Ticker TEML.BO


Equity Share Capital (In INR Mn) 2,323.91

Average P/E 10.8x

Beta vs Sensex 0.70

Average Daily Volume 125,843

Dividend Yield 0.3%

PEG Ratio 0.91

STOCK SCAN

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Retu

rn (

%)

TechM Sensex

Current Market Price (INR) 1,523.20

Target Price 1,793.00

Upside (%) 17.7%

52 Week High / Low (INR) 1,594.00 / 865.25

Market Capitalization (In INR Mn) 353,978.03

Market Data


Microsec Research: Phone No.: 91 33 30512100 Email: [email protected]

Ajay Jaiswal: President, Investment Strategies, Head of Research: [email protected]

Fundamental Research

Name Sectors Designation Email ID

Nitin Prakash Daga IT, Telecom & Entertainment VP‐Research [email protected]

Naveen Vyas FMCG, Midcaps, Mkt VP‐Research [email protected]

Sutapa Roy Economy Research Analyst s‐[email protected]

Sanjeev Jain BFSI Research Analyst [email protected]

Neha Majithia Metal, Mineral & Mining Research Analyst [email protected]

Soumyadip Raha Oil & Gas Executive Research [email protected]

Saroj Singh Auto, cement Executive Research [email protected]

Kapil Bhati Fert, Chem & Agri Executive Research [email protected]

Technical & Derivative Research

Vinit Pagaria Derivatives & Technical Senior VP [email protected]

Ranajit Saha Technical Research Sr. Manager [email protected]

Institutional Desk

Puja Shah Institutional Desk Dealer [email protected]

Abhishek Sharma Institutional Desk Dealer [email protected]

PMS Division

Siddharth Sedani PMS Research VP [email protected]

Ketan Mehta PMS Sales AVP [email protected]

Research‐Support

Subhabrata Boral Research Support Asst. Manager Technology [email protected]

Recommendation

Strong Buy >20%

Buy between 10% and 20%

Hold between 0% and 10%

Underperform between 0% and ‐10%

Sell < ‐10%

Expected absolute returns (%) over 12 months

MICROSEC RESEARCH IS ALSO ACCESSIBLE ON BLOOMBERG AT <MCLI>


Disclaimer: This document is prepared by the research team of Microsec Capital Ltd. (hereinafter referred as “MCL”) circulated for purely information purpose to the authorized recipient and should not be replicated or quoted or circulated to any person in any form. This document should not be interpreted as an Investment / taxation/ legal advice. While the information contained in the report has been procured in good faith, from sources considered to be reliable, no statement in the report should be considered to be complete or accurate. Therefore, it should only be relied upon at one’s own risk.

MCL is not soliciting any action based on the report. No indication is intended from the report that the transaction undertaken based on the information contained in this report will be profitable or that they will not result in losses. Investors must make their own investment decisions based on their specific investment objectives and financial position and using such independent advisors, as they believe necessary. Neither the Firm, nor its directors, employees, agents nor representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information.

Diwali Picks - Rakesh Jhunjhunwala · 2013-11-02 · Diwali Picks Dear Patrons, Wishing you A Very...

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