my thesis
TRANSCRIPT
INDIAN INSTITUTE OF PLANNING AND MANAGEMENT MUMBAI
THESIS ON
“CORPORATE FINANCING AND CORPORATE VALUATION OF IND IAN COMPANIES”
SUBMITTED BY
APURVA PRASAD
FINANCE
BATCH - PGP/FW/06-08 REF. ID – IIPM/ FW/ 06-08/ MUM/ FIN/ 043
2
1.1 Abstract
Indian economy has positioned itself on the growth curve which is signified by indicators
such as 8-9 percent annual growth, rising foreign exchange reserves, rapidly growing
FDI, second fastest growing emerging market and an active capital market. The strong
banking system and a prudent regulatory environment enable capital formation due to
increased economic activity. However, 2008 has witnessed concerns in the economy
which are characterized by increase in inflation, rise in commodity price, increase in
interest rates, tightening liquidity, slow down in demand and capital expenditure. There
has been a global financial contagion arising out of credit markets which have impacted
almost all industries directly or indirectly. This has led to implementation of various
structural changes in the industry such as change in the business model/ revenue model or
a change in the finance mix in order to adapt with the dynamism of the economy.
Study of corporate financing and corporate valuations therefore commands importance
and become an interesting study. The research tool used applied in the thesis is in the
form of financial modeling and analysis of 50 companies that constitute S&P CNX
NIFTY index with an effort to understand the dynamics of Indian companies operating in
the current business environment. The thesis attempts to forecast the economic &
business environment with the help of valuation based tools.
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1.2 Certificate i)
Scanned Copy
4
1.2
ii)
BONAFIDE CERTIFICATE
This is to certify that the Thesis titled “Corporate Financing & Corporate Valuation of
Indian Companies” is the original work and has been successfully carried out by
Mr.Apurva Prasad (IIPM/ FW/ 06-08/ MUM/ FIN/ 043). Mr.Apurva Prasad has initiated
the study and completed as per my expectations and under my guidance.
The final output is acceptable to me and is hereby finally approved.
Mr.Manoj Agarwal Date:
Head, Retail Clients, Inventure Growth & Securities Ltd.
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1.3 Thesis Topic Approval
i)
Dear Apurva,
I have received your synopsis as well as the confirmation of your external guide you through
the thesis. This letter is a formal approval to the topic proposed by you
Please go ahead with the thesis. Make it a comprehensive thesis by using empirical data as
the basis of the research.
Your ref. id number is IIPM/FW/06-08/MUM/FIN/043
Furthermore, you are required to send me a total of at least 6 thesis guidance response
sheets at equal intervals before the coalescence of the thesis. Please find below the format
for the response sheet.
Best of Luck.
Sonal Pandey
From Sonal Pandey [email protected]
To Apurva Prasad <[email protected]>
Date: Wed, Apr 23, 2008 at 2:59 PM
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1.3
ii)
Scanned Copy
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1.3
iii)
Scanned Copy
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1.4 Acknowledgement
This thesis has given me immense insights in the area of corporate finance and equity
research. This research has not just helped me to understand the fundamentals but also
the finer nuances of valuation and fundamental research. It has helped me to bridge the
theoretical and practical aspects of the research topic while providing me with deeper
insights and acquaintance.
Firstly, I would like to thank my internal guide Prof.Sonal Pandey and the institute for
approving the thesis topic and providing a learning platform. I am highly obligated and
would like to thank my external guide Prof R.C.M Pendyala and Mr.Manoj Agarwal for
providing me direction and guidance.
I wish to express my deepest appreciation to all the respondents for their valuable time
and their insights on the research topic. I thank my family and friends who have
supported me during the course of my research.
APURVA PRASAD
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1.5 Table of Content
SR.NO. PARTICULARS PAGE NO. 1 PREFATORY ITEMS 2-12
1.1 Abstract 2
1.2 Signatory Page/ Certificate 3
1.3 Topic Approval 5
1.4 Acknowledgement 8
1.5 Table of Contents 9
1.6 List of Charts 10
1.7 List of Tables 12
2 INTRODUCTION 13-14
2.1 Introduction 14
3 LITERATURE REVIEW 15-20
4 RESEARCH METHODOLOGY 21-22
5 RESEARCH ANALYSIS 23-104
5.1 Macroeconomic Analysis 24
5.2 Industry/ Sector Analysis 37
5.3 Company Analysis 65
6 CONCLUSION 105-108
6.1 Conclusion 106
6.2 Bibliography 108
7 APPENDICES 109-117
7.1 Thesis Synopsis 110
7.2 Response Sheets 112
7.3 Questionnaire 117
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1.5 List of Charts Page No.
Fig. 1 - Index of Industrial Production 24
Fig.2 - Production in Infrastructure Industries 25
Fig.3 – Performance of Basic Infrastructure Industries 25
Fig.4 – Money supply data 26
Fig.5 – Credit/ Deposit growth 26
Fig.6 – CRR trend 27
Fig.7 – Repo Rate trend 27
Fig.8 – G-Sec yield 28
Fig.9 - Foreign Trade growth 28
Fig.10 - Forex Reserve (Excluding Gold & SDRs) 29
Fig.11 - Inflation (WPI) trend 29
Fig.12 – WPI trend 30
Fig.13 - Crude Oil prices 30
Fig.14 – Crude Oil chart 31
Fig.15 – Commodity price trend 32
Fig.16 – NIFTY Chart 33
Fig.17 Weakness/ Threats Indicators 34
Fig.18 – Opportunities Indicator (i) 35
Fig.19 – Opportunities Indicator (ii) 36
Fig.20 – Opportunities Indicator (iii) 37
Fig.21 – Deposit Growth trend 38
Fig.22 – Credit Growth trend 39
Fig.23 – Repo Rate changes 39
Fig.24 – CRR changes 40
Fig.25 – G-Sec yield curve 40
Fig.26 - Sectoral Credit Growth 42
Fig.27 - Assets of Scheduled Commercial Banks (% change over 42
previous year)
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Page No.
Fig.28 - Assets of Scheduled Commercial Banks (Rs.crore) 43
Fig.29 - Liabilities with Scheduled Commercial Banks (% 43
change over previous year)
Fig.30 - Assets of Scheduled Commercial Banks (Rs.crore) 44
Fig.31 – Cement consumption growth 45
Fig.32 – Cement supply trend 46
Fig.33 – Cement demand / price trend 46
Fig.34 – Cement capacity utilization trend 47
Fig.35 – Cement Price Trend 47
Fig.36 - Cement Statistics: Production, Consumption & Prices 49
Fig.37 – Subscriber growth trend 50
Fig.38 - GSM Cellular Service 52
Fig.39 – Subscribers growth 52
Fig.40 - Textile Statistics 57
Fig.41 – Power demand/ supply scenario 58
Fig.42 - Power Generation Statistics 60
Fig.43 – Steel production growth 61
Fig.44 – Coke price trend 62
Fig.45 – Global Inventory & price trend 62
Fig.46 – NIFTY P/E & P/BV trend 106
Fig.47 – Sector Beta 107
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1.6 List of Tables Page No.
Table 1 – Auto sector 37
Table 2 – Cement sector 44
Table 3 – Telecom sector 50
Table 4 – Pharma sector 53
Table 5 – IT sector 54
Table 6 – Oil & Gas sector 55
Table 7 – Power sector 58
Table 8 – Metals sector 61
Table 9 – Company Valuations consolidated 107
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INTRODUCTION
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2.1 Introduction
Importance/ Background for the Research
The role of financial system in mobilizing and allocating the resources for capital
formation has been well established by many studies. In this paper, an attempt has been
made to understand the financing pattern of Indian companies represented Nifty-50.
Corporate valuations play a major role in determining long term growth of an economy;
therefore the thesis also intends to focus on corporate valuation aspects of the Indian
companies.
The combined market capitalization of the 50 companies that constitute the index is in
excess of $600 billion which comprises ~ 60% of the total market capitalization of the
total 6000 listed companies in India.
Objective
To study & analyze Corporate Financing and Corporate Valuation of Indian firms
represented by companies that constitutes the S&P CNX NIFTY index.
Scope of study
Corporate Financing – Financing Mix
Corporate Valuation – Relative valuation multiplier
Financial Statement Analysis – Ratio Analysis
EIC Analysis – Macroeconomic/ Sector/ Company
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LITERATURE REVIEW
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Corporate Finance includes the following principles:-
• Invest in projects that yield a return (cash flows) greater than the minimum
acceptable hurdle rate (financing mix).
• Choose a financing mix that maximizes the value of the firm and matches the
assets being financed.
Corporate Finance Principles
The Investment Principle: The investment principle states simply that firms should
invest in assets only when they are expected to earn a return greater than a minimum
acceptable return. This minimum return, which we term a hurdle rate should reflect
whether the money is raised from debt or equity, and what returns those investing the
money should have made elsewhere on similar investments.
The Financing Principle: The financing principle states that the mix of debt and
equity chosen to finance investments should maximize the value of investments made. In
the context of the hurdle rate specified in the investment principle, choosing a mix of debt
and equity that minimizes this hurdle rate allows the firm to take more new investments
and increase the value of existing investments.
The Dividend Principle: Firms sometimes cannot find investments that earn their
minimum required return or hurdle rate. If this shortfall persists, firms have to return any
cash they generate to the owners.
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Tools of Corporate Finance
1. The first of these tools is the time value of money, which allows us to compare
cash received or paid at different points in time and to weight them based on
when they occur.
2. The second tool is financial statement analysis since much of the information that
we get in finance comes from these statements.
3. The third tool is an understanding of how to value an asset or valuation
Financial Statement Analysis
Financial statements serve important functions: a) They provide information on how the
firm has performed in the past and what is its current position. b) They are a convenient
device for the stakeholders (shareholders, creditors, regulators, and others) to set
performance norms and impose restrictions on the management of the firm. c) They
provide useful templates for financial forecasting and planning.
Financial ratio analysis is a study of ratios between various items or groups of items in
financial statements. Financial ratios have can be classified into Liquidity ratios,
Leverage ratios, Turnover ratios, Profitability ratios, Valuation ratios.
Liquidity Ratio
Liquidity refers to the ability of a firm to meet its obligation in the short run, usually one
year. Liquidity is generally based on the relationship between the current assets (the
surces for meeting short-term obligations) and current liabilities. The important liquidity
ratios are current ratio, acid-test ratio and cash ratio.
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Leverage Ratio
Financial leverage refers to the use of debt finance. Leverage ratios help in assessing the
risk arising from the use of debt capital. The important ratios (Structural & Coverage) are
Debt-Equity ratio and Interest Coverage ratio.
Turnover Ratio
Turnover ratios, also referred to as activity ratios or asset management ratios, measure
how efficiently the assets are employed by a firm. These ratios are based on the
relationship between the level of activity, representaed by sales or net profit and levels of
various assets. The important turnover ratios are: Inventory turnover ratio, Debtor days,
etc.
Profitability Ratio
Profitability reflects the final result of business operations. There are two types of
profitability ratios: profit margin ratios and rate of return ratios. The important ratios are
Net profit margin, Operating margin, etc.
Valuation Ratio
Valuation ratios indicate of the equity stock of the company is assessed in the capital
market. Since the market value of equity reflects the combined influence of risk and
return, valuation ratios are the most comprehensive measures of a firm’s performance.
The important valuation ratios are price-earnings ratio, EV-EBITDA, Price-book value,
etc.
Value maximization is the central theme in financial management and owners of
corporate securities hold management responsible for value enhancement. There are two
general approaches to the valuation process: 1) the top-down, three-step approach or 2)
the bottom-up, stock valuation, stockpicking approach. Both of these approaches can be
implemented by either fundamentalists or technicians. The difference between the two
approaches is the perceived importance of the economy and a firm’s industry on the
valuation of a firm and its stock. Although we know that the value of a security is
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determined by its quality and profit potential, the economic environment and the
performance of a firm’s industry influence the value of a security and its rate of return.
General Economic Influence
Monetary and fiscal policy measures enacted by various agencies of national
governments influence the aggregate economies of those countries. The resulting
economic conditions influence all industries and companies within the economies.
Fiscal policy initiatives, such as tax credits or tax cuts, can encourage spending. In
addition government spending has a strong multiplier effect. Monetary policy produces
similar economic changes. A restrictive monetary policy that targets interest rates would
raise the market interest rates and therefore firms’ cost. Monetary policy therefore affects
all segments of an economy and that economy’s relationship with other economies. It is
therefore difficult to conceive of any industry or company that can avoid the impact of
macroeconomic developments that affect the total economy.
Industry Influence
The second step in valuation process is to identify global industries that will prosper or
suffer in the long run or during the expected near-term economic environment. Industries
react to economic changes at different points in the business cycle. For example, firms
typically increase capital expenditure when they are at full capacity at the peak of the
economic cycle. In contrast, non-cyclical industries such as retail food would not
experience a significant decline during a recession but also would not experience a strong
increase during economic expansion.
Company Analysis
After determining that an industry’s outlook is good, an investor can analyze and
compare individual firms’ performance within the entire industry using financial ratios
and cash flow values.
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Relative Valuation
Relative valuation techniques implicitly contend that it is possible to determine the value
of an economic entity by comparing it to similar entities on the basis of several relative
ratios that compare its stock price to relevant variables that affect a stock’s value, such as
earnings, cash flow, book value, and sales.
______________________________________________________________________ 1. Corporate Finance 2e – Aswath Damodaran 2. Investment Analysis & Portfolio Managemen 8e – Reilly/ Brown 3. Financial Management 7e – Prasanna Chandra 4. Grahan and Dodd’s Security Analysis 5e – Cottle/ Murray/ Block
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RESEARCH METHODOLOGY
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Primary Research
Data Mining
Financial modeling on excel was used for the analysis of Profit & Loss statement and the
Balance Sheet of 50 companies. Analysis includes the following:-
• Financial Ratios such as ROE, ROCE, Liquidity ratio, Turnover Ratios
(inventory, debtor).
• Margin Analysis: - Raw Material cost, Operating Margin, Tax Rate.
• Year on Year Analysis, Unit Analysis, CAGR.
• Financing mix – Leverage ratios (structural & coverage).
• Valuation – P/E, P/BV, P/CEPS
The market capitalization data is as on 31/07/2008 and the Promoter stake is as on June
2008. Multex Global in icicidirect.com is the source for forward EPS data and quarterly
results of the companies. The multiple assigned to the stock is on the basis of EIC
analysis and it’s used to project a target price. Company Annual Reports &
moneycontrol.com is the source of the financial data which was used for financial
modeling.
Interview (qualitative)
The questionnaire covered areas of macroeconomic environment and industry view as
these factors determine the behaviour of the stock to a large extent. The views that were
taken from the respondents included factors such as GDP growth, Foreign exchange rate,
Inflation, Crude Oil, Earnings growth & Sector view. The performance of a stock and
thereby its valuation is a function of the economy and the industry that surrounds the
company. Following is the analysis of the views taken from the respondents. The
respondents whose views were analysed are Mr.Abhay Kumar, Unit Head, ICICI Direct;
Mr.Mukesh Gupta, MD, Scope Commodeal; Mr.Rahul Khandelwal, Research Analyst,
ABN AMRO, Mr.Abhishek Raichura, Manager, Motilal Oswal Securities Ltd.;
Mr.Jignesh Patel, Advisor, Motilal Oswal Securities Ltd.
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RESEARCH ANALYSIS
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5.1 Macroeconomic Analysis
Fig. 1 - Index of Industrial Production
Source: Ministry of Finance
The revised annual growth achieved by the mining, manufacturing and electricity sectors
during April-June, 2008-09 was 4.7 %, 5.6 % and 2.0 % respectively as compared to 2.7
recent, 11.1 % and 8.3 % during the corresponding period of last year.
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Fig.2 - Production in Infrastructure Industries
Source: Ministry of Finance
Fig.3 – Performance of Basic Infrastructure Industries
Source: Ministry of Finance
During April-June 2008-09, six core infrastructure industries registered a growth of 3.5
% (provisional) as against 6.4 % during the corresponding period of the previous year.
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Fig.4 – Money supply data
Source: Ministry of Finance
During the current financial year 2007-08, broad money stock (M3) (up to July 18, 2008)
increased by 3.5 per cent as compared to 4.3 per cent during the corresponding period of
the last year. The year-on-year growth, as on July 18, 2008, was 20.0 per cent as
compared to 21.9 per cent of the corresponding date of last year
Fig.5 – Credit/ Deposit growth
Source: Ministry of Finance
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During the current financial year (up to July 18, 2008) gross bank credit increased by 1.9
per cent as compared to the decline of 0.9 per cent during the same period of the previous
year. The Non-Food credit during the financial year (up to July 18, 2008), increased by
1.7 per cent as compared to the decline of 0.6 per cent during the same period of the last
year. The year-on-year growth of time deposits with SCBs as on July 18, 2008 was 22.1
per cent as compared to 25.3 per cent on the corresponding date of last year.
Fig.6 – CRR trend
An upward trend has been witnessed in the CRR which has increased from 4.75 % in
September 2004 to 8.75 % in July 2008 indicating efforts to tighten the money supply.
Fig.7 – Repo Rate trend
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The Repo rates have also increased from 6.00 % in March 2004 to 8.50 % in July 2008
suggesting a monetary tightening of the money supply. The current (as on 25th September
2008) Repo rate is at 9.00 % and its has increased 150 bps over the last year and a half.
The CRR rate and the Repo rate has been increased in CY2008 in order to arrest
inflationary pressures.
Fig.8 – G-Sec yield
G-sec yield bottomed out in July 2004 and has almost doubled to 9.10 % in the last 4
years.
Fig.9 - Foreign Trade growth
Source: Ministry of Finance
Exports, in dollar terms, during April-June, 2008 increased by 22.3 percent. Imports
increased by 29.7 percent. Oil imports increased by 50.2 percent and Non-oil imports
increased by 20.9 per cent.
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Fig.10 - Forex Reserve (Excluding Gold & SDRs)
Source: Ministry of Finance
Fig.11 - Inflation (WPI) trend
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Fig.12 – WPI trend
Source: Ministry of Finance
The annual rate of inflation based on Wholesale Price Index (WPI) stood at 12.01 per
cent for week ended July 26, 2008 compared with 4.70 per cent a year ago. This rate was
contributed by an increase of 10.32 per cent in Primary Articles, 7.12 per cent increase in
Fuel, Power, Lights and Lubricants and -10.75 per cent increase in Manufactured
Products as against an increase of 10.47 per cent, -1.74 per cent and 5.08 per cent
respectively on the corresponding date of last year. Inflation for the week ended
September 3, 2008 stood at 12.34 % which has been showing signs of stabilization after
it fell 29 bps over the last two weeks from its 13 year highs.
Fig.13 - Crude Oil prices
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Fig.14 – Crude Oil chart
Source: http://www.wtrg.com/daily/crudeoilprice.html
Crude Oil spiked to $147/ bbl, its highest of all-time before declining to $107/ bbl as on
4th September, 2008. This slump in oil price was helped by Opec increasing production
by 350,000 bpd and non-Opec producers adding 550,000 bpd. With global economic
growth also looking less robust, oil prices have slumped from $140 levels.
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Fig.15 – Commodity price trend
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Fig.16 – NIFTY Chart
Source: www.nseindia.com
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Weakness/ Threats Indicators
Fig.17 - Weakness/ Threats Indicators
The recent turmoil in the global financial and credit markets have wiped out billions of
dollars from the balance sheet of the affected companies. This has produced a contagion
of spike in crude oil & commodity prices and a sharp increase in credit spreads. The
weakness & threats are evident in our economy caused by redemption pressure of the
portfolio investments of the FII and the dollar outflow. SENSEX & NIFTY have shed ~
40 % from its all time highs in January while capital market public issues have reduced
drastically. The valuations on the indices have come down and the open interest in the
derivative futures have also reduced substantially. The slowdown in economic growth
due to inflationary pressures and the interest rate scenario is the major threat to the
economy.
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Opportunities Indicators
Fig.18 – Opportunities Indicator (i)
Source: India Strategy Report
The opportunity for growth of the economy is largely a function of the growth of
domestic demand/ consumption, rising income (savings & investments) and changing
demographics. Factors such as growth in disposable income rise and consumption
increase illustrate the opportunity for Indian companies and capital markets. Capital
market growth opportunity is evident as there is a lot of scope for growth in equity and
debt market.
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Fig.19 – Opportunities Indicator (ii)
Source: India Strategy Report
Fig.20 – Opportunities Indicator (iii)
Source: India Strategy Report
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5.2 Industry/ Sector Analysis
Automobiles
The automobile sector contributes ~ 2% to the total market capitalization of NIFTY. The
ROE and the ROCE of the sector is 29.34% and 23.96% respectively with Hero Honda
recording the highest ROE of 32.79%. The Debt/ Equity of the sector is 0.35 with Tata
Motors having the highest leverage of 0.8 and Hero Honda having the lowest leverage of
0.07. The Operating Margin and the PAT Margin of the sector stands at 11.85% and
8.62% respectively. Current Ratio for the sector is 1.06 with Maruti having the highest
liquidity of 1.42 and Hero Honda having the lowest liquidity of 0.57. Dividend payout for
the sector is 25.35% and Ploughback ratio of the sector is 74.65%. Hero Honda retained
the least with the highest Dividend Payout of 39.72%.
Table 1 – Auto sector
Security Symbol Beta ROE
% ROCE %
Debt/ Equity
Operating Margin %
PAT Margin %
Current Ratio X
EPS Rs.
Dividend Payout %
M&M 0.74 29.89 21.13 0.46 11.62 8.16 1.37 46.15 26.58
MARUTI 0.7 26.47 24.15 0.09 12.14 9.74 1.42 60.21 7.17
TATAMOTORS 0.78 26.4 17.77 0.8 10.58 7.2 0.9 53.68 27.95
HEROHONDA 0.46 34.6 32.79 0.07 13.06 9.37 0.57 48.47 39.72
The auto sector continues to face challenging times, as the pressures of FY08 have
further intensified in FY09. Higher oil prices and interest rates remain key threats to
volume growth. The sharp rise in input prices would pose a challenge for margins. On the
volumes front, companies are banking on higher disposable income, led by strong
economic growth, favorable changes in personal income tax slabs, and new model
launches. However, financing constraints still need to be addressed, as banks have
significantly reduced their retail lendings. Large auto majors have now tied up with
cooperatives and NBFCs to provide financing to buyers. On the margins front, benefits
from productivity improvement and cost reduction programs undertaken by companies
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would continue to partially offset the pressures from rising input prices.
Commencement/ramping up of operations in tax-free zones like Uttaranchal would help
counter cost pressures through lower tax burden. Valuations of the auto majors have
become very attractive, with the long-term growth outlook still quite positive.
Banking
The Banking sector contributes ~ 8.5% to the total market capitalization of NIFTY. The
ROE for the sector recorded 17.6% for FY08.
Higher inflation, rising interest rates, regulatory actions to tighten liquidity coupled with
rising fiscal deficit are creating a challenging macro scenario for banks. While loan
growth would moderate around 20% growth, currently growing at 25%, marginally lower
margins for most banks (despite banks having shown their willingness to raise rates) can
be expected. Having a low cost liability base (CASA) would be a key differentiator for
the banking industry. Banks like HDFC Bank, Axis Bank, SBI, and PNB, which have
high CASA ratios are at an advantage.
Fig.21 – Deposit Growth trend
Deposits grew ~23% YoY and 2% QoQ (as on 6 June 2008) to Rs.32,570 billion. Strong
growth in deposits came on the back of higher interest rates offered by the banks.
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Fig.22 – Credit Growth trend
Credit grew 26% YoY (as on 6 June 2008) versus 22% in FY08. On a QoQ basis loans
grew by 1.4% compared to 2.1% QoQ in 1QFY08. In 1QFY09, the credit to deposit ratio
was 73.1%, which is lower than 73.6% recorded in FY08.
Fig.23 – Repo Rate changes
Fig.24 – CRR changes
40
In 1QFY09, the RBI has raised the repo rate by 75bps to 8.5% and CRR by 125bps to
8.75% (50bps to be effective in July 2008). CRR increase of 125bp would amount to
liquidity outflow from the system of Rs.45,000 crores.
Fig.25 – G-Sec yield curve
While the G-sec yields remained flat in FY08 on a YoY basis, they shot up significantly
in the last two months, as the high inflation numbers meant that interest rates would rise.
While one-year G-sec yield has increased by 168bp QoQ, 2-3 year yields increased
164bp and the 10 year G-sec yield increased by 74bp. On a YoY basis however, yields
are higher by 70-175bp across maturities
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Data available till 18 July 2008 indicates that credit growth continues to outpace deposit
growth in the current financial year. Bank credit is growing at well over 25 per cent while
deposit growth slowed to 21 per cent by the third week of July 2008.
Growth in deposits, both demand as well as term, is showing signs of slowing. Slowdown
in demand deposit growth is sharper. Demand deposit growth slowed from a high of 25.1
per cent as at the end of May 2008 to 14.2 per cent by the first week of July 2008.
Additional data for the week ended 25 July 2008 indicates that demand deposit growth
plummeted to 5.9 per cent. The robust 25 per cent plus robust growth in credit is expected
to marginally slow down due the sharp increase in interest rates brought about by the RBI
during June–July 2008. Retail credit is expected to particularly slow down further. In the
broader context, however, demand for credit will remain healthy unless the RBI seeks to
further harden interest rates. It is possible that with elections around the corner and
inflation remaining in double digit figures the monetary authority may well attempt to
further clamp down on liquidity to dampen demand and therefore credit growth. We
expect credit growth to be around 22–23 per cent for 2008–09 as a whole. According the
disaggregated data available till 23 May 2008, growth in credit to industry accelerated
further to 26.9 per cent from 26.4 per cent a year ago. Growth in credit to small scale
industries accelerated sharply from 29.5 per cent to 52.1 per cent during this period.
However, the continuous rise in interest rates over the past one year did take its toll on
personal loans. Growth in personal loans slowed from 23.9 per cent a year ago to 15.9 per
cent as on 23 May 2008. The consumer durables segment was the worst affected and
witnessed a decline of six per cent.
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Fig.26 - Sectoral Credit Growth
Fig.27 - Assets of Scheduled Commercial Banks (% change over previous year)
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Fig.28 - Assets of Scheduled Commercial Banks (Rs.crore)
Fig.29 - Liabilities with Scheduled Commercial Banks (% change over previous
year)
44
Fig.30 - Assets of Scheduled Commercial Banks (Rs.crore)
Cement
The Cement sector contributes ~ 2% to the total market capitalization of NIFTY. The
promoter holding for the sector is 38.23% as on June 2008. The ROE and the ROCE of
the sector is 23.98% and 25.17% respectively. The Operating margin and PAT margin of
the sector is 29.78% and 23.96% respectively with Ambuja Cements recording the
highest Operating margin of 36.3%. The dividend payout of the sector is 24.58% while
retaining ~ 75% of the profit. The liquidity measure of the sector is 1.02 X.
Table 2 – Cement sector
Security Symbol Equity Market
Capitalisation Weightage Beta Promoter%
ACC 1,876,511,140 10,948 0.42% 0.73 43.00 AMBUJACEM 3,045,095,596 12,401 0.47% 0.48 46.50 GRASIM 916,742,280 16,567 0.63% 0.71 25.20
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While volume growth is likely to remain stable, new capacities (~32MT in FY09) would
result in excess supply. However, these new capacities would impact demand-supply
equilibrium only in 2QCY09. In the interim, prices would remain under check on account
of high inflation and government monitoring. As a result, margins would remain under
pressure, with stable pricing and severe cost push. Excess supply situation is expected to
continue at least till FY11, curtailing pricing power for the industry. Valuations for the
industry are attractive – asset valuations for all cement companies are below replacement
cost of US$120/ton. However, the upside appears limited, especially with impending
excess supply situation and pressure on margins.
Fig.31 – Cement consumption growth
46
Fig.32 – Cement supply trend
In FY08, total capacity addition for the industry was 30MT, taking the total capacity to
198MT. Further, at least another 45MT of capacity is scheduled to commission in FY09.
As a result, FY09 is expected to witness excess supply based on capacity additions of
FY08 and FY09. While incremental demand would be around 16MT, incremental supply
would be at least 45MT.
Fig.33 – Cement demand / price trend
47
Fig.34 – Cement capacity utilization trend
Capacity utilization for 1QFY09 declined to 89% (v/s 100% in 1QFY08) on the back of
30MT of capacity addition in FY08. Cement industry’s capacity utilization for 1QFY09
is expected to decline on YoY basis for the first time in the last five years. Capacity
utilization for the industry is expected to ease off from optimum level of ~95% to ~88%
in FY09 and 75% in FY10 on the back of significant capacity addition over the next two
to three years.
Fig.35 – Cement Price Trend
Cement prices are expected to remain stable with 1.6% QoQ increase. Given high
inflation, the cement companies were under pressure to maintain prices. Part of the price
48
increase is on account of increase in freight and higher excise. Further, ban on exports
also resulted in flush of supply in Western and Northern markets, which also helped in
controlling cement prices. Cement prices in eastern region are expected to recover by
6.6% QoQ (~5.4% YoY) in line with strong demand growth in the region.
The cement production was up by about seven per cent to 14.7 million tonnes in June
2008. Production remained flat in the Western region. The Eastern and Central regions
reported a production rise of 4–5 per cent. Southern region, the largest cement producing
zone recorded a robust production growth of 13.4 per cent, lifting the overall production
growth during the month. The industry enhanced its annual installed capacity by 30
million tonnes to 198 million tonnes in 2007–08. As of June 2008 the total capacity
stands at about 202 million tonnes. During the June 2007 quarter, the industry had
operated nearly at peak levels. However, the utilisation dipped to 89 per cent in the June
2008 quarter. While this is partly due to a substantial increase in industry’s capacity, this
dip is also attributed to a slow down in May 2008. As a result, cumulative production
growth decelerated to six per cent during the quarter against a production rise of 7.4 per
cent in the year ago quarter. While we expect the same to pick up post monsoon, the slow
down in the June 2008 quarter is expected to lower the annual production growth for
2008–09. We expect the average capacity utilisation level to remain around 89 per cent
during the year. We, therefore, revise our annual production growth forecast, for the year
2008–09, to 10.5 per cent against the earlier forecast of 11.5 per cent. Cement prices in
Delhi inched up by Re.1 to Rs.229 per 50 kg bag in July 2008. Prices in Calcutta in-
creased by Rs.4 per to Rs.249, recording a price rise in four out of last five months. The
prices in Chennai inched up by Rs.3 to Rs.263 per 50 kg bag. The same in Mumbai
remained unchanged at Rs.253. Cement companies continue to reel under cost pressure.
Despite this, we expect cement prices in the North region to remain subdued considering
the impact of significant capacity additions made in the region in 2007–08. Prices in
other parts of the country are expected to remain stable in the near term.
49
Fig.36 - Cement Statistics: Production, Consumption & Prices
Construction
Macro environment for construction companies would be challenging over the medium
term, given the following:-
(1) Higher commodity prices and increased wage inflation would restrict EBITDA
margin expansion
(2) Volatile capital markets could impact business momentum for cash contractors and
infrastructure developers. Most of the companies have negative operating cash flows,
requiring frequent access to capital markets
(3) Project awards could possibly get delayed due to the forthcoming elections, both at
the center and in several states
Engineering
Macro environment for capital goods companies would be challenging over the medium
term, given the following:-
(1) Execution constraints, resulting in delayed revenue growth: The key issues are: (1)
availability of skilled manpower, (2) lack of reliable vendor base (limited availability of
50
critical components and poor quality of subcontractor base in India), (3) bureaucracy,
which includes issues like delays in land acquisition, rehabilitation, environmental/forest
clearances.
(2) Higher input costs: Rising commodity prices would be the single largest risk on the
earnings of the capital goods companies during FY09.
Telecom
Telecom sector contributes ~ 12% to the market capitalization of NIFTY in which Bharti
Airtel & Reliance Communications contribute ~ 6% & ~ 4% in NIFTY. Bharti Airtel
leads the sector with the highest Operating margin of 41.35% and EPS CAGR of 55 %.
Promoter holding for the sector stands high at 66.63%.
Table 3 – Telecom sector
Fig.37 – Subscriber growth trend
Security Symbol ROE ROCE Debt/Equity Operating
Margin PAT Margin EPS Promoter%
BHARTIARTL 30.82 25.82 0.32 41.35 24.45 32.87 66.50 IDEA 22.53 12.51 1.95 33.54 15.54 3.96 57.70 TATACOMM 5.25 5.07 0.12 19.23 10.47 12.07 76.20
51
Subscriber net additions remained strong during 1QFY09. We expect the industry to add
~25m subscribers in 1QFY09 v/s ~27m subscribers added in 4QFY08. QoQ decline
primarily reflects higher base due to year-end adjustments in some operators, especially
BSNL. Sustained subscriber momentum would support 11-14% quarterly average
subscriber growth for Bharti, RCOM, and Idea.
Momentum in subscriber additions continues to be strong, primarily driven by higher
coverage and attractive tariffs. News flow on international expansion/industry
consolidation could be further triggers while adverse regulatory environment and increase
in competitive activity pose key risks. Valuations of majors at 9-9.5x FY09E
EV/EBITDA and ~7x FY10E EV/EBITDA are attractive. Current valuations factor tough
regulatory environment and growth headwinds for incumbents resulting from entry of
potential new competition.
In June 2008, telecommunication sector added a total of 8.8 million subscribers taking
the total outstanding subscribers to 325.8 million subscribers. Total outstanding
subscribers grew by 44.8 per cent over the year–ago month. Wireless subscribers added a
total of 8.9 million subscribers taking the subscribers base to 286.9 million subscribers.
Wireline subscribers declined by 1.4 lakh subscribers to 38.9 million during the month.
Teledensity for the month increased to 28.3 per cent. The total outstanding cellular
subscribers witnessed a healthy growth of 56.5 per cent to 212.5 million subscribers.
Metros witnessed a decline in the GSM cellular subscribers addition for the second
consecutive month. In June 2008, GSM subscribers addition declined by 1.7 per cent to
seven lakh subscribers. Circle C witnessed a robust growth of 99.2 per cent cellular
subscribers addition. Outstanding mobile WLL subscribers grew by 51.3 per cent to 74.4
million subscribers. Uttar Pradesh (E) witnessed the highest subscriber addition of 7.7
lakh wireless subscribers. Andhra Pradesh made an addition of 7.1 lakh subscribers.
Wireless segment witnessed an addition of 7.3 lakh subscribers whereas, the wireline
segment declined by 0.2 lakh subscribers in June 2008. BSNL and MTNL’s wireline
subscribers declined by 2.1 lakh and 0.2 lakh subscribers whereas, their wireless
subscribers increased by 3.8 lakh and 0.9 lakh subscribers, respectively.
52
Fig.38 - GSM Cellular Service
Source: CMIE
Fig.39 – Subscribers growth
Source: CMIE
53
Real Estate
In FY08, the focus was on the real estate (RE) sector as a ‘theme’, with all RE stocks
moving in tandem. In FY09, the focus is likely to shift to specific companies within the
RE sector. We expect FY09 to be a year of consolidation for the RE industry, in which
the industry leaders would get differentiated from peers. Developers with staying power
would utilize this consolidation phase to emerge stronger and position themselves better
to capitalize on the growth phase post consolidation. Key differentiating factors for RE
companies would be: (1) financial soundness, (2) monetization visibility over the next 3-
4 years, and (3) execution capability. Our top picks are DLF and Indiabulls Real Estate.
Pharmaceuticals
Pharmaceutical sector contributes ~ 3% to the total market capitalization of NIFTY. The
average beta of the sector is 0.46 which corroborates the defensive nature of the sector.
The ROE and the ROCE of the sector is 23.8% and 20.10% respectively. The Operating
margin and PAT margin of the sector is 12.91% and 21.5% respectively. The current
ratio of the sector is 2.5 X and Dr.Reddy’s Laboratories has the highest current ratio of
3.21 X. The retention ratio of the sector is ~ 75% while the lowest ploughback is of
Ranbaxy Laboratories at 46.4%.
Table 4 – Pharma sector
Security Symbol Beta ROE ROCE
Operating Margin
PAT Margin
Current Ratio
Dividend Payout %
Ploughback %
CIPLA 0.48 21.59 21.07 20.1 16.57 2.69 22.75 77.25 DRREDDY 0.42 26.61 25.69 15.2 14.39 3.21 5.41 94.59 RANBAXY 0.57 23.31 10.41 8.71 12.96 1.53 53.6 46.4 SUNPHARMA 0.36 23.69 23.24 7.65 42.08 2.63 21.82 78.18
While the past three years have witnessed significant underperformance by
pharmaceutical stocks (led by deteriorating business fundamentals, especially in the US),
the past few months have witnessed increased investor interest led by positive news flows
related to patent challenge/settlement upsides and the stake sale by Ranbaxy promoters to
a Japanese innovator company. Investor interest is also building up due to relative
defensive nature of pharmaceutical earnings (given current market conditions) and the
54
recent depreciation of the Indian rupee against the US dollar and the euro. Geographical
diversification of revenues is gradually reducing Indian Pharma’s dependence on the
fiercely competitive US market, thus reducing the sensitivity to US profits. The key
success factors for pharma companies would be: (1) pragmatic mix of niche/FTF and
normal products, (2) geographically diversified revenue base, (3) vertical integration, and
(4) strong balance sheets to fund inorganic growth.
Information Technology
The IT sector contributes nearly 11% to the total market capitalization of NIFTY and has
a sector beta of 0.72. The sector ROE and ROCE stands at 31.15% and 30.14%
respectively. The sector Operating Margin and PAT margin stands at 25.17% and 23.45%
respectively. Infosys recorded the highest Operating and PAT margin whereas TCS
recorded the highest ROE & ROA. The sector liquidity ratio is high at 3.03 X and the
Dividend payout for the sector is ~ 38% and the sectoral promoter holding stood at ~
50% as on June 2008.
Table 5 – IT sector
The quarter began on a positive note, with better than expected guidance by Infosys and
Satyam for FY09. The rupee depreciated 4.7% against the dollar during 1QFY09, giving
further fillip to the IT sector. After months of uncertainty in US credit markets, there is
some pick-up in IT spend by few US-based BFS (banking and financial services) clients.
Risk of back-ended growth remains for FY09. IT companies having (a) wider service
Security Symbol ROE % ROCE
% Debt/Equity Operating Margin %
PAT Margin %
EPS Rs. Promoter%
HCLTECH 32.17 32.35 0.01 24.35 26.65 17.82 67.50 INFOSYSTCH 33.14 33.14 0 31.72 28.57 78.15 16.50 SATYAMCOMP 24.58 24.64 0 22.47 21.08 25.59 8.60 TCS 40.97 41.27 0 27.12 24.53 46.07 76.40 WIPRO 24.9 19.3 0.33 20.17 16.44 19.68 79.40
55
span; (b) faster scalability; (c) better bargaining power; (d) higher European share of
revenues; and (e) financial strength would be on better footing.
Oil & Gas
Oil & Gas sector contributes ~ 27% to the market capitalization of S&P CNX NIFTY
with Reliance Industries & ONGC contributing 12% & 8% respectively. The average
promoter holding % stands at ~ 64%.
Table 6 – Oil & Gas sector
Security Symbol Equity Market
Capitalisation Weightage Beta Promoter%
BPCL 3,615,421,240 11,855 0.45% 0.79 64.30 RELIANCE 14,536,486,010 320,893 12.26% 1.1 51.40 RPL 45,000,000,000 74,138 2.83% 1.26 75.40 CAIRN 18,944,297,380 45,807 1.75% 0.79 64.80 ONGC 21,388,725,300 213,085 8.14% 1.01 74.10 GAIL 8,456,516,000 31,763 1.21% 0.96 57.40
Performance of PSU oil companies (ONGC, GAIL, HPCL, BPCL and IOC) continued to
be determined by the sharing of under-recoveries rather than business fundamentals. With
controlled retail fuel prices and increasing oil prices, under-recoveries continued to
burgeon. ONGC looks positive, following the recent price correction and large E&P
potential. However, possible increase in its subsidy sharing remains a concern. GAIL
would witness large volume upsides (136mmscmd by FY10 – 29% CAGR), as RIL’s
KG-D6 gas supply begins (RIL’s gas would be directed towards priority sectors, which
are on GAIL’s current network). Subsidy sharing (partly moderated by higher LPG
realization, with increasing oil prices) and likely petchem downturn remains a concern.
RIL would see near-term upsides from (1) marketing tie-ups with potential gas buyers,
(2) oil and gas production start at its KG-D6 block (2HFY09), (3) start of its RPL
refinery (expected to be online ahead of scheduled December 2008), and (4) progress on
56
retail business. The key issue to watch, in our view, would be the ongoing litigation with
RNRL.
Textiles
FY09 began on a promising note for the textile industry, with (a) the rupee depreciating,
and (b) supply side correcting due to capacities closing down in China. However, the
positives were overshadowed by (i) sharp increase in raw material (cotton price up
60%) and fuel costs, and (ii) slowdown in demand in the key western markets. As a
result, despite several near-term macro fundamentals turning positive and valuations
appearing inexpensive, the textile industry is expected to be under pressure over the next
six months.
The cotton textiles production index growth is witnessing a slowdown during the last four
months. On the contrary, the textiles products production index has been reporting a
healthy growth for the last two months. Spun yarn production growth continued its
sluggish trend even in the year 2008–09. Cotton yarn is the predominant yarn in spun
yarn and forms 74 per cent of total spun yarn production. Thus, spun yarn production
largely mirrors the growth in cotton yarn output. Cotton yarn production grew by 1.6 per
cent during May 2008. Consequently, spun yarn production grew by just 1.5 per cent,
compared to a growth of five per cent during May 2007. Blended yarn production grew
by a mere 0.3 per cent during the month of May, whereas synthetic yarn production
witnessed a growth of three per cent. For the year 2008–09, cotton yarn production is
expected to grow by around 5.8 per cent. Consequently, spun yarn production is expected
to grow by six per cent to 4,242 thousand tonnes. Fabrics production grew by a decent
five per cent during May 2008, compared to a growth of 6.5 per cent in May 2007.
Cotton fabrics production grew by 2.6 per cent, whereas blended fabrics production grew
by a meager 0.7 per cent during the month. Synthetic fabrics production which accounts
for 41 per cent of the total fabrics production grew by 8.1 per cent during May 2008.
During the year 2007–08, yarns, fabrics and made- ups exports grew by a healthy 13.1
per cent, compared to a growth of 8.2 per cent in 2006–07. Readymade garments exports
57
grew by a decent 6.9 per cent during 2007–08, as against a growth of 3.1 per cent in
2006–07. This was despite the strengthening rupee.
Fig.40 - Textile Statistics
Source: CMIE
Media
The media sector has witnessed the entry of a large number of players in FY08. Each of
the media companies has been diversifying into new media verticals to become a media
conglomerate. The entry of new players has fragmented the advertising market, thereby
impacting the incumbent players. While channel launches (broadcasters) and entry into
new markets (newspapers) were driving stock valuations in FY08, the focus would shift
to earnings growth and cash flows in FY09. Companies with earnings visibility, strong
growth momentum and strong operating cash flows will be better placed. Print media
companies have strong cash flows and the likely ease off in newsprint prices by 4QFY09
could boost earnings. The key differentiating factors for media companies would be (1)
execution capabilities; (2) earnings visibility and growth momentum; and (3) strong
positioning.
58
Power
Power sector accounts for ~ 9% of the total market capitalization of NIFTY. The sector
ROE and ROCE stands at 11.51% and 7.78% respectively. The sector Operating Margin
and PAT Margin stands at 34.41% and 20.19% respectively. NTPC has recorded the
highest margin and ROE & ROCE in the power sector. The dividend payout of the sector
is 27.41%. The sector Debt/ Equity is 0.88 X where Power Grid has the highest leverage
at 1.76 X.
Table 7 – Power sector
Fig.41 – Power demand/ supply scenario
The capacity addition for YTM May 2008 stood at 435MW v/s target capacity addition of
645MW - a shortfall of 210MW. Also, the generation for the period till May 2008 stood
at 120Bus (target of 124Bus) - an achievement of 97%. The base load deficit (all- India)
for first two months of FY09 stood at 10.8%, while peak load deficit stood at 14.4%. The
base load deficit in the Western region, however, stood at 17.3% and peak load deficit
was recorded at 25.7%.
Security Symbol Beta ROE ROCE Debt/Equity Operating
Margin PAT Margin
Dividend Payout %
NTPC 1.11 14.15 11.27 0.52 30.29 20.01 38.38 POWERGRID 1.15 11.21 6.78 1.76 83.24 30.36 30 RELINFRA 1.82 8.9 5.82 0.63 7.85 15.7 14.57 TATAPOWER 1.26 11.77 7.27 0.61 16.27 14.7 26.69
59
The outlook for power utilities is challenging due to: (1) higher interest cost; (2)
execution constraints; and (3) volatile capital markets impacting fund raising plans for
several private sector projects. Besides, there have been delays in terms of land
acquisition, environmental clearances, tight demand-supply for main plant equipment, etc
which have further increased challenges for the sector.
Capacity addition below target, plant shutdown for maintenance and lower reservoir
levels resulted in a moderate 2.5 per cent increase in total power generation during April–
July 2008. Shortage of lignite and gas together with increase in time lag between
syncronisation of plant and commercial operation date also supported slower growth.
However, completion of plant maintenance and higher availability of dry coal post
monsoon together with expectation of a good monsoon is expected to result in a 6.3 per
cent growth in power generation during 2008–09. While thermal power generation
reported a 4.8 per cent increase, hydro power output dipped by 5.4 per cent during April–
July 2008. Decline in water levels at major reservoirs in India led to lower hydel power.
As on 7 August 2008, water levels recorded a sharp 35.3 per cent decline vis–a–vis year
ago levels. However, the situation improved considerably compared to the previous
week. A good rainfall in the coming months will result in higher hydel output. Under the
Indo–US civilian nuclear agreement, India has agreed to place its civil nuclear facilities
under International Atomic Energy Agency safeguards and, in exchange, the United
States agreed to work towards full civil nuclear cooperation with India. This agreement
will enable India meet its goal of adding 25,000 mw of nuclear power capacity through
imports of nuclear reactors and fuel by 2020. On signing the agreement, supply of raw
materials to existing nuclear power plants is likely to increase resulting in higher nuclear
power output. In line with expectation, average power deficit recorded a decline to 8.4
per cent in June 2008 compared to the previous month. Yet, states across India continued
to face acute power cuts. This may either hamper industrial production or may push up
the fuel cost involved in running captive power on account of rise in diesel prices.
60
Fig.42 - Power Generation Statistics
Source: CMIE
FMCG
The FMCG sector could be impacted by rising inflationary pressure. Recent price hikes
by the companies could soften demand growth and trigger down-trading. Strong pricing
power and high switching cost would be the key differentiator, as it would ensure
stability in margins and sustain volume growth. A selective approach, with preference for
companies in packed foods, decorative paints, cigarettes, detergents, IMFL and skin care
is preferred. Key differentiating factors for FMCG companies: (1) high pricing power; (2)
high consumer switching cost; and (3) product innovation.
Retail
Existing retailers would continue to grow topline and attract footfalls, though same-store
sales growth could slow down. Rising competition and entry of new players would
continue to offer bargains to consumers and retain the attraction of organized retail.
61
EBITDA margins are unlikely to expand due to rising lease rentals and manpower costs.
We expect specialty stores to flourish due to committed customers and strong brand
recall. The key differentiating factors for retail companies would be: (1) scale of
operations, and (2) cost control initiatives.
Metals
Metal sector contributes ~ 6% of the total market capitalization of NIFTY. Tata Steel
recorded the highest Operating & PAT Margin in the metal sector whereas Sterlite
Industries recorded the highest Dividend payout in the sector. The Debt/ Equity of the
metal sector stood at 0.51 X where Tata Steel has the highest leverage of 0.66 X.
Table 8 – Metals sector
Fig.43 – Steel production growth
Security Symbol
Market Capitalisation Beta ROE % ROCE
% Debt/ Equity
PAT Margin %
Current Ratio
EPS Rs.
STER 44,929 1.11 9.54 7.68 0.63 7.93 2.47 13.43 SAIL 58,094 1.38 34.07 28.76 0.24 17.96 1.59 18.24 TATASTEEL 47,873 1.1 17.03 11.61 0.66 23.65 3.92 63.62
62
Global crude steel output increased 3.9% to 554m tons during January-May 2008, driven
by 9.7% growth in China, 13.5% in India and 2.9% in the rest of the world (RoW).
China’s moving average total (MAT) growth rate has slowed from 21.5% in May 2007 to
11.2% in May 2008 due to slower capacity addition and closing of ~30m tons of
inefficient capacity, while India’s MAT growth rate has climbed steeply from 9.1% in
May 2007 to 16% in May 2008. China is still the largest contributor to growth and
accounted for 61% of the incremental crude steel production during January-May 2008.
Fig.44 – Coke price trend
Fig.45 – Global Inventory & price trend
63
Aluminium prices on LME are expected to average US$3,000/ton during FY09. Recent
hike in electricity rate in China will increase the cost of production of aluminium there.
Rising energy costs will ensure that aluminium remains firm. Aluminum prices have
increased 7% QoQ to US$2,991/ ton and 7% YoY.
Shortage of raw material – coking coal, iron ore and steel scrap – has shifted the cost
curve of the steel industry upwards and has constrained the global production of crude
steel, resulting in doubling of steel prices in a short span of six months. Integrated steel
producers like Tata Steel and JSPL are the key beneficiaries of this trend. While the costs
of steel producers using the blast furnace route have increased significantly, after 3x
increase in coking coal prices in 2008, the costs of sponge iron based mini steel mills has
not increased in a similar fashion due to use of domestically available coal. Mini mills
like Godawari, Raipur Alloy, Monnet Ispat, Tata Sponge, and Adhunik Metaliks are the
key beneficiaries of this trend.
Steel prices cool off in July
Backed by measures taken by primary steel producers to restrain prices at the dealer
level, average steel prices took a breather in July. On sequential basis, the benchmark hot
rolled coils recorded a 4.5 per cent fall to Rs.45,200 per tonne during the month. Prices of
other flat products like cold rolled coils and galvanised sheets recorded modest declines
of 0.6 per cent and 1.5 per cent, respectively. Rio Tinto, the second largest iron exporter,
reached an agreement with all of its customers in Asia for iron ore deliveries, with price
increases of a whopping 97 per cent. In tandem with global prices, domestic mining
major, NMDC, is pitching in for a substantial price hike in the range of 70–80 per cent
for its ore contracts in 2008–09. The three–month moratorium for holding steel prices
came to end in July 2008. While steel prices would remain stable in the near term, these
are expected to fur- ther firm up in phases in 2008–09 on account of mounting cost
pressures.
Healthy cash flows accruing from the buoyancy in steel prices would enable the industry
to service high cost of debt on existing term loans and working capital loans. The share of
big steel companies in total outstanding investments amount to a significant 61 per cent.
64
Most of the steel majors would be able to leverage their strong financial profile to fund
their ongoing projects and secure financial closure for their new projects. We thus do not
perceive rising interest rates as a major concern, which could stall or delay expansions in
the steel industry. Steel demand continued to remain upbeat in 2008–09, with
consumption of finished steel growing by a decent 6.8 per cent during April–May 2008.
However, production of finished steel continued to rise at a tepid pace. Aggregate
production growth during April–May stood at a modest 5.1 per cent.
65
5.3 Company/ Stock Analysis
ABB Ltd.
ABB intends to invest $ 100 million towards capex expenditure in CY08-CY09. It plans
to increase the transformer capacity to 22500 MVA from the current 15000 MVA.
66
ACC Ltd.
The Operating Margin has decreased by 315 bps YoY for April-June quarter 2008 due to
increase in raw material cost and lower realization.
The ROE has increased from 20.77% in FY04 to 34.47% in FY07. The Inventory
turnover has also increased from 6.05x to 6.79 times from FY04 to FY07. The short term
liquidity of the company has remained in the range of 0.80x to 0.95x over the past 4
years. The leverage of the company has reduced significantly and the interest coverage
has increased over the past 4 years. The Dividend % has increased to 200% and the
retention has remained between 62-74% over the past 4 years.
67
Bharti Airtel Ltd.
Revenue grew by 40.65% while PAT grew by 45% YoY for Q1FY09. The revenue has
increased largely on subscriber addition as ARPU has declined.
The ROE for FY08 stood at 31% and the short term liquidity of the company has
remained below 0.60x. The company has not distributed any dividends and thereby
retained its entire earnings with the business. The Financial leverage of the company is
calculated to be 1.06
The company has been assigned the multiple of 22 and based on its FY10E EPS of
Rs.54.60 the price target is Rs.1201.
CMP: Rs.812
EPS (Rs.) P/E Multiple
(x)
Price Target (Rs.)
Potential Upside %
FY08 35.31 23.00 FY09E 44.60 18.21 22 981 FY10E 54.60 14.87 22 1,201 47.93
68
BHEL
Revenue of the company has increased by 32% while PAT recorded a growth of 33%
YoY for Q1FY09. The Net Profit margin recorded 8.17% for Q1FY09.
The ROE of the company has increased significantly from 13% to 25% from FY04 to
FY07. The dividend per share has increased from Rs.6 to Rs.24.50 over the past 4 years.
The order book for the company stood at Rs.85200 crores as on March 2008. During
1QFY09, BHEL bagged orders worth more than Rs100b, including key order of 500MW
at Korba West and two units of 500MW each at Marwa thermal power project worth
Rs33.7b (3*500MW), Gas Turbine based Combined Cycle Power Plant of 1,371MW for
Pragati III worth Rs35.9b, 153MW captive power plant for Bhatinda refinery worth
Rs11.5b and Bokaro TPS of 500MW worth Rs18.4b for Damodar Valley Corporation
(DVC).
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BPCL
The debt equity of the company has increased from 0.46x to 1.05x in FY07. The dividend
payout of the company has been in the range of 30 to 40% in the last 4 years. The Raw
Material cost stood at 92% of the revenue in FY07 and has gone higher due to sharp
increase in crude oil prices.
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Cairn India Ltd.
Cipla Ltd.
The EBITDA margin for FY08 stood at 23.06% and the Net Profit margin stood at
16.57%. The Interest coverage of the company has increased from 31x to 73x. P/E stands
71
at 25.53 while P/CEPS is 21.46. Revenue grew 30% while PAT growth has been 16%
YoY for Q1FY09.
CMP: Rs.230
EPS (Rs.) P/E Multiple
(x)
Price Target (Rs.)
Potential Upside %
FY08 9.01 25.53 FY09E 10.20 22.55 22 224 FY10E 11.60 19.83 22 255 10.96
The company has been assigned a multiple of 22x and based on FY10E EPS of Rs.11.60
price target is Rs.255.
DLF Ltd.
The Operating Margin for the company stood at 55.69% and the net profit margin stood
at 46.82% for FY08. The Interest coverage has increased to 8x in FY08 from 6.12x in
FY04. The stock is trading 38.63x its current EPS of 15.19.
72
Dr.Reddy’s Laboratories Ltd.
Revenue YoY growth and PAT YoY growth for Q1FY09 stood at 48 % and 44 %
respectively. Operating Margin increased by 586 bps YoY and the Net profit margin
stoof at 19.07 % for Q1FY09. Other Income contributed ~ 7% to the sales of the
company for FY08.
CMP: Rs.567
EPS (Rs.) P/E Multiple
(x)
Price Target (Rs.)
Potential Upside %
FY08 28.26 20.08 FY09E 29.65 19.14 22 652 FY10E 38.94 14.58 22 857 50.93
The company has been assigned a multiple of 22x and based on FY10E EPS of Rs.38.94,
price target of Rs.857 has been set or a 50.93% upside from the CMP of Rs.567.
73
GAIL
Revenue YoY growth and PAT YoY growth for Q1FY09 stood at 34.98 % and 30.89 %
respectively. The Operating Margin & Net Profit Margin for Q1FY09 was 24.42 % and
15.65 % respectively. The interest coverage has increased from 23x to 50x in the last four
years for the company.
CMP: Rs.429
EPS (Rs.) P/E Multiple
(x)
Price Target (Rs.)
Potential Upside %
FY08 30.76 13.97 FY09E 32.70 13.14 14 458 6.56 FY10E
The company has been assigned a multiple of 14 and based on the FY09E EPS of
Rs.32.70, target of Rs.458 is set or an upside of 6.56% from the CMP of Rs.429.
74
Grasim Industries Ltd.
The Viscose Staple Fibre installed capacity has been increased by 24 % in FY08 to
333,975 TPA. The Grey Cement capacity installed capacity has been increased by 28% to
16.75 MnTPA
CMP: Rs.2045
EPS (Rs.) P/E Multiple
(x)
Price Target (Rs.)
Potential Upside %
FY08 289.44 7.07 FY09E 296.58 6.90 7 2,076 FY10E 295.15 6.93 7 2,066 1.01
The company has been assigned a multiple of 7 and based on the FY10E EPS of
Rs.295.15, target of Rs.2,066 is set or an upside of 1.01% from the CMP of Rs.2,045.
75
HCL Technologies Ltd.
HCL booked a forex loss of US$ 71.3million, out of which US$31 million was primarily
due to the cancellation of forex hedges worth US$540 million. The company still holds
forex cover of US$ 2 billion spread over the next seven quarters. The forex losses booked
by HCL are the highest in the industry due to which its net profit has declined sharply by
58.8 % (Q-o-Q) standing at Rs.141 crore. Taking out the effect of hedging losses, the
company has shown strong growth of 19.0% (Q-o-Q) in bottomline. Thus, the company
had a good operational performance but hedging losses overshadowed it.
HCL reported EBIT margins at 19.5% with expansion of 123 bps (Q-o-Q). The factors
that contributed to this were higher utilization rate, rupee depreciation, higher realization
and better realization in one of the BPO deals adding 85 bps, 191 bps, 14 bps and 43 bps,
respectively, to margins. However, this was compensated by the dip caused by higher
selling, general & administration cost (SGA), hedging losses, depreciation and shift to
onsite dragging margins by 108 bps, 82 bps, 10 bps and 10 bps, respectively.
76
HDFC Ltd.
The Revenue & PAT YoY growth during Q1FY09 has been at 26.63 % and 25.56 %
respectively. The BV of the company stands at Rs.282.31 per share and the P/BV is
8.32x.
HDFC Bank Ltd.
77
YoY Income growth & PAT growth for Q1FY09 was at 70.36 % and 44.55 %
respectively. The BV of the company is Rs.272.42 per share and is currently trading at
4.56x P/BV.
Hero Honda
The Sales YoY growth and PAT YoY growth stood at -0.60% and 43.74% respectively.
The sales realization reduced YoY due to slowing unit sales as the interest rate have
increased significantly in the past quarter which affected the 2-wheeler demand.
CMP: Rs.837
EPS (Rs.) P/E Multiple
(x)
Price Target (Rs.)
Potential Upside %
FY08 48.47 17.27 FY09E 53.70 15.59 13 698 FY10E 60.10 13.93 13 781 -6.65
Multiple of 13x has been assigned and on the basis of FY10E EPS of Rs.60.10 a price
target of Rs.781 has been set or a downside of 6.65% from the CMP of Rs.837.
78
Hindalco Industries Ltd.
Sales realization has shown a negative growth of 0.65% YoY during Q1FY09 whereas
PAT growth is due to the growth in Other Income of 72.28%
CMP: Rs.124
EPS (Rs.) P/E Multiple
(x)
Price Target (Rs.)
Potential Upside %
FY08 24.38 5.12 FY09E 18.95 6.58 6 114 FY10E 18.08 6.90 6 108 -13.04
Multiple of 6x has been assigned and based on the FY10E EPS of Rs.18.08, price target
of Rs.108 has been set or a downside of 13.04% from the CMP of Rs.124.
79
Hindustan Unilever Ltd.
Sales YoY growth & PAT YoY growth for Q1FY09 have been at 21.09 % and 13.20 %
respectively. The other income component decreased by 21.10 % YoY during Q1FY09.
The ROE of the company has increased from 60.88% to 122.52% from FY04 to FY07.
The dividend per share has also increased from Rs.5 to Rs.9.08 from FY04 to FY07.
ICICI Bank Ltd.
80
Idea Cellular Ltd.
The company incurred capex of 5,120 crores during FY08 and the subscriber addition
was up by 71 % to 24 million during FY08. The revenue for the company has grown at
139.17 % and PAT growth has been at 39.43 % during Q1FY09.
Infosys Technologies Ltd.
Revenue growth and PAT growth YoY has increased during Q1FY09 by 27.18 % and
22.76 % respectively. The company is completely debt free and therefore the cost of
81
capital is equal to the cost of debt. The BV is Rs.235.84 per share and the P/BV is 7.46x.
Employee expense is equal to 49.66 % of the Net Sales during FY08.
CMP: Rs.1759
EPS (Rs.) P/E Multiple
(x)
Price Target (Rs.)
Potential Upside %
FY08 81.26 21.65 FY09E 95.10 18.50 20 1,902 FY10E 104.70 16.80 20 2,094 19.04
Multiple of 20x has been assigned and on the basis of FY10E EPS of Rs.104.70, price
target is Rs.2,094 or a 19.04 % upside from the CMP Rs.1,759.
ITC Ltd.
Revenue grew 17.28 % during Q1FY09 but the PAT grew a negative of 4.37 % YoY for
Q1FY09. The ROE has been above 20 % for the past 4 years. The Dividend payout has
increased from 36.64 % in FY04 to 48.67 % in FY07.
82
CMP: Rs.195
EPS (Rs.) P/E Multiple
(x)
Price Target (Rs.)
Potential Upside %
FY08 8.28 23.56 FY09E 9.70 20.11 21 204 4.61 FY10E
Multiple of 21x has been assigned and on the basis of FY09E EPS of Rs.9.70, price target
is Rs.204 or an upside of 4.61 % from the CMP of Rs.195.
Larsen & Toubro Ltd.
Revenue growth & PAT growth YoY during Q1FY09 has been at 52.88 % and 33.33 %
respectively. The PAT margin for Q1FY09 was recorded at 7.18 %. The BV is Rs.270.78
per share and the P/BV is 9.99 at CMP of the stock and the Tax rate for FY08 was
32.01%
L&T maintained its guidance of 30-35 % revenue growth and 30 % growth in order
inflow for FY09 despite evidence of slowdown in products business and slower order
inflow from mature businesses. A pick up in order inflow is likely in the domestic oil &
gas segment and from projects in the Middle East.
83
Mahindra & Mahindra
PAT YoY recorded a negative growth of 16.67 % in Q1FY09. The Operating profit
margin reduced by 192 bps to 7.50 % and the Net Profit margin reduced by 166 bps to
4.83 % during Q1FY09. The Ploughback ratio or retained earnings has increased from 68
% to 74 % in FY07.
Maruti Suzuki India Ltd.
84
The company’s domestic sale volume grew lightly more than the industry at 12 %. The
company increased its market share in passenger cars from 51 % to 51.40 %. The
company’s share in A2 segment remains above 58 % and 21.90 % in the A3 segment
while the total market share in the 4=wheeler segment stands at 46 %.
Sales increased 2.91 % YoY while PAT registered a negative growth of 6.76 % during
Q1FY09.
CMP: Rs.695
EPS (Rs.) P/E Multiple
(x)
Price Target (Rs.)
Potential Upside %
FY08 59.91 11.61 FY09E 67.35 10.33 10 674 FY10E 78.00 8.92 10 780 12.12
Multiple of 10x has been assigned and on the basis of FY10E EPS of Rs.78, price target
is Rs.780 or an upside of 12.12 % from the CMP of Rs.12.12 %.
National Alumunium Company Ltd.
85
Revenue growth was 24.81 % while PAT grew 17.61 % YoY for Q1FY09. The
Operating profit margin reduced by 202 bps to 45.87 % during Q1FY09. The CEPS of
the company is Rs.29.56 and the P/CEPS is 13.29 at CMP of Rs.393. The dividend yield
of the company was 1.91 % and the P/BV is 2.72x.
CMP: Rs.393
EPS (Rs.) P/E Multiple
(x)
Price Target (Rs.)
Potential Upside %
FY08 25.22 15.61 FY09E 27.50 14.32 14 385 FY10E 33.30 11.83 14 466 18.38
Multiple of 14x has been assigned and on the basis of FY10E EPS of Rs.33.30, the price
target is Rs.433 or an upside of 18.38 % from the CMP of Rs.393.
NTPC
Q1FY09 recorded a growth of 6.35 % in revenue and a negative growth in PAT YoY.
The Operating profit margin reduced by 465 bps to 25.39 % YoY and the net profit
margin reduced by 833 bps to 18.09 % YoY during Q1FY09. The Dividend per share has
increased from Rs.1.39 to Rs.3.20 from FY04 to FY07 and the Debt Equity of the
company has been in the range of 0.42 to 0.52 in the last 4 years.
86
The topline increase saw more contribution from higher realizations, which were at
Rs.1.94 per unit for Q1FY09 and Rs.1.84 in Q1FY08. The coal and gas plants have run at
a plant load factor (PLF) of 92.19% and 67.20% as compared to 94.00% and 77.98%,
respectively for the corresponding quarter. The consumption of coal was also marginally
down to 28.71 million tonnes (MT) against 29.45 MT for the corresponding quarter. PAT
for the quarter excluding previous period sales, forex revaluation, incentives and wage
revision effect has grown by 5.28%. During the first quarter, NTPC has been able to
commission its two plants, one at Sipat with a capacity of 500 MW and other at Bhilai
(JV) of 250 MW. The Kahalgaon plant with a capacity of 500 MW has also become
operational from August 1 2008. In addition to these, NTPC further plans to add 2000
MW of own capacity and 500 MW of JV capacities during the current year itself.
CMP: Rs.178
EPS (Rs.) P/E Multiple
(x)
Price Target (Rs.)
Potential Upside %
FY08 8.99 19.81 FY09E 10.19 17.48 20 204 FY10E 11.03 16.15 20 221 23.86
Multiple of 20 has been assigned and on the basis of FY10E EPS of Rs.11.03, price target
is Rs.221 or an upside of 23.86 % from the CMP of Rs.178.
87
ONGC
Revenue of ONGC grew at 46.59 % and PAT grew 43.94 % YoY during Q1FY09. The
operating margin improved to 58.42 % and the Net Profit margin stood at 32.97 % during
Q1FY09. The interest coverage has increased from 2.76x in FY04 to 6.70x in FY08.
Power & Fuel cost has been above 60 % of the revenue for the last 4 years. The CEPS
stood at Rs.11.59 and the P/CEPS stood at 13.91x and the dividend yield stood at 2 %.
The P/BV is 2.37x at CMP.
Punjab National Bank
88
Punjab National Bank (PNB) reported its Q1FY09 results, which were in line with our
expectations. The company reported a PAT of Rs 512.4 crore in Q1FY09 against Rs
425.05 crore in Q1FY08 (jump of 21% Y-o-Y). On the core business front, the bank
reported a modest growth of 20% and 21.4% on the advances and deposits, respectively.
The NIMs, on a Y-o-Y basis, have declined by 32 bps to 3.27% due to higher cost of
funds and higher CRR prescription. There was also a significant improvement on the
asset quality front as NNPAs have come down to 0.63% in Q1FY09 from 0.98% in
Q1FY08.
89
Power Grid Corporation
The ROE of the company has improved from 8.77 % to 11.21 % from FY04 to FY07
while the current ratio reduced from 1.05x to 0.54x during the same period. The retention
ratio has stayed above 70 % from during FY04 to FY07. For Q1FY09, revenue grew at
32.66 % while PAT declined by 32.31 % primarily due to increase in interest expense.
The Operating profit margin remains high at 82.54 % while PAT margin is at 23.66 % for
Q1FY09.
Ranbaxy Laboratories
90
Sales increased 18.45 % and PAT growth was recorded at 18.45 % and -91.85 %
respectively during Q1FY09. Multiple of 22x has been assigned and based on the FY10E
EPS of Rs.22.70, price target of Rs.499 has been set or a 8.71% upside from the CMP of
Rs.459
CMP: 459
EPS (Rs.) P/E Multiple
(x)
Price Target (Rs.)
Potential Upside %
FY08 15.86 28.97 FY09E 18.77 24.48 22 413 FY10E 22.70 20.24 22 499 8.71
Reliance Industries Ltd.
Multiple of 19x has been assigned and based on the FY10E EPS of Rs.165.20, price
target of Rs.3,139 has been set or a 50.71% upside from the CMP of Rs.2,082.
91
CMP: Rs.2082
EPS (Rs.) P/E Multiple
(x)
Price Target (Rs.)
Potential Upside %
FY08 105.40 19.76 FY09E 113.60 18.33 19 2,158 FY10E 165.20 12.61 19 3,139 50.71
Reliance Communications Ltd.
RCom’s broadband business grew by 56 % in FY08 whereas ARPU sharply declined as
compared to peers. Rcom had 5.26 crore subscribers as on July 2008 and 30295 towers
by end-June 2008.
Multiple of 15x has been assigned and based on the FY10E EPS of Rs.37.35, price target
of Rs.560 has been set or a 40.41% upside from the CMP of Rs.399.
CMP: Rs.399
EPS (Rs.) P/E Multiple
(x)
Price Target (Rs.)
Potential Upside %
FY08 24.97 15.98 FY09E 30.27 13.18 15 454 FY10E 37.35 10.68 15 560 40.41
92
Reliance Infrastructure Ltd.
Multiple of 22x has been assigned and based on the FY10E EPS of Rs.47, price target of
Rs.1,034 has been set or a 1.48% upside from the CMP of Rs.1,018.
CMP: Rs.1018
EPS (Rs.) P/E Multiple
(x)
Price Target (Rs.)
Potential Upside %
FY08 45.68 22.31 FY09E 47.50 21.45 22 1,045 FY10E 47.00 21.68 22 1,034 1.48
93
SAIL
Multiple of 7x has been assigned and based on the FY09E EPS of Rs.20.60, price target
of Rs.144 has been set or a 4.92% upside from the CMP of Rs.137.
CMP: Rs.137
EPS (Rs.) P/E Multiple
(x)
Price Target (Rs.)
Potential Upside %
FY08 18.24 7.52 FY09E 20.60 6.66 7 144 4.92 FY10E
94
Satyam Computers Ltd.
Satyam Computers delivered an 8.5% Q-o-Q growth in topline at Rs.2621 crore, in line
with our estimate of Rs.2620 crore. EBITDA margins at 24.12% improved 133 bps ahead
of our expectation of 60 bps improvement. The big surprise was the company’s net profit
performance, which grew by 17% Q-o-Q to Rs 548 crore. The business mix of the
company safeguards the company, relative to its peers, from the impending financial
crises in the US (Satyam has the least exposure to the BFSI segment compared to TCS
and Infosys). The company has also had some significant deal wins this quarter, which
further re-iterate our confidence as one of the best picks in the sector.
95
Multiple of 15x has been assigned and based on the FY10E EPS of Rs.33.12, price target
of Rs.497 has been set or a 17.98% upside from the CMP of Rs.421.
CMP: Rs.421
EPS (Rs.) P/E Multiple
(x)
Price Target (Rs.)
Potential Upside %
FY08 24.71 17.04 FY09E 30.40 13.85 15 456 FY10E 33.12 12.71 15 497 17.98
State Bank of India
96
Siemens Ltd.
Sterlite Industries Ltd.
Recent restructuring of the existing business of Sterlite in power, zinc, copper and
alumunium is value-neutral as the arrangement requires that for every four shares held in
Sterlite, seven shares of MALCO (Madras Alumunium) will be given. Acquisition of
97
Konkola mines in Zambia and American Smelting and Refining company (ASARCO)
will result in value creation.
CMP: Rs.514
EPS (Rs.) P/E Multiple
(x)
Price Target (Rs.)
Potential Upside %
FY08 66.00 7.80 FY09E 61.90 8.32 7 433 FY10E 71.69 7.18 7 502 -2.50
Sun Pharmaceuticals Ltd.
Multiple of 25x has been assigned and based on the FY09E EPS of Rs.66.70, price target
of Rs.1,688 has been set or a 10.12% upside from the CMP of Rs.1,513.
CMP: Rs.1513
EPS (Rs.) P/E Multiple
(x)
Price Target (Rs.)
Potential Upside %
FY08 48.12 31.44 FY09E 66.70 22.68 25 1,668 10.12 FY10E
98
Suzlon Energy Ltd.
Multiple of 20x has been assigned and based on the FY09E EPS of Rs.12.35, price target
of Rs.247 has been set or a 5.22% upside from the CMP of Rs.234.
CMP: Rs.234.75
EPS (Rs.) P/E Multiple
(x)
Price Target (Rs.)
Potential Upside %
FY08 7.43 31.59 FY09E 12.35 19.01 20 247 5.22 FY10E
99
Tata Communications
Tata Motors
100
Tata Power Company Ltd.
Tata Steel Ltd.
Coking coal prices and iron ore prices have increased by 100 % and 60 % respectively
which is pushing the increase in prices. Corus is expected to produce 21 mt in FY09
while Tata Steel’s domestic production will increase by 0.8 mt to 5.7 mt in FY09.
101
Tata Consultancy Services Ltd.
Tata Consultancy Services once again delivered muted growth of 5.9% (q-o-q) as
compared to our expectation of 6.64% (q-o-q). Bottom line registered a de-growth of
0.9% compared to our expectation of flattish growth. The revenues for the quarter stood
at Rs 6411 crore and bottomline was at Rs 1243 crore. The muted performance was
attributable to certain client specific issues faced by the company. EBDITA margins at
23.89% saw a drop of 113 bps compared to our expectation of 61 bps drop. The
performance, we believe re-iterates our view of short-term concerns regarding client
spend and delays in project ramp-ups. On the positive side however, the company closed
12 large deals this quarter out of which 3 deals were in the range of $75 -$100 million.
We are confident of the delivery capability of the company, a healthy deal pipeline also
provides comfort regarding future growth visibility.
Multiple of 16x has been assigned and based on the FY09E EPS of Rs.65.10, price target
of Rs.1,042 has been set or a 22.41% upside from the CMP of Rs.850.
102
CMP: Rs.850
EPS (Rs.) P/E Multiple
(x)
Price Target (Rs.)
Potential Upside %
FY08 51.36 16.57 FY09E 59.10 14.40 16 946 FY10E 65.10 13.07 16 1,042 22.41
Unitech Ltd.
103
Wipro Ltd.
Multiple of 16x has been assigned and based on the FY09E EPS of Rs.29.90, price target
of Rs.478 has been set or a 10.77% upside from the CMP of Rs.431.
CMP: Rs.431
EPS (Rs.) P/E Multiple
(x)
Price Target (Rs.)
Potential Upside %
FY08 22.15 19.50 FY09E 26.73 16.16 16 428 FY10E 29.90 14.44 16 478 10.77
104
Zee Entertainment Ltd.
Multiple of 20x has been assigned and based on the FY09E EPS of Rs.13.55, price target
of Rs.271 has been set or a 19.88% upside from the CMP of Rs.226.
CMP: 226.05
EPS (Rs.) P/E Multiple
(x)
Price Target (Rs.)
Potential Upside %
FY08 8.77 25.78 FY09E 10.69 21.15 20 214 FY10E 13.55 16.68 20 271 19.88
105
CONCLUSION
106
6.1 Conclusion
The GDP growth for 2008-09 is seen between 7.50 % - 8.00 %. The US$/ Rs. Foreign
exchange rate for CY2009 is estimated to be around Rs.43 to a dollar. 60 % of the
respondents view inflation returning to single digit by January 2009. Crude oil is
expected to consolidate in the range of $100 - $120/ bbl during CY2009. The historical
average of NIFTY P/E is 17.4 and the current P/E of NIFTY stands at 18.43 as on 29-
August 2008. The macroeconomic factors suggest NIFTY P/E to remain above the
historic average of 17.4x for CY2009. Current NIFTY P/BV of 3.83 x as on 29-August
2008 is below the historical average of 3.89 x. Among the sectors, banking sector looks
most positive followed by Oil & Gas and Capital goods sector. The β of banking sector is
1.1 which is relatively lower than the β of 1.3 of the Power sector and higher than β of
0.45 of the Pharma sector. Sugar sector & Fertilizer sector appears weak over a horizon
of more than 1 year. The stock upside is seen in Reliance Industries (50.93%), Bharti
Airtel (47.93%) and NTPC (23.86%) over the next 12-18 months from September 2008.
Fig.46 – NIFTY P/E & P/BV trend
NIFTY P/E & P/B
0
5
10
15
20
25
30
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
P/E
P/B
107
Table – Company Valuations consolidated
Company CMP Rs.
FY09E EPS
FY10E EPS
Multiple x
Target Rs. Upside
Bharti Airtel 812 44.60 54.60 22 1,201 47.93% Cipla 230 10.20 11.60 22 255 10.96% Dr.Reddy's Laboratories 567 29.65 38.94 22 857 50.93% GAIL Ltd. 429 32.70 14 458 6.56% Grasim Industries 2,045 296.58 295.15 7 2,066 1.01% Hero Honda 837 53.70 60.10 13 781 -7.00% Hindalco Industries 124 18.95 18.08 6 108 -13.04% Infosys Technologies 1,759 95.10 104.70 20 2,094 19.04% ITC Ltd. 195 9.70 21 204 4.61% Maruti Suzuki India Ltd. 695 67.35 78.00 10 780 12.12% NALCO 393 27.50 33.30 14 466 18.38% NTPC 178 10.19 11.03 20 221 23.86% Ranbaxy Laboratories 459 18.77 22.70 22 499 8.71% Reliance Industries 2,082 113.60 165.20 19 3,139 50.71% Reliance Communications 399 30.27 37.35 15 560 40.41% Reliance Infrastructure 1,018 47.50 47.00 22 1,034 1.48% SAIL 137 20.60 7 144 4.92% Satyam Computers 421 30.40 33.12 15 497 17.98% Sterlite Industries 514 61.90 71.69 7 502 -2.50% Sun Pharmaceuticals 1,513 66.70 25 1,668 10.12% Suzlon Energy 234 12.35 20 247 5.22% TCS 850 59.10 65.10 16 1,042 22.41% Wipro 431 26.73 29.90 16 478 10.77% Zee Entertainment 226 10.69 13.55 20 271 19.88%
Based on the fundamental analysis, the potential upside has been projected as seen in the
table. The valuations are subject to market risks and other systematic & unsystematic
risk.
Fig.47 – Sector Beta
SECTOR BETA
Auto
Banking
IT
Construction
Power
FMCG
Pharma
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
108
6.2 Bibliography
1. Corporate Finance 2e – Aswath Damodaran
2. Investment Analysis & Portfolio Managemen 8e – Reilly/ Brown
3. Financial Management 7e – Prasanna Chandra
4. Grahan and Dodd’s Security Analysis 5e – Cottle/ Murray/ Block
5. Financial Management – Khan & Jain
6. India Strategy – Enam Research
7. India Strategy – Motilal Oswal Research
8. Research reports – ICICI direct
9. www.icicidirect.com
10. www.moneycontrol.com
11. www.myiris.com
12. www.nseindia.com
13. finmin.nic.in
14. www.cmie.com
15. www.wrtg.com
109
APPENDICES
110
7.1 Thesis Synopsis
• Student details:
Name: APURVA PRASAD
Batch: PGP/06-08/FW
Specialization: Finance & Marketing
Phone No.: +91-9967293901
E-mail: [email protected]
• Area of Research: Corporate Finance
• Title of the Thesis: “To study & analyze Corporate Financing and
Corporate Valuation of Indian firms”
• Premise: S&P CNX-500/ Nifty-50
• Literature: Financial Management – Prasanna Chandra
Financial Management – M.Y.Khan & P.K.Jain
• Scope of thesis:
o Corporate Financing & Leverage of S&P CNX-500/ Nifty (Internal,
External).
o Capital Structure analysis of S&P CNX-500/ Nifty (EBIT-EPS/ ROI-ROE
analysis).
o Corporate Valuation & Risk/ Return of S&P CNX-500/ Nifty (valuation
models).
• Research Methodology:
o Primary Research: Data mining, Interview (Qualitative)
111
o Desk Research: Published Texts, documents, Internet.
• Relevance/ Importance of selected Research topic:
The role of financial system in mobilizing and allocating the resources for capital
formation has been well established by many studies. In this paper, an attempt has
been made to understand the financing pattern of Indian companies represented
by S&P CNX-500/ Nifty-50. Corporate valuations play a major role in
determining long term growth of an economy; therefore the thesis also intends to
focus on corporate valuation aspects of the Indian companies.
An empirical study on S&P CNX-500/ Nifty-50 with postulation that it qualifies
to infer on Indian companies since S&P CNX-500 stands for >90% market
capitalization of all listed companies in India; Nifty-50 contributes ~ 60% market
capitalization of all listed companies in India.
• Details of the External Guides
� Guide-1
o Name: Prof. R.C.M.Pendyala
o Designation: Visiting Faculty, IIPM Mumbai
o Qualification: MBA, AICWA
o Contact no: +91-9820356445
� Guide-2
o Name: Mr.Manoj Agarwal
o Designation: Head, Retail Clients,
Inventure Growth & Securities Ltd.
o Contact no: +91-9820719589
112
7.2 Response Sheets
RESPONSE SHEET # 1 Name: APURVA PRASAD
ID No.: IIPM/ FW/ 06-08/ MUM/ FIN/ 043
Progress of Thesis:
I have prepared the financial modeling format in excel which includes ratio analysis,
margin analysis and valuations for Nifty 50.
I have also been referring to Literature on Financial Analysis & Financial Management
Reference:
• Security Analysis – Graham & Dodd
• Financial Management – Prasanna Chandra
• Investment Analysis & Portfolio Management – Reilly Brown
• NSE Research Papers
P.S. Excel Fin Model attached with mail.
113
RESPONSE SHEET # 2
Name: APURVA PRASAD
ID No.: IIPM/ FW/ 06-08/ MUM/ FIN/ 043
Progress of Thesis:
I have secured data and analyzed it using the financial model prepared by me.
I have prepared the financial modeling format in excel which includes ratio analysis,
margin analysis and valuations for Nifty 50.
I have also been referring to Literature on Financial Analysis & Financial Management
Reference:
• Corporate Finance – Aswath Damodaran
• Security Analysis – Graham & Dodd
• Financial Management – Prasanna Chandra
• Investment Analysis & Portfolio Management – Reilly Brown
• NSE Research Papers
P.S. Updated Excel Fin Model attached with mail.
114
RESPONSE SHEET # 3 Name: APURVA PRASAD
ID No.: IIPM/ FW/ 06-08/ MUM/ FIN/ 043
Progress of Thesis:
• I’ve completed financial data mining for NIFTY-50 companies using excel
modeling.
• I’ve also identified important macroeconomic triggers and I’m working on
analysis of macroeconomic triggers viz Monetary measures, Inflation & Fiscal
structure, Forex & Debt market, Capital movement & Global economy.
• I have also been referring to Literature on Financial Analysis & Financial
Management.
Reference:
• Corporate Finance – Aswath Damodaran
• Security Analysis – Graham & Dodd
• Financial Management – Prasanna Chandra
• Investment Analysis & Portfolio Management – Reilly Brown
• NSE Research Papers
P.S. Consol financials & Updated Excel Fin Model attached with mail.
115
RESPONSE SHEET # 4 Name: APURVA PRASAD
ID No.: IIPM/ FW/ 06-08/ MUM/ FIN/ 043
Progress of Thesis:
• I’ve prepared the draft & financial valuation of the NIFTY companies.
• I will frame the questionnaire and conduct the qualitative interview next.
Reference:
• Corporate Finance – Aswath Damodaran
• Security Analysis – Graham & Dodd
• Financial Management – Prasanna Chandra
• Investment Analysis & Portfolio Management – Reilly Brown
• NSE Research Papers
P.S. draft thesis attached
116
RESPONSE SHEET # 6 Name: APURVA PRASAD
ID No.: IIPM/ FW/ 06-08/ MUM/ FIN/ 043
Date when Guide was consulted: 20-09-2008
Progress of Thesis:
• Received approval of thesis draft from guide as well as structural & contextual
approval.
• Formatting of the content
Reference:
• Corporate Finance – Aswath Damodaran
• Security Analysis – Graham & Dodd
• Financial Management – Prasanna Chandra
• Investment Analysis & Portfolio Management – Reilly Brown
• NSE Research Papers
117
7.3 Thesis Questionnaire 1. Indian GDP will grow at _____ % during 2008-09.
a) < 7 % b) 7-7.50 % c) 7.50-8.00 % d) > 8%
2. $ / Rs. will sustain _______ for CY2009.
( 37 ___ ___ 40 ___ ___ ___ ___ 45 ___ ___ 48 )
3. Inflation will reach single digits by ___________.
a) November 2008 b) January 2009 c) March 2009 d) May 2009
4. Crude oil will sustain _______ levels for CY2009.
a) < $ 80/bbl b) $ 80-100/ bbl c) $100-120/bbl d) >$120/bbl
5. Corporate earnings of the index companies are expected to grow at _____% for
FY09.
a) <15% b) 15-17% c) 17-19% d) >19%
6. My view on the following sectors for investment horizon of 1- 2years:-
(0- Underweight; 10- Overweight)
Pharma & Healthcare: 0 __ __ __ __ 5 __ __ __ __ 10 Information Technology: 0 __ __ __ __ 5 __ __ __ __ 10 Automobile: 0 __ __ __ __ 5 __ __ __ __ 10 Banking: 0 __ __ __ __ 5 __ __ __ __ 10 Real Estate: 0 __ __ __ __ 5 __ __ __ __ 10 Capital Goods: 0 __ __ __ __ 5 __ __ __ __ 10 Power: 0 __ __ __ __ 5 __ __ __ __ 10 Cement: 0 __ __ __ __ 5 __ __ __ __ 10 Fertilizer: 0 __ __ __ __ 5 __ __ __ __ 10 Sugar: 0 __ __ __ __ 5 __ __ __ __ 10 Shipping: 0 __ __ __ __ 5 __ __ __ __ 10 Oil & Gas: 0 __ __ __ __ 5 __ __ __ __ 10 Media & Entertainment: 0 __ __ __ __ 5 __ __ __ __ 10 Name: Designation/ Dept.: Organization: Contact No.: