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Theme ReportAmar Ambani, [email protected]

India Strategy

The Lucky 13

January 02, 2013

A major part of 2012 may not have been very exciting for the Indian stock market. Yet, the second half of the year brought hope of a promising 2013. Also, with 2012 behind us, the supposed ‘end of the world’ predictions would hopefully have been put to rest. Pessimists though, always manage to find a bagful of excuses to remain fearful and depressed. Bears in the stock market will cite the decelerating GDP growth and twin deficits to justify their case for a subdued performance in 2013. Although some merit in this argument, the positives will likely outweigh negatives in the coming 12 months.

Similarly, doomsday predictors may turn to the so called ominous number 13 in the New Year. However, you may be surprised to know that ‘13’ is considered lucky by many. Several successful sportspersons world over have gainfully donned this number on their T‐shirts, including the Olympic Hockey Gold winner for India, Balbir Singh. In numerology, ‘13’ has been termed lucky in many ways. Pronounced as tera, the number signifies a devotional pronouncement to God in Northern India.

In reality, it’s a case of seeing the proverbial glass ‘half full’ or ‘half empty’. Apollo 13, the failed US space program, can be considered blessed or cursed depending on how one looks at it. On one hand, the shuttle crashed and on the other, the entire crew returned home safe and sound. If the good and bad come intertwined with each other, it’s always better to live with the lesser evil and the larger gain. Given this frame of mind, one will invariably reckon luck as good alone.

We see good reason to be hopeful for equities in 2013. The Indian stock market received a fresh lease of life when the government swung into positive action following fear of an imminent country downgrade and another bout of quantitative easing announced by Central bankers around the world. We firmly believe the government policy measures will continue as downgrade fears have not been completely dispelled. Among other things, we expect it to remain focused on countering fiscal deficit through measures like direct subsidy via ‘Aadhaar’, disinvestment and introduction of Goods & Services Tax and Direct Tax Code.

Global growth trajectory is expected to be higher in 2013 compared to 2012. Coupled with expectations of benign inflation and the Fed’s intention of keeping interest rates low till 2014‐15, the environment looks largely conducive for continued money flow in Asian equities. The Rupee carry trade also favours FII flows into India. The FDI green signal in certain sectors may also help bring the much needed long term capital. We have reason to believe that the worst is over for INR; not to suggest that the Rupee is on a super appreciation spree but a major slide from here is surely ruled out.

A key market trigger is the peak out of the interest rate cycle. After two CRR cuts, we now expect a Repo rate cut of 25 basis points in the January 2013 policy review meet of RBI. There is a case for a 75‐100bps rate cut in 2013.

Some pundits reckon that the forthcoming elections may beget uncertainty. On the contrary, we are confident the elections will reset the system instead, either through a fresh mandate to Congress or by virtue of a change in mandate. The result can only be unlucky in the event of a third front assuming power.

Valuations are reasonably placed at 14.5x FY14E for the Nifty and the earnings downgrade momentum is waning. Whether the current market involves a ‘risk on’ trade or signals the start of a new bull run, the current situation presents a tactical opportunity for equities, certainly not to be missed. Let’s greet the ‘13’ in 2013 with renewed hope and measured confidence. Precisely why we recommend 13 growth stories for 2013 and beyond, in our special theme report titled ‘The Lucky 13’. Incidentally, the number is considered lucky in China and Italy; their economies could do with some luck. Coincidently, the number is considered lucky by our honourable President Pranab Mukherjee too. Let us hope the Indian economy turns better during his term.

Wishing you and your loved ones a Happy and Prosperous New Year!

Nifty: 5,951 Sensex: 19,581

The Lucky 13

2

Buy recommendation summary

Company Sector CMP (Rs)

18‐month Target (Rs)

Upside (%)

FY12‐15 PAT CAGR (%)

P/E (x) FY15E

RoE (%)FY15E

EV/EBIDTA (x) FY15E

ACC** Cement 1,432 1,755 22.6 18.5 12.4 21.5 7.1

DEN Networks Media 200 290 45.0 112.8 19.3 13.6 7.3

Dr Reddy's Pharma 1,834 2,358 28.6 21.8 13.2 26.8 8.1

Financial Tech IT 1,138 1,510 32.7 (18.7)* 16.6 10.4 18.8

ITC FMCG 287 353 23.0 18.3 21.8 40.5 15.6

Petronet LNG Oil & Gas 158 208 31.9 12.0 8.0 24.1 5.0

United Spirits Breweries 1,953 2,400 22.9 68.5 31.5 9.7 17.7

Wipro IT 397 495 24.7 12.8 12.1 19.7 7.4

Wockhardt Pharma 1,562 2,089 33.7 17.0 12.0 34.2 7.5 *FY12 included a one off large stake sale of MCX holding of Rs2.5bn ** Calendar year ending.

Financials

Company Sector CMP (Rs)

18‐month Target (Rs)

Upside (%)

FY12‐15 PAT CAGR (%)

P/BV (x) FY15E

ROA (%)FY15E

ROE (%)FY15E

HDFC Bank Financials 685 850 24.1 19.7 3.4 1.6 14.5

ICICI Bank Financials 1,159 1,500 29.4 23.5 1.7 1.7 21.7

LIC Housing Fin Financials 297 390 31.3 25.2 1.7 1.8 21.5

Shriram Trans Fin Financials 754 950 26.0 11.4 1.8 2.5 18.6 Source: India Infoline Research

Sector: Cement

Sector view: Positive

Sensex: 19,581

52 Week h/l (Rs): 1,545 / 1,082

Market cap (Rscr) : 26,851

6m Avg vol (‘000Nos): 308

Bloomberg code: ACC IS

BSE code: 500410

NSE code: ACC

FV (Rs): 10

Prices as on Jan 01, 2013

Company rating grid

Low High

1 2 3 4 5

Earnings Growth

Cash flow

B/S Strength

Valuation appeal

Risk

Share price trend

80

110

140

Dec‐11 Apr‐12 Aug‐12 Dec‐12

ACC Sensex

Share holding pattern

-

20

40

60

80

100

Dec-11 M ar-12 Jun-12 Sep-12

Promoters Institutions Others%

Rating: BUY Target (18 months): Rs1,755

CMP: Rs1,432

Upside: 22.6%

Research Analyst: Hemant Nahata

[email protected]

ACC

Return of the up-cycle; ACC earnings set to soar Cement dispatch growth for the last four quarters has been strong bridging the gap between supply and demand which has been created since FY10. In addition, pace of order placement for new capacity has not picked up on account of 1) delays in securing the necessary clearances for limestone/land, 2) poor utilization of plants in south and 3) lower return on incremental capacity. Utilization rate, which dipped to 77% in FY12 (due to addition of 90mtpa over FY09‐12 from base of 210mtpa), is expected to recover to 81‐85% levels by FY15 as supply surplus declines. Historically, prices have improved during high utilization periods, indicating an up‐cycle in the sector. We believe ACC will be a key beneficiary of this up cycle with earnings set for an 18.5% cagr over CY11‐14 as against 4.4% cagr in CY08‐11.

Realisation to improve 12% over CY12-14 Cement realizations have improved after a small correction during the last week of November 2012. The price correction has been limited to north, west and central regions. South has surprisingly remained stable despite experiencing returning monsoon. We expect realizations to improve in north, west, east while remaining stable in south and central regions on account of supply surplus. With ~60% of ACC sales coming from high growth north, west and east regions (balance from central and south regions), we factor in a 6.3%/4.5% yoy jump in realizations in CY13/CY14.

Jamul 5mtpa plant to commence operation by H1 CY15 ACC is enhancing its capacity by 5mtpa to 35mtpa (by H1 CY15) by setting‐up a plant at Jamul, Chhattisgarh. The new capacity expansion, in our view, will be inadequate to bring market share back to CY08 levels. Going by current trends, most of the company’s plants (except south) will be running at 95% utilization levels by CY15, thereby limiting scope of further volume push. We believe up‐cycle in cement sector and strong balance sheet will prompt ACC to augment its capacity organically or inorganically in the near future. Valuation appear appealing at 13x CY14E; Recommend BUY ACC balance sheet continues to be strong with cash and cash equivalent at Rs32bn (as against 27bn a year before). Return ratios, which were on a declining mode, are expected to improve in CY13 and CY14. Debt/equity continues to remain low as most of the recent expansion has been funded through internal accruals. Despite a strong balance sheet, ACC trades at a 20% discount compared to its peers like Ultratech on EV/ton basis. We believe current valuation leaves enough room for upside and recommend BUY for an 18‐month target of Rs1,755.

Valuation summary Y/E Sales PAT EPS Change P/E EV/EBIDTA D/E RoE

March Rs mn Rs mn Rs % yoy (x) (x) (x) %

CY11 96,603 13,253 70.5 18.3 20.0 13.2 0.1 19.4

CY12E 112,282 15,068 80.2 13.7 17.6 10.5 0.1 20.0

CY13E 125,335 17,839 94.9 18.4 14.8 8.5 0.1 21.0

CY14E 138,550 21,359 113.6 19.7 12.4 7.1 0.1 21.5

Source: Company, India Infoline Research

ACC

4

Key risks Key risks to our projection remain: Fall in cement prices,

Government interference in the form of price caps, hike in duties etc and

Drought like situation leading to subdued demand.

Focus tables

Pan‐India ‐ Utilization to improve from FY13 North region to run into deficit in FY14 Mn tons FY11 FY12 FY13E FY14E FY15E

Effective Cement Cap. 271 293 310 327 349

yoy growth (%) 15.8 8.1 5.8 5.5 6.7

Possible production 251 285 297 317 336

Cement Dispatches 210 224 241 265 287

yoy growth (%) 5.5 6.7 7.6 10.0 8.3

Capacity Utilization 77.5 76.5 77.7 81.0 82.2

Surplus/(Deficit) 41.0 61.0 56.0 52.0 49.0

Mn tons FY11 FY12 FY13E FY14E FY15E

Effective Cement Cap 62 66 67 71 77

yoy growth (%) 21.6 6.5 1.5 6.0 8.5



yoy growth (%) 8.5 9.8 8.9 13.1 8.7


Surplus/(Deficit) 8.0 7.0 3.0 (2.0) (3.0) Source: CMA, Companies, India Infoline research

South: Surplus to result into consolidation East : Supply to match demand in FY14 Mn tons FY11 FY12 FY13E FY14E FY15E


yoy growth (%) 18.6 7.8 8.2 3.4 1.6



yoy growth (%) 3.1 1.5 4.5 10.0 10.4


Surplus/(Deficit) 29.0 44.0 44.0 44.0 39.0



yoy growth (%) 2.9 5.7 5.4 5.1 17.1



yoy growth (%) 3.4 6.7 9.4 8.6 7.9


Surplus/(Deficit) 1.0 5.0 3.0 1.0 4.0 Source: CMA, Companies, India Infoline research

West : Utilization levels to remain robust Central : Stabilization of new plants to drag prices Mn tons FY11 FY12 FY13E FY14E FY15E


yoy growth (%) 11.4 12.8 2.3 6.7 4.2



yoy growth (%) 6.7 12.5 13.9 4.9 4.7


Surplus/(Deficit) 5.0 5.0 3.0 4.0 4.0



yoy growth (%) 17.9 9.1 11.1 10.0 11.4



yoy growth (%) 6.9 6.5 3.0 11.8 7.9


Surplus/(Deficit) (2.0) ‐ 3.0 5.0 5.0 Source: CMA, Companies, India Infoline research

ACC

5

Financials Income statement Y/e 31 Mar (Rs m) CY11 CY12E CY13E CY14E

Revenue 96,603 112,282 125,335 138,550

Operating profit 19,207 24,372 30,056 36,160

Depreciation (4,753) (5,377) (5,727) (6,588)

Interest expense (969) (1,174) (1,100) (1,020)

Other income 1,919 2,454 1,931 1,965

Profit before tax 15,404 20,276 25,160 30,517

Taxes (2,152) (5,208) (6,830) (8,465)

Minorities 0 0 (492) (693)

Adj. profit 13,253 15,068 17,839 21,359

Exceptional items 0 (3,354) 0 0

Net profit 13,253 11,714 17,839 21,359

Balance sheet Y/e 31 Mar (Rs m) CY11 CY12E CY13E CY14E

Equity capital 1,880 1,880 1,880 1,880

Reserves 70,043 76,699 89,480 105,782

Net worth 71,923 78,579 91,360 107,661

Debt 5,107 8,107 10,107 13,107

Deferred tax liab (net) 5,184 5,184 5,184 5,184

Total liabilities 82,214 91,869 106,650 125,952

Fixed assets 66,429 68,698 77,971 93,383

Investments 16,250 22,500 22,500 22,500

Net working capital (16,990) (16,531) (14,244) (12,840)

Inventories 10,997 13,785 17,369 21,135

Sundry debtors 2,604 3,178 3,725 4,529

Other current assets 6,053 7,387 9,070 10,528

Sundry creditors (26,104) (30,340) (33,868) (37,438)

Other current liabilities (10,540) (10,540) (10,540) (11,594)

Cash 16,526 17,202 20,423 22,909

Total assets 82,214 91,869 106,650 125,952

Cash flow statement Y/e 31 Mar (Rs m) CY11 CY12E CY13E CY14E


Depreciation 4,753 5,377 5,727 6,588

Tax paid (2,152) (5,208) (6,830) (8,465)

Working capital ∆ (3,741) (459) (2,287) (1,404)

Operating cashflow 14,265 19,986 21,771 27,236

Capital expenditure (4,729) (7,647) (15,000) (22,000)

Free cash flow 9,536 12,339 6,771 5,236

Equity raised (967) ‐ ‐ ‐

Investments 777 (6,251) ‐ ‐

Debt financing/disposal (131) 3,000 2,000 3,000

Dividends paid (5,058) (5,058) (5,058) (5,058)

Other items 1,568 (3,354) (492) (693)

Net ∆ in cash 5,725 676 3,221 2,486

Key ratios Y/e 31 Mar CY11 CY12E CY13E CY14E

Growth matrix (%)

Revenue growth 25.2 16.2 11.6 10.5

Op profit growth 23.6 26.9 23.3 20.3

EBIT growth 7.8 31.0 22.4 20.1

Net profit growth 18.3 13.7 18.4 19.7

Profitability ratios (%)

OPM 19.9 21.7 24.0 26.1

EBIT margin 16.9 19.1 21.0 22.8

Net profit margin 13.7 13.4 14.2 15.4

RoCE 21.0 24.6 26.5 27.1

RoNW 19.4 20.0 21.0 21.5

RoA 11.5 12.0 12.6 13.1

Per share ratios

EPS 70.5 80.2 94.9 113.6

Dividend per share 23.0 23.0 23.0 23.0

Cash EPS 95.8 108.8 125.4 148.7

Book value per share 382.7 418.1 486.1 572.8

Valuation ratios (x)

P/E 20.0 17.6 14.8 12.4

P/CEPS 14.7 13.0 11.2 9.5

P/B 3.7 3.4 2.9 2.5

EV/EBIDTA 13.2 10.5 8.5 7.1

Payout (%)

Dividend payout 38.2 33.6 28.4 23.7

Tax payout 14.0 25.7 27.1 27.7

Liquidity ratios

Debtor days 10 10 11 12

Inventory days 42 45 51 56

Creditor days 99 99 99 99

Leverage ratios

Interest coverage 16.9 18.3 23.9 30.9

Net debt / equity (0.2) (0.1) (0.1) (0.1)

Net debt / op. profit (0.6) (0.4) (0.3) (0.3)

Du‐Pont analysis Y/e 31 Mar (Rs m) CY11 CY12E CY13E CY14E

Tax burden (x) 0.86 0.74 0.71 0.70

Interest burden (x) 0.94 0.95 0.96 0.97

EBIT margin (x) 0.17 0.19 0.21 0.23

Asset turnover (x) 0.84 0.89 0.88 0.85

Financial leverage (x) 1.68 1.67 1.67 1.64

RoE (%) 19.4 20.0 21.0 21.5

Sector: Media


Sensex: 19,581

52 Week h/l (Rs): 210/47



Bloomberg code: DEN IN

BSE code: 532814

NSE code: DEN

FV (Rs): 10


Company rating grid

Low High

1 2 3 4 5

Earnings Growth

Cash flow

B/S Strength

Valuation appeal

Risk

Share price trend

0

100

200

300

400

500


Den Networks Sensex


‐

20

40

60

80

100

Dec‐11 Mar‐12 Jun‐12 Sep‐12

Promoters Institutions Others

%

Rating: BUY Target (18 months): Rs290

CMP: Rs200

Upside: 45%

Research Analyst:

Bhavna Sinyal [email protected]

Den Networks Ltd

Subscription ramp-up during Phase I; Phase II to be a bigger driver Digital subscription of Den Networks rose from ~0.5mn to 1.6mn during Phase I digitization (covering 4 Metros). With constant demand from Local Cable Operators (LCOs) for more Set Top Boxes (STB), the total number of subscribers in Phase I locations is expected to cross 2mn by Jan’2013. Out of the current subscribers of 1.6mn, Delhi is the core area of presence accounting for 1.1mn, followed by Mumbai (0.3mn) and Kolkata (0.2mn). The full impact of Phase I digitization on Den’s top line would be reflected from Q4 FY13. In Phase II locations, DEN has a subscriber base of 4‐4.5mn, of which 0.5mn are already digitized. With company’s strong foothold in Phase II locations (presence in 24 cities out of the total 38 cities) and lower penetration of digital cable (~10%) within its subscribers, revenue growth would likely be robust in the longer term. Ministry of Information & Broadcasting (MIB) is already in talks with industry on Phase II implementation. As digitization progresses, DEN’s subscriber base is expected to touch 15‐20mn from the current 11mn. MSOs better placed than DTH players to reap digitization benefits With relatively lower requirement for capex, ability to provide bundled services (video, broadband, telephone, etc), capacity to carry more HD channels and large LCO network, we expect MSOs to benefit significantly from digitization. From mid‐Sept to Phase I deadline, DTH players added subscribers to the tune of 0.17mn whereas MSOs added 1.7mn subscribers. DEN, being one of the leading MSO, has already received order for ~2mn STBs from Phase II locations signifying the phenomenal pace of digitization. In addition to increased demand for STBs, digitization will gradually eliminate the scope of under‐declaration of subscribers by the LCOs (Digital Addressable System identifying each subscriber). Resultantly, MSOs will have direct control over its subscribers and would share a legitimate portion of the revenue pie. Likely to deliver 100%+ earnings CAGR Digitization has resulted in complete turnaround of the cable industry. Backed by factual subscriber statistics and lower content cost, Den Networks being one of the leading cable distribution companies is likely to see a meaningful impact on its profitability. This was partially evident in sharp operating margin improvement during H1 FY13, from 7.3% in FY12 to 20.2%. Full impact of Phase I implementation, commencement of Phase II (a bigger opportunity), significant demand for STBs and margin improvement would drive exceptional earnings growth (100%+ CAGR) over FY12‐15. Valuation summary Y/E Revenue PAT EPS Change P/E EV/EBIDTA D/E RoE


FY12 11,295 143 1.1 (61.9) 182.8 24.0 0.3 1.8

FY13E 9,827 588 4.4 304.5 45.2 12.9 0.5 7.1

FY14E 12,775 816 6.1 38.9 32.5 10.1 0.5 9.0

FY15E 15,969 1,376 10.4 68.7 19.3 7.3 0.6 13.6


Den Networks Ltd

7

Company Background Den Networks, one of the leading cable distribution companies, has strong foothold in Delhi, UP and Karnataka with presence also in Maharashtra, Gujarat, Rajasthan, MP, Haryana, Uttarakhand and Kerala. Recently, company entered in West Bengal, Jharkhand and Bihar. Den offers gamut of high quality services ‐ 300 digital channels with high‐quality picture and sound, micro‐blogging, 24x7 music, interactive gaming, restaurant/event search application, etc. It had entered a 50‐50 JV with News Corp's Star TV Group in 2008. In May 2011, Star DEN formed a 50‐50 JV with Zee Turner combining the distribution assets of the Star, Zee and Turner groups in India. Key risks If digitization does not progresses as expected, significant growth in revenue may not be realized within the

expected time frame. Fierce competition from DTH players (via better services at competitive price) may devour MSOs share in the

revenue pie. Focus charts Structural improvement in margins ….to drive robust growth in earnings

7.3

19.020.5

23.7

1.3

6.0 6.4

8.6

0

5

10

15

20

25

FY12 FY13E FY14E FY15E

(%)

OPM PATM

0

300

600

900

1,200

1,500


(Rs mn)

CAGR 112.8%


Enhanced returns for equity shareholders Improvement in interest coverage ratio reinforces confidence

1.8

7.1

9.0

13.6

0

3

6

9

12

15


(%)

2.1

3.4 3.6

4.5

0

1

2

3

4

5

6


(x)


Den Networks Ltd

8

Financials - Consolidated Income statement Y/e 31 Mar (Rs m) FY12 FY13E FY14E FY15E

Revenue 11,295 9,827 12,775 15,969

Expenditure (10,473) (7,960) (10,156) (12,184)

Operating Profit 822 1,867 2,619 3,785

Other Income 271 311 343 377

EBIDTA 1,093 2,178 2,961 4,161

Dep/Amortization (538) (805) (1,087) (1,298)

Interest (269) (402) (527) (638)

PBT 286 972 1,348 2,225

Tax (100) (340) (472) (779)

PAT & before minority interest

186 632 876 1,446

Share of P/(L) in associates

(43) (44) (60) (70)

Net Profit 143 588 816 1,376

Balance sheet Y/e 31 Mar (Rs m) FY12 FY13E FY14E FY15E

Share Capital 1,305 1,327 1,327 1,327

Reserve & Surplus 6,716 7,303 8,119 9,496

Networth 8,021 8,630 9,447 10,823

Minority Interest 616 616 616 616

Pref. Sh issued by subsidiary to min.

25 25 25 25

S.loans 2,559 3,838 4,990 5,988

UnS.loans 38 46 55 66

Loan Funds 2,597 3,884 5,045 6,054

Deffered Tax Liability 26 26 26 26

Equity+Liabilities 11,285 13,182 15,159 17,544

Net Block 2,833 4,980 6,590 7,798

Capital W‐I‐P 755 906 1,132 1,359

Goodwill on Cons. 2,932 3,225 3,547 3,902

Investments 223 257 295 340

Deffered Tax Asset 228 251 276 303

Current Assets, Loans & Advances

8,235 6,918 7,608 9,115

Unbilled Revenue 243 215 245 306

S.Debtors 2,904 2,477 3,185 3,894

Cash & Bank Balance 3,076 2,476 1,938 2,203

Loans and Advances 2,012 1,750 2,240 2,712

Current Liab & Prov 3,921 3,355 4,290 5,272

C.L 3,861 3,285 4,200 5,162

Provisions 60 70 90 110

Net Current Assets 4,313 3,564 3,318 3,843

Total Assets 11,285 13,182 15,159 17,544

Cash flow statement Y/e 31 Mar (Rs m) FY12 FY13E FY14E FY15E

PBT 286 972 1,348 2,225

Depreciation 538 805 1,087 1,298

Interest Expense 269 402 527 638

Change in WC (149) 149 (292) (260)

Direct taxes Paid (100) (340) (472) (779)

Other Items (51) ‐ ‐ ‐

Op. Cash flows 793 1,988 2,197 3,123

Investments (1,567) (3,452) (3,309) (3,159)

Fin Cash flow 1,113 864 574 301

Net inc /dec in Cash 339 (601) (538) 265

Op Cash Balance 2,738 3,076 2,476 1,938

Cl Cash Balance 3,076 2,476 1,938 2,203

Key ratios Y/e 31 Mar FY12 FY13E FY14E FY15E

Growth matrix (%)

Revenue growth 10.5 (13.0) 30.0 25.0

Op profit growth (8.7) 127.0 40.3 44.5

EBITDA growth (13.5) 99.3 35.9 40.5

Net profit growth (61.9) 311.5 38.9 68.7


OPM 7.3 19.0 20.5 23.7

EBITDA margin 9.7 22.2 23.2 26.1


RoCE 1.4 4.8 5.8 8.4

RoE 1.8 7.1 9.0 13.6

RoA 1.0 3.7 4.5 6.5

Per share ratios

EPS 1.1 4.4 6.1 10.4

BVPS 61.5 65.0 71.2 81.5

Valuation ratios

P/E 182.8 45.2 32.5 19.3

P/B 3.3 3.1 2.8 2.5

EV/EBIDTA 24.0 12.9 10.1 7.3

Liquidity ratios

Debtor days 93.8 92.0 91.0 89.0

Creditor days 83.8 84.0 82.0 81.0

Leverage ratios


Debt/Equity 0.3 0.5 0.5 0.6

Net debt / equity (0.1) 0.2 0.3 0.4

Net debt / op. profit (0.6) 0.8 1.2 1.0

Sector: Pharmaceutical


Sensex: 19,581

52 Week h/l (Rs): 1,915/1,526



Bloomberg code: DRRD IN

BSE code: 500124

NSE code: DRREDDY

FV (Rs): 2


Company rating grid

Low High

1 2 3 4 5

Earnings Growth

Cash Flow

B/S Strength

Valuation appeal

Risk

Share price trend

50

70

90

110

130

Dec‐11 May‐12 Oct‐12

Dr Reddy's Sensex


‐

20

40

60

80

100




CMP: Rs1,834

Upside: 28.6%

Research Analyst:

Bhavika Thakker [email protected]

Dr. Reddy’s Laboratories

One of the best bet to play on US business Dr. Reddy’s (DRDY) has strong presence in the US generics and OTC segment. The company has a sturdy track record of monetising one‐off (FTFs and PIVs) opportunities. We believe the trend will continue with niche generic launches in next two years. DRDY has a strong US drug portfolio of 63 ANDAs pending for approval with the USFDA, of which 33 are Para IVs and 7 have ‘First To File’ status. Within launched products, DRDY has ~24 Rx products ranking among the top 3 in the category. Unlike other generic players from India, DRDY has seen a good traction in OTC business with products like Ranitidine, Famotidine and Omeprazole. In US, the growth in H1FY13 has been better than expected. We believe new launches which include two undisclosed limited competition opportunities will help company to post robust growth in FY13. The launch of products like Quetiapine, Clopidogrel, Fexofenadine etc will help to sustain growth in FY14 and beyond.

Improving PSAI segment to abet growth DRDYs’ troubled PSAI segment (26% of revenue), is also reviving. The recent quarters’ stellar performance substantiate our belief that worst is over in the PSAI segment. We believe the growth in active Ingredients business will be led by strong order book and new customer orders. Additionally, growth would also aided by approval of Mexico facility which was under the import alert since June 2011. In past, the plant generated ~US$60m in annual revenue, of which 50‐60% was from the US market. Additionally, acquisition of OctoPlus (a service based specialty pharmaceutical company) will enhance specialty revenue. DRDY has ~560 cumulative DMF filings as on date.

Biologics; a long term growth driver In the long term, biologics is going to play major role in pharma sector. Dr Reddy's, an early mover in the biologic segment, is definitely at advantageous position to cash in the opportunity. Biologics contributed about 5% to DRDY’s domestic sales in FY12. The company has three major biological products in domestic market; Reditux, Grafeel and Cresp. We believe real value would be extracted after 7‐8 years of gestation period.

One of the attractive bet in large cap space In next two years, we believe the company will gain maximum from the patent cliff. Robust domestic and international generic market growth along with improving outlook of PSAI (muted growth in PSAI segment was a challenge in the past) provides us comfort. We expect Revenue and PAT to witness a CAGR of 17% and 21% over FY12‐15E, respectively. Valuation summary Y/E Sales PAT EPS Change P/E EV/EBIDTA D/E RoE


FY12 98,145 13,009 76.7 30.2 23.9 12.9 0.3 28.8

FY13E 103,061 16,140 95.2 24.1 19.3 12.2 0.3 28.7

FY14E 120,785 18,868 111.2 16.9 16.5 10.1 0.2 26.8

FY15E 140,306 23,522 138.7 24.7 13.2 8.1 0.1 26.8


Dr Reddy’s

10

Key risks Forex risks: revenue except for India is dollar dominated

Legal risks associate with patent challenges and delay in product approval.

Risk associated with policy changes in domestic and international market.

Focus charts

Revenue: Impressive history of monetisisng one‐offs Revenue Break‐up

‐

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

FY07

FY08

FY09

FY10

FY11

FY12E

FY13E

FY14E

FY15E

(Rs mn) Revenue One offs

‐

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

FY08

FY09

FY10

FY11

FY12E

FY13E

FY14E

FY15E

(Rs mn)

Global generic PSAI Proprietory products


Generic business on constant push Improving PSAI outlook

‐

5,000

10,000

15,000

20,000

25,000

Q1FY11

Q2FY11

Q3FY11

Q4FY11

Q1FY12

Q2FY12

Q3FY12

Q4FY12

Q1FY13

Q2FY13

(Rs mn)

‐

2,000

4,000

6,000

8,000

10,000

Q1FY11

Q2FY11

Q3FY11

Q4FY11

Q1FY12

Q2FY12

Q3FY12

Q4FY12

Q1FY13

Q2FY13

(Rs mn)


North America is the biggest pie in Global Generics ANDA filing Trend

14%

17%

37%

15%

17%

North America

Europe

Russia & CIS

India

Others

‐

50

100

150

200

250

300

350

400

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13*

ANDA pending ANDA aprroved ANDA filed

Source: Company, India Infoline Research *till September 2013

Dr Reddy’s

11

Financials Income statement Y/e 31 Mar (Rs m) FY12 FY13E FY14E FY15E

Revenue 98,145 103,061 120,785 140,306


Depreciation (5,181) (5,617) (6,281) (6,735)

Interest expense (1,056) (1,031) (978) (800)

Other income 1,323 1,413 1,538 1,649


Taxes (5,035) (3,189) (3,728) (4,648)

Adj. profit 14,362 16,140 18,868 23,522

Reported Net profit 13,009 16,140 18,868 23,522


Equity capital 848 848 848 848

Reserves 49,042 61,761 77,088 97,070

Net worth 49,890 62,609 77,936 97,918

Non Current Liab 17,438 19,547 16,437 13,153

Current Liab 45,914 53,622 60,210 64,165


Fixed assets 29,404 37,296 38,909 40,298

Intangible assets 13,848 10,562 12,668 14,544

Investments 9 9 9 9

Current Assets 53,929 57,450 61,191 70,677

Inventories 19,433 20,706 24,308 28,237

Sundry debtors 25,368 27,030 25,929 30,119

Other curr assets 7,058 7,643 8,884 10,250

Curr Investments 2,070 2,070 2,070 2,070

Cash 16,052 30,461 41,806 49,708

Total assets 113,242 135,778 154,583 175,236

Cash Flow Statement Y/e 31 Mar FY12 FY13E FY14E FY15E


Depreciation 5,181 5,617 6,281 6,735

Tax paid (5,035) (3,189) (3,728) (4,648)

Working capital ∆ (10,381) (1,208) (1,765) (8,299)

Oper cashflow 9,162 20,549 23,384 21,957


Free cash flow 2,210 10,326 13,384 11,957 Debt financing/ disposal 12,891 7,505 1,501 (515)

Dividends paid (2,712) (3,422) (3,540) (3,540)

Other items (2,079) 0 0 0

Net ∆ in cash 10,310 14,409 11,344 7,902


Growth matrix (%)

Revenue growth 30.9 5.0 17.2 16.2

Op profit growth 56.5 1.0 15.3 20.3

EBIT growth 69.4 (0.5) 15.8 22.9



OPM 24.8 23.8 23.4 24.3

EBIT margin 23.5 22.4 20.6 20.6


RoCE 20.2 16.4 16.2 17.6

RoNW 28.8 28.7 26.8 26.8

RoA 13.0 13.2 13.2 14.4

Per share ratios

EPS 76.7 95.2 111.2 138.7


Cash EPS 107.3 128.3 148.3 178.4



P/E 23.9 19.3 16.5 13.2

P/CEPS 17.1 14.3 12.4 10.3

P/B 6.2 5.0 4.0 3.2

EV/EBIDTA 12.9 12.2 10.1 8.1

Payout (%)


Tax payout 26.0 16.5 16.5 16.5

Liquidity ratios




Leverage ratios


Net debt / equity 0.0 (0.2) (0.3) (0.4)

Net debt / op. profit 0.1 (0.4) (0.9) (1.1)

Du-Pont Analysis Y/e 31 Mar FY12 FY13E FY14E FY15E

Tax burden (x) 0.67 0.84 0.84 0.84


EBIT margin (x) 0.24 0.22 0.21 0.21

Asset turnover (x) 0.87 0.74 0.80 0.86


RoE (%) 28.8 28.7 26.8 26.8

Sector: IT

Sector view: Neutral

Sensex: 19,581

52 Week h/l (Rs): 1,224/ 522



Bloomberg code: FTECH.IB

BSE code: 526881

NSE code: FINANTECH

FV (Rs): 2

Price as on Jan 01, 2013

Company rating grid

Low High

1 2 3 4 5

Earnings Growth

Cash flow

B/S Strength

Valuation appeal

Risk

Share price trend

70

110

150

190


Financial Tech Sensex


0

20

40

60

80

100


Promoters FIIs Others


CMP: Rs1,138

Upside: 32.7%

Research Analyst: Aniruddha Mehta

[email protected]

Financial Technologies

Innovative business model focused on non-linear revenues Financial Technologies (FTIL) is the flagship business of the FT Group – a conglomerate of technology, exchange and various related ventures. Its key technologies for financial markets (viz. ODIN, DOME) have shown impressive growth over years with sustained market share (80%+ market share for ODIN). With a bid to participate in the India’s nascent but burgeoning financial intermediary markets, FT group has successfully ventured to develop exchanges a across asset classes with a unique revenue sharing model helping to develop a non‐linear revenue stream as the exchanges mature. This model has not only resulted in higher profitability but also has helped diversify risks.

Improving traction at key exchanges – strong growth driver With its expertise in financial markets technology, FTIL has built a strong eco‐system of exchanges and related ventures across asset classes and within multiple emerging market geographies. A good portion of these ventures have been highly successful growing multi‐folds and having substantial market share viz. MCX, MCX‐SX (currency segment), IEX, NSEL and NBHC. This has effectively ramped up FTIL’s non‐linear revenues resulting in higher revenue productivity. Recent regulatory approval for MCX‐SX to cater to equity, fixed income and interest rate derivatives is expected to bode well for FTIL providing additional fillip to both licenses sale as well as transaction revenues. Driven by operating leverage, OPM outlook is sanguine A key advantage of the non‐linear/revenue sharing business model of FTIL is the operating leverage that it lends as the volumes/revenues of these ventures grow. These non‐linear revenues which are in the form of variable AMC fees, come at marginal additional costs thus providing a boost to operating profitability. For instance, the variable AMC revenues from MCX have grown 2.5x over FY09‐12 driven by growing volumes. As volumes grow at its key exchanges, this revenue stream (with its inherent non‐linearity) should continue to improve operating profitability.

Stake sale in exchange ventures to help monetize investments Regulation mandated stake sale is expected to lead to equity sale of 5% (2.5% through MCX) in MCX‐SX and 8% in IEX within next 18 months. Established market leadership of these exchanges and their nascent growth stage are expected to help FTIL effectively monetize its investments in these ventures. Also, further stake sale in MCX‐SX and other incubating ventures can provide additional upsides. A diversified business model with established exchanges/ventures, improving profitability and investment monetization opportunity make FTIL an attractive play. Through SOTP valuation we arrive at a TP of Rs1510. Recommend BUY.



FY12 4,256 4,780 103.7 420.0 11.0 26.0 0.1 21.2

FY13E 4,015 2,586 56.1 (45.9) 19.2 24.5 (0.0) 10.7

FY14E 4,502 2,773 60.2 7.2 18.2 21.2 (0.1) 10.3

FY15E 4,811 3,016 65.4 8.8 16.6 18.8 (0.1) 10.4

Souce: Company, India Infoline Research


13

Key Risks Failure to garner volumes at newly developed exchanges Inability to monetize investments done in various exchanges and related ventures Adverse regulatory ruling for any of the exchange ventures can be risk to our growth estimates Focus charts

Stable revenue growth over FY13‐15E Margin to expand over FY13‐15E

0

1.5

3

4.5

6

FY11 FY12 FY13E FY14E FY15E

(Rs bn)

30

35

40

45

50

55


(%)


Impressive market share of key exchanges ventures MCX average daily turnover ‐ increasing trend

0 20 40 60 80 100

MCX

IEX

NSEL

MCXSX *

(%)

0

150

300

450

600

FY09 FY10 FY11 FY12 H1FY13

(Rs bn)

Source: Company, India Infoline Research, * MCX SX Currency segment market share

IEX average daily volumes‐ increasing trend ODIN licence growth profile

0

150

300

450

600

FY09 FY10 FY11 FY12 H1FY13

(MWh)*

0

200

400

600

800

1000

FY09 FY10 FY11 FY12

(000's)

Source: Company, India Infoline Research, * volumes for day ahead market


14


Revenue 4,256 4,273 4,691 5,036


Depreciation (173) (273) (293) (303)

Interest expense (304) (450) (370) (290)

Other income 3,689 2,252 2,148 2,244


Taxes (514) (913) (962) (1,051)

Adj. profit 4,780 2,739 2,886 3,154



Reserves 24,456 26,784 29,093 31,616

Net worth 24,548 26,876 29,185 31,708

Def tax liab (net) 137 137 137 137

Debt 5,627 5,627 4,627 3,627


Fixed assets 4,705 4,832 4,939 5,035

Investments 17,380 17,380 17,380 17,380

Net working capital 8,227 10,429 11,631 13,057

Sundry debtors 363 364 400 429

Cash 3,990 6,175 6,961 8,043


Sundry creditors (292) (293) (321) (345)

Other curr liabilities (1,963) (1,971) (2,164) (2,323)

Total assets 30,313 32,641 33,950 35,473



Depreciation 173 273 293 303

Tax paid (514) (913) (962) (1,051)

Working capital ∆ (7,563) (17) (416) (344)

Operating cashflow (2,610) 2,995 2,763 3,113

Capital expenditure (808) (400) (400) (400)

Free cash flow (3,417) 2,595 2,363 2,713

Equity raised (405) 0 0 (0)

Investments 1,124 ‐ ‐ ‐

Debt raised/repaid 5,627 ‐ (1,000) (1,000)

Dividends paid (431) (411) (577) (631)

Other items 17 ‐ ‐ ‐

Net ∆ in cash 2,515 2,184 786 1,082


Growth matrix (%)

Revenue growth 19.0 0.4 9.8 7.4


EBIT growth 114.0 (26.7) 2.8 6.5

Net profit growth 58.8 (42.7) 5.4 9.3


OPM 49.0 49.7 50.4 50.7

EBIT margin 131.6 96.0 89.9 89.2


RoCE 21.9 13.0 12.7 12.9

RoNW 21.2 10.7 10.3 10.4

RoA 15.9 8.1 8.1 8.5

Per share ratios

EPS 103.7 59.4 62.6 68.4


Cash EPS 107.4 65.3 69.0 75.0



P/E 11.0 19.2 18.2 16.6

P/B 2.1 2.0 1.8 1.7

EV/EBIDTA 26.0 24.5 21.2 18.8

Payout (%)


Tax payout 9.7 25.0 25.0 25.0

Liquidity ratios



Leverage ratios

Net debt / equity 0.1 (0.0) (0.1) (0.1)

Net debt / op. profit 0.8 (0.3) (1.0) (1.7)

Du‐pont analysis Y/e 31 Mar (Rs m) FY12 FY13E FY14E FY15E

Tax burden (x) 0.90 0.75 0.75 0.75


EBIT margin (x) 1.32 0.96 0.90 0.89

Asset turnover (x) 0.14 0.13 0.13 0.14


RoE (%) 21.2 10.7 10.3 10.4

Sector: Financials


Sensex: 19,581

52 Week h/l (Rs): 706 / 419


6m Avg vol (‘000Nos): 2,564

Bloomberg code: HDFCB IN

BSE code: 500180

NSE code: HDFCBANK

FV (Rs): 2


Company rating grid

Low High

1 2 3 4 5

Earnings Growth

Cash flow

B/S Strength

Valuation appeal

Risk

Share price trend

70

90

110

130

150

170


HDFC Bank Sensex


‐

20

40

60

80

100



%


CMP: Rs685

Upside: 24.1%

Research Analyst: Rajiv Mehta


HDFC Bank

At top of the game in retail banking; robust quality corporate book HDFC Bank is unarguably the best bank in the country. Driven by ingenious strategy and exemplary execution, the bank continues to grow robustly on increasing base simultaneously preserving asset quality and generating superior profitability. Bank’s retail loan franchise contributing 53% of overall advances is the second largest in industry and the most diversified comprising 11‐12 products (none contributing >25%). In each product, bank is strongly positioned with significant market share. The corporate portfolio is largely working capital exposure to well‐known companies and the bank is least exposed to chunky infra/capex loans. Sturdy loan growth to continue; impressive command on margin Driven by an enviable credit profile and consistent market share gains, HDFC Bank has historically grown significantly ahead of the system. The retail book has grown nearly 2x in the past 2.5 years aided by strong demand across products, brisk mobilization of retail TDs and lower than priced‐in delinquencies. A wide bouquet of products lends resilience to retail segment growth as moderation in one or two products typically gets offset by robust growth in others. As exhibited in the past, HDFC Bank has a strong grip on NIMs (consistently above 4%) given its dominant market positioning in retail and corporate lending, sticky retail deposit franchise and flexibility to play with retail/corporate mix and product mix within retail segment. We expect strong loan growth to continue, supported by widened distribution (added 558 branches in FY12) and brisk traction in retail products. Margin would remain firm aided by favourable shift in loan mix and CASA improvement.

Nearly impregnable asset quality; cushion of counter-cyclical buffer Annualized slippage ratio since FY11 has been near 1%, lowest in bank’s history. Asset quality in the retail segment has been extremely resilient with actual losses materially lower than expected losses in most products. Corporate asset quality has held well due to largely working capital exposure and better quality project loans. Even if slippages were to normalize in medium term, the counter‐cyclical buffer (Rs16‐17bn on balance sheet) would lower incremental provisioning requirement. Therefore, we see RoAs sustaining above 1.6% comfortably notwithstanding substantial opex growth.

Sustained superior performance to guard premium valuation HDFC Bank’s trades at 4.1x 1‐yr rolling P/adj.BV, ~15% premium to 6‐year mean. With bank estimated to deliver 24% earnings CAGR over FY12‐15, valuation would continue to command premium both on absolute and relative basis. In our view, there is high probability of the bank outperforming equity market return over the next couple of years.

Valuation summary Y/E Tot Inc PAT Chg Adj.BV P/ABV RoA RoE Tier‐1

March (Rs mn) (Rs mn) (% yoy) (Rs) (x) (%) (%) (%)

FY12 175,405 51,671 31.6 126.0 5.4 1.7 18.7 11.6

FY13E 215,616 64,335 24.5 146.5 4.7 1.7 19.8 11.1

FY14E 261,312 78,320 21.7 171.6 4.0 1.7 20.6 10.5

FY15E 321,265 97,407 24.4 202.8 3.4 1.7 21.7 10.0


HDFC Bank

16

Key risks to our view A sharp slowdown in the consumption momentum could moderate bank’s loan growth

Onset of an adverse retail NPL cycle could affect the asset quality of the bank

Focus charts

Loan mix has shifted significantly towards retail Retail loan mix ‐ most diversified in the industry

0%

20%

40%

60%

80%

100%

Q1 FY11

Q2 FY11

Q3 FY11

Q4 FY11

Q1 FY12

Q2 FY12

Q3 FY12

Q4 FY12

Q1 FY13

Q2 FY13

Corporate Retail

7%

3%

13%

7%

1%

17%13%

2%

13%

24%Auto Loans

CV/CE

Two Wheelers

Personal Loans

Business Banking

LAS

Credit Cards

Home Loans

Gold

Others


NIM consistently above 4% mark Persistent improvement in asset quality

3.5

3.7

3.9

4.1

4.3

4.5

Q3 FY10

Q4 FY10

Q1 FY11

Q2 FY11

Q3 FY11

Q4 FY11

Q1 FY12

Q2 FY12

Q3 FY12

Q4 FY12

Q1 FY13

Q2 FY13

(%)

0.0

0.4

0.8

1.2

1.6

2.0

Q3 FY10

Q4 FY10

Q1 FY11

Q2 FY11

Q3 FY11

Q4 FY11

Q1 FY12

Q2 FY12

Q3 FY12

Q4 FY12

Q1 FY13

Q2 FY13

(%)Gross NPA Net NPA


Slippages to remain exceptionally low Superior RoA delivery to continue

0.0

0.5

1.0

1.5

2.0

2.5

FY10 FY11 FY12 FY13E FY14E FY15E

(%)

1.0

1.2

1.4

1.6

1.8

2.0


(%)


HDFC Bank

17


Interest income 272,864 339,407 392,435 466,348

Interest expense (149,896) (191,029) (212,775) (243,923)

Net interest income 122,968 148,378 179,660 222,426

Non‐interest income 52,437 67,238 81,652 98,839

Total op income 175,405 215,616 261,312 321,265

Total op expenses (85,900) (106,516) (128,885) (154,662)

Op profit (pre‐prov) 89,505 109,100 132,428 166,603

Total provisions (14,367) (15,548) (18,538) (24,959)


Taxes (23,466) (29,217) (35,569) (44,237)

Net profit 51,671 64,335 78,320 97,407


Total cash & equivalents 209,377 292,068 299,477 318,203

Investments 974,829 1,091,809 1,375,679 1,747,112

Advances 1,954,200 2,364,582 2,932,082 3,723,744

Total int‐earning assets 3,138,407 3,748,459 4,607,238 5,789,059

Fixed assets 23,472 26,993 31,042 35,698

Other assets 217,216 260,660 312,792 375,350

Total assets 3,379,095 4,036,111 4,951,071 6,200,107

Net worth 299,247 350,656 411,092 486,488

Deposits 2,467,064 2,935,807 3,640,400 4,623,308

Borrowings 238,465 300,466 360,559 443,488

Total int‐bearing liabs 2,705,530 3,236,273 4,000,960 5,066,796

Non‐int‐bearing liabs 374,319 449,182 539,019 646,823

Total liabilities 3,079,848 3,685,455 4,539,978 5,713,619

Equity + Total liabilities 3,379,095 4,036,111 4,951,071 6,200,107


Growth matrix (%)

Net interest income 16.6 20.7 21.1 23.8

Total op income 17.9 22.9 21.2 22.9

Op profit (pre‐provision) 15.9 21.9 21.4 25.8

Net profit 31.6 24.5 21.7 24.4

Advances 22.2 21.0 24.0 27.0

Deposits 18.3 19.0 24.0 27.0

Total assets 21.8 19.4 22.7 25.2

Profitability Ratios (%)

NIM 4.3 4.3 4.3 4.3

Non‐int inc/Total inc 29.9 31.2 31.2 30.8

Return on Avg Equity 18.7 19.8 20.6 21.7

Return on Avg Assets 1.7 1.7 1.7 1.7

Per share ratios (Rs)

EPS 22.0 27.2 33.2 41.2

Adj.BVPS 126.0 146.5 171.6 202.8

DPS 4.3 5.2 6.5 8.0


P/E 31.1 25.1 20.6 16.6

P/Adj.BVPS 5.4 4.7 4.0 3.4

Other key ratios (%)

Credit/Deposits 79.2 80.5 80.5 80.5

Cost/Income 49.0 49.4 49.3 48.1

CASA 48.4 48.0 50.0 51.0

CAR 16.5 15.5 14.3 13.1

Tier‐I capital 11.6 11.1 10.5 10.0

Gross NPLs/Loans 1.0 1.0 1.1 1.2

Credit Cost 0.8 0.7 0.7 0.8

Net NPLs/Net loans 0.2 0.2 0.2 0.2

Tax rate 31.2 31.2 31.2 31.2

Dividend yield 0.6 0.8 1.0 1.2

Sector: Financials


Sensex: 19,581

52 Week h/l (Rs): 1,162 / 685


6m Avg vol (‘000Nos): 3,550

Bloomberg code: ICICIBC IN

BSE code: 532174

NSE code: ICICIBANK

FV (Rs): 10


Company rating grid

Low High

1 2 3 4 5

Earnings Growth

RoA Progression

B/S Strength

Valuation appeal

Risk

Share price trend

90

110

130

150

170


ICICI Bank Sensex


‐

20

40

60

80

100


Institutions Others

%


CMP: Rs1,159

Upside: 29.4%



ICICI Bank

Domestic lending to drive growth; FY12-15E loan CAGR at 19% The corporate lending environment has improved since the start of FY12 with a sharp decline in wholesale funding rates and relatively better pricing environment. Resultantly, ICICI Bank grew its corporate portfolio by robust 34% in H1 FY13. The retail growth momentum has also accelerated over the past three quarters aided by substantial disbursements of home loans and vehicle loans. The bank is looking at improving market share in both these segments. While the international book is expected to remain flat during FY13, domestic loan book is likely to grow by 20%. Over FY12‐15, we estimate ICICI Bank to witness a near system CAGR of 18‐19%.

Impressive NIM performance to continue; FY12-15E NII CAGR at 22% ICICI Bank has seen a material improvement in NIM over the past one year driven by significant asset re‐pricing and steep fall in wholesale funding rates. Margin is expected to stay comfortably above 3% in the medium term supported by CASA improvement, benign wholesale rates, favourable re‐pricing of retail TDs from FY14 and beneficial shift in loan mix towards domestic business. Based on expectation of firm NIMs, we estimate a strong NII CAGR of 22% over FY12‐15.

Asset quality to stay resilient; credit cost to remain at 75-80bps ICICI Bank’s absolute gross NPL has been flat over the past two years while substantially declining as a percentage from 5% to 3.5%. Bank’s retail gross NPL declined by 23% in aforementioned time aided by low slippages and significant upgrades/recoveries. Overall also, fresh delinquencies have been in a modest range of Rs7‐10bn (slippage ratio of 1.3‐1.6%) excluding the chunky Deccan Chronicle slippage of ~Rs5bn in Q2 FY13. Except for GTL and 3i infotech, ICICI Bank has not seen significant restructuring and the outstanding restructured book stand at marginal 1.6% of advances. Currently, its share in CDR referrals is negligible. Bank has been providing substantially against fresh NPLs maintaining PCR at 78‐80% and net NPLs at 0.6‐0.8%. Management continues to guide full‐year credit cost at 75bps (73bps in H1 FY13) implying stable asset quality in the near term. Longer term credit cost is estimated to be in the range of 75‐80bps even if delinquency ratio were to inch up.

Core RoA/RoE improving; structural re-rating impending ICICI Bank’s core RoA (excluding subsidiary dividends) has seen structural improvement of 15‐20bps. Notwithstanding weakness in fee income growth and some stress on asset quality, we expect core RoA to remain above 1.5% and RoE to impove on the back of increasing leverage. Amid stabilizing macro conditions, continuance of healthy asset quality performance would dispel exaggerated fears around the bank and drive a steep valuation re‐rating.

Valuation summary Y/E Tot Inc PAT Chg Adj.BV P/ABV RoA RoE Tier‐1


FY12 182,369 64,652 25.5 507.9 2.3 1.5 11.2 12.7

FY13E 220,062 78,591 21.6 552.7 2.1 1.5 12.4 12.6

FY14E 256,125 91,118 15.9 605.8 1.9 1.5 13.2 11.9

FY15E 306,367 110,934 21.7 669.8 1.7 1.6 14.5 11.2


ICICI Bank

19

Key risks to our view Persistent weakness in corporate loan demand could hamper loan and fee income growth

Increase in wholesale rates would impair projected margin trajectory

A sharp deterioration in asset quality would impact earnings growth/projected RoAs Focus charts

Robust earnings growth in past eight quarters Structural improvement in NIM

0

10

20

30

40

50

Q1 FY11

Q2 FY11

Q3 FY11

Q4 FY11

Q1 FY12

Q2 FY12

Q3 FY12

Q4 FY12

Q1 FY13

Q2 FY13

(%)

1.5

1.9

2.3

2.7

3.1

Q1 FY11

Q2 FY11

Q3 FY11

Q4 FY11

Q1 FY12

Q2 FY12

Q3 FY12

Q4 FY12

Q1 FY13

Q2 FY13

(%)


Benign slippages driving asset quality improvement Net NPL/Networth ratio has consistently declined

90

93

96

99

102

105

Q1 FY11

Q2 FY11

Q3 FY11

Q4 FY11

Q1 FY12

Q2 FY12

Q3 FY12

Q4 FY12

Q1 FY13

Q2 FY13

(Rs bn)

3.0

3.5

4.0

4.5

5.0

5.5

Gross NPA GNPL%

(

2

4

6

8

10

Q3 FY10

Q4 FY10

Q1 FY11

Q2 FY11

Q3 FY11

Q4 FY11

Q1 FY12

Q2 FY12

Q3 FY12

Q4 FY12

Q1 FY13

Q2 FY13

(%)


Delinquencies unlikely to surprise negatively Improving trend in RoA/RoE to continue

0.0

0.7

1.4

2.1

2.8

3.5


(%)

‐

50

100

150

200

250(bps)

Slippages Credit Cost

1.0

1.2

1.3

1.5

1.6

1.8


(%)

6.0

8.0

10.0

12.0

14.0

16.0(%)

RoA RoE


ICICI Bank

20

Financials Income statement Y/e 31 Mar (Rs mn) FY12 FY13E FY14E FY15E

Interest income 335,427 403,372 442,838 497,016




Total op income 182,369 220,062 256,125 306,367





Taxes (23,382) (29,068) (33,701) (41,031)

Net profit 66,419 78,591 91,118 110,934

Balance sheet Y/e 31 Mar (Rs mn) FY12 FY13E FY14E FY15E

Total cash & equi 362,293 331,114 383,983 434,810

Investments 1,595,600 1,866,853 2,193,552 2,621,294

Advances 2,537,277 2,943,241 3,487,740 4,237,605

Int‐earn assets 4,495,170 5,141,208 6,065,276 7,293,708

Fixed assets 46,147 53,069 61,029 70,184

Other assets 195,154 218,572 240,430 264,473

Total assets 4,736,471 5,412,849 6,366,734 7,628,365

Net worth 604,052 659,273 724,447 802,951

Deposits 2,555,000 3,014,899 3,617,879 4,395,723

Borrowings 1,401,649 1,541,814 1,803,922 2,182,746

Total int‐bear liab 3,956,649 4,556,713 5,421,802 6,578,469

Non‐int‐bearing liab 175,770 196,862 220,486 246,944

Total liabilities 4,132,418 4,753,576 5,642,287 6,825,413

Equity + Total liab 4,736,471 5,412,849 6,366,734 7,628,365


Growth matrix (%)


Total op income 16.4 20.7 16.4 19.6

Op profit (pre‐prov) 14.8 23.4 16.7 21.5

Net profit 25.5 21.6 15.9 21.7

Advances 17.3 16.0 18.5 21.5

Deposits 13.3 18.0 20.0 21.5

Total assets 16.6 14.3 17.6 19.8


NIM 2.6 2.9 2.9 2.9





EPS 56.1 68.2 79.0 96.2

Adj.BVPS 507.9 552.7 605.8 669.8

DPS 16.0 18.0 20.0 25.0


P/E 20.6 17.0 14.7 12.0

P/Adj.BVPS 2.3 2.1 1.9 1.7


Credit/Deposits 99.3 97.6 96.4 96.4

Cost/Income 43.0 41.7 41.6 40.7

CASA 43.5 43.0 44.5 46.0

CAR 18.5 17.9 16.6 15.1

Tier‐I capital 12.7 12.6 11.9 11.2


Credit Cost 0.4 0.8 0.8 0.8


Tax rate 26.6 27.0 27.0 27.0


Sector: FMCG


Sensex: 19,581

52 Week h/l (Rs): 307 / 197


6m Avg vol (‘000Nos): 5,996

Bloomberg code: ITC IB

BSE code: 500875

NSE code: ITC

FV (Re): 1


Company rating grid

Low High

1 2 3 4 5

Earnings Growth

Cash flow

B/S Strength

Valuation appeal

Risk

Share price trend

50

100

150

200


ITC Sensex


-

20

40

60

80

100

Dec-11 M ar-12 Jun-12 Sep-12



CMP: Rs287

Upside: 23.3%

Research Analyst: Vanmala Nagwekar

[email protected]

ITC

Strong resilience in cigarette volumes Despite heavy tax burden and regulatory restrictions, ITC’s core cigarette business continues to display resilience with stable earnings growth and flat volume growth. In nine of the past ten years, ITC has registered EBIT growth in the range of 15‐20% p.a. despite steep excise and tax increases. ITC’s strong pricing power helps it take price hikes without loosing market share. In years of steep tax increases like FY08, FY09 and FY11, ITC focused on EBIT growth while witnessing a decline in volumes. This stability in cigarette EBIT growth is expected to continue driving consistent earnings growth for ITC. We expect ITC to witness 16.2% and 18.4% CAGR in revenues and net profit respectively over FY12‐14. Entry into the 64mm cigarette segment The new slab of lower excise duty for cigarettes below 65mm in length has provided ITC an opportunity to re‐enter this segment. ITC had exited the Rs2‐2.5/stick price point post the excise duty increase in FY11. The government has introduced a new slab of <65mm cigarettes with a lower excise rate of Rs0.66/stick (ITC was present in 69mm segment). We expect re‐entry in this segment with a 64mm offering at Rs2‐2.5/stick price point to help ITC improve its cigarette volume growth. Other-FMCG segment to break-even in current fiscal With improving profitability in the foods segment (60%+ of FMCG business) driven by higher margins in biscuits and staples segment, the other‐FMCG segment is emerging stronger. Personal care products are also gaining significant market share in key categories. ITC is investing heavily in brand building and plans to enter new categories (dairy, chocolates etc), which will further drive growth. The other‐FMCG division continues to record 20%+ revenue growth and is expected to break even at EBIT level in Q4 FY13 (78% yoy decline in loss at ~Rs692mn in H1 FY13). Dominance to continue… so would premium valuation ITC remains one of our top picks in the sector given the strong resilience in its core cigarette business. We believe with the ban on gutka and paan masala by almost thirteen states, some demand will shift from these tobacco products to cigarettes, which will partly help ITC improve cigarette volume growth. We see no major risks from plain packaging norms as India is primarily a single stick / loose cigarette market. ITC is gaining traction in non‐cigarette businesses as well, making it a well diversified growth company. Valuation summary Y/E Sales PAT EPS Change P/E EV/EBIDTA D/E RoE


FY12 247,984 61,624 7.9 23.6 36.4 26.1 0.0 35.5

FY13E 287,827 72,901 9.3 18.3 30.7 22.0 0.0 36.6

FY14E 334,906 86,344 11.0 18.4 26.0 18.5 0.0 38.5

FY15E 390,688 102,572 13.1 18.8 21.8 15.6 0.0 40.5


ITC

22

Key risks Disruptive change in cigarette taxation structure could impact volumes and margins adversely. Significant decline in cigarette volumes on the back of price hikes could dent profitability and valuations. Delay in FMCG breakeven or rise in losses due to gestation for new ventures. Focus charts

Trend in cigarette revenues & EBIT margins Strong resilience in cigarette volumes

30,000

35,000

40,000

45,000

50,000

55,000

60,000

65,000

Q1 FY10

Q2 FY10

Q3 FY10

Q4 FY10

Q1 FY11

Q2 FY11

Q3 FY11

Q4 FY11

Q1 FY12

Q2 FY12

Q3 FY12

Q4 FY12

Q1 FY13

Q2 FY13

(Rs mn)

25.0

27.5

30.0

32.5

35.0(%)

Cigarette revenues EBIT Margins

(4)

(2)

0

2

4

6

8

10

Q1 FY10

Q2 FY10

Q3 FY10

Q4 FY10

Q1 FY11

Q2 FY11

Q3 FY11

Q4 FY11

Q1 FY12

Q2 FY12

Q3 FY12

Q4 FY12

Q1 FY13

Q2 FY13

(%)


Rising Other‐FMCG revenues Losses reduce… likely to break‐even in Q4 FY14E

5,000

8,000

11,000

14,000

17,000

20,000

Q1 FY10

Q2 FY10

Q3 FY10

Q4 FY10

Q1 FY11

Q2 FY11

Q3 FY11

Q4 FY11

Q1 FY12

Q2 FY12

Q3 FY12

Q4 FY12

Q1 FY13

Q2 FY13

(Rs mn)

5

10

15

20

25

30

35(yoy %)

(1,100)

(900)

(700)

(500)

(300)

(100)

Q1 FY10

Q2 FY10

Q3 FY10

Q4 FY10

Q1 FY11

Q2 FY11

Q3 FY11

Q4 FY11

Q1 FY12

Q2 FY12

Q3 FY12

Q4 FY12

Q1 FY13

Q2 FY13

(Rs mn)


Segment wise revenue mix Segment wise EBIT mix

Agri

15%

Cigarette

57%

Hotels

3%

FMCG

14%

Paper

11%

Hotels

3%Paper

11%

Cigarette

79%

Agri

7%


ITC

23


Revenue 247,984 287,827 334,906 390,688


Depreciation (6,985) (7,550) (8,315) (9,080)

Interest expense (779) (579) (579) (579)

Other income 12,007 14,102 16,052 18,752


Taxes (27,352) (33,524) (39,706) (47,168)

Adj. profit 61,624 72,901 86,344 102,572


Equity capital 7,818 7,818 7,818 7,818

Reserves 180,101 203,034 230,326 260,219

Net worth 187,919 210,853 238,145 268,037

Debt 791 791 791 791

Deferred tax liab (net) 8,727 8,727 8,727 8,727


Fixed assets 113,759 126,210 142,895 158,815

Investments 63,166 64,533 64,533 64,533

Net working capital (7,678) (3,822) (1,052) 1,209

Inventories 56,378 70,971 82,580 96,334

Sundry debtors 9,860 11,434 13,304 15,520

Other current assets 18,311 22,311 24,311 27,811


Other current liab. (77,979) (91,979) (101,979) (115,979)

Cash 28,189 33,451 41,287 52,998

Total assets 197,437 220,371 247,663 277,555



Depreciation 6,985 7,550 8,315 9,080

Tax paid (27,352) (33,524) (39,706) (47,168)

Working capital ∆ 1,350 (3,855) (2,770) (2,261)



Free cash flow 46,000 56,596 66,889 84,391

Equity raised 7,653 ‐ ‐ 0

Investments (7,620) (1,367) ‐ ‐

Debt financing/disposal (94) ‐ ‐ ‐

Dividends paid (40,890) (49,967) (59,052) (72,680)

Other items 709 ‐ ‐ ‐

Net ∆ in cash 5,757 5,261 7,836 11,711


Growth matrix (%)

Revenue growth 17.2 16.1 16.4 16.7

Op profit growth 19.0 18.6 18.4 18.3

EBIT growth 22.3 19.2 18.3 18.7



OPM 34.2 34.9 35.5 36.0

EBIT margin 36.2 37.2 37.8 38.5


RoCE 49.1 51.2 54.1 57.2

RoNW 35.5 36.6 38.5 40.5

RoA 22.7 23.6 24.7 26.1

Per share ratios

EPS 7.9 9.3 11.0 13.1


Cash EPS 8.8 10.3 12.1 14.3



P/E 36.4 30.7 26.0 21.8

P/CEPS 32.7 27.9 23.7 20.1

P/B 11.9 10.6 9.4 8.4

EV/EBIDTA 26.1 22.0 18.5 15.6

Payout (%)


Tax payout 30.7 31.5 31.5 31.5

Liquidity ratios




Leverage ratios


Net debt / equity (0.15) (0.15) (0.17) (0.19)



Tax burden (x) 0.69 0.69 0.69 0.69


EBIT margin (x) 0.36 0.37 0.38 0.38

Asset turnover (x) 0.91 0.93 0.96 1.00


RoE (%) 35.5 36.6 38.5 40.5

Sector: Financials


Sensex: 19,581

52 Week h/l (Rs): 299 / 214


6m Avg vol (‘000Nos): 2,531

Bloomberg code: LICHF IN

BSE code: 500253

NSE code: LICHSGFIN

FV (Rs): 2

Price as on d Jan 01, 2013

Company rating grid

Low High

1 2 3 4 5

Earnings Growth

Cash flow

B/S Strength

Valuation appeal

Risk

Share price trend

90

100

110

120

130

140


LIC Housing Fin Sensex


‐

20

40

60

80

100



%


CMP: Rs297

Upside: 31.3%



LIC Housing Finance Ltd

Secular growth to continue for leading housing financier Driven by macro drivers of rising affordability and increasing urbanization and indigenous advantages of wide distribution, superior service quality, product improvisation and competitive pricing, LIC Housing Finance (LICHF) has witnessed an impressive 31.6% loan CAGR over FY09‐12. It is one of the leading housing finance companies currently with outstanding book at Rs691bn and market share of ~10%. Individual loan portfolio comprises 96% of the book and has witnessed robust 33.4% CAGR over FY09‐12. The residual 4% book is loans to project developers having shorter maturities but carrying significantly higher rates. Strong loan growth would likely continue underpinned by persistent traction in individual home loans and revival in project loan disbursals. NIM to witness cyclical recovery over medium term LICHF’s NIM has declined by 135bps over the past six quarters and stood at a multi‐quarter low of 2.1% in Q2 FY13. Margin compression was driven by steep increase in funding cost, partial inertia in loan yield (a large portion of disbursals over FY10‐12 came from products having fixed rate in initial years) and significant decline in contribution of project loans. We believe NIM is near its cyclical bottom and is set to improve in ensuing quarters aided by upward re‐pricing of Rs100‐120bn Fix‐o‐Floaty loans (by at least 200bps), decline in funding cost and increase in the share of project loans. Recent capital raising (Rs8.1bn) from parent and planned QIP (~Rs12bn) would also support margin. Asset quality intact; RoA delivery to improve LICHF enjoys superior asset quality with Gross NPA ratio at 0.6% at end‐Q2 FY13. In the individual loan segment, granularity in loan book (average ticket size of Rs1.5‐1.6mn), substantial exposure to salaried class/end‐user segment, lower average LTV (50‐60%) and stringent credit assessment underscore lower delinquency rates. Even in the developer portfolio, gross NPAs of LICHF are lower than the banking industry. Based on our presumption of brisk loan growth, material improvement in margin and stable operating and credit costs, we believe that RoA delivery would start improving from H2 FY13. Valuation at tipping point; stock set for substantial upside Aided by margin recovery, LICHF would revert back to high earnings growth trajectory over FY13‐15 (estimated 30% CAGR). This along with improving return ratios should drive a structural valuation re‐rating over the medium term. Further, the stock is currently trading at attractive discount (40‐45% on FY14 Adj.BV) to its larger peer HDFC. Valuation summary Y/E Tot Inc PAT Chg Adj.BV P/ABV RoA RoE Tier‐1


FY12 16,240 9,142 (6.2) 110.8 2.7 1.6 18.6 11.0

FY13E 18,770 10,594 15.9 125.9 2.4 1.6 17.3 10.3

FY14E 24,066 13,861 30.8 146.7 2.0 1.7 19.6 9.8

FY15E 30,378 17,961 29.6 174.2 1.7 1.8 21.5 9.5


s


25

Key risks to our view Intensified competition in the home loan market would affect growth and profitability

A slower‐than‐anticipated decline in interest rates would elongate LICHF’s margin expansion

Focus charts

Loan growth remains strong at 20‐25% yoy Robust disbursements of individual home loans

10

15

20

25

30

35

40

Q3FY10

Q4FY10

Q1FY11

Q2FY11

Q3FY11

Q4FY11

Q1FY12

Q2FY12

Q3FY12

Q4FY12

Q1FY13

Q2FY13

(%)

0%

20%

40%

60%

80%

100%

Q3FY10

Q4FY10

Q1FY11

Q2FY11

Q3FY11

Q4FY11

Q1FY12

Q2FY12

Q3FY12

Q4FY12

Q1FY13

Q2FY13

Individual Others


NIM impacted by ALM issues, but set to recover Gross NPA % ‐ Assets quality has been intact

0.0

0.7

1.4

2.1

2.8

3.5

Q3FY10

Q4FY10

Q1FY11

Q2FY11

Q3FY11

Q4FY11

Q1FY12

Q2FY12

Q3FY12

Q4FY12

Q1FY13

Q2FY13

(%)

0.2

0.4

0.6

0.8

1.0

1.2

Q4FY10

Q1FY11

Q2FY11

Q3FY11

Q4FY11

Q1FY12

Q2FY12

Q3FY12

Q4FY12

Q1FY13

Q2FY13

(%)


Gradual recovery in RoA expected Earnings growth to bounce back in FY14/15

0.9

1.2

1.5

1.8

2.1

2.4


(%)

‐10.0

0.0

10.0

20.0

30.0

40.0

50.0


(%)



26


Interest income 59,827 74,165 89,753 107,053




Total op income 16,240 18,770 24,066 30,378





Taxes (3,167) (3,722) (4,870) (6,311)

Net profit 9,142 10,594 13,861 17,961

Balance sheet Y/e 31 Mar (Rs m) FY11 FY12 FY13E FY14E

Investments 14,034 14,736 15,472 16,246

Advances 630,802 769,578 946,581 1,173,761

Net current assets (27,715) (40,992) (51,685) (64,958)

Fixed assets 626 720 828 952

Total assets 617,747 744,042 911,197 1,126,001

Net worth 56,821 65,303 76,348 90,789

Secured loans 503,688 609,462 749,639 929,552

Unsecured loans 57,253 69,276 85,210 105,660

Total int‐bearing liabs 560,941 678,739 834,848 1,035,212

Equity + Total liabilities 617,762 744,042 911,197 1,126,001


Growth matrix (%)


Total op income (8.3) 15.6 28.2 26.2

Op profit (pre‐provision) (10.8) 15.3 30.5 27.9

Net profit (6.2) 15.9 30.8 29.6

Loans 23.5 22.0 23.0 24.0

Borrowings 24.2 21.0 23.0 24.0

Total assets 25.2 20.4 22.5 23.6


NIM 2.4 2.3 2.4 2.5





EPS 18.1 21.0 27.5 35.6

Adj.BVPS 110.8 125.9 146.7 174.2

DPS 3.3 3.6 4.8 6.0


P/E 16.4 14.1 10.8 8.3

P/Adj.BVPS 2.7 2.4 2.0 1.7


Loans/Borrowings 112.5 113.4 113.4 113.4

Cost/Income 14.6 14.8 13.3 12.1

CAR 16.7 14.8 13.5 12.5

Tier‐I capital 11.0 10.3 9.8 9.5


Total prov/Avg loans 0.3 0.2 0.3 0.2


Tax rate 25.7 26.0 26.0 26.0


Sector: Oil & Gas


Sensex: 19,581

52 Week h/l (Rs): 180 / 122


6m Avg vol (‘000Nos): 1,301

Bloomberg code: PLNG IB

BSE code: 532522

NSE code: PETRONET

FV (Rs): 10


Company rating grid

Low High

1 2 3 4 5

Earnings Growth

Cash Flow

B/S Strength

Valuation appeal

Risk

Share price trend

75

105

135

Jan‐12 May‐12 Sep‐12 Jan‐13

Petronet Sensex


‐

20

40

60

80

100




CMP: Rs158

Upside: 31.6%

Research Analyst: Prayesh Jain Naman Jain

[email protected]

Petronet LNG

Domestic LNG demand to remain strong India has been a gas starved country for long. The situation has only worsened with 1) declining production at RIL’s KG‐D6 field, 2) natural decline at ONGC’s high profile fields and 3) robust increase in natural gas demand. In such a scenario, LNG imports have partly met the supply deficit and Petronet LNG, country’s largest importer has been the biggest beneficiary of this. Demand for LNG is expected to remain strong in the country given 1) shortage of power supply, 2) our expectations of a fall in LNG prices on the back of rising global supply and weakening Japanese demand and 3) muted ramp up expected in domestic gas production.

Higher domestic gas prices benefit LNG demand As per media reports, Rangarajan Committee has recommended to raise the gas prices to US$8/mmbtu. This, if implemented, would improve the relative attractiveness of LNG as the gap between domestic price and LNG price would reduce by ~50% attracting demand from sectors using APM gas.

Petronet expanding capacity from 10mtpa to 25mtpa by 2017E To leverage on the rising demand for LNG, Petronet has embarked on an expansion program whereby 1) start of Kochi terminal with a capacity of 5mtpa in FY14, 2) expansion capacity at Dahej terminal in two phases a) marine facilities by end of FY14 and b) increase in regasification and storage capacities by H2 FY16, 3) new terminal at Gangavaram by FY17. Eventually, Petronet will have a capacity of 25mtpa by FY17E vis‐à‐vis 10mtpa currently.

Robust business model Amidst profound business prospects, Petronet has evolved a robust business model wherein it passes any fluctuations in currency and LNG to its customers, thereby protecting its earnings in a gyrating global LNG market. Furthermore, with substantial volumes being locked in through long term contracts with suppliers and consumers, revenue visibility is robust. On the customer side, it has offtake agreements with GAIL, IOC and BPCL. It charges a fixed re‐gasification margin (which rise 5% per annum) on the volumes handled and thereby operates in an annuity like business model.

Strong earnings growth FY15E onwards With complete ramp‐up in Kochi facility in FY15 along with higher operational capacity at Dahej, FY15E earnings are expected to jump 29.4% (following a flattish FY14). On FY15E EPS of Rs19.8, the stock trades at a P/E multiple of 8x, which we find attractive given robust earnings growth, healthy balance sheet and 20%+ return ratios.



FY12 226,959 10,575 14.1 70.6 11.3 7.6 0.9 34.1

FY13E 291,360 11,735 15.6 11.0 10.2 7.0 0.7 29.2

FY14E 361,373 11,469 15.3 (2.3) 10.4 6.0 0.5 22.9

FY15E 479,148 14,845 19.8 29.4 8.0 5.0 0.4 24.1


Petronet LNG

28

Key risks Regulations over marketing margins could dent profitability

Incapability of increasing re‐gas tariffs at Dahej will dent earning estimates for the company

Higher than expected domestic gas production can negatively impact demand for LNG Focus charts

Domestic natural gas demand to far overshoot domestic gas supplies

0

100

200

300

400

500

600

FY13E FY14E FY15E FY16E FY17E FY20E FY30E

Estimated demand Domestic supply

mmscmd


US changing from large importer to exporter of LNG Petronet capacity expansion trend

‐4

‐2

0

2

4

6

8

10

12

14

2009 2011 2013 2015 2017 2019 2021 2023 2025

AEO 2012

AEO 2004

bcfd

0

5

10

15

20

25

30

FY09 FY10 FY11 FY12 FY13E FY14E FY15E FY16E FY17E

Gangavaram capacity

Kochi capacity

Dahej capacity

mtpa

Source: EIA Annual energy outlook, India Infoline Research Source: Company, India Infoline Research

Petronet re‐gas charges rise 5% p.a. Attractive valuations

0

5

10

15

20

25

30

35

40

45

CY04

CY05

CY06

CY07

CY08

CY09

CY10

CY11

CY12

CY13E

CY14E

Rs/mmbtu

0

50

100

150

200

250

300

Apr‐06

Oct‐06

Apr‐07

Oct‐07

Apr‐08

Oct‐08

Apr‐09

Oct‐09

Apr‐10

Oct‐10

Apr‐11

Oct‐11

Apr‐12

Oct‐12

Apr‐13

CMP 5.1x 8.2x

11.4x 14.5x 17.6x

Rs

Source: Company, India Infoline Research Source: Bloomberg, Company, India Infoline Research

Petronet LNG

29


Revenue 226,959 291,360 361,373 479,148


Depreciation (1,842) (2,578) (4,242) (4,762)


Other income 849 1,000 1,000 1,000


Taxes (4,950) (5,780) (5,649) (7,312)

Adj. profit 10,575 11,735 11,469 14,845


Equity capital 7,500 7,500 7,500 7,500

Reserves 27,698 37,707 47,451 60,571

Net worth 35,198 45,207 54,951 68,071

Debt 30,340 30,340 27,340 30,340

Def tax liab (net) 3,630 2,692 2,692 2,692


Fixed assets 58,113 73,213 77,213 96,213

Investments 1,399 1,399 1,399 1,399

Net working cap (185) 256 529 1,934

Inventories 7,124 9,163 11,381 15,115

Sundry debtors 12,859 16,540 20,544 27,285



Other curr liab (10,257) (12,309) (14,771) (17,725)

Cash 9,841 3,372 5,842 1,557

Total assets 69,168 78,239 84,983 101,102



Depreciation 1,842 2,578 4,242 4,762

Tax paid (4,950) (5,780) (5,649) (7,312)

Working capital ∆ 386 (441) (274) (1,405)

Operating cash flow

12,803 13,872 15,436 18,202

Capex (10,902) (17,678) (8,242) (23,762)

Free cash flow 1,901 (3,806) 7,195 (5,560)

Equity raised (454) ‐ ‐ ‐

Investments 10,250 ‐ ‐ ‐

Debt raised/repaid (1,822) ‐ (3,000) 3,000

Dividends paid (1,725) (1,725) (1,725) (1,725)

Other items 150 (938) ‐ ‐

Net ∆ in cash 8,301 (6,469) 2,470 (4,285)


Growth matrix (%)

Revenue growth 72.0 28.4 24.0 32.6

Op profit growth 50.4 14.3 13.0 25.0

EBIT growth 57.3 11.8 5.5 26.5

Net profit growth 70.6 11.0 (2.3) 29.4


OPM 8.1 7.2 6.5 6.2

EBIT margin 7.6 6.6 5.6 5.4


RoCE 26.3 26.2 25.0 27.7

RoNW 34.1 29.2 22.9 24.1

RoA 12.7 11.8 10.1 11.2

Per share ratios

EPS 14.1 15.6 15.3 19.8


Cash EPS 16.6 19.1 20.9 26.1


Valuation ratios

P/E 11.3 10.2 10.4 8.0

P/CEPS 9.6 8.3 7.6 6.1

P/B 3.4 2.6 2.2 1.8

EV/EBIDTA 7.6 7.0 6.0 5.0

Payout (%)


Tax payout 31.9 33.0 33.0 33.0

Liquidity ratios




Leverage ratios

Net debt / equity 0.6 0.6 0.4 0.4

Net debt / op. profit 1.1 1.3 0.9 1.0

Du‐Pont analysis Y/e 31 Mar (Rs m) FY12 FY13E FY14E FY15E

Tax burden (x) 0.68 0.67 0.67 0.67


EBIT margin (x) 0.08 0.07 0.06 0.05

Asset turnover (x) 2.72 2.93 3.19 3.61


RoE (%) 34.1 29.2 22.9 24.1

Sector: Financials


Sensex: 19,581

52 Week h/l (Rs): 785 / 416



Bloomberg code: SHTF IN

BSE code: 511218

NSE code: SRTRANSFIN

FV (Rs): 10


Company rating grid

Low High

1 2 3 4 5

Earnings Growth

RoA Progression

B/S Strength

Valuation appeal

Risk

Share price trend

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STFC Sensex


‐

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40

60

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%


CMP: Rs754

Upside: 25.9%



Shriram Transport Finance Co

Largest CV financier with a niche business model Shriram Transport Finance Company (STFC) is the largest CV financier commanding ~25% market share in pre‐owned CV financing and 7‐8% market share in new truck financing. With 30+ years of experience and strong expertise in loan origination, used vehicle valuation and cash collection, STFC’s business model is difficult to replicate. Therefore, other organized players combined form only ~10% of the used CV financing market. STFC has pan‐india presence through a network of 502 offices, 8,200+ field officers and partnership with 500+ private financiers. Company has mainly focused on SRTOs operating on state highways ferrying essential commodities. Company’s product portfolio also includes financing of tractors, LCVs, 3Ws, passenger CVs and CEs.

Rural and Automall initiatives driving disbursement growth After being impacted by slowing economic activity and coal/iron ore mining issues, STFC’s disbursement growth has started to improve. The revival is largely attributable to company’s rural penetration drive and improving traction from Automalls. STFC is in the process of widening its rural reach by increasing the number of centres from 250 to 400 by the year end. The new low‐cost centers are generating substantial business and have added 35,000 new customers. Automall, a large transacting platform for buyers and sellers of pre‐owned CVs, currently contributes ~25% to company’s monthly disbursement volume. STFC has 10 big Automalls and 40 such smaller centres across the country. We believe that revival in economic activity, resolution of mining issues and expansion of rural and Automall initiatives would drive higher disbursements and healthy AUM growth over FY12‐15.

NIM to remain steady; NPLs to adjust higher to new norms Robust lending yields, strong credit rating and brand equity underpin STFC’s attractive NIMs in the range of 7‐9%. With nearly matching asset‐liability maturity profile, margins have moved in a narrow band. In the medium term, NIM is expected to inch up aided by loan mix shift towards used CVs and lower re‐pricing of bank loans. Given secured nature of business, ease in liquidation of asset, resilient customer segment and default‐linked incentive structure for field officers, STFC has traditionally seen moderate delinquencies across CV/rate cycles. Minning related NPLs which cropped up due to regulatory issues have been largely provided. Based on RBI’s draft guidelines on NPA recognition and standard asset provisioning, STFC’s GNPL ratio and credit cost would materially increase in the coming three years. This would however be a one‐time adjustment to comply with more stringent norms. Even after absorbing the full impact of new regulations, RoA/RoE would settle at healthy levels of 2.5‐2.7%/17‐19% in the longer term. Such return ratios should support at least the current level of valuation (2.1x 1‐yr fwd P/adj.BV).

Valuation summary Y/E Tot Inc PAT Chg Adj.BV P/ABV RoA RoE Div Yld


FY12 34,343 12,591 2.2 260.4 2.9 2.8 23.1 0.9

FY13E 38,350 13,889 10.3 311.7 2.4 2.8 21.1 0.9

FY14E 46,244 16,258 17.1 371.1 2.0 2.9 20.6 1.1

FY15E 56,225 17,399 7.0 414.8 1.8 2.5 18.6 1.2



31

Key risks to our view Elongation of CV recovery cycle and rate down cycle would impact company’s performance

NPLs could increase higher than estimated if company fails to respond effectively to new recognition norms Focus charts

AUM growth has started to improve Used CV disbursements have been robust

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32

Financials Income statement Y/e 31 Mar (Rs mn) FY12 FY13E FY14E FY15E

Interest income 56,532 65,095 77,430 93,598




Total op income 34,343 38,350 46,244 56,225





Taxes (6,235) (6,841) (8,007) (8,570)

Net profit 12,591 13,889 16,258 17,399

Balance sheet Y/e 31 Mar (Rs mn) FY12 FY13E FY14E FY15E

Total cash & equiv 53,812 45,838 45,330 46,018

Investments 39,544 14,544 23,271 30,252

Advances 220,821 313,186 390,438 484,144

Tot int‐earn assets 314,178 373,568 459,040 560,414

Net Curr Assets (25,920) (29,080) (32,622) (36,592)

Fixed assets 377 528 607 698

Other assets 2,562 2,562 2,562 2,562

Total assets 291,197 347,578 429,586 527,083

Net worth 59,923 71,975 86,000 101,036

Borrowings 231,274 275,604 343,586 426,046

Equity + Total liab 291,197 347,578 429,586 527,083


Growth matrix (%)


Total op income 8.7 11.7 20.6 21.6

Op profit (pre‐prov) 10.2 11.3 22.3 23.7

Net profit 2.2 10.3 17.1 7.0

Advances 11.2 41.8 24.7 24.0

Total assets 17.5 19.4 23.6 22.7


NIM 8.4 8.1 8.2 8.1





EPS 55.6 61.4 71.8 76.9

Adj.BVPS 260.4 311.7 371.1 414.8

DPS 6.5 7.0 8.5 9.0


P/E 13.5 12.2 10.4 9.8

P/Adj.BVPS 2.9 2.4 2.0 1.8


Loans/Borrowings 95.5 113.6 113.6 113.6

Cost/Income 22.8 23.1 22.0 20.6


Credit Cost 2.0 2.0 2.3 2.9


Tax rate 33.1 33.0 33.0 33.0


Sector: Alcoholic Beverages


Sensex: 19,581

52 Week h/l (Rs): 2,150/450


6m Avg vol (‘000Nos): 4,632

Bloomberg code: UNSP IB

BSE code: 532432

NSE code: MCDOWELL_N

FV (Rs): 10


Company rating grid

Low High

1 2 3 4 5

Earnings Growth

Cash flow

B/S Strength

Valuation appeal

Risk

Share price trend

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Dec‐11 Jun‐12 Dec‐12

UNSP Sensex


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%Promoters FIIs Others


CMP: Rs1,953

Upside: 22.9%

Research Analyst: Bhavesh Gandhi

[email protected]

United Spirits

Diageo to support premiumization efforts at UNSP United Spirits would retain its focus on premiumization of spirits portfolio and in the process is not averse to take a hit on volumes so as to improve revenue mix and margins. After the preferential allotment, Diageo to hold 27.4% stake in United Spirits and would support fine tuning and segmentation around brands in order to facilitate premiumization. However, Diageo would not directly introduce its own brands in to UNSP stable though we would have preferred Diageo using UNSP distribution strength to promote its premium brands.

Margins to climb ~150bps over FY13-15E Diageo believes additional investments are required on marketing and selling (advertising spends from current 5% of sales to probably 6‐7%) to drive premiumization strategy. This would probably keep margin expansion under check than otherwise would have been possible, given the focus on improvement of revenue mix over next few years. We model in 156bps margin expansion over FY13‐15E though eventually Diageo expects UNSP margins to reach historical levels. On an EBIDTA/case basis too, UNSP has room for margin improvement considering much smaller players like Radico Khaitan enjoy ~15% premium on EBIDTA/case as compared to that for UNSP.

Diageo deal to help pare debt in FY14; co to turn FCF +ve After the sale of treasury shares and 10% pref allotment to Diageo, UNSP is expected to garner ~Rs33bn which is to be used for debt reduction; accordingly, we expect 32% savings in FY14 interest cost that would help UNSP turn free cash flow positive in the next fiscal. Working capital days is likely to hover around 175 days and improvement in operating cycle might take about two years. Rerating potential exists over medium term; BUY UNSP stock has had a stellar run over past two months on the back of the deal with Diageo which can probably result in a 25‐30% upgrade of FY14 EPS due to savings on interest expenses. Over the next 2‐3 years, United Spirits is likely to sharpen its focus on selling of premium brands while backward integration steps taken in past 1‐2 years could probably keep raw material cost inflation under control. We expect UNSP, the largest domestic player with dominant market share, to leverage its twin bulwarks of unmatched distribution strength and high entry barriers and be the biggest beneficiary of the secular demand in spirits market. We forecast ~2.6x jump in PAT driven by margin uptick and interest cost reduction over FY13‐15; at 17.5x FY15E EV/EBIDTA, we believe potential exists for rerating in the medium term. Recommend BUY for an 18‐month target of Rs2,400. Valuation summary Y/E Sales PAT EPS Change P/E EV/EBIDTA D/E RoE


FY12 91,865 1,879 14.9 (67.0) 130.8 30.6 1.8 1.6

FY13E 103,675 3,464 27.5 84.3 71.0 24.0 1.7 7.2

FY14E 113,351 6,315 43.5 57.9 44.9 21.6 0.7 9.1

FY15E 125,678 9,009 62.0 42.7 31.5 17.7 0.5 9.7


United Spirits

34

Key risks Higher than estimated rise in ENA costs and working capital expenses could lead to margin pressures and rise in leverage and thus impact our EPS estimates adversely Focus charts

Revenue growth trend over next 3 years Margins to improve ~150bps over FY13‐15E

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UNSP to turn FCF +ve in FY14 Leverage to be in comfortable territory

(24)

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1‐yr fwd EV/EBIDTA bands 1‐yr fwd P/BV bands

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Rs Price 1.3 3.2 5.1 7.1 9.0


United Spirits

35


Revenue 91,865 103,675 113,351 125,678

Op.profit 10,603 13,671 15,299 18,537

Depreciation (1,474) (1,524) (1,574) (1,624)

Interest exp (7,773) (8,139) (5,574) (4,909)

Other income 814 895 985 1,083

PBT 2,169 4,904 9,136 13,087

Taxes (1,481) (1,569) (2,924) (4,188)

Minorities 7 130 102 110

Adj. profit 695 3,464 6,315 9,009

Extra items 1,184 ‐ ‐ ‐

Net profit 1,879 3,464 6,315 9,009


Equity capital 1,259 1,259 1,453 1,453

Reserves 45,359 48,461 87,298 95,889

Net worth 46,618 49,720 88,751 97,342

Minority int. 146 146 146 146

Debt 81,870 85,670 58,670 51,670

IPL liability 2,804 2,311 1,819 1,327


Fixed assets 21,481 20,496 19,942 19,338


Investments 2,384 2,384 2,384 2,384

Net working cap 45,997 53,877 66,397 68,478

Inventories 27,548 31,245 34,161 37,875

Sundry debtors 19,729 22,155 24,223 26,857

Cash 3,632 3,877 11,731 7,867



Other curr lia (7,177) (8,223) (8,990) (9,968)

Misc.expenditure 2,578 2,191 1,863 1,583

Total assets 131,437 137,847 149,386 150,484


PBT 2,169 4,904 9,136 13,087

Depreciation 1,474 1,524 1,574 1,624

Misc.exp w/o (2,130) 387 329 279

Def tax (asset)/lia (267) ‐ ‐ ‐

Tax paid (1,481) (1,569) (2,924) (4,188)

Working capital ∆ (6,418) (7,635) (4,666) (5,945)

Other op.items 1,191 130 102 110

Operating CF (5,461) (2,260) 3,551 4,968

Capital exp (16,616) (441) (921) (921)

Free cash flow (22,077) (2,701) 2,630 4,046

Equity raised 3,334 ‐ 33,134 ‐

Debt fin/disp 17,921 3,800 (27,000) (7,000)

IPL liability (492) (492) (492) (492)

Dividends paid (381) (362) (418) (418)

Net ∆ in cash (2,690) 245 7,854 (3,864)


Growth matrix (%)

Revenue growth 24.5 12.9 9.3 10.9

Op profit growth (7.3) 28.9 11.9 21.2

EBIT growth (10.6) 31.2 12.8 22.3

Net profit growth (67.0) 84.3 82.3 42.7


OPM 11.5 13.2 13.5 14.7

EBIT margin 10.8 12.6 13.0 14.3


RoCE 8.3 9.7 10.2 12.0

RoNW 1.6 7.2 9.1 9.7

RoA 0.5 2.2 3.7 5.0

Per share ratios

EPS 5.5 27.5 43.5 62.0


Cash EPS 17.2 39.6 54.3 73.2


Valuation ratio (x)

P/E 130.8 71.0 44.9 31.5

P/CEPS 113.3 49.3 36.0 26.7

P/B 5.3 4.9 3.2 2.9

EV/EBIDTA 30.6 24.0 21.6 17.7

Payout (%)


Tax payout 68.3 32.0 32.0 32.0

Liquidity ratios




Leverage ratios


Net debt / equity 1.7 1.6 0.5 0.4


Du‐Pont analysis Y/e 31 Mar (Rs m) FY12 FY13E FY14E FY15E

Tax burden (x) 0.32 0.71 0.69 0.69


EBIT margin (x) 0.11 0.13 0.13 0.14

Asset turnover (x) 0.65 0.65 0.66 0.69


RoE (%) 1.6 7.2 9.1 9.7

Sector: IT Services


Sensex: 19,581

52 Week h/l (Rs): 453 / 326


6m Avg vol (‘000Nos): 1,587

Bloomberg code: WPRO IB

BSE code: 507685

NSE code: WIPRO

FV (Rs): 2

Price as on Jan 01, 2013

Company rating grid

Low High

1 2 3 4 5

Earnings Growth

Cash flow

B/S Strength

Valuation appeal

Risk

Share price trend

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Wipro Sensex


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CMP: Rs397

Upside: 24.7%

Research Analyst: Aniruddha Mehta

[email protected]

Wipro Ltd

Recent performance, deal pipeline show improving trends Wipro has over past 3‐4 quarters delivered improving revenue performance with stable margin and operating metrics pick up. Though the volumes have not outperformed expectations, improving underlying business momentum is becoming visible. Decent quarterly dollar revenue guidance (1.3‐3.2% qoq) in a seasonally weak December quarter, sustained hiring and relatively positive management commentary is comforting. Ramp up in S&M spending has also resulted in improving traction on the deal pipeline, better deal wins and client satisfaction.

Diversified portfolio, strategic initiatives to help maintain momentum The strategic business restructuring at Wipro more than six quarters back has effectively led to tangible improvements in key operating metrics. Focussed client engagement through CEM structure continues to result in increased client satisfaction and client mining. For instance Top 2‐10 clients have grown at 4.5% CQGR over past four quarters versus 1.1% CQGR for the IT services business. US$100mn+ clientele has also continued its uptrend. Increased delivery automation and thrust on IP/platforms has helped turn the needle on revenue productivity (+5.5% onsite, +4.5% offshore yoy). Wipro’s diversified portfolio with balanced vertical exposure, strong foot hold in services like Infrastructure services, Analytics and focussed client engagement should hold the company in good stead.

Headroom in various margin levers to help sustain OPM Wipro’s OPM performance has remained stable in the recent past despite correction in utilisation and salary hikes. This was largely on the back of weaker rupee, cost efficiency and improved revenue productivity. We believe, as growth slowly returns, headroom in margin levers of utilization and SG&A leverage should help sustain margin (if not improve). Additionally delivery automation, higher offshoring and broadening employee pyramid should continue to support the margin.

Valuation at 12.1x FY15E provides a decent entry While the business momentum at Wipro has been tepid compared to its faster growing peers like TCS, HCLT, valuations too have remained relatively cheap (~20% discount to TCS). Though the consensus growth expectations remain modest (at best), we believe headroom for surprise exists as Wipro’s IT services growth differential with peers is expected to narrow. Also, with the impending de‐merger, valuation for the standalone IT business would gradually improve. We expect dollar revenue/rupee EPS CAGR of 8%/9% over FY13‐15E. Valuation at 12.1x FY15E earnings provides a decent entry.



FY12 371,971 56,063 22.8 4.5 17.4 12.9 0.2 21.4

FY13E 430,539 65,593 26.7 17.0 14.9 10.2 0.2 21.3

FY14E 466,464 70,214 28.6 7.0 13.9 9.1 0.2 19.7

FY15E 517,789 80,498 32.8 14.6 12.1 7.4 0.1 19.7


Wipro Ltd

37

Key Risks Significant slowdown in demand from key geographies of US and Europe

Sharp appreciation in rupee (vis‐à‐vis US$) can be a risk to our margin estimates

Adverse regulation on offshoring in key markets esp. US Focus charts

Diversified industry exposure Top 2‐10 clients growing faster than total IT services

Retail &

Transportation

Energy & Utilities

Financial services

Manufacturing &

Hitech

Global Media &

Telecom

Healthcare,

Lifesciences

‐4.0

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Q3FY11

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Q3FY12

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Q1FY13

Q2FY13

Top 2‐10 Total IT services

(%)

Source: PPAC, India Infoline Research

Utilization be a major lever when volumes expand No. of US$100mn+ clientele on an up‐trend

70

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Wipro Ltd

38


Revenue 371,971 430,539 466,464 517,789


Depreciation (10,076) (11,292) (13,379) (15,897)


Other income 12,506 13,200 14,520 15,972


Taxes (13,763) (19,653) (21,030) (24,098)

Minority, others 76 (200) (190) (179)

Adj. profit 56,063 65,593 70,214 80,498


Equity capital 4,917 4,917 4,917 4,917

Reserves 280,397 326,199 375,209 433,088

Net worth 285,314 331,116 380,126 438,005

Minority Interest 849 849 849 849

Debt 58,958 58,958 58,958 58,958

Other NC* Liab 9,290 10,753 11,650 12,932


Fixed assets 58,988 62,696 64,316 58,419


Investments 3,232 3,232 3,232 3,232

Othr NC. assets 25,530 29,550 32,015 35,538

Net WC 192,251 231,789 277,609 339,145

Inventories 10,662 12,341 13,371 14,842

Sundry debtors 80,328 92,976 100,734 111,818

Cash 119,627 147,730 186,536 238,051



Provisions (1,121) (1,298) (1,406) (1,560)

Other curr liabilities (32,858) (38,032) (41,205) (45,739)

Total assets 354,411 401,676 451,583 510,744

* NC – non current



Depreciation 10,076 11,292 13,379 15,897

Tax paid (13,763) (19,653) (21,030) (24,098)

Working capital ∆ (18,308) (11,435) (7,014) (10,021)

Other Op. items (5,428) (2,557) (1,568) (2,241)


Capex (28,845) (15,000) (15,000) (10,000)

Free cash flow 13,482 48,094 60,201 74,312

Equity raised 6,535 - - -Investments (239) ‐ ‐ ‐

Debt raised/repaid 6,156 ‐ ‐ ‐

Dividends paid (16,964) (19,791) (21,205) (22,618)

Other items 234 (200) (190) (179)

Net ∆ in cash 9,204 28,103 38,806 51,515


Growth matrix (%)

Revenue growth 19.8 15.7 8.3 11.0


EBIT growth 12.7 20.8 6.8 14.1



OPM 19.0 20.1 20.0 20.8

EBIT margin 19.7 20.5 20.2 20.8


RoCE 22.3 23.4 22.1 22.4

RoNW 21.4 21.3 19.7 19.7

RoA 14.8 15.0 14.2 14.5

Per share ratios

EPS 22.8 26.7 28.6 32.8


Cash EPS 26.9 31.3 34.0 39.2



P/E 17.4 14.9 13.9 12.1

P/B 3.4 2.9 2.6 2.2

EV/EBIDTA 12.9 10.2 9.1 7.4

Payout (%)


Tax payout 19.7 23.0 23.0 23.0

Liquidity ratios




Leverage ratios

Net debt / equity (0.2) (0.3) (0.3) (0.4)



Tax burden (x) 0.80 0.77 0.77 0.77


EBIT margin (x) 0.20 0.21 0.20 0.21

Asset turnover (x) 0.98 0.98 0.94 0.93


RoE (%) 21.4 21.3 19.7 18.9

Sector: Pharmaceuticals


Sensex: 19,581

52 Week h/l (Rs): 1,830 / 251



Bloomberg code: WPL.IN

BSE code: 532300

NSE code: WOCKPHARMA

FV (Rs): 5


Company rating grid

Low High

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Earnings Growth

Cash flow

B/S Strength

Valuation appeal

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Wockhardt Sensex


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CMP: Rs1,562

Upside: 33.8%

Research Analyst: Bhavika Thakker

[email protected]

Wockhardt

US business holds the key for future growth In the US the company has niche product portfolio consist of 60 products including two over the counter (OTC) products (Lansoprozole and Fexofinadine). The largest product is Toprol XL (US$140mn‐30% of the US revenue) followed by Bromfed, Amoxyclav, Azithromycin and Tamsulosin (~5% each of the US revenue). The company also has a strong pipeline of 32 ANDA pending for approval (includes 10 FTFs/PIVs). We expect continuous improvement in the pipeline as the company plans to file ~12‐15 products every year. We believe US business holds the key for future growth.

Domestic business to witness steady performance even after part sell-off of nutrition business Wockhardt has divested its few leading brands (Dexolac, Farex, Proteinx etc.) of nutrition business for Rs2.5bn to Danone to de‐leverage its balance sheet. We believe post sale, brands retained by the company like Bonestein, B.G.Prot etc. still have the potential to deliver growth. Wockhardt derives 25% of the revenue from domestic business. The therapies like Vitamins, Respiratory, Diabetes and Pain contribute 55% of the domestic portfolio. We believe growth would be sustained by robust prescription sales (sales force of 3,300 and 7 brands featuring in the top 300) and growth in nutrients biz.

EU Structural changes; Medium term profitability impact Wockhardt derives 27% of the revenue from EU. The company ventured into European market through various acquisitions. The company started of well in the region but generisation of ART 50 (Diacerein) and increased pricing pressure took a toll on profitability. Additionally, acquisitions cost burdened the balance sheet. Wockhardt has already taken significant restructuring initiatives and started focusing on noval and niche products (like insulin ‐biosimilars) to re‐gain profitability. We believe the company would stabilize in EU in 3‐4 years.

Turnaround in business and balance sheet to sustain further rally The company is now out of all debt traps, we believe turnaround in business and balance sheet to sustain further rally. The company had defaulted on FFCB worth US$110mn in 2009, but now, Wockhardt is out of debt trap as it has settled all its FCCB and forex derivative liabilities. Its debt to equity ratio as on Q2 FY13 stands at 0.5% compared to 5.5x in FY10. Wockhardt has also beaten the street expectations consequently for four quarter by delivering strong sales growth and margin expansion. Though stock has rallied ~5x in the last year, it still trades at deep discount to peers (12x FY15E EPS of Rs130.6). With better operating cash flows and balance sheet, Wockhardt is expected to witness a gradual valuation re‐rating henceforth. Valuation summary Y/E Sales PAT EPS Change P/E EV/EBIDTA D/E RoE


FY12 46,373 8,924 81.5 67.0 19.2 14.0 5.3 58.5

FY13E 55,741 10,490 95.9 17.6 14.8 11.6 2.4 78.7

FY14E 66,047 12,428 113.6 18.5 12.5 9.2 1.2 49.0

FY15E 75,483 14,291 130.6 15.0 12.0 7.5 0.8 36.4


Wockhardt

40

Key risks Sharp price erosion in Toprol XL and other key molecules Unexpected competition in the key drugs and delay in launches and approvals in the US Amortisation of EU assets and Unfavourable currency

Focus charts

Clearly out of debt trap Increasing contribution from the US

Year Business divestments/settlement of contingent liabilities Rsbn

2009 German business Esparma GmbH to Mova GmbH 1.2

2009 Animal healthcare division to the French veterinary care Co. 1.7

2012 Nutrition business‐(brands like Farex, Dexolac,Nusobee and Protinex) 12.8

2010 Derivatives/ Hedging contracts (9.6)

2011 Derivatives/ Hedging contracts (3.7)

2011 Derivatives/ Hedging contracts (2.4) ‐

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

FY09 FY10 FY11 FY12 FY13E FY14E FY15E

(Rs mn)

India USA Europe Rest of the World & CIS


Strong ANDA pipeline Niche product portfolio in the US

32

87

119

10

0

20

40

60

80

100

120

140

Pending Launched Total Filings FTF with Para‐

IV

5%5% 5%

9%

37%

39%Troprol XL

Bromfed

AmoxyClav

Azitomycin

Flonase

Others

Source: Company, India Infoline research

Domestic business tilted towards Acute segment Therapeutic distribution

84%

16%

Acute

Chronic

6%4%

4%

7%

24%

13%

12%10%

10%

9%

Vitamins / Minerals /

NutrientsGastro Intestinal

Respiratory

Pain / Analgesics

Anti‐infective

Anti Diabetic

Derma

Hormones

Neuro / CNS

Others Source: Company,India Infoline Research

Wockhardt

41


Revenue 46,373 55,741 66,047 75,483


Depreciation (1,225) (1,473) (1,746) (1,995)


Other income 235 259 306 361


Taxes (2,351) (2,786) (3,301) (3,796)

Extra Ordinary 5,497 0 0 0

Net profit 3,416 10,479 12,416 14,279

Adjustments & MI 5,508 11 11 11

Adj Net profit 8,924 10,490 12,428 14,291



Preference capital and others 7,614 7,614 7,614 7,614

Reserves 6,549 17,039 29,467 43,758

Net worth 14,710 25,200 37,628 51,919

Debt 29,672 34,747 29,270 29,988

Def tax liab & others 1,855 1,767 2,140 2,568


Fixed assets 11,039 13,239 15,989 18,739


CWIP 9,023 9,023 9,023 9,023

Investments 908 908 908 908

Misc & Def Tax Ass 2,080 2,501 2,963 3,386

Net working capital 1,514 2,248 3,029 4,080

Inventories 8,886 10,794 12,877 14,963

Sundry debtors 7,587 9,217 10,995 12,776

Other cur. assets 1,343 1,615 1,913 2,186


Other cur liabilities (10,893) (12,875) (15,050) (17,040)

Cash 7,000 19,122 22,452 33,666

Total assets 46,237 61,714 69,037 84,475



Depreciation 1,225 1,473 1,746 1,995

Tax paid (2,351) (2,786) (3,301) (3,796)

Working capital ∆ (2,610) (734) (781) (1,051)



Free cash flow 5,995 7,545 8,885 10,478

∆ Equity ‐ ‐ ‐ ‐

Investments (11) ‐ ‐ ‐

Debt financing/disposal (805) 4,987 (5,104) 1,147

Other items (3,008) (410) (451) (412)

Net ∆ in cash 2,171 12,122 3,330 11,214


Growth matrix (%)

Revenue growth 23.1 20.2 18.5 14.3

Op profit growth 57.2 16.0 18.5 15.6

EBIT growth 64.5 15.5 18.5 15.8



OPM 31.1 30.0 30.0 30.3

EBIT margin 28.9 27.8 27.8 28.1


RoCE 30.5 28.7 28.1 27.7

RoNW 58.5 78.7 49.0 36.4

RoA 6.7 16.7 16.0 15.5

Per share ratios

EPS 31.2 95.8 113.5 130.5


Cash EPS 42.4 109.2 129.4 148.7



P/E 19.2 14.8 12.5 12.0

P/CEPS 36.8 13.1 11.1 10.5

P/B 24.1 9.2 5.3 3.7

EV/EBIDTA 14.0 11.6 9.2 7.5

Payout (%)


Tax payout 20.9 21.0 21.0 21.0

Liquidity ratios




Leverage ratios


Net debt / equity 4.1 1.3 0.5 0.1



Tax burden (x) 0.24 0.73 0.74 0.75


EBIT margin (x) 0.29 0.28 0.28 0.28

Asset turnover (x) 0.91 0.89 0.85 0.82


RoE (%) 58.5 78.7 49.0 36.4

Recommendation parameters for fundamental reports:

Buy – Absolute return of over +10%

Market Performer – Absolute return between ‐10% to +10%

Sell – Absolute return below ‐10%

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