Please refer to important disclosures at the end of this report. Investing ‘principles’ in banks during rising interest rates Strong domestic investment and consumption demand We expect domestic interest rates to rise in the coming quarters, possibly faster than the consensus. This is because domestic investment and consumption demand is exceeding domestic financial savings at present, which is reflected in the country’s large current account deficit of about 3% of GDP. Strong investment demand has led to an increase in domestic credit growth to about 21% yoy by July 16, 2010, while deposit growth continues to lag behind at 15% yoy. Exhibit 1: Wide gap between credit growth and deposit growth Source: RBI, Angel Research Policy tightening likely to be front-ended WPI inflation is becoming increasingly broad-based, with contribution of crops to the 10.6% WPI down to 51% in June 2010 (from 70% in February 2010) and contribution of other items (having 50% weightage in the WPI index) increasing to 39%. Hence, we believe controlling inflationary expectations will be the clear priority for the RBI during FY2011, with a likelihood of far more front-ended rate hikes in this tightening cycle compared to the previous cycle that started in 2004. Accordingly, we expect further hikes in each of the policy rates, up to 125bp each on the repo and reverse repo front and 100bp on the CRR front, by the next annual policy. Domestic interest rates expected to rise faster During FY2010, out of the government borrowing of Rs4lakh-cr, 40% was facilitated through unwinding of MSS securities and OMO purchases and done in an environment of sluggish private credit demand. FY2011 started with the 3G windfall for the government, leading to range-bound G-sec yields. However, with the possibility of the government’s spending to exceed budget estimates by Rs50,000cr–60,000cr, market borrowings are estimated to remain at about Rs3.4lakh-cr, to be funded through fresh issuance of securities. Accordingly, G-sec yields could also see further upward pressures in 2HFY2011E from the current level of 7.7% to 8.00–8.25%. With private sector credit demand also being robust, over the course of the year, we expect deposit and lending rates to be on an upward trajectory. - 5.0 10.0 15.0 20.0 25.0 30.0 35.0 Jan-08 Mar-08 May-08 Jul-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 yoy deposit growth yoy credit growth (%) Market Strategy August 2010 Angel Portfolio Sector Weightage(%) Stocks Auto & Ancillaries 5.0 Maruti, JK Tyres Banking 30.0 SBI, Axis Bank, ICICI Bank, HDFC Bank FMCG 3.0 ITC Hotels 3.0 Taj GVK Infra & Cap Goods 15.0 L&T, Reliance Infra, IVRCL Infra, Jyoti Structures Media 2.0 Jagran Prakashan Metals 9.0 Hindalco, Electrosteel Castings, Godawari Power, Bhushan Steel Oil & Gas 10.0 Reliance Industries Pharma 5.0 Dishman Pharma, Aurobindo Pharma Real Estate 3.0 Anant Raj Industries Software 9.0 Infosys, TCS, Tech Mahindra, Mphasis Others 6.0 AB Nuvo, Finolex Cables Top Picks Company (Rs) CMP TP AB Nuvo 807 1,166 Axis Bank 1,297 1,688 ICICI Bank 989 1,211 Maruti Suzuki 1,226 1,356 Tech Mahindra 715 950 Anant Raj 124 178 Bhushan Steel 1,648 1,979 Dishman Pharma 209 279 IVRCL Infra 170 216 Jagran Prakashan 119 154 Electrosteel Castings 50 72 Finolex Cables 58 85 Godawari Power 228 313 JK Tyres 163 237 Taj GVK 165 240 Note: Investment period – 12 Months BSE Sensex (18,220) and Price as on August 10, 2010
Transcript
Please refer to important disclosures at the end of this report.
Investing ‘principles’ in banks during rising interest rates
Strong domestic investment and consumption demand
We expect domestic interest rates to rise in the coming quarters, possibly faster than
the consensus. This is because domestic investment and consumption demand is
exceeding domestic financial savings at present, which is reflected in the country’s
large current account deficit of about 3% of GDP. Strong investment demand has led
to an increase in domestic credit growth to about 21% yoy by July 16, 2010, while
deposit growth continues to lag behind at 15% yoy.
Exhibit 1: Wide gap between credit growth and deposit growth
Source: RBI, Angel Research
Policy tightening likely to be front-ended
WPI inflation is becoming increasingly broad-based, with contribution of crops to the
10.6% WPI down to 51% in June 2010 (from 70% in February 2010) and contribution
of other items (having 50% weightage in the WPI index) increasing to 39%. Hence, we
believe controlling inflationary expectations will be the clear priority for the RBI during
FY2011, with a likelihood of far more front-ended rate hikes in this tightening cycle
compared to the previous cycle that started in 2004. Accordingly, we expect further
hikes in each of the policy rates, up to 125bp each on the repo and reverse repo front
and 100bp on the CRR front, by the next annual policy.
Domestic interest rates expected to rise faster
During FY2010, out of the government borrowing of Rs4lakh-cr, 40% was facilitated
through unwinding of MSS securities and OMO purchases and done in an
environment of sluggish private credit demand. FY2011 started with the 3G windfall
for the government, leading to range-bound G-sec yields. However, with the possibility
of the government’s spending to exceed budget estimates by Rs50,000cr–60,000cr,
market borrowings are estimated to remain at about Rs3.4lakh-cr, to be funded
through fresh issuance of securities. Accordingly, G-sec yields could also see further
upward pressures in 2HFY2011E from the current level of 7.7% to 8.00–8.25%. With
private sector credit demand also being robust, over the course of the year, we expect
deposit and lending rates to be on an upward trajectory.
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Market StrategyAugust 2010
Angel Portfolio Sector Weightage(%) Stocks
Auto & Ancillaries
5.0 Maruti, JK Tyres
Banking 30.0 SBI, Axis Bank, ICICI Bank, HDFC Bank
Source: Company, Angel Research; Note: Prices as on August 09, 2010
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August 2010 5
Market Strategy
New banking licenses: L&T Finance, LIC Housing, IFCI, IDFC appear most eligible
Limited number of new licenses to be awarded
The Reserve bank of India (RBI) released a discussion paper on the granting of new banking licenses on August 11, 2010. The discussion papers collates the various viewpoints, international practices and pros and cons of allowing foreign banks, industrial houses and NBFCs to set up banks, as well as the appropriate minimum capital requirements and ceilings on promoter shareholding. Evidently, the government and the RBI find a reasonable case for allowing more private banks to be set up to increase competition in the sector and, at the same time, the RBI has made it clear that only a limited number of new licenses will be given.
L&T Finance, LIC Housing, IFCI and IDFC appear most eligible; move unlikely to be disruptive for existing private banks
The RBI has listed safeguards to address the downside risks of industrial and business houses promoting banks. We believe potentially the main criterion could be ‘point (v)’ i.e., industrial and business houses promoting banks must have diversified ownership and no connection with real estate. In our view, 3–4 licenses may, at the most, be awarded and if we apply the above criterion. We believe L&T Finance, LIC/LIC Housing, IFCI and IDFC could be the most likely companies to meet the potential eligibility criteria (although, at this juncture, IDFC has indicated that it may not be interested in converting into a bank). In our view, while this will increase competition in the sector, it is unlikely to be disruptive for existing private banks due to the inherently long gestation period required to build up a large, granular balance sheet, especially a retail liability franchise.
Minimum capital requirements and ceilings on promoter shareholding unlikely to be onerous
In our view, the most likely minimum capital requirement that the RBI might set would be Rs1,000cr (option B). Considering that only 3–4 licenses may be awarded, we believe, even for this higher limit (as against Rs300cr at present), there would be more than 3–4 candidates who would be quite comfortable and capable of infusing such an amount of equity.
As regards the ceilings on promoter shareholding, we believe the RBI would most likely prefer option A, i.e., minimum 40% promoter holding with a five-year lock-in period and additional five years to bring it down to 10% through successive equity dilutions. In our view, most candidates would not be deterred by this criterion, as seen in the past.
With virtually every industrial house expressing interest, who may actually become eligible?
Based purely on minimum capital requirements and ceilings on promoter shareholding, a large number of industrial houses would still likely be interested in applying for a banking license. While the discussion paper addresses the issue of awarding licenses to industrial houses, we believe at this point it comprises a collation of several viewpoints and international practices and cannot necessarily be construed as an indication of the RBI’s willingness to allow various industrial houses to set up banks.
Fiduciary nature of banks: While industrial houses have been allowed to set up life insurance companies, the RBI observes that banks are a different case due to their fiduciary nature. While mutual funds and life insurance companies invest according to their customers’ mandates, depositors do not have a say in a bank’s credit allocation decisions.
August 2010 6
Market Strategy
Bad experiences in the past: The RBI cites several instances when letting industrial houses set up banks led to bad experiences, in countries like Japan, South Korea and India (prior to bank nationalisation). Infact, even in the last 15 years, in case of the 12 new licenses awarded, the RBI acknowledges that the best experience has been with institutionally promoted private banks.
International practices – Few actual examples of industrial house-promoted banks: While the RBI cites several major countries that do not explicitly disallow industrial houses, it finds that there are only few examples of actual banks in these countries promoted by industrial houses. The fact that the US does not allow industrial houses to set up banks is also likely to get due weightage.
Onerous challenges of supervising credit flow to related entities like suppliers and customers: As regards to controlling the flow of credit from such a bank to promoter-linked entities, notwithstanding obvious restrictions on direct lending to promoter group companies, the RBI mentions the onerous supervisory challenges of monitoring and controlling any potential flow of credit to suppliers and customers, among others.
The most important criterion – Requiring diversified shareholding in promoting company: In our view, the RBI may be most comfortable with large, financially strong as well as highly reputed and trusted companies, preferably with existing experience in financial services, which are professionally managed, with diversified shareholding i.e., promoters not having substantial control.
At the same time, if the objective of granting licenses is to increase competition in the sector, provide better products and services to customers at cheaper costs and increase financial inclusion, then we believe it would be important to award licenses to large, financially strong entities with a strong brand that can attract capital and quality human resources and give genuine, strong competition to existing players, without being disruptive. Therefore, the existing large listed companies/institutions cannot be simply excluded in the eligibility criteria, even if limited licenses are to be awarded.
The RBI has listed safeguards to address the downside risks of industrial and business houses promoting banks. We believe potentially the main criterion could be ‘point (v)’ i.e., industrial and business houses promoting banks must have diversified ownership and no connection with real estate.
If we apply this criterion, then L&T Finance, LIC, IFCI and IDFC could emerge as most likely candidates, where resulting banks would be management-controlled, with diversified shareholding and strong parentage. Virtually, all of the other entities that, as per media reports, have expressed interest in applying for a license would potentially not make the cut, as promoter shareholding in the group companies exceed 24%. (At this juncture, IDFC has indicated that it may not be interested in converting into a bank.) In our view, while this will increase competition in the sector, it is unlikely to be disruptive for existing private banks due to the inherently long gestation period required to build up a large, granular balance sheet, especially a retail liability franchise.
However, this is merely a discussion paper and the actual guidelines may have a different shape altogether. Hence, we have not factored into our investment recommendations any upside from the grant of banking licenses to any listed companies, nor the impact of this from the competition standpoint on any of the banks under our coverage.
August 2010 7
Market Strategy
New Investment Ideas
Aditya Birla Nuvo (CMP: Rs.807/ TP: Rs.1,166/ Upside: 44%)
Aditya Birla Nuvo (ABNL), a diversified business conglomerate, emerged from the three-way merger of Indian Rayon, Birla Global Finance and Indo Gulf in 2005.
ABNL is the holding company of several subsidiaries and has business interests in insurance, asset management, financial services, garments, carbon black, insulators, rayon, fertilisers, IT and ITeS businesses. The company also holds ~25% stake in Idea Cellular.
ABNL has started delivering improved performance in its manufacturing businesses. The BPO and garments businesses have been profitable since the last two quarters. The insurance business and the AMC are also well geared to benefit from the significant market opportunity lying ahead.
We have conservatively valued ABNL’s stake in Birla Sun Life Insurance keeping in view the change in regulatory norms getting implemented from September 2010.
Due to the diversity in the nature of ABNL’s businesses, we have valued ABNL on SOTP basis (FY2010 numbers) and assigned 15% conglomerate discount.
Axis Bank (CMP: Rs.1,297/ TP: Rs.1,688/ Upside:30%)
The Bank has expanded its network at 33% CAGR since FY2005, doubling its CASA market share to 4.0% by FY2010 (20bp yoy increase in FY2010). We expect the bank to continue market share gains of 30-50bp every year driven by strong branch expansion.
Fee income contribution across a spectrum of services has been a meaningful 2% of assets (almost twice the level in PSBs) over FY2007-10.
The Bank’s high credit growth was backed by strong low-cost deposit growth, rather than chasing risky loans using high-cost deposits. Moreover, with the improving economic outlook and reducing corporate leverage, NPA concerns are receding and could provide upside to our earnings estimates (which still factor NPA provisions at 0.5% of assets in FY2011E vs. an average of 0.4% over FY2006-10).
The stock is trading at attractive valuations of 2.5x FY2012E P/ABV. Hence, we maintain a Buy on the stock with a Target Price of Rs1,688 (at 3.2x FY2012E P/ABV).
Hindalco is trebling its aluminium capacity over the next five years. The commissioning at Hirakud is expected in 2QFY2011E, where capacity is being increased from 155ktpa to 161ktpa in Phase-1 and to 213ktpa in Phase-2 by 4QFY2012E. Moreover, capacities at Mahan Aluminium and Aditya Aluminium are expected to come on stream by 2QFY2012E and 3QFY2012E, respectively. Consequently, we expect sales volume to grow at a 26.6% CAGR over FY2010–13E. Further, the company’s Jharkhand Aluminium project is expected to be commissioned in 1QFY2014E.
On the alumina front, we believe the company would benefit from the production of special grade alumina, which commands a premium of US $200-250/tonne. Moreover, with the commissioning of the Utkal refinery in 2QFY2012E, we expect alumina sales volume to grow at a 42.9% CAGR over FY2010–12E.
Novelis (Hindalco’s subsidiary) is expected to benefit from increased demand for rolled products, which is expected to grow by 34% over the next five years. Benefits of capacity expansion in Brazil are expected to be visible in FY2013E.
We maintain a Buy rating on the stock, valuing the standalone business at 6.5x FY2012E EV/EBITDA, Novelis at 5.5x FY2012E EV/EBITDA and its investments at a 25% discount to their market value.
Y/E Sales OPM PAT EPS ROE P/E P/BV EV/EBITDA EV/Sales
ICICI Bank (CMP: Rs.989/ TP: Rs.1,211/ Upside: 22%)
The Bank is well-positioned to gain market share on the back of substantial branch expansion from 955 in 3QFY2008 to 2016 in 1QFY2011 as well as strong Capital Adequacy at 20.2% (Tier-I at 14.0%).
Net Interest Margins of the Bank are expected to sustain on the back of increase in CASA ratio to 42.1% in 1QFY2011 from 29% in FY2009.
On the back of an improving economic environment, NPA losses are expected to start declining. The Bank has also done lower restructuring of loans than PSU Banks (7% of Net Worth v/s 40%+ for most PSU Banks). As a result, we expect NPA provisions /Assets to decline sharply to 0.5% by FY2012E (from 1.2% in FY2010)
The stock is trading at attractive valuations of 1.9x FY2012E P/ABV. Hence, we maintain a Buy on the stock with a Target Price of Rs1,211 valuing the core bank at 2.5x FY2012E P/ABV and assigning a value of Rs260 for its subsidiaries.
Given India's low car penetration (12 per 1,000 v/s 21 per 1,000 in China) and with PPP-based per capita estimated to approach the empirically-observed inflection point for car demand of US $5,000 over the next 4-5 years, we expect 15.2% CAGR in domestic volumes over FY2010-12E.
Maruti has a sizeable competitive advantage over foreign entrants due to its widespread distribution network (2,767 service and 681 sales outlets).
Moreover, with Suzuki Japan making Maruti a manufacturing hub for small cars, to cater to increasing global demand caused by rising fuel prices and stricter emission standards, we estimate 7.2% CAGR in export volumes over FY2010-12E.
The company, through de-bottlenecking, would be able to manufacture around 1.1lakh units per month from 2HFY2011E thereby reducing the uncertainty of capacity constraints to a certain extent. Further, we believe that, the recent hike in royalty payment would be passed by the company to certain extent with a price hike.
At the CMP, the stock is trading at attractive valuation (13x FY2012E earnings). At our Target Price of Rs1,338, Maruti would trade at 14.4x FY2012E (15% discount to our Sensex target multiple).
Y/E Sales OPM PAT EPS ROE P/E P/BV EV/EBITDA EV/Sales
The company is currently seeing strong traction and pursuing some large transformational deals in North America (average size of these deals range from US $25mn–75mn for a period of five years). Thus, we believe the company’s growth will be led by strong volume ramp ups, with key deals in the pipeline despite the price cut taken in the BT deal for assured volumes.
Sustained volume traction from non-BT clients (CQGR of 7.5% in last eight quarters) continues to provide revenue growth momentum, margin improvement, geographical diversification and reduced client concentration to the company.
Positive news flow from Satyam in the form of client retention, new deal wins and favorable settlement with Upaid provides comfort on future business prospects.
We have valued Tech Mahindra on an SOTP basis, valuing Tech Mahindra (excluding Satyam) at 13x, at a 40% discount to Infosys target multiple of 21x and valued Satyam’s stake at Rs234 per share based on a market cap basis by applying a 30% holding company discount to arrive at a Target Price of Rs950. Thus we continue to maintain our Buy recommendation on the stock.
Y/E Sales OPM PAT EPS ROE P/E P/BV EV/EBITDA EV/Sales
Almost all of ARIL's land bank (872 acres) is exclusively located in the NCR within 50km of Delhi, with approximately 525 acres in Delhi. This land bank has been acquired at an historical average cost of Rs300/sq ft.
We expect ARIL's residential projects to drive its near-term operational visibility and help register Rs600cr Profit over the next three years. ARIL recently launched two residential projects in NCR; Kapashera (0.28mn sq. ft.) and Manesar (1mn sq. ft.) for Rs5,000/sq. ft. and Rs2,500/sq. ft., respectively. Management has indicated that it has entirely sold Kapashera project and ~50% of Manesar project. Further, we expect ARIL’s Manesar and Kirti Nagar properties to reach their peak occupancy levels in 6–9 months as leasing activity improves coupled with five hotels getting operational by FY2011E. Consequently, we expect ARIL to report rental income of Rs201cr in FY2012E as compared to Rs49cr reported in FY2010.
ARIL is trading at a 40% discount to its NAV. The stock is trading at 9.0x FY2012E EPS and 0.9x FY2012E P/BV and hence we maintain a Buy on stock with a Target Price of Rs178 (15% discount to our one-year forward NAV).
Y/E Sales OPM PAT EPS ROE P/E P/BV EV/EBITDA EV/Sales
Dishman has incurred organic capex of Rs300cr in the last three years towards expansion of existing facilities at its Bavla unit and building the China and HPAPI facilities.
Post all these facilities coming on-stream FY2011E onwards, Dishman would strengthen its ties with the Global Innovators leading to stable Revenue flow over the long run.
Further, Revenues from the Abbott-Solvay contract, which constituted 13% of FY2010 Sales, have also started normalizing. Also, the Carbogen Amics (41% of FY2010 sales) is expected to witness an uptrend in FY2011. Overall, the company has guided towards 20% growth in Top-line for FY2011E.
Dishman is currently trading at attractive valuations of 9.7x FY2012E Earnings. We have valued the company at 13x FY2012E earnings resulting into a target price of Rs279.
Y/E Sales OPM PAT EPS ROE P/E P/BV EV/EBITDA EV/Sales
Jagran (JPL) continues to post steady growth in revenues, primarily aided by advertisement revenues owing to its strong foothold in the Hindi belt. For FY2010-12E, we expect JPL’s ad-revenue to post a CAGR of 19% (on higher proportion of colour ads, rate hikes and pickup in ad spend), aiding top-line CAGR of ~16% over the period.
August 2010 14
Market Strategy
For FY2011E, we expect operating margins to marginally dip on the back of ~8-10% rise in newsprint costs and increasing competitive intensity with the entry of DB Corp in Jharkhand. However, strong ad revenue growth, cost curtailment measures and improving profitability in the nascent businesses of I-Next/City plus and OOH/event management are likely to protect any sharp margin decline. Hence, we estimate the company’s operating margins to remain stable at 30% levels in FY2012E.
JPL acquired the print business from Mid-Day Multimedia, while we did not factor the deal in our numbers, we estimate the deal to be earnings accretive by ~2–3%. Moreover, Blackstone’s recent investment of Rs225cr in company’s promoter entity and strong operating cash flow makes JPL well placed to fund future growth. We believe, the underperformance of the stock and attractive valuations provides a good entry point for investors, and maintain a Buy with a Target Price of Rs154 based on 20x FY2012E EPS.
Y/E Sales OPM PAT EPS ROE P/E P/BV EV/EBITDA EV/Sales
IVRCL has a robust order book of Rs23,275cr (4.3x FY2010 revenues) which lends
revenue visibility. Robust order booking over last few quarters has ensured that its
dependence on AP orders have come down significantly (from 28% to current
17%). IVRCL had issues on the execution front due to its high AP exposure and now
with decline in that we are expecting the company to back on the growth trajectory. IVRC Asset has started tolling Jalandhar-Amritsar road in May’10 and Chennai
water project has also started. In FY2011, all its old BOT projects would start
generating revenues to fund its future investments. Management has given
guidance of increase in revenues from these BOT projects once fully operational to
Rs1.4cr/day. IVRC Assets would be requiring equity infusion of Rs1300-1400cr
over the next 3years and is also planning to raise money. We believe that value
unlocking at the subsidiary level will act as a near term catalyst.
We have valued IVRCL on SOTP basis. Its core Construction business is valued at a
P/E of 14x FY2012E EPS of Rs11.6 (Rs162/share), whereas its stake in subsidiaries
IVR Prime (Rs37/share) and Hindustan Dorr-Oliver (Rs17/share) has been valued
on a Mcap basis, post assigning a 20% holding company discount. At the CMP of
Rs170, the stock is trading at 14.7x FY2012E EPS and 1.9x FY2012E P/BV on
standalone basis and adjusting for its subsidiaries at 10.1x FY2012E EPS and 1.3x
FY2012E P/BV which we believe is at reasonable valuations. Therefore, on the
back of the company’s excellent execution track record, robust Order Book to
Sales ratio and comfortable valuations, we maintain a Buy on the stock with a
target price of Rs216.
Y/E Sales OPM PAT EPS ROE P/E P/BV EV/EBITDA EV/Sales
Electrosteel Castings (ECL) is venturing into steel-making through its subsidiary Electrosteel Integrated (EIL), which is setting up a 2.2mn tonne steel plant expected to be commissioned by FY2012E. Further, ECL plans to list EIL to raise ~Rs300cr, which is likely to unlock value for ECL. EIL has already filed the DRHP and IPO is expected over the next one month.
ECL's backward integration initiatives through allocation of coking coal mines are expected to result in expansion of EBITDA Margin by 1,304bp over FY2009-12E.
The company is also awaiting final environmental clearance for its iron ore mine, which will further lower costs, but has not been factored in our estimates.
We recommend a Buy on the stock, valuing the Core business at 8x FY2012E FDEPS and its investments in the Steel business at 1x Book Value.
Y/E Sales OPM PAT EPS ROE P/E P/BV EV/EBITDA EV/Sales
Finolex Cables is poised for a strong growth over the next few years, owing to entry in the verticals of High Tension (HT) and Extra High Voltage (EHV) Cables and market share expansion in the existing Low Tension (LT) Cables segment.
The rapid ramp up of production at the Roorkee plant has already started delivering results. The company has further increased the capacity at this plant by 50%. The proximity to the growing North Indian markets and tax benefits from this plant are expected to boost the turnaround of the company.
Company’s derivatives losses are expected to decline going ahead. By FY2012, these losses are estimated to decline to Rs 24cr from Rs76cr in FY2010.
We believe attractive valuations of 6.2x FY2012E EPS and 1.1x FY2012E BV provides a good entry point for investors. We have valued the stock at 9x FY2012E EPS which result into target price of Rs85.
Y/E Sales OPM PAT EPS ROE P/E P/BV EV/EBITDA EV/Sales
Godawari Power & Ispat (CMP: Rs.228/ TP: Rs.313/ Upside: 37%)
Godawari Power commissioned 0.6mn tonne pellet plant in February 2010. We expect GPIL to save ~Rs125cr from increasing iron ore production from its Ari Dongri mines and its subsequent conversion into pellets. Further, the capacity of the mine is expected to increase to 0.9mn tonne by FY2011E, not factored in our estimates.
Commercial production of the 0.6mn tonne pellet plant in its 75% subsidiary Ardent Steel has started in August 2010. We expect the plant to contribute Rs18cr and Rs52cr to the company’s EBITDA in FY2011E and FY2012E, respectively.
August 2010 16
Market Strategy
The company has secured the necessary clearance for its Boria Tibu mine and production is expected to start post monsoon. The mine has total reserves of 7.0mn tonnes and iron ore of ~62% Fe content. The company expects to produce ~200,000 tonnes in FY2011E.
With earnings expected to grow at a CAGR of 93.6% over FY2010-12E. We maintain our Buy recommendation, valuing the stock at 3.5x FY2012E EV/EBITDA
Y/E Sales OPM PAT EPS ROE P/E P/BV EV/EBITDA EV/Sales
JK Tyre & Industries (CMP: Rs.163/ TP: Rs.237/ Upside: 45%)
Given the shortage of radial tyres in the Trucks & Buses Segment, the company is set to fully utilise its enhanced capacity, and that too at higher realisations (70% of India's total truck/bus radial tyre production), driving strong earnings growth and improving RoEs.
Further, the Tornel acquisition turned profitable in FY2010, aided by the restructuring exercise implemented by the company.
The stock is available at attractive valuations of 3.4x FY2012E EPS and hence we recommend a Buy. At our target price of Rs237, the stock will trade at 5x FY2012E EPS of Rs47.5 and 0.8x FY2012E BV of Rs293. On EV/EBITDA basis, the stock will trade at 3.3x FY2012E EBITDA of Rs603cr
Y/E Sales OPM PAT EPS ROE P/E P/BV EV/EBITDA EV/Sales
Robust growth in foreign tourist arrivals (9.8% growth during January to July 2010 v/s -7.6% in the corresponding period last year) and increased domestic tourist activity is enabling hoteliers to foresee promising outlook going ahead.
Signs of improving demand are visible with occupancy rates improving substantially to ~64-65% in 1QFY2011 and Average Room Rates firming up.
Considering the revival in demand happening in business destinations like Hyderabad and Chennai, where TAJGVK has presence, we expect the company to be a significant beneficiary in the coming quarters.
Moreover, in comparison to its peers, the stock trades at attractive valuations of Rs1cr FY2012E EV/Room and 13.5x FY2012E EPS. Assigning a target PE multiple of 20x, we recommend a Buy on the stock with a target price of Rs240.
Y/E Sales OPM PAT EPS ROE P/E P/BV EV/EBITDA EV/Sales
Note: For some stocks we have kept a BUY rating inspite of lower than benchmarked returns, as we believe these stocks have potential to get re-rated and hence would provide good upsides from a long term perspective. Source: Company, Angel Research, * estimates for CY10E and CY11E; ^ estimates for SY10E and SY11E
Research Team Tel: 022 - 4040 3800 E-mail: [email protected] Website: www.angeltrade.com
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Reports based on technical and derivative analysis center on studying charts of a stock's price
movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals.
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Ratings (Returns): Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%) Reduce (-5% to -15%) Sell (< -15%)
