Centrum Broking Limited: Institutional Equities

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Centrum Broking Limited

Institutional Equities
Strategy Report
G. Chokkalingam Group CIO, Centrum
July 2012
Strictly Private and Confidential
Summary of Views
Positive on the markets Expect Sensex to breach 20,500 by March end 2013 Key Overweight Banking (Private) and Pharma sectors and Midcap Space INR should see bottom at 57/USD and appreciate closer to 54 levels post presidential election Monsoons remain a concern but real impact on economy diminishing Expect government action on FDI in multi-brand retail and passage of Bills (pertaining to Insurance, Banking & Pension) due to mounting pressure from weak macro, drawdown of forex reserves and recent political realignment Top picks
Axis Bank Cairn Coal India Ltd. (CIL) GSK Consumer Healthcare Hero Moto Corp Ltd. (HMCL) Hindustan Zinc Ltd. (HZL) ICICI Bank Karur Vysya Bank Lupin NIIT Ltd. (NIIT) NMDC Petronet LNG Prime Focus Wyeth
Economy and Strategy
Current Macro under pressure

GDP data for Q4FY12 at 5.3% was the worst performance over the last 12 quarters IIP data (0.1% for April 2012) has touched the lows that we had saw postLehman CAD at 4.2% of GDP is the worst performance till date Rainfall deficit has reached 23% with only 15 out of 36 subdivisions receiving normal to excess rainfall Fiscal deficit target of 5.1% may be difficult to achieve owing to high crude and INR depreciation INR has depreciated by 20% y-o-y as the Balance of Payments have been in deficit and there is a dollar shortage and risk aversion pushing up USD
CAD
(bn USD) 40 30 20 10 0 (10) (20) (30) (40) (50) (60) Sep-07 Sep-08 Sep-09 Mar-07 Sep-10 Mar-08 Dec-07 Mar-09 Dec-08 Mar-10 Dec-09 Mar-11 Dec-10 Sep-11 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Mar-12 Dec-11 ($/barrel) 160 140 120 100 80 60 40 20 0
Trade Balance
Invisibles
CAD
Crude Brent (RHS)
Source: Bloomberg, Centrum Research
IIP-Core inflation data trend

25% 20% 15% 10% 5% 0% -5% -10% Sep-08 Dec-09 Nov-07 Feb-09 Oct-05 Jul-09 Aug-06 Oct-10 Jun-07 Apr-08 Aug-11 Mar-06 Mar-11 Jan-07 May-05 May-10 Jan-12 10% 8% 6% 4% 2% 0% -2% -4%
Daily Mean Rainfall
IIP % (LHS)
Core inflation % (RHS)

Source: IMD
Some concerns overdonereflected in price

Sensex is currently trading below the 10-year mean valuation. Even when we look at the ratio between Bond yields and equity yields the ratio is below long term averages. Unless there is a major global crisis the markets have taken support at current valuations Crude has corrected by almost 20-25% from its peaks and gold imports are down by 30% in Q1FY13; Oil and precious metals accounted for 45% of total imports in FY12 The top-line for the companies is still growing which buttresses the fact that demand destruction has not taken place completely and once the margin pressures subside profitability would return An analysis of standalone financials of 3724 companies indicates that the sales growth for the firms has grown by 23.4% for FY12 as compared to 21.5% in FY11. On a consolidated basis for 850 companies, sales growth continued to be a robust 27%.
Brent Crude
USD/Barre l 130 120 110 100 90 80 1/4/11 2/5/11 3/9/11 4/10/11 5/12/11 6/13/11 7/15/11 8/16/11 9/17/11 1/23/12 2/24/12 3/27/12 4/28/12 10/19/11 11/20/11 12/22/11 5/30/12
Sep-11
Sensex Forward P/E graph

30 25 20 15 10 12-May-03, 7.23 5 0 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 13-Jan-08, 25.29
3.0 2.5 2.0 1.5 1.0 0.5 0.0 Oct-01
Bond Yield/Equity yield ratio
Feb-04
Oct-08
May-02
May-09
Dec-02
Nov-05
Dec-09
Sep-04
Apr-05
Feb-11
Mar-01
Mar-08
Jan-00
Jun-06
Jan-07
Jul-03
Jul-10
Aug-00
P/E Mean - Std Dev Min Source: Bloomberg, Centrum Research
Mean 12x
Mean + Std Dev Max
BEY R (Bond-Equity Yield Ratio)
Mean
Aug-07
+1 Stdev
-1 Stdev
Apr-12
7/1/12
Monsoons mostly smoke with no real fire

Some of the concerns on Monsoons may be overdone as empirical data suggests decreased correlation between rainfall and Agri GDP This could be attributed to increased penetration of irrigation facilities, standing at close to 50% of the cultivable area from 25% in the 1980s Moreover, the contribution of Agri GDP to the overall GDP has reduced from 45% in 1952 to 14% in 2012 and hence the impact on the economy is expected to be minimal The impact of subdued monsoon could lead to higher food inflation which may delay the expected interest rate reversal. Improving cloud formation - The latest satellite picture from Indias Meteorological Department (IMD) shows a lot of cloud formation around the country. IMD has also said that the rains in this season are expected to be at 96% of the long-term average.
Agri GDP growth versus Rainfall deviation

High Correlation 30% 25% 20% 15% 10% 5% 0% -5% Mar-81 Mar-86 Mar-91 Mar-96 Mar-01 Mar-06 Mar-11 Low Correlation 25 20 15 10 5 0 -5 -10 -15 -20 -25
Agri GDP % YoY Source: IMD, Bloomberg, Centrum Research
Rainfall deviation % (RHS)
Satellite Picture of Clouds

50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 1952 1956 1960
Agri GDP as % of Total GDP
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
2008
Source: IMD, taken as of 10thJuly 2012
2012
Key triggers to alleviate pressure points

Fiscal Policy Government has been under various pressure points Facing lot of criticism in many quarters and bearing the brunt of bad international press too Already multiple rating agencies like S&P, Fitch have put India on a rating watch Mounting pressure on INR and drawdown of reserves to the tune of USD 12.8 billion We believe that the presidential elections would be keenly watched as there are possibilities of political realignment post the elections and hope of government action Government is trying to build consensus on FDI in multi brand retail, pension, aviation, insurance. Government may manage an almost majority in the parliament ex-nominated members in Rajya sabha even without the Trinamool Congress. This is important to pass crucial bills in the parliament Monetary Policy
Interest rate reversal we believe that in a scenario where core inflation is consistently below 5% levels and liquidity is in deficit the RBI should take steps to reduce rates as a combination of Repo rate and CRR cuts.
Political realignment in Rajya Sabha

Independents 3% Nominated 4% Third Front 13% National Democratic Alliance 28%
Source: RajyaSabha Website
Core inflation versus Repo rate

YoY% 10% 8% 6% 4% 2% Expected Trajectory of the interest rates Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11
AITC 4%
United Progressive Alliance 36%
Excluding the Trinamool Congress, the government can get support from Nominated and Independents to get a majority
Parties supporting UPA from outside 12%
0% -2% -4%
Core Inflation %
Repo Rate %
Sensex@20,500 by FY13 end

We estimate Sensex to post an EPS of Rs. 1416 for FY14E (15% growth over FY13E) Applying a target P/E of 14.5x (inline with long term mean) we get Sensex target of 20500 for FY13 end, although this can be achieved earlier (by Dec 2012) if government reforms agenda takes off The P/E for Sensex has seen high correlation with the Nominal GDP growth. Hence we believe that the target multiple applied for Sensex is appropriate considering the Nominal GDP growth expectations of close to 14% Composition of incremental index earnings shows that the majority of earnings come from Financials, Materials and Auto sectors; softening interest rate cycle should aid recovery in the Financials and Auto sectors while a low base of FY13 would help sectors like Materials to post a good growth in FY14.c
PE versus Nominal GDP growth
Composition of incremental earnings
30 25 20 15 10 5 0 Aug-09 Aug-04 Apr-01 Apr-06 Apr-11 Jun-00 Jun-05 Jun-10 Dec-07 Dec-02 Oct-03 Feb-02 Oct-08 Feb-07 Feb-12
Consumer Staples 7%
IT 10%
Auto 11%
Industrials 3% Telecom 2% Health Care 3% Energy 10% Utilities 4%
Materials 16%
Nominal GDP % (YoY)
Trailing PE Ratio
Financials 34%
Midcaps to outperform
The perception with midcaps is that they are highly illiquid and difficult for large institutions to make money. We classify the midcaps in broadly three categories Extremely Illiquid stocks which are difficult for large institutions to take any positions in. Stories which have played out and have moved from becoming small capitalization stocks to larger capitalization stocks. We believe that there is a mid-segment of stocks which are low profile and have relatively less volumes than the previous category although they are worth looking at
In the last 20 years there have been many micro stories which have moved from being a mid-cap to large-cap thus creating wealth for investors who identified these when they were largely unknown Empirical evidence suggests that in a rising market the midcaps tend to outperform and they have been doing so every alternate fiscal year
One year rolling returns

% return 200% 150% 100% 50% 0% -50% -100% Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12
Mid cap stock performance

Company COROMANDEL INTL. CITY UNION BANK KARUR VYSYA BANK EID PARRY INDIA MRF LTD 24-Oct-08 48 11 120 65 2,025 10-Jun-12 269 54 437 192 10,536 % Return 460 386 264 193 420
Index BSE SENSEX 30 INDEX BSE MID-CAP INDEX

BSE Midcap Sensex
24-Oct-08 8,701 3,096
10-Jun-12 17,618 6,307
% Return 102 104
Source: Bloomberg, CentrumResearch
Sector Outlook and Valuation
Sector outlook and recommendations

Sector Auto View Neutral Key Highlights Two-wheelers Outperform The 2W industry has registered a volume CAGR of 10-12% over the past 17 years and is more resilient in times of economic slowdown as compared to PVs and CVs. We expect the volume growth of 10-12% for 2Ws to continue in FY13E. Passenger Vehicles Neutral Rising differential in price of petrol and diesel continues to weigh on the Petrol portfolio. In FY12 overall petrol portfolio registered a drop of 15% against a growth of 25% for the diesel portfolio. We expect this trend to continue. Considering the normalized production at Maruti and continued traction in the diesel portfolio, we expect overall passenger car industry to register a YoY volume growth of 10-11% for FY13E. Commercial Vehicles - Neutral Within the CV segment, we expect the Truck segment to register negative growth but the Bus segment to register 8-10% growth driven by significant demand from private operators. We expect the strong momentum to continue for the LCV segment with a growth of 18-20%. Growth slowdown and resulting pressure on asset quality will continue to dominate investor sentiments in the absence of any signal on recovery. However, things are improving at the margin with steps being taken to revive economic activity. However, current valuations factor in the negatives largely with select banks trading at -1SD PABV (12m rolling) and hence they offer decent safety margin. We expect the interest rates to come off materially led by easing in inflation. Lower interest rates will help address investor concerns over growth, profitability and asset quality. Failure of monsoon is a key risk to our call as it would keep inflation high and impede our expectation of rates coming down. Top picks HMCL
Banking
Private Banks: Outperform Public Sector: Neutral
Axis Bank ICICI Bank Karur Vysya Bank
10
Sector outlook and recommendations.(contd.)

Sector Cement View Neutral Key Highlights Despatches of the industry started improving post 4.9% growth in FY11 and 2.3% in H1FY12 Capacity utilization rate is expected to remain under pressure at 76% in FY13E and 78% in FY14E Pricing power of manufacturers may come under pressure after the recent judgment of CCI and state governments could also pressurize cement companies to bring down the prices Rich valuations for large players compared with their historical valuation multiples Cement prices and despatches may come under pressure in Q2 with the onset of monsoon Companies within education space continue to see strong demand given the dearth of quality education system in India We remain positive on segments such as multimedia to schools, vocational training and publication as they would continue to post strong growth for the next 2-3 years Volume growth could be under pressure due to economic slowdown on back of downtrading Shortfall in rains could play a huge role in rural growth and further inflation Low A&P spends coupled with subdued RM Cost could help companies maintain margins Ad revenue growth to remain under pressure and be at low single digits Extension of deadline for Phase-I digitisation to benefit DTH providers Margins to remain under pressure for print players as newsprint prices increase Top picks --
Education
Outperform
NIIT
FMCG
Neutral
GSK Consumer Healthcare
Media
Neutral
Prime Focus
11

Sector Metals View Ferrous: Neutral Mining: Outperform Key Highlights Margin pressure to sustain on ferrous space due to a fall in global steel prices and higher raw material costs Stretched balance sheets and lower free cash flow to remain a drag on ferrous valuations For miners, production growth is expected to rise from an inflection point and result in higher sales volumes Robust margins, strong balance sheets and attractive valuations for mining majors Non-ferrous space could surprise the street on recovery in LME base metal prices which are well below marginal cost Crude prices to remain high thus keeping under-recoveries at elevated levels Refining margins to exert pressure in FY13E before recovering in FY14E KG D6 decline to continue yet availability to improve post commissioning of Kochi and Dabhol re-gasification terminals Petchem prices and margins to recover by end CY12 Good growth of 15% in the domestic market Benefits from patent expiries in the US Surge in exports Benefits from depreciating rupee Top picks HZL NMDC Coal India
Oil & Gas
Neutral
Cairn Petronet LNG
Pharma
Outperform
Lupin Wyeth
12

Sector Telecom View Underperform Key Highlights Regulatory challenges continue to remain high on the sector Higher spectrum pricing is likely to impact profitability and return ratios of companies While 2G voice market is likely to see volume growth in FY13 with stable pricing scenario, higher amortization would impact PBT margins We prefer companies with diversified revenue mix between 2G voice and data given the environment Top picks Bharti Airtel
13
Auto sector outlook

Two-wheelers Outperform
Neutral
The two-wheeler industry has registered a volume CAGR of 10-12% over the past 17 years and is more resilient in times of economic slowdown as compared to PVs and CVs. We expect volume growth of 10-12% for 2Ws to continue in FY13E. We are upgrading Hero MotoCorp from Neutral to Buy and maintain our Buy rating on Bajaj Auto. Rising differential in price of petrol and diesel continues to weigh on the petrol portfolio. In FY12 overall petrol portfolio registered a drop of 15% against a growth of 25% for the diesel portfolio. We expect this trend to continue. Considering the normalized production at Maruti and continued traction in the diesel portfolio, we expect overall passenger car industry to register a YoY volume growth of 10-11% for FY13E. We continue to remain positive on Maruti but downgrade M&M to Neutral from Buy due to lower off-take in the tractor segment. Within the CV segment, we expect the Truck segment to register negative growth but the Bus segment to register 8-10% growth driven by significant demand from private operators. We expect the strong momentum to continue for the LCV segment with a growth of 18-20%. We are upgrading Tata Motors to Buy from Neutral but maintain our Neutral rating on Ashok Leyland.
Passenger Vehicles Neutral
Commercial Vehicles - Neutral
14
Valuation
Valuation
EPS (Rs.) Company Maruti Suzuki M&M (Stand.) Bajaj Auto Hero Honda Ashok Leyland Tata Motors* Sector Average
*Consolidated Source: Centrum Research Estimates,
P/E (x) FY13E 15.0 19.3 13.1 14.9 12.8 6.5 13.6 FY14E 13.2 16.1 11.4 13.2 9.9 6.0 11.6
Core P/E (x) FY13E 14.8 13.8 13.9 15.1 11.5 6.5 12.6 FY14E 11.9 11.4 11.4 13.0 8.8 6.0 10.4
EV/EBITDA (x) FY13E 15.0 9.1 9.3 15.1 7.5 4.0 10.0 FY14E 13.2 7.3 7.6 13.0 6.4 3.5 8.5
ROE (%) FY13E 14.4 18.8 64.0 55.0 12.5 35.0 33.3 FY14E 14.4 19.7 70.2 47.4 15.2 30.5 32.9
ROCE (%) FY13E 18.9 22.1 86.7 64.6 9.9 20.3 37.1 FY14E 19.0 23.5 95.1 60.0 11.3 19.7 38.1
FY13E 80.9 37.8 116.3 138.7 2.0 38.0
FY14E 91.6 45.4 133.1 156.3 2.6 40.7
Recommendations: Prefer 2Ws, Maruti and Tata Motors

Company Maruti Suzuki M&M (Stand.) Bajaj Auto Hero Honda Ashok Leyland Tata Motors CMP (Rs) 1212 730 1,522 2,064 26 246 Target Price 1,368 797 1,778 2,379 25 290 Upside/Downside (%) 12.9 9.2 16.8 15.3 (2.6) 17.9 Stock to Sector Outperformer Neutral Outperformer Outperformer Neutral Outperformer Sector to Market Neutral Neutral Neutral Neutral Neutral Neutral Stock to Market Buy Neutral Buy Buy Neutral Buy
Source: Centrum Research Estimates
15
Banking sector outlook
Private: Outperform; PSBs: Neutral
Down-cycle has materialized: In line with our investment thesis (outlined in Sep11), the outlook for banking sector has deteriorated in recent quarters led by a worsening macro. The stagflation has only added to the macro concerns with GDP estimates for FY13 being lowered to ~6% on the one hand and inflation refusing to moderate (as supply side issues persist). Collectively, all these factors have shaken the outlook for the 3 pillars of banks financial performance: profitability, quality and growth. In response, we have built in significant build up of stress assets during FY13 and FY14 along with slower balance sheet growth. Valuations, pricing bad news: As the down cycle has materialized, the banking stocks have been battered materially with an average decline of ~35% from all time high levels. In line, valuations have contracted significantly despite sizable downward revision in earnings estimates. Importantly, select banks are trading close to their -1 SD to 5 yr mean PABV and offer a healthy risk reward considering healthy safety margin on the downside and huge potential upside in the event of macro turning positive. Challenges remain, but things improve at the margin: Notwithstanding the heightened pessimism over strength and shape of economic recovery, things are improving gradually (albeit at the margin). The government has taken cognizance of the need to consolidate the fiscal deficit (subsidies within 2% of GDP), initiate new reforms (fertilizer subsidy reforms, new manufacturing policy, telecom policy, SEB restructuring etc) and fast track mega projects. Moreover, India will be a key beneficiary of softening in global commodity prices (as macro globally has worsened) which, along with improved export competitiveness, (led by Re-depreciation) should help address CAD concerns. Softer commodity prices and stability in Re should aid moderation in inflation thereby paving the way for reduction in policy rates which in turn can stimulate economic activity. How and what to play? Given the uncertainty over the strength and shape of recovery, we recommend a mix of stocks including large cap private banks with valuations offering significant safety margin (Axis Bank, ICICI Bank) and low beta bank (Karur Vysya Bank) with strong balance-sheet positions and proven track record of consistently high return ratios. For Axis Bank and ICICI Bank, the current valuations (close to -1SD to 5yr mean) seem to suggest a material deterioration in fundamentals, which we believe is unlikely to pan out. The risk reward is favorable for investors with a 12-15 months investment horizon. Meanwhile, we remain circumspect on public sector banks due to their higher exposure to troubled sectors and limited capacity to absorb additional slippages given high level of stress assets currently. Key risk: Failure of monsoons is a key risk to our positive stance on the banking sector given its implications on inflation and hence RBIs willingness to bring down interest rates. In turn, high interest rates would weaken our growth and asset quality outlook.
16
Valuation
Adj. PAT Banks Private Banks Axis Bank City Union Bank Federal Bank HDFC Bank ICICI Bank Karur Vysya Bank Public Sector Banks Bank of Baroda Bank of India Indian Bank Punjab National Bank State Bank of India Union Bank of India
Adj BVPS FY14E FY13E FY14E
RoE (%) FY13E FY14E
RoA (%) FY13E FY14E
PABV (x) FY13E FY14E
FY13E
4,853 321 841 6,612 7,586 575
5,781 411 1,018 8,393 9,084 755
629 34 342 147 546 268
733 43 377 175 594 305
19.6 23.7 14.0 20.3 12.0 19.9
20.0 24.9 15.2 21.9 13.1 22.7
1.5 1.6 1.3 1.8 1.5 1.4
1.5 1.6 1.3 1.9 1.5 1.5
1.7 1.6 1.3 4.0 1.7 1.6
1.5 1.3 1.2 3.4 1.6 1.4
5,519 3,300 1,974 5,591 14,418 2,322
6,372 4,072 2,482 6,663 17,010 2,874
696 339 235 732 1,182 215
815 383 267 888 1,365 249
18.5 14.8 19.1 18.6 16.1 14.9
18.3 16.1 21.1 18.9 16.7 16.2
18.5 0.8 1.3 19.5 16.1 0.8
18.3 0.8 1.4 19.8 16.7 0.9
1.0 1.0 0.8 1.2 1.9 1.0
0.9 0.9 0.7 1.0 1.6 0.8
17
Recommendations
Prefer Private over peers (Outperform) over PSBs (Neutral)
Banks Private Banks Axis Bank City Union Bank Federal Bank HDFC Bank ICICI Bank Karur Vysya Bank Public Sector Banks Bank of Baroda Bank of India Indian Bank Punjab National Bank State Bank of India Union Bank of India
Stock to market
CMP
Target
Upside/(Downside) %
Stock to sector
Sector to market
Buy Buy Sell Sell Buy Buy
1,075 54 447 588 941 437
1,300 60 450 580 1,100 500
20.9 11.0 0.7 (1.4) 16.9 14.4
Outperform Outperform Neutral Underperform Outperform Outperform
Outperform Outperform Outperform Outperform Outperform Outperform
Buy Buy Buy Sell Sell Buy
730 348 185 863 2,220 210
850 425 270 900 2,450 240
16.4 22.1 45.9 4.3 10.4 14.3
Outperform Outperform Outperform Neutral Neutral Outperform
Neutral Neutral Neutral Neutral Neutral Neutral
18
Cement sector outlook

Positives
Neutral
Despatches of the industry improved in 2HFY12 after sluggish growth of 4.9% in FY11 and 2.3% in 1HFY12. In Apr-May 12 the industry recorded despatches growth of 9.6% against 0% in the same period last year. We expect the despatches growth to be 8% in FY13E and FY14E. We believe that the capacity utilization of the industry bottomed out at 74% in FY12E and we expect a gradual improvement in the utilization rate going ahead. Capacity utilization rate is expected to be 76% in FY13E and 78% in FY14E. Cement manufacturers maintained production discipline and the industry ensured price hikes to expand operating margins which also compensated for increase in operating costs (freight, energy and raw material costs). Declining pace of capacity addition will be positive for cement manufacturers in the long run. The industry commissioned 141mt (87% of FY07 end installed capacity) of new capacities over FY08-FY12, which distorted the demand-supply equilibrium of the industry, which is evident by the fact that the effective capacity utilization rate of the industry declined to 74% by FY12 compared to 97% in FY07. We expect 21mt and 19mt of new capacities in FY13E and FY14E. Demand-supply gap will keep the utilization rate subdued over the next two years, much lower than the peak-cycle utilization rate of 90-98% during FY06-FY10 Pricing power of manufacturers may come under pressure after the recent judgment of the Competition Commission of India which slapped Rs63bn in penalties on top 10 cement manufacturers for their alleged cartelization bid Cement manufacturers were able to maintain production discipline and hence, their realization improved significantly (Rs290/bag in May 12 against Rs238/bag in Jan 11) over the last 15months. Profitability of manufacturers may come under pressure if they are not able to maintain production discipline going forward Rising cost pressures continued to be a challenge for the industry. We expect increase in energy (domestic and international coal price) and freight costs (diesel price could be increased) going forward
Concerns

19
Valuation
Valuation Mid-cap stocks trading at attractive valuations
Adj EPS (Rs) Companies ACC* Ambuja* Ultra Tech Grasim^ India Cements^ Shree Cement JK Cement^ Orient Paper FY13E 67.4 9.7 79.3 247.2 12.4 144.4 29.2 10.0 FY14E 72.8 11.3 95.2 281.3 13.9 193.0 31.7 11.4 P/E (x) FY13E 18.9 17.6 19.7 10.7 6.8 20.1 6.7 6.3 FY14E 17.5 15.1 16.4 9.4 6.1 15.1 6.2 5.5 EV/EBITDA (x) FY13E 10.7 10.0 10.8 5.2 4.5 6.7 4.5 3.8 FY14E 9.8 8.5 9.0 4.7 4.3 5.9 4.2 3.2 P/BV (x) FY13E 3.1 2.9 2.9 1.4 0.5 3.4 0.8 1.1 FY14E 2.8 2.6 2.5 1.3 0.5 2.7 0.7 0.9 RoE (%) FY13E 16.9 17.5 15.7 12.0 9.1 21.0 12.7 17.0 FY14E 16.8 18.3 16.4 12.2 9.5 23.1 12.5 17.2 RoCE (%) FY13E 15.6 16.7 11.7 10.4 8.2 13.7 9.0 12.3 FY14E 18.3 17.5 12.5 11.0 8.2 15.5 9.2 13.2
December ending ^ consolidated financials Source: Centrum Research Estimates
Recommendations
Stock ACC Ambuja Ultra Tech Grasim India Cements Shree Cement JK Cement Orient Paper Stock to market Sell Sell Sell Neutral Buy Neutral Neutral Buy CMP (Rs) 1,272 170 1,563 2,647 85 2,907 197 63 TP (Rs) 1,030 149 1,179 2,660 118 2,924 204 76 Upside/(downside) % (19.0) (12.5) (24.6) 0.5 39.3 0.6 3.6 20.3 Stock to sector Underperform Underperform Underperform Neutral Outperform Neutral Neutral Outperform Sector to market Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral
20
Education sector outlook
Outperform
Companies within the education space continued to see strong demand given the dearth of quality education systems in India Segments such as multimedia to school, vocational training and publication will continue to post strong growth in the next 2-3 years We have Outperformance rating on the sector as companies are trading at attractive valuations and their growth momentum continues. Hence, we believe certain stocks will outperform in the space.
Education market would continue to grow
2008 (US$ mn) Pre-school K-12 Tutoring Books Stationery Education CD-Roms Multimedia in schools Higher Education Preparatory Child skill enhancement IT training E-learning Finishing school Vocational Teacher training Total
Source: Technopak, Centrum Research
CAGR (%) 2013 (US$ mn) 20-25 5-10 8-13 5-10 5-10 25-30 60-70 8-13 13-18 20-30 35-45 35-45 50-60 15-20 50-60 3,500 30,800 8,000 2,400 2,000 390 320 11,200 3,200 2,200 1,050 240 235 3,100 140 68,775
CAGR (%) 2018 (US$ mn) 10-15 5-10 5-10 3-8 3-8 20-25 20-25 7-12 10-15 17-22 33-38 33-38 45-55 10-15 45-55 5,800 43,200 11,800 3,000 2,600 1,100 3,300 18,100 5,900 5,600 4,700 1,100 1,800 6,200 1,100 115,300
1,200 21,000 5,000 1,700 1,380 120 25 6,700 1,600 740 195 45 25 1,500 15 41,245
21
Valuation
Valuation - Attractive in education space overall but risk reward remains favorable on certain stocks
Adj-EPS dil.(Rs) Company NIIT Educomp Sol. Navneet Pub. Career Point FY13E 5.0 26.0 4.4 13.1 FY14E 6.4 29.7 5.4 17.6 P/E (x) FY13E 8.6 6.7 13.0 12.6 FY14E 6.8 5.8 10.7 9.4 EV/EBITDA (x) FY13E 4.6 4.8 8.1 9.5 FY14E 3.7 3.8 6.6 6.2 P/B (x) FY13E 1.0 0.6 3.2 1.8 FY14E 0.9 0.6 2.7 1.4 ROE (%) FY13E 11.9 9.6 26.7 7.7 FY14E 13.8 10.0 27.6 9.5 ROCE (%) FY13E 11.2 11.5 22.6 11.1 FY14E 12.9 12.3 24.7 13.6
Recommendations We prefer Navneet Publication and NIIT among Education stocks

Company NIIT Educomp Sol. Navneet Pub. Career Point Sector Education Education Education Education Stock to Market Buy Buy Buy Neutral CMP 43 173 58 166 TP 54 203 75 158 Upside/(Downside) % 24.4 17.2 30.1 (4.7) Stock to Sector Outperform Outperform Outperform Neutral Sector to Market Outperform Outperform Outperform Outperform
22
FMCG sector outlook
Neutral
Volume growth is expected to be under pressure following the economic slowdown. Mass premium products are expected to see a drop in volume growth as people are cutting spending and downtrading. Cumulative rainfall till 1st week of July was more than 25% below normal. Further delay in rainfall will impact crops and hence the rural volume growth which has been higher than urban growth in the past few years. This could lead to a slowdown. Further, this could increase food grain prices and further increase food inflation. Implementation of the new packaging norms will be from 1st Nov and the companies have been given flexibility to change weights and sizes for product prices between Rs1 and Rs10. This will help companies increase volume growth for bottom of the chain customers. A&P spend for the companies will decline and help them mitigate the effect of raw material cost inflation. Also with declining crude prices, some of the RM costs have declined which could help companies maintain operating margins. Strong rural growth to continue
(%) 20 14 15 10 5 0 (5) (10) (8) CY03 CY05 Urban CY07 Rural CY09 CY11 3 1 10 13
A&P spends to remain subdued

(%) 16.1 16.3 15.7 15.3
16
18 11
20 16
14.3 12.1
13.0 12.4
14
9.6 9.3
12 8 4 0 GSK CH Colgate HUL Dabur

FY1 1
11.0 11.2
7.2 7.6
Marico
FY1 2
GCPL Britannia Nestle
Source: Dabur presentation, Centrum Research
Source: Company, Centrum Research
23
5.2 4.8
Valuation
Valuation
EPS Company Nestle Colgate Palmolive GSK-CH FY13E 118.0 38.7 98.3 FY14E 142.8 44.5 118.5 FY13E 38.3 28.9 26.6 PE FY14E 31.6 25.1 22.0 P/BV FY13E 23.5 30.6 8.1 FY14E 18.2 25.0 6.9 EV/EBIDTA FY13E 23.5 23.1 20.5 FY14E 19.0 19.6 16.4 RoE (%) FY13E 72.8 113.2 33.1 FY14E 65.0 109.2 34.0 RoCE (%) FY13E 45.2 126.6 23.6 FY14E 49.7 124.0 24.1
Recommendations
Company name Nestle Colgate Palmolive GSK-CH
CMP (Rs) 4,460 1,156 2,614
TP (Rs) 4,427 1,112 2,963
Upside/(Downside )% (0.7) (3.8) 13.4
Stock to Sector Neutral Neutral Outperformer
Sector to Market Neutral Neutral Neutral
Stock to Market Neutral Neutral Buy
24
Media sector outlook
Neutral
Advertising revenues of the sector would be under pressure due to the current economic situation. Growth rates will be in low single digits for both broadcasting and print companies with national advertising declining. As H1 is a seasonally low quarter it would further impact adverting revenues as key sectors such as auto, BFSI, consumer durables will cut their ad spends. With digitisation deadline for Phase-I extended to 30 October 2012, we expect the digitisation process to slow down in the near term. We believe DTH companies will benefit most as they have ready set-top boxes with them. We expect DTH companies to add 10mn boxes in FY13. We expect the print companies to show a decline in margins as newsprint prices are increasing on the back of Rupee depreciation while ad revenue growth remains lackluster. However, broadcasting companies could maintain margins as they have cut on programming cost. We believe ZEEL non-sports margins will be maintained while Sun TV Network will grow its EBIT margins. Other media companies such as ENIL will mitigate the decline in ad revenue by increasing focus on activation and events. Balaji Telefilms will continue to focus more on the movies business while content production business for television will grow marginally. Niche players such as Prime Focus will show handsome growth on the back of stock 2D to 3D conversion. Plummeting ad revenue growth for Print media
(%) 40 30 20 10 0 (10) 12.2 (4.0) Q1FY10 14.9 19.4 8.2 18.3 7.0 (0.3) 1.5 Q2FY10 Q3FY10 19.9 17.9 31.3 19.7 14.9 12.7 29.2 30.6 11.4 20.1 9.5 7.7 27.2 22.0 20.5 9.0 17.8 16.8 17.8 17.0 15.9 12.5 10.1 8.7 7.9 5.4 2.8 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12
Sun TVs DTH subscription revenues shows robust growth

(Rsmn) 1,000 840 820 700 540 700 530 790 840 Q3FY12 290 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 DTH Analog 860 Q4FY12 310 800 630 460 600 400 360 365 360 440 390 400 200 0 Q1FY10 Q2FY10 Q3FY10 Q4FY10 680 510
560
560
Jagran Prakashan
HT Media
DB Corp
25
470
Valuation
Valuation
EPS Company Balaji Telefilms Dish TV Info Edge HT Media Jagran Prakashan ENIL Prime Focus Sun TV Network Zee Entertainment
PE FY14E 5.4 1.5 30.5 10.6 8.24 14.3 11.9 22.3 7.8 FY13E 11.1 95.8 29.2 10.9 12.9 17.4 5.8 14.1 20.1 FY14E 7.5 38.8 24.2 9.1 10.3 14.6 4.3 12.5 17.4
P/BV FY13E 0.6 NM 5.8 1.4 3.6 2.0 1.5 4.4 3.3 FY14E 0.6 47.3 4.7 1.2 3.3 1.8 1.1 4.3 2.9
EV/EBIDTA FY13E 1.2 10.5 19.8 4.4 7.3 9.7 4.2 6.6 13.5 FY14E 0.2 7.5 14.9 3.2 5.9 8.4 3.0 5.8 11.4
RoE (%) FY13E 5.7 NM 21.7 13.7 28.2 12.1 27.3 32.1 16.4 FY14E 7.8 312.2 21.5 14.3 31.6 12.8 30.6 34.7 16.9
RoCE (%) FY13E 2.3 12.9 17.1 10.0 27.2 9.6 16.2 30.1 14.4 FY14E 5.4 25.3 17.7 11.1 30.1 10.4 20.4 32.7 15.0
FY13E 3.6 0.6 25.3 8.8 6.57 11.9 8.8 19.9 6.7
Recommendations
Company name Balaji Telefilms Dish TV Info Edge HT Media Jagran Prakashan ENIL Prime Focus Sun TV Network Zee Entertainment
CMP (Rs) 40 70 335 101 88 215 54 313 145
TP (Rs) 43 78 366 148 115 257 95 338 146
Upside/(Downside )% 7.5 11.4 9.3 46.5 30.7 19.5 75.9 8.0 0.7
Stock to Sector Neutral Outperform Neutral Outperform Outperform Outperform Outperform Outperform Neutral
Sector to Market Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral
Stock to Market Neutral Buy Neutral Buy Buy Buy Buy Buy Neutral
26
Metal sector outlook

Ferrous Neutral Domestic demand is expected to suffer due to slow pickup in investment cycle amidst government policy paralysis Margin pressure to sustain due to fall in global steel prices and higher raw material costs in rupee terms (caused by steel production indiscipline globally and sharp rupee depreciation) Volume growth tapered due to lower domestic demand and project delays Balance sheets remain stretched with debt, CWIP and higher working capital. Return ratios poor Domestic demand supply mismatch of minerals is in favor of miners leading to greater pricing power Production growth is at an inflection point and higher growth is expected in FY13-15E Extremely strong balance sheets 30-40% of market cap in cash, high free cash flow generation ability Robust margins due to lowest quartile cash cost of production Volume growth expected from expansions completed in the last few years LME prices have downside protection and could surprise street on the upside Valuations remain attractive. Positive triggers on raw material security (coal and bauxite)
MiningOutperform
Non-Ferrous-Outperform
Operating metrics Steel prices under pressure Miners sales vol. CAGR to turn upwards sharply LME prices well below global marginal COP
3,000 2,500
800 700 600 500 400 A pr-1 1 A pr-1 2 Jul-1 0 Jul-1 1 O ct-1 0 O ct-1 1 Jan-1 1 Jan-1 2 Jul-1 2
350 300 250 200 150 100
12% 10% 8% 6% 4% 2% 0% 6.4%
9.9% 5.9%
2,000
2.0%
1,500 Oct-10 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Aluminium Lead Zinc M arginal COP Zinc Aluminium M arginal COP
HR-CIS Export (LHS) Coking Coal-Contract
Iron ore 63% Fe China
NMDC FY10-12A
Coal India FY12-14E
Source: Bloomberg; Centrum Research Estimates
27
Valuation
Valuation - Attractive in metals space overall but risk reward remains favorable on mining stocks
Adj-EPS dil.(Rs) Company JSW Steel SAIL Tata Steel Sesa Goa* Coal India** NMDC GPIL Sterlite Inds HZL FY13E 82.4 8.5 32.0 42.5 29.8 19.2 37.2 14.4 15.8 FY14E 96.0 9.4 52.6 37.5 33.0 20.2 42.0 14.1 15.9 P/E (x) FY13E 8.7 11.0 13.2 4.7 11.9 10.1 3.6 7.5 7.7 FY14E 7.4 9.9 8.0 5.3 10.7 9.6 3.2 7.7 7.7 EV/EBITDA (x) FY13E 5.9 7.8 6.5 6.4 6.9 5.7 3.9 4.0 3.9 FY14E 5.2 7.6 5.5 6.3 5.9 5.2 3.2 3.8 3.3 P/B (x) FY13E 0.9 0.9 1.0 0.9 4.1 2.5 0.5 0.7 1.6 FY14E 0.8 0.8 0.9 0.8 3.5 2.1 0.5 0.7 1.4 ROE (%) FY13E 10.8 8.3 7.3 20.7 30.1 24.8 15.2 10.1 20.8 FY14E 11.4 8.5 11.0 15.8 28.6 21.8 14.9 9.2 18.1 ROCE (%) FY13E 9.7 7.4 8.7 12.8 30.2 30.1 14.6 10.9 19.9 FY14E 10.3 7.7 10.8 10.0 28.9 26.3 14.8 9.9 16.4
*Sesa goa profits includes cairn's contribution as an associate; ** coal India profits after adjusting for non cash OBR expenses Source: Centrum Research Estimates
Recommendations Coal India and NMDC among miners, HZL and Sterlite Inds among non-ferrous base metals
Stock Tata Steel SAIL JSW Steel GPIL NMDC Sesa Goa Coal India Sterlite Inds HZL Sector Ferrous Ferrous Ferrous Ferrous Mining Mining Mining Non-Ferrous Non-Ferrous Stock to Marlet Sell Sell Neutral Buy Buy Neutral Buy Buy Buy CMP 439 94 713 133 194 200 354 108 121 TP 393 88 735 172 227 208 384 125 151 Upside/(Downside) % (10.4) (6.1) 3.1 29.8 17.3 3.8 8.5 15.5 24.4 Stock to Sector Underperform Underperform Outperform Outperform Outperform Neutral Outperform Outperform Outperform Sector to Market Neutral Neutral Neutral Neutral Outperform Outperform Outperform Outperform Outperform
28
Oil and Gas sector outlook
Neutral
Higher oil prices are likely to affect the performance of the oil and gas sector and the companies falling under its purview. We estimate crude prices to average at US$107/bbl, US$110/bbl and US$115/bbl in FY13E, FY14E and FY15E respectively. Higher crude prices along with depreciating rupee is likely to inflate the under-recoveries thus impacting the upstream and downstream companies and straining government finances (cash funding to OMCs). Refining outlook does not seem to be encouraging either. Higher crude prices are expected to keep the GRMs under check. We foresee some pressure on GRMs during FY13E compared to FY12 when Singapore Complex GRMs averaged at US$8.6/bbl. Declining KG D6 gas volumes is affecting gas utilities. KG D6 gas volumes are likely to remain under pressure till further investments are made. However, overall gas availability is likely to improve post commissioning of two re-gasification terminals i.e. PLNGs Kochi and GAILs Dabhol terminal. Petchem prices and margins which are currently reeling under pressure are expected to rebound by the end of CY12. Crude price and under-recoveries
(%) 100
115 82 65 1,000 500 0 FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E Petrol PDS Kerosene Avg. Brent price (US$/bbl) Diesel Domestic LPG 85 70 87 107 110 115 140 120 100 80 60 40 20 0
Sharing of under-recoveries
0 60 60
(INRbn)
2,000 1,500
10 49
0 21 69 46
12
16 49
6 56
80 60 40 20 0 FY07 FY08 FY09 Upstream FY10 FY11 42 33 32 32 39 40 40 38 33 56 59
0 FY12 FY13E FY14E FY15E Absorption
Oil bonds/ cash
29
Valuation
Valuation
EPS FY13E BPCL Cairn GAIL Gujarat Gas GSPL HPCL IGL IOC OIL ONGC PLNG RIL 30.3 46.8 27.6 18.5 7.9 23.7 23.4 31.2 43.6 24.3 13.2 65.2 FY14E 40.7 45.3 33.5 18.5 8.0 33.9 27.0 39.3 63.1 29.8 13.8 64.8 P/E(x) FY13E 25.4 6.7 13.0 16.9 9.1 14.5 10.6 8.5 10.9 11.5 11.1 11.3 FY14E 18.9 6.9 10.7 16.9 9.0 10.1 9.2 6.8 7.5 9.4 10.6 11.4 P/BV (x) FY13E 1.8 1.1 1.9 4.6 1.5 0.9 2.4 1.0 1.5 1.7 2.6 1.3 FY14E 1.7 1.0 1.7 4.2 1.3 0.8 2.1 0.9 1.3 1.5 2.2 1.2 EV/EBITDA (x) FY13E 13.0 3.9 8.8 10.6 5.1 9.4 6.2 6.6 4.4 4.9 7.7 7.2 FY14E 10.2 3.6 7.3 10.0 5.1 7.7 5.6 5.5 2.6 4.1 6.4 6.9 RoE (%) FY13E 7.2 17.3 15.3 28.8 16.7 6.0 24.8 12.6 14.3 14.8 25.5 12.2 FY14E 9.2 14.9 16.8 26.0 14.9 8.2 24.4 14.5 18.8 16.9 22.5 11.1 RoCE (%) FY13E 6.8 17.3 12.2 20.0 12.6 6.6 25.6 9.6 13.5 12.3 14.2 9.5 FY14E 7.4 14.8 13.3 18.4 11.3 7.0 26.5 10.8 17.8 14.1 13.9 8.8
Recommendations
Stock to market BPCL Cairn GAIL Gujarat Gas GSPL HPCL IGL IOC OIL ONGC PLNG RIL Buy Buy Neutral Sell Neutral Neutral Under Review Neutral Buy Buy Buy Neutral CMP 769 313 358 312 71 344 249 266 476 280 146 740 TP 904 390 373 277 74 351 270 568 313 177 819 Upside/(Downside) % 17.6 24.8 4.2 (11.2) 3.9 2.0 1.4 19.3 12.1 21.1 10.7 Stock to Sector Outperform Outperform Neutral Underperform Neutral Neutral Under Review Neutral Outperform Outperform Outperform Neutral Sector to market Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral
30
Pharma sector outlook
Overweight
The domestic pharma market of Rs555bn ($10.1bn) had a healthy growth of 15% during FY12. The growth rate is likely to be maintained due to improvement in purchasing power and increase in lifestyle diseases. The healthcare insurance sector has grown by over 25% in FY12 resulting in enhanced use of drugs. New product introductions and line extensions are likely to generate 4-5% additional growth. The exports of drugs and pharma for FY12 was $13bn (Rs715bn) and grew at 25%. The exports for FY13 are expected ~$18bn (Rs990bn) with a YoY growth of 38%. Export revenues during FY12 were higher due to 14% depreciation of rupee against dollar. First-to-file (FTF), Authorised Generics (AG) and patent expiry opportunities have helped Indian pharma companies. Ranbaxy received $600mn (Rs33.0bn) revenues from 180-day exclusivity of generic Lipitor and Dr. Reddys Labs received $100mn (Rs5.5bn) for generic Zyprexa. Indian pharma companies are likely to benefit from $170bn (Rs9,350bn) patent expiry opportunities in the US over the next five years. The Indian biotech sector at ~$2.5bn (Rs137bn) grew over 20% in FY12. The growth momentum is likely to continue due to the launch of new products and exports to developing markets. The Indian CRAMS segment at ~$1.2bn (Rs66bn) is expected to grow at 15% in FY13 after a slowdown in the last two years. Overall, the Indian pharma industry is expected to grow by 16-17% in FY13. Concerns The depreciation of rupee is likely to increase the imported raw material cost and mark-to-market losses. The Government is likely to implement New Pharma Pricing Policy (NPPP), which is expected to increase the span of control from ~25% to 60% thereby affecting the profitability of major companies.
31
Valuation
Valuation: The pharma companies is attractively valued at current price and are poised for good growth
EPS FY13E Aurobindo Pharma Biocon Cipla Dishman Dr. Reddy's Labs Elder Pharma Glaxo SK Pharma * Lupin Merck * Pfizer Ranbaxy Labs * Sun Pharma Wyeth 12.8 17.2 16.5 11.0 89.1 45.9 87.6 25.7 41.1 71.1 29.7 21.3 75.9 FY14E 19.6 21.5 19.5 14.4 102.7 61.2 103.3 31.8 49.1 80.2 23.0 26.3 90.2 P/E(x) FY13E 8.7 13.8 19.6 5.9 18.4 6.8 23.0 21.2 14.6 16.6 16.5 29.3 12.4 FY14E 5.7 11.1 16.6 4.5 16.0 5.1 19.5 17.2 12.2 14.7 21.4 23.8 10.5 P/BV (x) FY13E 1.2 1.9 3.1 0.5 4.0 0.8 7.8 4.9 2.2 1.9 3.2 4.3 3.6 FY14E 1.0 1.7 2.7 0.5 3.4 0.7 6.8 3.9 2.1 1.8 2.8 3.8 2.9 EV/EBITDA (x) FY13E 8.3 7.9 14.2 5.5 12.1 4.9 19.3 14.1 17.3 16.4 13.2 20.0 9.4 FY14E 5.9 6.7 12.1 4.7 10.5 4.0 16.4 11.3 13.8 13.5 16.2 16.6 7.9 RoE (%) FY13E 14.9 14.6 16.7 8.9 23.9 12.1 36.1 25.3 15.8 13.6 23.5 18.6 32.0 FY14E 19.7 16.6 17.3 10.6 22.9 14.2 37.3 25.0 17.9 12.6 13.9 19.8 30.8 RoCE (%) FY13E 8.3 13.8 14.9 7.6 17.0 10.7 31.3 19.9 15.7 14.1 13.2 18.7 32.0 FY14E 10.5 16.3 15.7 8.8 19.2 12.3 32.4 22.0 17.9 13.1 8.7 19.6 30.8
Recommendations
Stock to market Aurobindo Pharma Biocon Cipla Dishman Dr. Reddy's Labs Elder Pharma Glaxo SK Pharma * Lupin Merck * Pfizer Ranbaxy Labs * Sun Pharma Wyeth Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Neutral Neutral Buy CMP 111 238 323 65 1,640 313 2,016 546 600 1,182 491 625 945 TP 137 344 390 72 2,087 429 2,479 635 687 1,364 464 657 1,353 Upside/(Downside) % 23.8 44.5 20.8 10.8 27.3 36.9 23.0 16.4 14.6 15.4 (5.5) 5.2 43.2 Stock to Sector Outperform Outperform Outperform Outperform Outperform Outperform Outperform Outperform Outperform Outperform Neutral Neutral Outperform Sector to market Outperform Outperform Outperform Outperform Outperform Outperform Outperform Outperform Outperform Outperform Outperform Outperform Outperform
* Year end December; CMP as on 13th June 2012 Source: Centrum Research Estimates
32
Telecom sector outlook
Underperform
Regulatory uncertainty over spectrum pricing and spectrum re-farming is negative for the sector. TRAI recommendation on spectrum base price for spectrum auction would result in escalation of spectrum price and is likely to put pressure on the balance sheet again We believe that companies may not take price hikes in 2G voice services to compensate for higher payout for spectrum in the next 2-3 months as they may gauge the extent of likely spectrum payout Minutes of usage growth in couple of quarters may be lower in single digits due to higher base and lower incremental addition in net subscribers Balance sheets may become stretched with higher debt. Return ratios will be under pressure.
Subs Net additions witnessing a slowdown
14,000,000 12,020,904 12,000,000 10,000,000 8,000,000 6,000,000 4,000,000 2,000,000 Apr'2011 Jun'2011 0
Revenue per minute likely to stabilize in voice market

(Rs) 0.33 0.32 0.31 0.30 0.29 0.28 0.27 0.26
1,000,000
10,543,899
0.32 0.30 0.30 0.29 553,660 605,289 610,573 658,919 0.29 701,542 0.28 740,821 0.29 744,020 Sep'11 770,491 Dec'11 0.28
800,000
9,693,835 9,329,293 9,147,308
600,000
7,283,184 7,273,664 6,569,810
7,640,205
7,018,886
7,122,082
6,675,758
7,552,025
6,571,046
400,000 200,000 0
June'10
Dec'10
Mar'10
Sep'10
Dec'2011
Oct'2011
Aug'2011
Apr'2012
Feb'2012
Total Minutes
Mar'11
Source: COAI, Centrum Research
Source: TRAI, Centrum Research
33
Jun'11 RPM
Valuation
Valuation Regulatory risks to restrict re rating
Adj-EPS dil.(Rs) Company Bharti Airtel Idea Cellular Rcom Tulip Telecom FY13E 17.4 4.2 3.0 4.7 FY14E 23.0 5.9 5.9 9.2 P/E (x) FY13E 18.4 20.3 23.4 8.9 FY14E 14.0 14.5 12.0 8.3 EV/EBITDA (x) FY13E 6.5 6.3 7.4 5.2 FY14E 5.3 5.1 6.1 4.5 P/B (x) FY13E 2.1 1.9 0.4 1.8 FY14E 1.9 1.7 0.4 1.4 ROE (%) FY13E 12.3 1.8 10.1 4.9 FY14E 14.3 3.4 12.5 9.1 ROCE (%) FY13E 7.7 2.9 7.8 7.0 FY14E 9.4 3.4 9.5 8.2
Recommendations We prefer Bharti among telecom companies

Company Bharti Airtel Idea Cellular Rcom Tulip Telecom Sector Telecom Telecom Telecom Telecom Stock to Market Accumulate Neutral Neutral Neutral CMP 321 85 71 119 TP 361 73 69 120 Upside/(Downside) % 12.3 (14.4) (3.7) 1.0 Stock to Sector Outperform Neutral Neutral Neutral Sector to Market Underperform Underperform Underperform Underperform
34
Top picks
35
Axis Bank
CMP: Rs1,075, TP: Rs1,300, Upside: 21%
Investment arguments Asset quality concerns overdone: Asset quality matrices have been contained (slippages at 1.2%/restructuring at 85bps) despite the challenging environment. Power sector exposure is high but funded exposure is to companies with captive/coal linkages and hence negligible impact due to import of coal. 20% of Non-funded exposure to power sector is backed by LOC from other financial institutions. Of the total power projects, 20% of projects are coming up for commissioning in FY13 and 45% in FY14. So the risk is still far into the future. Restructured assets still quite in control at 1.6% offering enough headroom to absorb incremental restructuring if required. Well placed to weather NIM pressure: Good progress on the liability profile with share of retail deposits improving from 40% to 45% - thereby reducing its dependence on wholesale deposits. Moreover, retail assets will be the next big growth driver (30% of loans by FY15 from 22% in FY12) which should provide impetus to the risk adjusted NIMs. Moreover, the de-risking of SME portfolio is largely over and hence the bank is ready to grow its SME book over FY13-14. Concerns Higher SME exposure could materially worsen profitability if macro remains challenging for elongated period. Valuation The stock currently trades at 1.5x FY14E PABV, which is -1SD or 30% discount to 5 yr mean. Current valuations are attractive given it is expected to deliver RoAs of 1.51.6%, RoEs of ~20% and is well positioned to navigate through current challenges and capture maximum upside to improvement in macro as well . 36
Stock to Sector OUTPERFORM
Sector to Market OUTPERFORM
Stock to Market BUY
Financials
Profit & Loss Account Interest Earned Interest expended Net interest income Non-interest income Net total income Operating expenses Pre- provisioning profit (PPP) Provision & Contingency PBT Tax PAT FY2012 21,995 13,977 8,018 5,420 13,438 6,007 7,431 1,143 6,288 6,288 4,242 FY2013E 24,581 15,157 9,425 6,356 15,781 7,113 8,668 1,475 7,192 7,192 4,853 FY2014E 29,839 18,551 11,287 7,542 18,830 8,506 10,324 1,756 8,568 8,568 5,781 FY2015E 35,613 22,314 13,299 8,573 21,872 10,274 11,599 1,852 9,747 9,747 6,576
Valuation Table Net profit (Rs cr) Shares in issue (cr) EPS (Rs) EPS growth (%) PE (x) P/PPP (x) Book value (Rs/share) P/BV (x) Adj book value (Rs/share) P/ABV (x) RONW (%)
FY2012 4,242 41.3 102.7 103.0% 10.5 6.0 552.0 1.9 534.3 2.0 18.6%
FY2013E 4,853 41.3 117.4 78.5% 9.2 5.1 644.8 1.7 623.2 1.7 18.2%
FY2014E 5,781 41.3 139.9 69.5% 7.7 4.3 754.6 1.4 727.0 1.5 18.5%
FY2015E 6,576 41.3 159.2 55.0% 6.8 3.8 878.6 1.2 847.3 1.3 18.1%
Source: Company; Centrum Research Estimate
Cairn
CMP: Rs312 , TP: Rs390, Upside: 25%
Investment arguments Currently produces about 175,000bpd crude from four fields Mangala, Bhagyam, Saraswati and Raageshwari and is expected to commence production from Aishwariya in H2CY12. Set to reach 240,000bpd in CY13. Rajasthan block resource potential pegged at about 7.3bn boe gross and expected ultimate recovery pegged at about 1.7bn boe. Significant cash of over US$1.5bn on the books and development capex of over US$0.7-.09bn in FY13 thus leaving aside cash for dividend payments. Two successive discoveries each in Mannar basin in Sri Lanka block and in KG onshore block KG-ONN-2003/1 which signifies future potential. Concerns Delay in government approvals for increasing Rajasthan production. Delay in production ramp up from Rajasthan fields and delay in commissioning of pipeline. Sudden drop in crude prices due to issues related to EU, higher inventories, lower demand etc. Valuation We remain optimistic over Cairns production ramp up and expect higher crude prices to persist which bodes well for Cairn. The stock is currently available at 6.8x and 7.1x FY13E EPS of Rs46.8 and FY14E EPS of Rs45.3. We have valued the stock using DCF methodology and maintain Buy with a price target of Rs384.
Sector to Market NEUTRAL
Stock to Market BUY
Financials
Rs mn Net Sales Growth % EBITDA EBITDA Margin % Adj. PAT Growth % P/E (x) P/BV (x) EV/EBITDA (x) RoE % RoCE% Dividend/ share (Rs) Operating metrics Cairn share in MBA prod. (bpd) Raj. Crude realisation (US$/bbl) Exchange rate (Rs/US$) 70,695 78.1 45.6 89,787 104.0 47.9 126,000 94.2 52.0 162,750 96.8 48.0 169,076 101.2 46.0 FY11 102,779 533.3 82,451 80.2 63,344 503 9.8 1.5 7.3 17.1 16.3 FY12 118,607 15.4 92,544 78.0 79,377 25 7.8 1.3 6.0 17.9 17.6 FY13E 203,402 71.5 121,045 59.5 89,300 13 7.0 1.1 4.1 17.3 17.3 11.0 FY14E 227,957 12.1 120,810 53.0 86,364 (3) 7.2 1.0 3.9 14.9 14.8 10.0 FY15E 223,988 (1.7) 115,040 51.4 81,547 (6) 7.6 0.9 3.7 12.7 12.6 9.0
37
Coal India Ltd. (CIL)

CMP: Rs354, TP: Rs384, Upside: 8.5%
Investment arguments Sales volumes to turn the tide of flat growth and grow by 6.8% in FY13E to ~463 MT on the back of better railway logistics and higher production Mining expansions and higher capacity utilizations to aid in production growth FSA coal pricing shift to GCV is positive for realizations and price increases could be taken in future Wage settlement and FSA overhang is no more High margin, robust free cash flow generation and cash rich balance sheet (cash/share>Rs90) Concerns Logistical constraints in achieving desired volumes Monsoons and naxal attacks hampering production Proposed mining tax (=25% of mining profit) in the new mining bill Valuation Trading at 10.7x FY14E P/E and 5.9x FY14E EV/EBITDA We value at average of EV/EBITDA and DCF methodologies and recommend Buy with a target price of Rs384. For EV/EBITDA methodology, we have valued CIL at 6.5x FY14E EV/EBITDA.
Stock to Market BUY
Financials
(Rs mn) Net Sales Growth % EBITDA* Margin % Adj-PAT* Growth % Adj-EPS (dil.) P/E (x) P/BV (x) EV/EBITDA (x) ROE (%) ROCE (%) Dividend/share (Rs) FY11 526,162 12.7 166,754 31.7 125,958 5.5 19.9 17.7 5.8 10.3 28.2 30.9 4.0 FY12 624,154 18.6 193,617 31.0 172,834 37.2 27.4 12.9 4.8 8.6 31.8 28.6 9.5 FY13E 678,068 8.6 225,905 33.3 188,167 8.9 29.8 11.9 4.1 6.9 30.1 30.2 11.0 FY14E 736,599 8.6 249,418 33.9 208,277 10.7 33.0 10.7 3.5 5.9 28.6 28.9 12.5 FY15E 802,895 9.0 277,949 34.6 233,118 11.9 36.9 9.6 2.9 4.9 27.3 27.7 12.5
*EBITDA adjusted for OBR expenses, PAT adj for OBR and extraordinaries Operating Metrics Sales Volumes (MT) Linkage (FSA, MoU etc) E-auction Total Realizations (Rs/tonne) Linkage (FSA, MoU etc) E-auction Total 357.0 47.7 424.5 1,050 1,846 1,091 362.0 50.9 433.1 1,207 2,599 1,418 395.6 48.6 462.6 1,256 2,850 1,466 415.1 48.6 485.5 1,306 2,936 1,517 428.0 48.4 509.5 1,345 3,024 1,576 FY11 FY12 FY13E FY14E FY15E
38
GSK Consumer Healthcare

Investment arguments GSK consumer is the undisputed leader in the Rs35bn Indian HFD category having ~70% market share across its brands, Horlicks, Boost, Viva and Maltova Volume drivers: Increase in penetration (22% pan India), focus on variants (23% of sales in 2011 from 17% in 2007) and pricing (small SKUs contribute ~4% of sales) and increasing distribution reach Focusing aggressively on new launches in the non-HFD portfolio which has now become 7% of sales from 3% four years ago. New products include categories such as biscuits, instant noodles, health bars, sports drinks and breakfast oats Concerns Slower than expected growth in non-HFD segment and not being able to scale new launches Deficient monsoons in South India could impact volume growth as more than 46% of revenues come from South India Valuation Trading at 26.6x CY12E and 22x CY13E P/E and 16.4x CY13E EV/EBITDA We value the stock at 25x CY13E EPS in-line with its 1- year average multiple. We have a BUY rating and target price of Rs2963 (13% upside)
Stock to Market BUY
Financials
Particulars (Rsmn) Net Sales Growth % EBITDA Margin % Adj-PAT Growth % Adj-EPS (dil.) P/E (x) P/BV (x) EV/EBITDA (x) ROE (%) ROCE (%) Dividend/share (Rs) CY10 23,061 20.0 3,767 16.3 2,999 28.8 71.3 36.7 11.5 26.6 32.2 24.5 50.0 CY11 26,855 16.5 4,250 15.8 3,552 18.5 84.5 30.9 9.6 23.3 33.8 24.5 35.0 CY12E 31,183 16.1 4,779 15.3 4,132 16.3 98.3 26.6 8.1 20.5 33.1 23.6 42.5 CY13E 36,433 16.8 5,804 15.9 4,985 20.6 118.5 22.1 6.9 16.5 34.0 24.1 54.0 CY14E 42,453 16.5 6,800 16.0 5,815 16.7 138.3 18.9 6.0 13.6 33.9 24.1 65.0
Operating Metrics HFD Segment Volume growth HFD Segment Value growth Gross Margins % A& P as % of sales
CY10 13.3 4.8 62.2 16.1
CY11 9.0 6.7 61.8 16.3
CY12E 9.5 6.0 60.5 16.0
CY13E 10.0 6.0 60.7 16.0
CY14E 10.0 5.5 60.5 16.0
39
Hero Moto Corp Ltd. (HMCL)

Investment arguments The two-wheeler industry has registered a volume CAGR of 10-12% over the last 17 years and is more resilient in times of economic slowdown unlike PVs and CVs. We expect volume growth of 10-12% for 2Ws to continue in FY13E. We believe that HMCL currently has one of the strongest product portfolios in the Executive segment and given the down trading (shift from Premium bikes to Executive bikes) in the motorcycle segment in the recent past, we believe HMCL will benefit the most. We do not expect HMSI to disrupt industry dynamics in the medium term. Given the capacity at HMSI, we believe it can potentially inch up its market share to 12% in FY13E from 8% currently in the domestic MC segment. We expect the companys margins to remain in the range of 15-15.3% over FY13E-FY14E. Concerns Continued weakness in the macro environment, coupled with deficient monsoons, may lead to lower than expected growth in FY13. Sharp rise in commodity prices. Valuation At the CMP of Rs. 2,064, the stock is currently trading at 14.9x FY13E EPS and 13.2x FY14E EPS. We are upgrading the stock to Buy from Hold with a revised target price of Rs2,379. 40
Stock to Market BUY
Financials
(RsMn) Net Sales Growth (%) EBITDA Margin (%) PAT Growth (%) P/E (x) P/BV (x) EV/EBITDA (x) ROE (%) ROCE (%) Dividend Per share Total Volumes ( in '000s) Growth (%)
FY11 193,979 28.1 26,132 13.5 19,918 (8.1) 20.7 13.9 13.8 62.0 76.2 105.0 5,402 17.9
FY12 233,814 22.6 34,072 15.3 21,806 9.5 18.9 9.6 10.9 60.2 72.7 45.0 6,256 15.8
FY13E 267,951 20.5 40,387 15.1 27,701 27.0 14.9 7.1 8.7 55.0 64.6 55.0 7,044 12.6
FY14E 306,094 14.6 46,819 15.3 31,210 12.7 13.2 5.6 6.9 47.4 60.0 65.0 7,938 12.7
Hindustan Zinc Ltd. (HZL)

CMP: Rs121, TP: Rs151, Upside: 24%
Investment arguments Backward integrated lowest quartile cost of zinc-lead production with free silver Lead and silver volumes to grow at an impressive CAGR of 30% and 43% respectively during FY12-14E Focus on capex in mining expected to lead to opening up of new mines (Kayar) and possible announcements of enhanced metal making capacity going ahead High margin (>50%), robust free cash flow generation and cash rich balance sheet Government stake buyout in future (at fair value/premium to market cap) to be beneficial for minority shareholders as promoters may opt for delisting at premium Concerns Huge cash on books a drag on ROE Mining costs have increased and output has reduced due to fall in grades and shutdowns at smelters Proposed mining tax (=royalty) in the new mining bill Valuation Trading at cheap valuations of 7.7x FY14E P/E and 3.3x FY14E EV/EBITDA We value at 5x FY14E EV/EBITDA and recommend Buy with a target price of Rs151
Stock to Market BUY
Financials
(Rsmn) Net Sales Growth % EBITDA Margin % Adj-PAT* Growth % Adj-EPS (dil.) P/E (x) P/BV (x) EV/EBITDA (x) ROE (%) ROCE (%) Dividend/share (Rs) FY11 99,121 23.6 56,228 17.3 49,005 21.3 11.6 10.5 2.3 6.5 21.7 21.9 1.0 FY12 112,551 13.5 60,695 7.9 55,260 12.8 13.1 9.3 1.9 5.5 20.6 19.5 2.4 FY13E 133,023 18.2 72,245 19.0 66,601 20.5 15.8 7.7 1.6 3.9 20.8 19.9 3.2 FY14E 135,891 2.2 68,990 (4.5) 67,041 0.7 15.9 7.7 1.4 3.3 18.1 16.4 3.2 FY15E 138,959 2.3 71,123 3.1 71,997 7.4 17.0 7.1 1.2 2.4 16.9 14.7 3.4
*adjusted for one-off and extraordinary gains/losses Operating Metrics Sales Volumes (kt) Zinc Lead Silver (tonne) Realizations (US$/tonne) Zinc LME Lead LME Silver (Rs/Kg) 713 57 147 2,185 2,244 37,091 758 91 208 2,099 2,268 55,000 756 145 400 2,100 2,200 50,000 791 154 425 2,205 2,310 50,000 800 158 450 2,315 2,426 50,000 FY11 FY12 FY13E FY14E FY15E
41
ICICI Bank
CMP: 941, TP: Rs1,100, Upside: 17%
Investment arguments Growth in focus: After two years of consolidation and preservation (FY0910), the bank is now focusing on growth again with strong focus on secured credit. Moreover, capital position remains strong with Tier I ratio of 12.7% and Tier II ratio of 5.8%. Improved credit quality: Focus on secured credit and cleaned-up balance sheet should continue to ensure healthy asset quality as well as contained credit costs. Low exposure to troubled sectors (textile, SEBs, aviation etc) has kept slippages low (1.4% for FY12 vs +2% for PSBs) and hence contained credit costs (60bps for FY12 vs +80bps for PSBs). High collateral on power projects giving significant comfort. Multiple supports to NIM: Reducing international exposure, lower securitization losses, declining non-yielding SR and incrementally higher share towards retail segment will help counter NIM pressure arising from tight liquidity and higher CoF. Moreover, liability side has seen material improvement with CASA mix improving to 43.5% and 76% of deposits constituted by retail. Concerns Continued macro challenges for elongated period can lead to stress in loan book key to our earnings assumptions. Valuation The current valuation seems to be discounting poor macro affecting growth and asset quality. However, despite slower loan growth prospects and higher credit cost over the medium term, we expect RoA to remain robust and RoE to expand 200bp over FY12-15. The stock is trading at 1.6x FY14E PABV close to -1SD to its 5 yr mean which makes risk-reward favorable. 42
Stock to Market BUY
Financials
Profit & Loss Account Interest Earned Interest expended Net interest income Non-interest income Net total income Operating expenses Pre- provisioning profit (PPP) Provision & Contingency PBT Tax PAT FY2012 33,543 22,809 10,734 7,503 18,237 7,850 10,386 1,583 8,803 2,338 6,465 FY2013E 37,608 24,515 13,092 8,637 21,729 8,646 13,083 2,832 10,251 2,665 7,586 FY2014E 45,338 29,844 15,494 10,134 25,628 9,922 15,706 3,431 12,275 3,192 9,084 FY2015E 54,375 36,000 18,375 11,281 29,655 11,482 18,173 4,017 14,156 3,760 10,396
Valuation table Net profit (Rs cr) Shares in issue (cr) EPS (Rs) EPS growth (%) PE (x) P/PPP (x) Book value (Rs/share) P/BV (x) Adj book value (Rs/share) P/ABV (x) RONW (%)
FY2012 6,465 115.3 56.1 25.4% 16.8 10.4 524.0 1.8 507.8 1.9 10.7%
FY2013E 7,586 115.3 65.8 17.3% 14.3 8.3 571.8 1.6 545.9 1.7 11.5%
FY2014E 9,084 115.3 78.8 19.7% 11.9 6.9 629.5 1.5 593.7 1.6 12.5%
FY2015E 10,396 115.3 90.2 14.4% 10.4 6.0 696.0 1.4 650.3 1.4 13.0%
Karur Vysya Bank

Investment arguments Well placed to navigate, tough times ahead: KVB is a play on consistently robust performance driven by deeper understanding of its target segment. This has translated into strong pricing power and contained credit costs and hence robust avg RoA of ~1.6% for last decade. Asset quality remains robust (%GNPA at 1.5%) with limited restructured assets (2.2% of loans). Concerns over high textile exposure (~8%) seem overdone as better credit selection has prevented significant slippages in past and we expect the same to continue in future as well. Renewed focus on liability side: KVB has stepped up efforts to strengthen its liability side including 1) aggressive branch expansion in non-home state locations 2) product innovation and business process reengineering and 3) array of changes (based on BCG consultations) to address scalability challenges. The benefits of efforts underway should be visible over medium term. Concerns Continued macro challenges for elongated period can lead to stress in loan book key to our earnings assumptions. Valuation KVB compares well with leading private sector peers on growth, profitability (RoA of +1.5% and RoE of +20%) and quality (%GNPA at 1.45%, restructured at 2.2%). Despite that, KVB trades at a significant 50% discount to avg PBV of five quality private banks. While some valuation discount to quality private banks can be justified on account of the size of operations and scalability challenges, the extent of discount currently is unjustified and we expect it to narrow down going ahead.
Stock to Market BUY
Financials
Profit & Loss Account Interest Earned Interest expended Net interest income Non-interest income Net total income Operating expenses Pre- provisioning profit (PPP) Provision & Contingency PBT Tax PAT FY2012 3,270 2,353 917 350 1,267 542 726 94 632 130 502 FY2013E 4,015 2,838 1,177 402 1,578 651 928 160 767 192 575 FY2014E 4,983 3,467 1,516 497 2,012 769 1,244 237 1,007 252 755 FY2015E 6,043 4,249 1,794 572 2,366 920 1,446 298 1,148 237 911
Valuation table Net profit (Rs cr) Shares in issue (cr) EPS (Rs) EPS growth (%) PE (x) P/PPP (x) Book value (Rs/share) P/BV (x) Adj book value (Rs/share) P/ABV (x) RONW (%)
FY2012 502 10.7 46.8 5.9% 9.3 6.5 252.7 1.7 245.3 1.8 18.5%
FY2013 575 10.7 53.7 14.7% 8.1 5.0 287.7 1.5 267.8 1.6 18.7%
FY2014 755 10.7 70.5 31.2% 6.2 3.8 333.1 1.3 304.9 1.4 21.2%
FY2015 911 10.7 85.0 20.7% 5.1 3.2 387.5 1.1 355.2 1.2 21.9%
43
Lupin
Investment arguments Integrated pharma company with strong presence in India, US and Japan The company has a track record of 7 years of sustained growth and is likely to maintain the growth above 20% Lupin has a strong presence in the US market and markets its flagship brand Suprax. The company markets 45 generic products in the US, of which 17 products are ranked No.1 Lupin has a pipeline of 127 ANDAs in the US of which 58 are approved. It has launched 11 new products in the US, of which 3 are Oral Contraceptive (OC) products Lupin acquired I-rom an injectible formulation company in Japan in FY12 to strengthen its position in the Japanese pharma market FY12 growths in various geographies: US, Europe 21%, India 23%, Japan 39%, Africa 40% and Philippines 58%YoY Concerns Higher tax rate due to expiry of EOU benefits Lower capacity utilisation of Indore SEZ Valuation Trading at 21.2x FY13E EPS and 17.2x FY14E EPS We value at 20x FY14E EPS and recommend Buy with a target price of Rs635
Stock to Market BUY
Financials
Particulars (Rsmn) Net Sales Sales growth % EBIDTA EBIDTA margin % Net Profit Net Profit growth % EPS Rs. P/E(x) P/BV(x) EV/EBIDTA (x) RoE % ROCE % Dividend/share Rs. FY11 58,319 19.7 11,911 20.4 8,625 26.5 19.4 28.1 7.4 21.4 29.5 21.0 3.0 FY12 70,829 21.5 14,446 20.4 8,676 0.6 19.5 28.0 6.1 17.9 23.8 17.3 3.2 FY13E 85,174 20.3 17,953 21.1 11,434 31.8 25.7 21.2 4.9 14.1 25.3 19.9 3.5 FY14E 101,572 19.3 22,134 21.8 14,119 23.5 31.8 17.2 3.9 11.3 25.0 22.0 4.0 FY15E 120,307 18.4 27,127 22.5 17,276 22.4 38.9 14.0 3.1 9.2 24.5 22.5 4.5
Sales Composition
Particulars (Rsmn) Formulations-India Formulations-Reg Mkt Formulations-Semi Reg API Others Other op. Income Total Excise duty Net sales FY11 15,509 28,229 3,642 4,765 5,275 1,252 58,672 354 58,319 FY12 19,059 35,885 4,322 4,074 5,707 2,202 71,249 420 70,829 FY13E 23,499 45,422 5,100 4,235 5,992 1,425 85,673 499 85,174 FY14E 28,817 55,081 5,967 4,403 6,292 1,615 102,175 603 101,572 FY15E 35,399 65,728 6,922 4,579 6,607 1,805 121,038 731 120,307
44
NIIT Ltd. (NIIT)

Investment arguments Better revenue mix in favour of individual learning solution (highest operating margin among all segments) would help expand operating margin. New businesses also turned EBITDA positive. Hence, all the segments would see improvement in operating profit margin. Core net profit (on a like to like basis) is expected to register 15% CAGR over FY12-15E Restructuring of business helps reduce balance sheet size by 16% to Rs7.75bn Net debt is zero with RoE of 18% in FY12 and has been generating free cash flow. With no major capex plan, we dont see pressure on free cash flow status Concerns Lower than expected growth in enrollment in IT training division Higher than expected losses in the Yuva Jyoti subsidiary can impact the margin of the company Valuation Trading at attractive valuations of 6.8x FY14E P/E and 3.8x FY14E EV/EBITDA Based on sum of parts valuation, we recommend Buy with a target price of Rs54, implying 6.8x FY14E earrings
Stock to Market BUY
Financials
Particulars (Rsmn) Net Sales Growth (%) EBITDA EBITDA Margin (%) Net Profit (Adj) Growth (%) ROCE (%) ROE (%) Diluted EPS (Rs) P/E (x) EV/EBITDA (x) Dividend Yield (%)
(Rsmn) Individual Learning Solution Corporate Learning Solution School Learning Solution Yuva Jyoti Revenue Operating margin (%) Individual Learning Solution Corporate Learning Solution School Learning Solution EBITDA (Total)
FY11 12,483 4.1 1,594 12.8 922 31.2 13.1 17.4 6 7.7 6.4 3.5
FY11 5,165 5,836 1,481 12,482 18.5 8.1 11.4 12.8
FY12E 12,603 1.0 1,475 11.7 1,102 19.5 15.2 18.1 7 6.5 4.9 3.7
FY12 5,829 4,729 2,042 2 12,602 16.1 9.3 7.1 11.7
FY13E 10,925 (13.3) 1,374 12.6 826 (25.0) 11.2 11.9 5 8.6 4.6 2.2
FY13E 6,260 2,850 1,760 55 10,925 15.2 10.5 11.0 12.6 FY14E 6,930 3,300 1,936 125 12,291 16.1 11.0 13.0 13.5
FY14E 12,291 12.5 1,664 13.5 1,054 27.6 12.9 13.8 6 6.8 3.8 3.7
FY15E 13,669 11.2 1,951 14.3 1,215 15.2 13.7 14.4 7 5.9 3.1 4.7
CAGR FY15E (10-15E) 7,654 3,775 2,065 175 13,669 17.2 11.0 13.5 14.3 9.5 (7.2) 0.4 2.7
45
NMDC
CMP: 194, TP: 227, Upside: 17%
Investment arguments Sales volumes to grow at a CAGR of 10% during FY12-14E backed by high demand and improved logistics Greater flexibility in setting iron ore prices based on domestic demand Mining expansions in Chhattisgarh and Karnataka to increase output by ~10 mtpa in two years Value addition to ore from setting up of pellet and steel plant. Higher returns on cash pile. High margin (>75%), robust free cash flow generation and cash rich balance sheet (cash/share>Rs50) Overseas project investments and announcements Concerns Logistical constraints in achieving desired volumes Proposed mining tax (=royalty) in the new mining bill Valuation Trading at cheap valuations of 9.6x FY14E P/E and 5.2x FY14E EV/EBITDA We value at 6.5x FY14E EV/EBITDA and recommend Buy with a target price of Rs227
Stock to Market BUY
Financials
Particulars (Rsmn) Net Sales Growth % EBITDA Margin % Adj-PAT* Growth % Adj-EPS (dil.) P/E (x) P/BV (x) EV/EBITDA (x) ROE (%) ROCE (%) Dividend/share (Rs) FY11 113,693 82.4 86,444 76.0 64,992 88.5 16.4 11.8 4.0 6.9 33.8 44.0 3.3 FY12 112,619 (0.9) 89,259 79.3 72,654 11.8 18.3 10.6 3.1 6.3 29.3 35.3 3.7 FY13E 123,971 10.1 94,473 76.2 76,048 4.7 19.2 10.1 2.5 5.7 24.8 30.1 3.8 FY14E 133,120 7.4 100,502 75.5 80,047 5.3 20.2 9.6 2.1 5.2 21.8 26.3 4.0 FY15E 138,769 4.2 103,520 74.6 83,141 3.9 21.0 9.2 1.8 4.7 19.3 22.8 4.2
* adjusted for one-off and extraordinary gains/losses Operating Metrics Sales Volumes (MT) Growth % Realizations (Rs/tonne) EBITDA/tonne (Rs) 4,323 3,287 FY11 26.3 FY12 27.3 3.8 4,125 3,270 FY13E 30 9.9 4,132 3,149 FY14E 33 10.0 4,034 3,046 FY15E 36 9.1 3,855 2,876
46
Petronet LNG
CMP: Rs146 , TP: Rs177, Upside: 21%
Investment arguments Current nameplate re-gasification capacity of 10mmtpa likely to double over the next 1.5-2.0yrs and grow further to 25mmtpa over the next four years. Greenfield Kochi re-gasification terminal (5mmtpa) likely to be commissioned by the end of 2012 thus augmenting re-gasification volumes. Re-gasification margins are likely to be sustainable and the company may/may not exercise 5% yearly escalation in re-gasification margins depending on LNG prices, demand etc. Crude being at higher level, Indias LNG demand has been increasing and is likely to keep up the momentum going ahead which augurs well for PLNG. Concerns Regulations on setting up new LNG terminals, capping marketing, regasification margins. Higher LNG prices Valuation Rising LNG re-gasification capacity will aid rise in earnings going ahead. We have valued PLNG using DCF methodology (cost of equity- , WACC)and maintain Buy on the stock with a price target of Rs.
Stock to Market BUY
Financials
Particulars (Rsmn) Net Sales Growth % EBITDA EBITDA Margin % Adj. PAT Growth % P/E (x) P/BV (x) EV/EBITDA (x) RoE % RoCE% Dividend/ share (Rs) Operating margins Long-term regas. vol. (TBTUs) Spit re-gas. vol. (TBTUs) Total re-gas vol. (TBTUs) Growth % Re-gasification margins (Rs/mmbtu) 382.4 60.5 442.9 9.3 31.5 377.8 175.5 553.3 24.9 38.1 385.7 190.0 575.7 4.0 36.9 457.1 256.0 713.1 23.9 34.9 482.4 260.0 742.4 4.1 34.9 FY11 131,973 23.9 12,161 43.7 6,196 53.2 15.6 3.6 10.5 25.2 12.7 FY12 226,959 72.0 18,292 50.4 10,575 70.7 9.1 2.7 6.4 34.1 17.3 FY13E 239,254 5.4 18,515 1.2 9,899 (6.4) 9.8 2.3 7.0 25.5 14.2 FY14E 281,220 17.5 21,899 18.3 10,325 4.3 9.3 2.0 5.8 22.5 13.9 FY15E 282,448 0.4 22,731 3.8 10,882 5.4 8.9 1.7 5.1 20.7 13.7
47
Prime Focus
Investment arguments It is a unique global network of integrated studios and has offices across 3 continents in all time zones. Its 15 facilities, over 4,500 staff, 24x7, 365-day work schedule give it major time and cost benefits Well-positioned to capitalize on its 3D and VFX capabilities and increasing use of this in movies opens huge market potential. Currently has ~35% market share in 3D conversion Its customers include Hollywood studios such as Warner Bros., Lucasfilm, DreamWorks, Paramount, Twentieth Century Fox, Walt Disney, Summit Entertainment, Relativity Media and Sony Concerns Outstanding FCCB of USD55mn which it is expected to re-pay before December 2012 with 43% premium amounting to a total of ~USD79mn Valuation The stock is currently trading at 6.2x and 4.5x FY13E and FY14E EPS of Rs8.76 and Rs11.89 respectively. Is at a significant discount to its Indian M&E peers even though it has higher revenue growth, high RoE, higher margins and leadership position. We value Prime Focus at 8x FY14E EPS of Rs11.89 and arrive at a target price of Rs95
Stock to Market BUY
Financials
Particulars (Rsmn) Net Sales Growth % EBITDA Margin % Adj-PAT Growth % Adj-EPS P/E (x) P/BV (x) EV/EBITDA (x) ROE (%) ROCE (%) FY10 4,528 27.8 1,196 26.4 472 501.8 3.2 17.0 4.2 10.4 25.6 8.8 FY11 5,030 11.1 1,681 33.4 831 76.2 5.6 9.7 2.2 7.3 29.8 13.5 FY12 7,719 53.5 2,343 30.3 1,021 22.9 6.9 7.9 1.7 5.4 24.7 13.7 FY13E 9,366 21.3 2,936 31.4 1,304 27.7 8.8 6.2 1.6 4.4 27.3 16.2 FY14E 11,223 19.8 3,768 33.6 1,771 35.8 11.9 4.5 1.2 3.1 30.6 20.4
Revenue Break-up USA UK India PFT
FY10 1,744 1,926 858 0
FY11 2,583 1,518 817 110 538
FY12E 4,699 1,921 832 329 831
FY13E 5,616 2,114 847 789 1,033
FY14E 6,716 2,261 864 1381 1,356
Outsourced Revenue for India 95 Source: Company; Centrum Research Estimate
48
Wyeth
CMP: Rs945, TP: Rs1,353, Upside: 43%
Investment arguments Wyeth is a leading MNC pharma company operating predominantly in India and has well-established brands All major brands are growing faster than the market . Top 6 brands contribute ~47% to net sales Prevenar 13 is the largest selling vaccine in India with sales of ~Rs1.2bn (20% of net sales) Wyeth has 27% MS in oral contraceptive segment and markets Lorette, Ovral-G and Ovral-L in this segment The company has plans to launch new vaccines and OTC products of the parent company in India Concerns Higher dependence on single product Prevenar 13 High import content, effect of depreciating rupee Under NPPP, five out of six top products would be under price-control Uncertainty of merger with Pfizer-the parent company Low liquidity on BSE and NSE Valuation Wyeth is trading at 12.4x FY13E EPS and 10.5x FY14E EPS Debt-free cash rich company, cash/ share Rs160 We value at 15x FY14E EPS and recommend Buy with a target price of Rs1353
Stock to Market BUY
Financials
Particulars (Rsmn) Net Sales Sales growth % EBIDTA EBIDTA margin % Net Profit Net Profit growth % EPS Rs. P/E(x) P/BV(x) EV/EBIDTA (x) RoE % ROCE % Dividend/share Rs. FY11(16m) 6,365 11.1 2,222 34.9 1,653 40.0 72.7 13.0 5.6 8.4 37.4 37.2 22.0 FY12 5,941 24.5 1,834 30.9 1,449 16.9 63.8 14.8 4.5 11.4 33.5 33.4 18.0 FY13E 6,980 17.5 2,202 31.5 1,725 19.0 75.9 12.4 3.6 9.4 32.0 32.0 22.0 FY14E 8,219 17.8 2,623 31.9 2,050 18.8 90.2 10.5 2.9 7.9 30.8 30.8 25.0 FY15E 9,636 17.3 3,122 32.4 2,441 19.1 107.5 8.8 2.4 6.6 29.7 29.7 27.0
Major Brands
Particulars (Rsmn) Folvite Mucaine Wysolone Ovral-L Ativan Wymox Total-top 6 % of Net sales FY11 681 516 380 376 326 255 2,534 53.1 FY12 752 611 409 471 362 230 2,835 47.7 FY13E 880 745 474 603 416 209 3,328 47.7 FY14E 1021 902 546 766 475 192 3,901 47.5 FY15E 1174 1082 622 972 536 179 4,565 47.4
49
Rating methodology
Stock to SECTOR SECTOR TO MARKET Outperform OUTPERFORM Neutral Underperform Outperform NEUTRAL Neutral Underperform Outperform UNDERPERFORM Neutral Underperform STOCK TO MARKET BUY BUY ACCUMULATE NEUTRAL NEUTRAL NEUTRAL REDUCE SELL SELL
ACCUMULATE: Add on decline ; REDUCE: Sell on rise Stock to Sector This is the relative rating of the stock to the sector and reflects its relative attractiveness vis--vis other coverage stocks in the sector. Sector to Market This is the relative rating of the sector vis--vis the other sectors in the coverage space. This is derived based on the conviction of the analyst on a sector and macro view outlined in market strategy. Stock to Market The final rating on the stock is obtained as a combination of the stock to sector and sector to market view as outlined in the table above.
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Disclaimer
Centrum Broking Limited .(Centrum) is a full-service, Stock Broking Company and a member of The Stock Exchange, Mumbai (BSE) and National Stock Exchange of India Ltd. (NSE). Our holding company, Centrum Capital Ltd, is an investment banker and an underwriter of securities. As a group Centrum has Investment Banking, Advisory and other business relationships with a significant percentage of the companies covered by our Research Group. Our research professionals provide important inputs into the Group's Investment Banking and other business selection processes. Recipients of this report should assume that our Group is seeking or may seek or will seek Investment Banking, advisory, project finance or other businesses and may receive commission, brokerage, fees or other compensation from the company or companies that are the subject of this material/report. Our Company and Group companies and their officers, directors and employees, including the analysts and others involved in the preparation or issuance of this material and their dependants, may on the date of this report or from, time to time have "long" or "short" positions in, act as principal in, and buy or sell the securities or derivatives thereof of companies mentioned herein. Centrum or its affiliates do not own 1% or more in the equity of this company Our sales people, dealers, traders and other professionals may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. We may have earlier issued or may issue in future reports on the companies covered herein with recommendations/ information inconsistent or different those made in this report. In reviewing this document, you should be aware that any or all of the foregoing, among other things, may give rise to or potential conflicts of interest. We and our Group may rely on information barriers, such as "Chinese Walls" to control the flow of information contained in one or more areas within us, or other areas, units, groups or affiliates of Centrum. Centrum or its affiliates do not make a market in the security of the company for which this report or any report was written. Further, Centrum or its its affiliates did not make a market in the subject companys securities at the time that the research report was published. This report is for information purposes only and this document/material should not be construed as an offer to sell or the solicitation of an offer to buy, purchase or subscribe to any securities, and neither this document nor anything contained herein shall form the basis of or be relied upon in connection with any contract or commitment whatsoever. This document does not solicit any action based on the material contained herein. It is for the general information of the clients of Centrum. Though disseminated to clients simultaneously, not all clients may receive this report at the same time. Centrum will not treat recipients as clients by virtue of their receiving this report. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Similarly, this document does not have regard to the specific investment objectives, financial situation/circumstances and the particular needs of any specific person who may receive this document. The securities discussed in this report may not be suitable for all investors. The securities described herein may not be eligible for sale in all jurisdictions or to all categories of investors. The countries in which the companies mentioned in this report are organized may have restrictions on investments, voting rights or dealings in securities by nationals of other countries. The appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives. Persons who may receive this document should consider and independently evaluate whether it is suitable for his/ her/their particular circumstances and, if necessary, seek professional/financial advice. Any such person shall be responsible for conducting his/her/their own investigation and analysis of the information contained or referred to in this document and of evaluating the merits and risks involved in the securities forming the subject matter of this document. The projections and forecasts described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. Projections and forecasts are necessarily speculative in nature, and it can be expected that one or more of the estimates on which the projections and forecasts were based will not materialize or will vary significantly from actual results, and such variances will likely increase over time. All projections and forecasts described in this report have been prepared solely by the authors of this report independently of the Company. These projections and forecasts were not prepared with a view toward compliance with published guidelines or generally accented accounting principles. No independent accountants have expressed an opinion or any other form of assurance on these projections or forecasts. You should not regard the inclusion of the projections and forecasts described herein as a representation or warranty by or on behalf of the Company, Centrum, the authors of this report or any other person that these projections or forecasts or their underlying assumptions will be achieved. For these reasons, you should only consider the projections and forecasts described in this report after carefully evaluating all of the information in this report, including the assumptions underlying such projections and forecasts. The price and value of the investments referred to in this document/material and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide for future performance. Future returns are not guaranteed and a loss of original capital may occur. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice. Centrum does not provide tax advice to its clients, and all investors are strongly advised to consult regarding any potential investment. Centrum and its affiliates accept no liabilities for any loss or damage of any kind arising out of the use of this report. Foreign currencies denominated securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of or income derived from the investment. In addition, investors in securities such as ADRs, the value of which are influenced by foreign currencies effectively assume currency risk. Certain transactions including those involving futures, options, and other derivatives as well as non-investment-grade securities give rise to substantial risk and are not suitable for all investors. Please ensure that you have read and understood the current risk disclosure documents before entering into any derivative transactions. This report/document has been prepared by Centrum, based upon information available to the public and sources, believed to be reliable. No representation or warranty, express or implied is made that it is accurate or complete. Centrum has reviewed the report and, in so far as it includes current or historical information, it is believed to be reliable, although its accuracy and completeness cannot be guaranteed. The opinions expressed in this document/material are subject to change without notice and have no obligation to tell you when opinions or information in this report change. This report or recommendations or information contained herein do/does not constitute or purport to constitute investment advice in publicly accessible media and should not be reproduced, transmitted or published by the recipient. The report is for the use and consumption of the recipient only. This publication may not be distributed to the public used by the public media without the express written consent of Centrum. This report or any portion hereof may not be printed, sold or distributed without the written consent of Centrum. This report has not been prepared by Centrum Securities LLC. However, Centrum Securities LLC has reviewed the report and, in so far as it includes current or historical information, it is believed to be reliable, although its accuracy and completeness cannot be guaranteed. The distribution of this document in other jurisdictions may be restricted by law, and persons into whose possession this document comes should inform themselves about, and observe, any such restrictions. Neither Centrum nor its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. This document does not constitute an offer or invitation to subscribe for or purchase or deal in any securities and neither this document nor anything contained herein shall form the basis of any contract or commitment whatsoever. This document is strictly confidential and is being furnished to you solely for your information, may not be distributed to the press or other media and may not be reproduced or redistributed to any other person. The distribution of this report in other jurisdictions may be restricted by law and persons into whose possession this report comes should inform themselves about, and observe any such restrictions. By accepting this report, you agree to be bound by the fore going limitations. No representation is made that this report is accurate or complete. The opinions and projections expressed herein are entirely those of the author and are given as part of the normal research activity of Centrum Broking and are given as of this date and are subject to change without notice. Any opinion estimate or projection herein constitutes a view as of the date of this report and there can be no assurance that future results or events will be consistent with any such opinions, estimate or projection. This document has not been prepared by or in conjunction with or on behalf of or at the instigation of, or by arrangement with the company or any of its directors or any other person. Information in this document must not be relied upon as having been authorized or approved by the company or its directors or any other person. Any opinions and projections contained herein are entirely those of the authors. None of the company or its directors or any other person accepts any liability whatsoever for any loss arising from any use of this document or its contents or otherwise arising in connection therewith. Centrum and its affiliates have not managed or co-managed a public offering for the subject company in the preceding twelve months. Centrum and affiliates have not received compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for service in respect of public offerings, corporate finance, debt restructuring, investment banking or other advisory services in a merger/acquisition or some other sort of specific transaction. As per the declarations given by them, Mr. Rohit Nagraj, research analyst and the authors of this report and/or any of their family members do not serve as an officer, director or any way connected to the company/companies mentioned in this report. Further, as declared by them, they have not received any compensation from the above companies in the preceding twelve months. Our entire research professionals are our employees and are paid a salary. They do not have any other material conflict of interest of the research analyst or member of which the research analyst knows of has reason to know at the time of publication of the research report or at the time of the public appearance. While we would endeavour to update the information herein on a reasonable basis, Centrum, it's associated companies, their directors and employees are under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent Centrum from doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or Centrum policies, in circumstances where Centrum is acting in an advisory capacity to this company, or any certain other circumstances Key to Centrum Investment Rankings Buy: Expected outperform Nifty by>15%, Accumulate: Expected to outperform Nifty by +5 to 15%, Hold: Expected to outperform Nifty by -5% to +5%, Reduce: Expected to underperform Nifty by 5 to 15%, Sell: Expected to underperform Nifty by>15%
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Centrum Broking Limited

Member (NSE, BSE, MCX-SX), Depository Participant (CDSL) and SEBI registered Portfolio Manager Registration Nos. CAPITAL MARKET SEBI REGN. NO.: BSE: INB011454239, NSE: INB231454233 DERIVATIVES SEBI REGN. NO.: NSE: INF231454233 (TRADING & SELF CLEARING MEMBER) CDSL DP ID: 12200. SEBI REGISTRATION NO.: IN-DP-CDSL-20-99 PMS REGISTRATION NO.: INP000000456 MCX SX (Currency Derivative segment) REGN. NO.: INE261454236 Website: www.centrum.co.in Investor Grievance Email ID: investor.grievances@centrum.co.in Compliance Officer Details : Mr. Praveen Malik; Tel: (022) 42159703; Email ID: praveen.malik@centrum.co.in Registered Office Address Bombay Mutual Building ,2nd Floor, Dr. D. N. Road, Fort, Mumbai - 400 001 Correspondence Address Centrum House 6th Floor, CST Road, Near Vidya Nagari Marg, Kalina, Santacruz (E), Mumbai 400 098. Tel: (022) 4215 9000
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Centrum Broking Limited: Institutional Equities

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Centrum Broking Limited: Institutional Equities

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Your Aim is Our Only Target

Centrum Broking Limited

G. Chokkalingam Group CIO, Centrum

Strictly Private and Confidential

Economy and Strategy

Current Macro under pressure

Crude Brent (RHS)

Source: Bloomberg, Centrum Research

IIP-Core inflation data trend

Daily Mean Rainfall

Core inflation % (RHS)

Some concerns overdonereflected in price

Source: Bloomberg, Centrum Research

Sensex Forward P/E graph

Bond Yield/Equity yield ratio

P/E Mean - Std Dev Min Source: Bloomberg, Centrum Research

Mean + Std Dev Max

BEY R (Bond-Equity Yield Ratio)

Source: Bloomberg, Centrum Research

Monsoons mostly smoke with no real fire

Agri GDP growth versus Rainfall deviation

Agri GDP % YoY Source: IMD, Bloomberg, Centrum Research

Rainfall deviation % (RHS)

Satellite Picture of Clouds

Agri GDP as % of Total GDP

Source: IMD, taken as of 10thJuly 2012

Source: Bloomberg, Centrum Research

Key triggers to alleviate pressure points

Political realignment in Rajya Sabha

Core inflation versus Repo rate

United Progressive Alliance 36%

Parties supporting UPA from outside 12%

Source: Bloomberg, Centrum Research

Sensex@20,500 by FY13 end

PE versus Nominal GDP growth

Composition of incremental earnings

Industrials 3% Telecom 2% Health Care 3% Energy 10% Utilities 4%

Nominal GDP % (YoY)

Source: Bloomberg, Centrum Research

Source: Bloomberg, Centrum Research

One year rolling returns

Mid cap stock performance

Index BSE SENSEX 30 INDEX BSE MID-CAP INDEX

24-Oct-08 8,701 3,096

10-Jun-12 17,618 6,307

% Return 102 104

Source: Bloomberg, CentrumResearch

Source: Bloomberg, Centrum Research

Sector Outlook and Valuation

Sector outlook and recommendations

Private Banks: Outperform Public Sector: Neutral

Axis Bank ICICI Bank Karur Vysya Bank

Sector outlook and recommendations.(contd.)

GSK Consumer Healthcare

Sector outlook and recommendations.(contd.)

Oil & Gas

Cairn Petronet LNG

Sector outlook and recommendations.(contd.)

Auto sector outlook

Passenger Vehicles Neutral

Commercial Vehicles - Neutral

FY13E 80.9 37.8 116.3 138.7 2.0 38.0

FY14E 91.6 45.4 133.1 156.3 2.6 40.7