High Conviction Midcap Ideas: Nifty: 6,495 Sensex: 21,755

ThemeReport
AmarAmbani,research@indiainfoline.com
India Strategy
High Conviction Midcap Ideas
March24,2014
Nifty: 6,495
Sensex: 21,755
Recentopinionpollsandourownprojectionleadustobelievethatwearein
for a stable government at the Centre in June. Market sentiment is likely to
remainupbeatandwerecommendtakingatacticalequitylongpositiontoplaythisevent.Areversalinthe
GDP growth trend, fall in inflation, reasonable valuations on the back of earnings growth revisions and a
stable currency in the near term will support the market sentiment and FII flows will remain healthy. The
marketupmove,inourview,willbefrontendedandH22014willseeconsolidationtakingplace.OurNifty
targetis7200,withalowprobabilityofamajorcorrection.Werecommend10qualitymidcapstobuy.
What caused the market rally?

The Nifty rallied nearly 10% over the past two months steered by improving market sentiment, backed by
strong foreign liquidity flows. The changing sentiment can be attributed to a reaffirmation of the NDA
government coming to power by recent opinion polls. The stock market was worried about the emergence of
theAamAdmiParty(AAP)anditsimpactontheGeneralelectionoutcome.Themarketfearedthepossibilityof
ahungassemblyorathirdfrontgovernment,pushingthereformagendaincoldstorage.Butfollowupopinion
pollsreiteratedthatNDAledgovernmentwascomingtopowerandtheAAPsfortuneswouldbelimitedto8
15seats,atbest.Coupledwithastablecurrency,reductionintradedeficit,containmentoffiscaldeficitandfall
ininflation,FIIfundflowremainedstrongandproppedupthemarket.
The party to continue Time to load up

We are of the view that as long as one of the two national parties comes to power, the reform process will
restart.OpinionpollssuggestthatanNDAformationwilltakechargeofthereins.AlthoughOpinionpollshave
gotitwrongattimesinthepast,onemustnotethattheytendtogaugethemoodmoreaccuratelyclosertothe
election;andtheyareoftheviewthattheNDAformationisgainingmomentum.Ourownprojectionsupports
we expect 185195 seats for the BJP and enough postpoll support to form a government. We believe the
market sentiment will remain upbeat and the rally will not pause, albeit minor corrections. We also see the
possibilityofthemarketrising~5%onasingletradingdaypostconfirmationoftheexpectedGeneralelection
outcome.
Theimprovedsentiment,however,isonlymoderatelycapturedinstockpricesinourviewandleavesscopefor
more upside to the market. For one, the recent rally was contributed by global cyclicals like IT and Pharma.
Midcaps,stockswithperceivedlinkagestoBJPandmanydomesticplayshavenotyettakenoff.Two,overthe
lastthreemonths,theSensexhasrisen3.2%butS&P500andEuropesSTOXX600hasalsomoved3%and2.4%
respectively.So,itsnotamassiveoutperformancebytheIndianmarket.Three,valuationsarestillreasonable
at14xFY15and12xFY16earningsfortheNifty.Althoughthesevaluationsareatapremiumtootheremerging
markets, Indias ROE is also higher. Furthermore, valuations are at a discount to what India has historically
enjoyed.
Corporate profitability,which remained highly depressed(our calculation finds them 3035% below normative
level) for the last six years, is showing signs of improvement. Earnings growth revisions are encouraging; a
gradual uptick in demand, depreciated currency, cost control by companies over last few years and efforts to
reducedebtlevelswillleadtoa1416%growthinNiftyandSensexEPSearningsinFY15andFY16,followinga
mere8%growthinFY14E.
AbottomingoutofIndiasGDPgrowth,inflationreasonablyundercontrolandneartermstabilityintheRupee
willsupportfurthermarketupside.FIIsarelikelytoremainoverweightonIndiagivenalltheabovefactorsand
giventhattheresnotmuchtochoosefromotheremergingmarketeconomies.
High Conviction Midcap Ideas

We believe its time to load up stocks in the portfolio, especially quality midcap names. History also supports
this viewpoint; the equity market has seen healthy up move for a couple of years following the General
election.OurtargetfortheNiftyis7200withalowprobabilityofamajorcorrection.Wedonotseeamarket
fall to below 6200 till the new government is formed in June. The biggest nearterm risk to our call is the
electionoutcomeitselfsinceahungassemblywillspoiltheparty.Wehaveidentified10midcapstockstobuy
during this runup to elections Federal Bank, Bajaj Finance, Magma Fincorp, Tech Mahindra, Gujarat Gas,
MothersonSumi,KECInternational,TataCommunications,JKLakshmiCements,andJyothyLabs.
H2 2014 may see consolidation; next 5 years belong to the Bulls

Weanticipatethemajormarketrunuptotakeplaceinthefirsthalfof2014,evenbeforethestartofdelivery
by the new government. The post election phase (H2 2014) will be one of consolidation, driven by slow
economicrecoveryandglobalfactors.
The biggest risk from a medium term view is the rise in global interest rates. Coupled with the ongoing Fed
taper, there could be a flight of capital from emerging markets and a resultant return of weakness in the INR.
Emerging markets like India run the risk of high FII ownership, which is currently at alltime high. Currency
depreciation would mean sticky inflation; El Nino fear already threatens to affect monsoons this year. High
interestratecyclemaybeprolongedifinflationisstickyandglobalratesarerising,atatimewhenthesaving
investment gap is still high. While there is a lot of euphoria surrounding the new government, the economic
recoverywillnotbeaVshapedone.
Having said that, the next 56 years will be a time for equities. The stock market has seen a price and time
correctioninthelastsixyears.AchangeofguardattheCentre,favourabledemographics,conservativebanking
system (notwithstanding near term asset quality concerns) and supportive valuations augur well for a long
market run. We believe the time to raise equity exposure has come. The next few months present a tactical
opportunitytobuyIndianequities.Webringyou10attractivemidcapsideasinthisreport.
Buyrecommendationsummary
Company Sector
CMP
(Rs)
912m
Target
(Rs)
Upside
(%)
FY1416E
PATCAGR
(%)
FY16E
P/E(x) RoE(%) EV/EBIDTA
MothersonSumi Auto 229 280 22.3 35.0 13.8 38.2 6.4
GujaratGas Oil&Gas 269 320 19.0 11.0 7.5 30.4 4.9
KECInternational CapitalGoods 66 80 21.2 81.0 6.9 16.7 4.6
TataCommunications Telecom 286 340 18.9 28.0 19.0 19.5 6.0
JKLakshmiCements Cement 98 116 18.4 46.2 5.0 14.1 3.5
TechMahindra IT 1,820 2,250 23.6 13.5 10.9 28.4 6.0
JyothyLabs FMCG 194 232 19.7 59.6 14.4 26.1 13.3
Company Sector
CMP
(Rs)
912m
Target
(Rs)
Upside
(%)
FY1416E
PATCAGR
(%)
FY16E
P/adj.BV
(x) ROA(%) ROE(%)
FederalBank Banking 91 112 23.1 26.0 1.0 1.2 14.6
BajajFinance NBFC 1,680 2,003 19.2 21.0 1.5 3.3 21.5
MagmaFincorp NBFC 66 84 27.3 27.5 0.7 1.4 12.1
Source:IndiaInfolineResearch
Sector: Financials
Sector view: Positive
Sensex: 21,755
52Weekh/l(Rs): 1,712/965
Marketcap(Rscr): 8,418
6mAvgvol(000Nos): 34.8
Bloombergcode: BAFIN
BSEcode: 500034
NSEcode:
BAJFINANCE
FV(Rs): 10
PriceasonMar22,2014
Companyratinggrid

LowHigh
1 2 3 4 5
EarningsGrowth
RoAProgression
B/SStrength
Valuationappeal
Risk
Sharepricetrend
70
100
130
160
Mar13 Jul13 Nov13 Mar14
BajajFin Sensex
Shareholdingpattern
20
40
60
80
100
Mar13 Jun13 Sep13 Dec13
Others Institutions Promoters
%
Rating: BUY
Target(912months): Rs2,003
CMP: Rs1,680
Upside: 19.2%
Research Analyst:
RajivMehta
research@indiainfoline.com
Bajaj Finance Ltd
One of the most diversified, profitable and fastest growing NBFCs
Aided by product additions and network expansion, Bajaj Finance has
witnessed robust asset CAGR of 48% over the past three years. Profitability
too has been very impressive with average RoA delivery at ~3.8%. Given its
diversified product offerings, Bajaj Finance would continue to materially
outpace industry growth. Though the overall disbursement growth could
moderateabitduetodeemphasisoncommerciallendingandconsolidation
inconsumerfinancing,theassetgrowthisestimatedtoremainsturdydriven
by robust disbursement growth in SME financing and increasing duration of
theoverallloanbook.WeestimateFY1316AUMCAGRat31%.
Shift in asset mix to moderate RoA but risk also

BajajFinancesaboveaverageNIMprofileisunderpinnedbylargeproportion
ofhighyieldproductsinitsportfolioandcompetitivecostoffundinggivena
strong rating profile. NIM correction seen in recent quarters would continue
with an accelerated shift in asset mix towards mortgages (SME financing).
Though cost growth is likely to moderate, the contraction in margin would
precludeanyimprovementincost/incomeratio.BajajFinancesassetquality
hasbeenstableoverthepasttwoyearsdespitedeteriorationintheexternal
environment.Despitetransitionto90dayprovisioningpolicy,creditcosthas
been contained at 1.11.6%. While business landscape is expected to remain
soft in the near term, companys asset quality is unlikely to surprise
negatively. RoA would moderate due to shift in business mix towards low
betaproducts.
Top Pick in NBFC space

Overthepastfouryears,BajajFinancehastradedinanarrowvaluationband
supportedbyitsconsistentperformanceongrowthandprofitability.Withthe
company expected to deliver average 3.5% RoA over FY1316, current
valuationat1.7x1yrfwdP/ABVappearsextremelyattractive.Apartfromthe
riskreturn tradeoff and a surprise banking license win, we dont see any
exogenous factors impacting the profitability over the next couple of years.
BajajFinance,hence,isourTopPickintheNBFCspace.
Financialsummary
Y/e31Mar(Rsm) FY13 FY14E FY15E FY16E
Totaloperatingincome 19,057 25,658 31,861 39,472
Yoygrowth(%) 33.7 34.6 24.2 23.9
Operatingprofit(preprovisions) 10,534 14,237 17,470 21,627
Netprofit 5,913 7,775 9,327 11,425
yoygrowth(%) 45.5 31.5 20.0 22.5

EPS(Rs) 118.8 156.2 187.4 229.5
Adj.BVPS(Rs) 669.8 798.0 940.9 1,125.0
P/E(x) 14.1 10.7 8.9 7.3
P/Adj.BV(x) 2.5 2.1 1.8 1.5
ROE(%) 21.9 21.0 21.1 21.5
ROA(%) 3.8 3.8 3.5 3.3
CAR(%) 22.0 19.7 18.1 16.6
Source:Company,IndiaInfolineResearch

Sector: Financials
Sensex: 21,755
52Weekh/l(Rs): 99/44
6mAvgvol(000Nos): 2644
Bloombergcode: FBIN
BSEcode: 500469
NSEcode:
FEDERALBNK
FV(Rs): 2
PriceasonMar22,2014
Companyratinggrid

LowHigh
1 2 3 4 5
EarningsGrowth
RoAProgression
B/SStrength
Valuationappeal
Risk
Sharepricetrend
Shareholdingpattern
40
70
100
130
FB Sensex
20
40
60
80
100
%
Rating: BUY
Target(912months): Rs112
CMP: Rs91
Upside: 23.0%
Research Analyst:
RajivMehta
Federal Bank Ltd
After transition, set to pursue profitable growth
Federal Bank consciously underwent a transition of debulking corporate
book and pushing hard on relatively safer retail and SME loans. The shift in
depositsmixcomplimentedthechangeinloanmixwithshareofbulkfunding
declining materially. While this exercise entailed sacrifice of growth, it has
stabilized margin and asset quality and lowered risk to profitability. On the
cost side, bank has slowed down branch addition thereby moderating the
opex growth. Better control on operations and substantial network
investmentsduringFY12/13shouldenableFederalBanktopursueprofitable
growthincomingyearswhencreditenvironmentisexpectedtoimprove.
RoA poised to recover; capitalization is robust

A combination of NIM decline, higher cost growth and elevated credit cost
adversely impacted Federal Banks RoA during FY13/14. With these
determinants having started to improve, the RoA is on the mend and is
expected to recover to 1.25% by FY16. Earnings growth is estimated to
sharplyreboundfrom1.6%paoverFY1214to25.7%paoverFY1416.Tier1
capital at 14.2%, one of the highest in the industry, should comfortably
suffice growth requirements for the coming three years and also provides
comfortamidcurrentchallengingconditions.
Valuation at <1x FY16 P/ABV is extremely attractive

FederalBankistradingat1.1x1yrfwdrollingP/ABVandat0.96xFY16P/ABV
which is extremely attractive in the context of improving RoA and subsiding
risks to earnings. Surprisingly, Federal Bank trades at par with large PSU
Banks despite its superior loan franchise, profitability, growth prospects and
capitalization.ThereareupsideriskstoourgrowthandRoAestimatesincase
ofareasonablystrongeconomicrecovery.1yrfwdrollingP/ABViscurrently
at 6year mean but the bank has traded materially above its mean during
healthycreditconditions.Soitisquietlylikelythatvaluationcouldrerateto
1.21.3x over the next 69 months provided asset quality trends remain
assuaging.
Financialsummary
Yoygrowth(%) 6.2 7.6 15.9 20.0
Netprofit 8,382 7,514 9,295 11,876
yoygrowth(%) 7.9 (10.4) 23.7 27.8

EPS(Rs) 9.8 8.8 10.9 13.9
Adj.BVPS(Rs) 69.3 76.4 84.4 94.8
P/E(x) 9.3 10.4 8.4 6.6
P/Adj.BV(x) 1.3 1.2 1.1 1.0
ROE(%) 13.9 11.3 12.7 14.6
ROA(%) 1.27 1.02 1.14 1.24
CAR(%) 14.7 15.4 14.2 13.3

Sector: Oil & Gas

Sector view: Neutral
Sensex: 21,755
52Weekh/l(Rs): 306/159
Bloombergcode: GGASIB
BSEcode: 523477
NSEcode: GUJRATGAS
FV(Rs): 2
PriceasonMar22,2014
Companyratinggrid

LowHigh
1 2 3 4 5
EarningsGrowth
CashFlow
B/SStrength
Valuationappeal
Risk
Sharepricetrend
50
100
150
200
GujaratGas Sensex
Shareholdingpattern
0%
20%
40%
60%
80%
100%
Promoter Institutions Others
Rating: BUY
CMP: Rs269
Upside: 18.9%

Research Analyst:
PrayeshJain
Gujarat Gas
Gas volumes to rise after a hiatus
Over the past couple of years Gujarat Gas has seena steep decline in its gas
volumes owing to slowdown in industrial activity and sharp jump in RLNG
prices. The trend is expected to reverse with the company expanding into
newterritorieswhichencompasslargeindustrialbelts.Also,industrialactivity
is expected to pick up gradually once political stability is attained at the
centrallevel.AvailabilityofcheapgasfromnominatedfieldsofONGCandOil
India has enabled Gujarat Gas to bring down CNG prices which will spur up
demand for CNG. Cumulatively we expect these factors to result in 810%
volumeCAGRforGujaratGasoverthenextcoupleofyears.
Margins to stay strong

Intheperiodofdecliningvolumes,GujaratGassawamaterialchangeintwo
aspects which will be margin accretive 1) change in mix with regards to
segments (power generation, process heat and combined heat & power)
wherebybettermarginprocessheatcontributionhasincreasedto80%from
35% in CY10, and 2) amongst process segment, demand from industries
focusing on quality of heat has increased substantially. Network sharing and
gas swapping with GSPC can only improve margins further. Retaining these
benefits would cause a sharp jump in margins. However, we expect the
companytopassonpartialbenefitswithaviewtoincreaseitsvolumes.Even
ifthegaspricesareraisedfromApril2014,GujaratGaswillberelativelyless
impactedasdomesticAPMgasaccountsonlyfor15%ofitssupply.

Decent earnings growth, compelling valuations, strong dividends
DuringCY13,GujaratGasreportedrevenuegrowthofjust1%butregistereda
PAT growth of 29%. This was on the back of benefits of price hike and
efficient sourcing of gas. Return to volume growth trajectory, sustained
robust margins and limited requirement of capex is expected to result in
decent earnings CAGR of 10% during FY14E16E. With strong cash flows, we
expectgenerousdividendpayoutstocontinue.Atcurrentpriceandprojected
payout of 5060% the stock provides an attractive dividend yield of 7%+. In
termsofP/Emultiples,thestockisattractivebothonabsolute(FY16EP/Eof
7x)andrelativebasis(IGLFY16EP/Eof8.4x).WerecommendBUY.
Financialsummary
Y/e31Mar(Rsm) CY12 FY14E FY15E FY16E
Revenues 30,960 39,467 36,065 41,166
yoygrowth(%)* 28.0 2.0 14.2 14.1
Operatingprofit 4,082 6,933 6,063 6,874
OPM(%) 13.2 17.6 16.8 16.7
ReportedPAT 2,866 4,706 4,079 4,629
yoygrowth(%)* 4.8 31.4 8.3 13.5
EPS(Rs) 22.3 29.4 31.8 36.1
P/E(x)* 12.0 9.2 8.5 7.5
Price/Book(x) 3.6 2.9 2.5 2.1
EV/EBITDA(x)* 9.0 6.4 5.7 4.9
Debt/Equity(x) 0.3 0.2 0.2 0.2
RoE(%)* 32.7 34.8 31.3 30.4
RoCE(%)* 33.2 47.0 35.6 35.7
Source:Company,IndiaInfolineResearch,*FY14beinga15monthperiod,ratioshavebeenannualized

Sector: Cement
Sector view: Neutral
Sensex: 21,755
52Weekh/l(Rs): 119/49
Bloombergcode: JKLCIS
BSEcode: 500380
NSEcode: JKLAKSHMI
FV(Rs): 5
PriceasonMar22,2014
Companyratinggrid

LowHigh
1 2 3 4 5
EarningsGrowth
CashFlow
B/SStrength
Valuationappeal
Risk
Sharepricetrend
40
60
80
100
120
140
JKLakshmi Sensex
Shareholdingpattern
20
40
60
80
100
%
Rating: BUY
CMP: Rs98
Upside: 18.5%

Research Analyst:
HemantNahata
JK Lakshmi Cement
Favorable market mix to revive growth
JK Lakshmi Cement (JKLCE) 5.3mtpa capacity is located across Rajasthan,
Haryana and Gujarat with North/West regions accounting for 57%/43% of
sales.PostDurgplantexpansion,eachregion(northern,westernandeastern)
is likely to account for one third of the sales. PanIndia cement consumption
islikelytogrow68%overthenexttwoyears;assumingsamegrowthrateis
witnessed in all the five regions, north and eastern region could run into a
minordeficitinFY16.WebelievetheupcyclewitnessedinFY13couldrepeat
itself post H2 FY15 where demand push can inflate prices and thereby
operationalearningsofthecompaniescateringtolowsurpluszone.
Volume traction to translate into strong revenue growth

JKLCEisenhancingitscapacityfromcurrent5.3mtpato~10mtpabyFY15;this
wouldtranslateinto12%volumeCAGRoverFY1215.Thisexpansionincludes
1) 2.7mtpa plant at Durg, Chhattisgarh by Q2 FY15, 2) revival of defunct
cement capacity (adding 1.4mtpa by 1HFY15) at Udaipur Cement Works
(JKLCEislikelytohaveamajoritystake)and3)0.55mtpagrindingunitcoming
upinH2FY15toboostblendingratio.WefactorinJKLCE14%CAGRgrowthin
dispatches over FY13FY16. Volume traction along with improvement in
realization is likely to translate into 21/26% revenue growth in FY15/16
respectively.
Compelling BUY stock trades at 69% discount to replacement cost

OnanEV/tonbasis,companytradesatFY16EV/tonofUS$35,representinga
69% discount to the replacement cost of similar Southbased players though
the latter have to contend with capacity surplus. We believe JKLCE will be a
major beneficiary of improvement in key dynamics such as expansion led
volumegrowthinadeficitmarketandavailabilityoffuellinkages.Thiswould
translate into 46% earnings CAGR over FY1416. Stock trades at FY16 PER of
5x,atasignificantdiscounttomuchlargerplayerssuchasACC,Ultratechand
Ambuja Cements, which are trading at ~1316x. We recommend BUY for 9
mthtargetpriceofRs116.
Financialsummary
Y/e31Dec(Rsm) FY13 FY14E FY15E FY16E
Revenues 20,550 19,768 24,047 30,834
yoygrowth(%) 19.6 (3.8) 21.6 28.2
OPM(%) 20.9 13.8 15.5 20.0
ReportedPAT 1,921 730 890 2,281
yoygrowth(%) 76.7 (62.0) 21.9 156.4

EPS(Rs) 16.3 6.2 7.6 19.4
P/E(x) 5.9 15.5 12.7 5.0
Price/Book(x) 0.9 0.8 0.8 0.7
EV/EBITDA(x) 4.2 8.4 6.3 3.5
Debt/Equity(x) 0.9 1.2 1.2 0.9
RoE(%) 15.8 5.6 6.5 14.9
RoCE(%) 14.2 5.9 6.9 14.1

Sector: FMCG
Sensex: 21,755
52Weekh/l(Rs): 231/141
Bloombergcode: JYLIB
BSEcode: 532926
NSEcode: JYOTHYLAB
FV(Re): 1
PriceasonMar22,2014
Companyratinggrid

LowHigh
1 2 3 4 5
EarningsGrowth
CashFlow
B/SStrength
Valuationappeal
Risk
Sharepricetrend
50
100
150
JyothyLab Sensex
Shareholdingpattern
0
50
100
Promoters Institutions Others
Rating: BUY
CMP: Rs194
Upside: 19.7%
Research Analyst:
VanmalaNagwekar
Successful merger to drive revenues
Post the successful merger of Jyothy Laboratories Ltd (JLL) and Jyothy
Consumer Products Ltd (JCPL erstwhile Henkel India); JLL now owns 10
brands under four segments 1) Fabric care (Ujala, Henko, Mr. White and
Chek),2)Utensilscare(ExoandPril),3)PersonalCare(Margo,FaandNeem)
and 4) Household insecticides (Maxo). JLL will enjoy tax shields on
accumulatedlossesofJCPL(untilFY16),whichwillhelpthecompanyimprove
earnings growth. The merger has also helped JLL strengthen its distribution
reach.Withthesuccessfulmergeralongwith variouscost savingactivitiesin
placecoupledwithsupplychainandmanagerialrevamp,themanagementis
confident of achieving ~2025% yoy revenue growth in FY14. We forecast
revenueCAGRof~20%overFY1316.
Debt restructuring a positive move

JLL has restructured its current debt of Rs5.5bn by 1) Issuing 15mn equity
shares to the promoters on preferential basis (amounting ~Rs2.5bn), thus
increasingthepromotersstakeinthecompanyfrom63.7%to66.7%and2)
Raising zero coupon NCDs of Rs4bn, payable after three years at 11% p. a.
premium.Themajorrationalebehindthemovewastomaintainliquidityand
minimize the cost of the current debt. Since JLL is in the growth phase, it
needsfundstoinvestinthebrandsandotherexpansionplans.
Expect sharp jump in earnings over FY13-16; recommend Buy

The benefit of bringing in an experienced team on board led by S
Raghunandan is seen in the improving performance and could mark a
significant turnaround in business fortunes. We believe the managements
efforts on branding/distribution will bring in substantial growth over the
coming years. Operating leverage and rationalizing manufacturing facilities
are likely to expand operating margins by ~70bps over FY1416, witnessing
~22%EBITDACAGR.WerecommendBuy.
Financialsummary
Revenues 11,042 13,264 15,804 18,897
yoygrowth(%) 21.0 20.1 19.2 19.6
OPM(%) 11.6 14.2 14.5 14.9
PreexceptionalPAT 626 1,265 2,134 2,436
ReportedPAT 196 1,265 2,134 2,436
yoygrowth(%) (55.9) 543.9 68.7 14.1
EPS(Rs) 3.9 7.0 11.8 13.5
P/E(x) 49.9 27.7 16.4 14.4
Price/Book(x) 4.9 3.8 3.8 3.8
EV/EBITDA(x) 29.0 20.2 16.5 13.3
Debt/Equity(x) 1.0 0.5 0.5 0.6
RoE(%) 10.0 16.2 23.0 26.1
RoCE(%) 9.1 12.9 15.2 18.3
Jyothy Laboratories Ltd

Sector: Capital Goods

Sector view: Negative
Sensex: 21,755
52Weekh/l(Rs): 67/23
Bloombergcode: KECIIB
BSEcode: 532714
NSEcode: KEC
FV(Rs): 2
PriceasonMar22,2014
Companyratinggrid

LowHigh
1 2 3 4 5
EarningsGrowth
CashFlow
B/SStrength
Valuationappeal
Risk
Sharepricetrend
40
60
80
100
120
140
Mar13 Sep13 Mar14
KEC Sensex
Shareholdingpattern
0%
20%
40%
60%
80%
100%
Others Institutions Promoter
Rating: BUY
CMP: Rs66
Upside: 21.2%
Research Analyst:
TarangBhanushali
International order inflows to remain strong
KEC,overthelastoneyear,hasventuredintonewmarketsgloballytooffset
the decline in domestic order inflows. The company managed to report an
increaseof12%yoyinorderinflowsworthRs65bnin9MFY14.International
orders accounted for 59.1% of total order inflow in 9M FY14. Order book at
the end of Q3 FY14 stood at Rs102.5bn, translating into a BTB of 1.4X,
providingcomfortonrevenuevisibility.TransmissiondivisionsRs80bnworth
of orders accounted for 78% of the total order book. Further, the company
has also announced that it has won orders worth Rs12bn in the first two
months of Q4 FY13. The management plans to execute low margin legacy
ordersbaggedinthenewdivisionbytheendofQ1FY15.
Margin improvement to continue

KECs margins over the last two years have been impacted by some low
margin orders in its new segments and delay in executing some orders. We
believethatmarginsforKEChaveformedatroughandexpansioninmargins
witnessedoverthelasttwoquarterswouldcontinuegoingahead.Execution
of legacy orders byQ1FY15 and higher shareof transmission orders of total
order book would lead to margin expansion for the company. We expect
OPM to expand by 50bps yoy in FY15 to 6.6% and 40bps yoy in FY16 to 7%,
quitelowerthanthemanagementguidanceof8.5%.

Transmission business to boost earnings growth
KEC is one of our preferred picks in the T&D space due to the higher
concentration of international and transmission orders. We believe KEC
would be a key beneficiary of a revival in infrastructure spending as in the
past, pickup in transmission spending has been faster compared to other
businesses.Weexpectdebtordaystodeclineoverthenexttwoyearsleading
to a decline in interest costs. We estimate KECs bottomline to double over
thenexttwoyearsonthebackofmarginexpansionandlowerinterestcosts.
We value the companyat 8.5x FY16 EPS of Rs9.4 and arrive at a price target
ofRs80.
Financialsummary
Revenues 69,795 80,971 89,750 99,021
yoygrowth(%) 20.0 16.0 10.8 10.3
OPM(%) 5.5 6.1 6.6 7.0
PreexceptionalPAT 651 916 1,698 2,409
ReportedPAT 651 735 1,698 2,409
yoygrowth(%) (72.2) 12.8 131.0 41.9
EPS(Rs) 2.5 3.6 6.6 9.4
P/E(x) 25.6 18.2 9.8 6.9
Price/Book(x) 1.4 1.4 1.2 1.1
EV/EBITDA(x) 7.8 7.0 5.5 4.6
RoE(%) 1.2 1.6 1.3 1.1
RoCE(%) 5.6 7.6 13.3 16.7
KEC International Ltd

Sector: Financials
Sensex: 21,755
52Weekh/l(Rs): 103/62
Bloombergcode: MGMAIN
BSEcode: 524000
NSEcode:
MAGMA
FV(Rs): 2
PriceasonMar22,2014
Companyratinggrid

LowHigh
1 2 3 4 5
EarningsGrowth
RoAProgression
B/SStrength
Valuationappeal
Risk
Sharepricetrend
40
70
100
130
Magma Sensex
Shareholdingpattern
20
40
60
80
100
%
Rating: BUY
CMP: Rs66
Upside: 27.2%
Research Analyst:
RajivMehta
Magma Fincorp Ltd
Early indications of asset quality bottoming out
Being significantly exposed to CV/CE financing, Magma has see its asset
qualitydeteriorateoverthepastfewquarters.CollectionsinCV/CEspacehas
been hit by lower asset utilization and operating cost increases. However, in
recent months collection efficiency has seen gradual improvement and pace
of NPL accretion has moderated. Magma has one of the most conservative
asset recognition (120dpd) and provisioning (15% v/s regulatory 10%)
policies.Structuralimprovementinappraisal/collectionprocesses,substantial
shiftinportfoliomixtowardslowriskproductsandamildeconomicrecovery
shouldenableMagmatoarrestfurtherincreaseinNPLlevels.
Improving product mix to be a priority over growth in near term

Over the past two years, company efforts to diversify and derisk its asset
portfoliohasyieldedsignificantresultswiththeshareofCV/CEloansinAUM
declining from 53% to 33% while that of tractor loans, SME loans and
Mortgages increasing substantially. With Magma striving to achieve further
diversification, a sharp acceleration in growth is unlikely in the near term.
During9mFY14,disbursementswereflatyoyandthisshouldalsohurtnear
term asset growth. However, we expect disbursements to pick up from Q2
FY15driving1415%AUMgrowthoverFY1416.
Spread expansion and cost productivity to start reflecting in RoA

The shift in the portfolio mix towards better yielding assets and decline in
noninterestearningassetshasdrivensignificantimprovementinnetinterest
spread(NISimprovedfrom3.5%inFY12to5.7%in9mFY14).NISisexpected
toexpandfurtherasproductmixcontinuestoimprove.Focusonoperational
efficienciesandcalibrationofbranchadditionhasledtoreductioninopexto
AUM ratio. However, so far these structural improvements have failed to
manifest in RoA which has been hampered by sharp spike in credit cost.
Going ahead, with credit quality expected to stabilize and credit cost to
moderate,RoAisestimatedtorecovermaterially.
Cheapest NBFC business; expect significant valuation recovery

Valued at 0.7x FY16 P/ABV, Magma Fincorp is one the cheapest available
NBFCs.RoAimprovementshoulddrivemorethancommensuratereratingin
valuation.WithTier1capitalat10.6%,companywouldneedtoraiseequity.
Financialsummary
Yoygrowth(%) 70.5 20.6 14.5 17.8
Netprofit 1,383 1,528 1,961 2,493
yoygrowth(%) 86.8 10.5 28.3 27.1

EPS(Rs) 7.3 8.0 10.3 13.1
Adj.BVPS(Rs) 83.9 73.9 82.4 92.3
P/E(x) 9.0 8.1 6.3 5.0
P/Adj.BV(x) 0.8 0.9 0.8 0.7
ROE(%) 9.7 9.1 10.6 12.1
ROA(%) 1.3 1.1 1.3 1.4

Sector: Auto Ancillary

Sensex: 21,755
52Weekh/l(Rs): 250/116
Bloombergcode: MSSIB
BSEcode: 517334
NSEcode: MOTHERSUMI
FV(Re): 1
PriceasonMar22,2014
Companyratinggrid

LowHigh
1 2 3 4 5
EarningsGrowth
CashFlow
B/SStrength
Valuationappeal
Risk
Sharepricetrend
50
100
150
200
MothersonSumi Sensex
Shareholdingpattern
0%
20%
40%
60%
80%
100%
Promoter Institutions Others
Rating: BUY
CMP: Rs229
Upside: 22.2%

Research Analyst:
PrayeshJain
Motherson Sumi
SMR & SMP to gain from global recovery
Economic recovery in US and stability inEurope is expected to translate into
strongtoplinegrowthforMothersonSumis(MSS)subsidiariesSMRandSMP.
While SMR has established its leadership position in the rearview mirror
business with a 22% market share, it has also delivered strong improvement
in OPM from 5% in Q2 FY13 to 10.4% in Q3 FY14. The company target to
reach mind teen level of OPM in the next few years. In our view, SMP has a
larger scope to benefit from the global recovery as it is yet to entrench into
the US markets. Also with larger orders likely to commence from H2 FY15,
margin expansion akin to SMR cannot be ruled out. With 50%+ contribution
toconsolidatedrevenue,sensitivityofconsolidatedEPStoOPMexpansionat
SMPisveryhigh.
Cyclical recovery and in-sourcing to drive domestic business

Domestic revenues for MSS have been under pressure in the recent past on
thebackofmarkedslowdowninvehiclesalesasmajorityofrevenuesforMSS
arise from the OEM segment. With recovery expected in passenger car and
UVsalesfromH2FY15,revenuegrowthwouldbebacktoitsrisingtrajectory.
Furthermore,MSShascitedonvariousoccasionsthatitplanstoincreasein
sourcingforSMRandstartinsourcingforSMPfromthestandalonebusiness
over the medium term. This should also benefit margins which were
adequatelyprotectedinthephaseofweakrevenuetrends.
Strong management track record

MSSL sets for itself five year targets for revenue growth, RoCE, exports and
dividendpayout.Thetargetssetintheyear2000werefullymetby2005and
mostofthetargetssetintheyear2005werecloselymetby2010.For2015,
MSSL has set a target of achieving US$5bn revenues, 70% of which will be
from exports, a RoCE of 40% and dividend payout of 40%. With continued
strong performance by SMR and exemplary turnaround at SMP, we expect
the revenue and export sales target to be met. RoCE and dividend payout
targetscouldbemissedduetohighdebtusedtofundPeguformacquisition.
Financialsummary
Revenues 253,124 291,589 332,948 387,479
yoygrowth(%) 71.3 15.2 14.2 16.4
OPM(%) 5.8 6.9 7.2 8.6
ReportedPAT 4,445 7,988 10,117 14,583
yoygrowth(%) 71.2 79.7 26.6 44.1
EPS(Rs) 7.6 9.1 11.5 16.5
P/E(x) 30.3 25.3 20.0 13.8
Price/Book(x) 5.9 7.3 6.0 4.8
EV/EBITDA(x) 11.8 11.5 9.3 6.4
Debt/Equity(x) 2.1 1.6 1.1 0.8
RoE 21.4 31.6 32.9 38.2
RoCE 16.0 21.2 24.2 33.4

Sector: Telecom
Sensex: 21,755
52Weekh/l(Rs): 320/137
Bloombergcode: TCOMIB
BSEcode: 500483
NSEcode: TATACOMM
FV(Rs): 10
PriceasonMar22,2014
Companyratinggrid

LowHigh
1 2 3 4 5
EarningsGrowth
CashFlow
B/SStrength
Valuationappeal
Risk
Sharepricetrend
50
80
110
140
Mar13 Sep13 Mar14
TataComm Sensex
Shareholdingpattern
0
20
40
60
80
100
Jun13 Jul13 Sep13 Dec13
%
Others FIIs Promoters
Rating: BUY
CMP: Rs286
Upside: 19%

Research Analyst:
BhaveshGandhi
Tata Communications
Buoyancy in data revenues to continue; room for margin expansion
Tata Communications (Tcom) data revenues have grown at ~17% cagr over
the past three years and the company expects 15% to be the trend line for
data business. Although it expects 20% EBIDTA margin for data but this
includesdragfromnewservicessuchasATMs,mobilebroadbandandcloud,
enterprise voice and business video etc; since these services are far from
maturity, their current losses eat in to data profitability. Over a longer term,
webelievedatamarginshaveahigherpotentialcomparedtoexistinglevels.

Wholesale voice to chug along; focus more on FCF
Over the past several years, wholesale voice has been a commoditized but a
cash cow business for Tcom whose market share is inching towards 20%.
Tcoms market share is more than the combined share of the 2
nd
and 3
rd
ranked players, an indication of its scale. Company indicated that its not
chasing volumes but is consciously focused on generating free cash flows
whichwouldgrowfrom~US$120mninFY13.Forinstanceinthecurrentyear,
H1 saw wholesale voice generate FCF of US$84mn on the back of pricing
strength in India though voice margins did normalize to 8.3% in Q3 from an
elevated 11% in previous quarter due to moderation in India termination
pricing.

Improved operational traction supports our BUY reco
We turn optimist on Tcoms core business after several quarters of guarded
outlook as data services would drive incremental margin upside while voice
continues its steady growth. Data business also has inherently faster growth
potential, less of commoditized products and better margin profile. Our
numbers do not factor in any impact of Neotel stake sale though we expect
leverage position to improve significantly if the transaction with Vodacom is
completed.Webuildin~28%PATcagroverFY1416andvaluethecompany
on SOTP basis to account for its stake in Tata Tele as well as legacy land
holdings;recommendBUY.
Financialsummary
Revenues 172,130 196,632 221,664 248,482
yoygrowth(%) 21.3 14.2 12.7 12.1
OPM(%) 12.0 15.4 15.4 15.5
ReportedPAT (6,234) 2,615 2,915 4,280
yoygrowth(%) (21.6) 11.5 46.8
EPS(Rs) (21.9) 9.2 10.2 15.0
P/BV(x) 5.7 4.8 4.1 3.4
EV/EBITDA(x) 11.4 7.7 6.6 6.0
ROE(%) (39.3) 2.9 15.9 19.5
ROCE(%) 1.5 5.9 7.3 8.5

Sector: IT
Sensex: 21,755
52Weekh/l(Rs): 1,936/895
6mAvgvol(000Nos): 1,077
Bloombergcode: TECHMIN
BSEcode: 532755
NSEcode: TECHM
FV(Rs): 10
PriceasonMar22,2014
Companyratinggrid
LowHigh
1 2 3 4 5
EarningsGrowth
CashFlow
B/SStrength
Valuationappeal
Risk
Sharepricetrend
50
100
150
200
TechM Sensex
Shareholdingpattern
20
40
60
80
100
%
Rating: BUY
Target(912months): Rs2,250
CMP: Rs1,820
Upside: 23.6%

Research Analyst:
RajivMehta
Tech Mahindra Ltd

Impressive execution so far
Tech M is gaining prominence as a Tier1 player in telecom and enterprise
services having strengthened its position with strategic acquisitions. Company
has delivered industrybest 4%+ CQGR in dollar revenues over the past six
quarters despite restructuring at its largest client BT (account size has shrunk;
currently contributes 11% of revenues). Growth has been broadbased with
NonBT telecom and enterprises business registering healthy organic CQGR.
Aidedbyacquisitionsandsalesaggression,theactiveclientbasehasincreased
materiallyoverthepasttwoyears.BroadeningofcapabilitieshasenabledTech
Mtomineexistingclientswell.ThenumberofUS$10mn+clientsincreasedby
8andUS$50mn+clientshasincreasedby4overQ1FY13Q3FY14.
Growth momentum to continue

Recent deal wins and management commentary suggest that brisk revenue
traction is likely to continue. Tech Ms deal pipeline and win rates have
improved bolstered by enhanced service offerings. Deal wins announced in
recent quarters has been worth more than US$700mn in TCV. Addition to
billablemanpowerwasstrongduringQ3FY14at~4%ofpreviousquarterbase
indicatinghighneartermgrowthvisibility.Weexpectcompanytodeliver17%+
dollarrevenuegrowthoverFY1416.
Stable margin outlook for the medium term

Notwithstanding significant onsite shift due to initial transition work on
recently won large deals, companys operating margin performance has been
strong in 9M FY14 aided by rupee depreciation. While salary hikes would
impact Q4 FY14 margin by 200250bps, lower transition cost would mitigate
thesequentialdecline.Inthemediumtolongerterm,utilizationimprovement
(scopefor200bps),SG&Aleverage(currentlevel150200bpshigherthanlarger
peers) and optimization of employee pyramid would be critical margin levers.
WeexpectTechMtosustainoperatingmarginnear22%inFY15/16.
Valuation attractive in context of strong earnings delivery

Withthecompanyestimatedtodeliver2223%preexceptionalPATCAGRover
FY1316,valuationat11xFY16P/Eisattractiverepresentingscopeforrerating
in coming quarters as sectorleading growth continues. Tech M is one of our
preferredpicksinITsectorasvaluationriskislowandgrowthvisibilityishigh.
Financialsummary
Revenues 143,320 188,060 219,066 256,832
yoygrowth(%) 22.5 31.2 16.5 17.2
OPM(%) 21.4 22.5 22.1 22.3
ReportedPAT 19,556 31,338 31,744 38,701
yoygrowth(%) 17.1 42.5 5.3 21.9

EPS(Rs) 84.2 135.0 136.7 166.7
P/E(x) 21.6 13.5 13.3 10.9
Price/Book(x) 6.2 4.5 3.5 2.8
EV/EBITDA(x) 12.9 9.0 7.6 6.0
RoE(%) 36.3 37.0 29.5 28.4
Recommendationparametersforfundamentalreports:
BuyAbsolutereturnofover+10%
MarketPerformerAbsolutereturnbetween10%to+10%
SellAbsolutereturnbelow10%
CallFailureIncaseofaBuyreport,ifthestockfalls20%belowtherecommendedpriceonaclosingbasis,unlessotherwisespecified
by the analyst; or, in case of a Sell report, if the stock rises 20% above the recommended price on a closing basis, unless otherwise
specifiedbytheanalyst
Publishedin2014.IndiaInfolineLtd2014
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High Conviction Midcap Ideas: Nifty: 6,495 Sensex: 21,755

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ThemeReport

What caused the market rally?

The party to continue Time to load up

High Conviction Midcap Ideas

H2 2014 may see consolidation; next 5 years belong to the Bulls

Shift in asset mix to moderate RoA but risk also

Top Pick in NBFC space

RoA poised to recover; capitalization is robust

Valuation at <1x FY16 P/ABV is extremely attractive

Sector: Oil & Gas

Margins to stay strong

Volume traction to translate into strong revenue growth

Compelling BUY stock trades at 69% discount to replacement cost

Debt restructuring a positive move

Expect sharp jump in earnings over FY13-16; recommend Buy

Sector: Capital Goods

Margin improvement to continue

Improving product mix to be a priority over growth in near term

Spread expansion and cost productivity to start reflecting in RoA

Cheapest NBFC business; expect significant valuation recovery

Sector: Auto Ancillary

Cyclical recovery and in-sourcing to drive domestic business

Strong management track record

Tech Mahindra Ltd

Growth momentum to continue

Stable margin outlook for the medium term

Valuation attractive in context of strong earnings delivery

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