Bharat Heavy Electricals Ltd (BHEL)
– Bharat Heavy Electricals Ltd (BHEL) is a premier power generation equipment manufacturer and a leading EPC company. BHEL has emerged as the prime beneficiary of the four-fold increase in the investments in the power sector in India.
– BHEL currently has orders worth Rs164,130 crore on hand, which provides revenue coverage for the next three to four years. We believe the order inflow momentum would remain strong for BHEL. However, the key challenge for BHEL would be the timely execution of projects.
– BHEL is confident of bagging orders for at least five boilers and four turbines as far as the bulk tendering by NTPC is concerned. The order finalisation for the same was expected in Q4FY11, but seems it would be deferred to Q1FY12.
|Model Stock Portfolio From Sharekhan For May 2011|
|Name||CMP* (Rs)||FY10||PER (x) FY11E||FY12E||FY10||RoE (%) FY11E||FY12E||Price target||Upside (%)|
|Godrej Consumer Products||389||35.4||26.1||21.9||44.5||28.5||27.6||462||18.8%|
– BHEL has already expanded its capacity to 15GW in FY11. Also, the project to expand the capacity to 20GW by FY12 is being executed on a fast track. In our view, the stabilisation of the new capacity coupled with the de-bottlenecking of the supply chain would aid order execution and sustain robust growth in BHEL’s
revenues in the coming years. We estimate the profits of BHEL to grow at a CAGR of 19.2% over FY10-13.
– The near-term positive trigger in the BHEL stock is the order inflow in the power equipment business. The current valuation at 15.2x its FY12E earnings are also looking attractive We have, therefore, included BHEL amongst our Top Picks.
Godrej Consumer Products Ltd (GCPL)
– Godrej Consumer Products Ltd (GCPL) is a major player in the Indian FMCG market with a strong presence in the personal care, hair care and home care segments in India. The recent acquisitions (in line with the 3×3 strategy) have immensely improved the long-term growth prospects of Godrej Consumer Products Ltd (GCPL).
– On the back of strong distribution and advertising & promotional support, we expect Godrej Consumer Products Ltd (GCPL) to sustain the market share in its core categories of soap and hair colour in the domestic market. On the other hand, continuing its strong growth momentum the household insecticide business is expected to grow by 19% YoY.
– In the international markets, the Indonesian and Argentine businesses are expected to achieve a CAGR of around 25% and 15% respectively over FY10-13. Overall, we expect Godrej Consumer Products Ltd (GCPL)’s consolidated revenues to grow at a CAGR of about 19% over FY11-13.
– Due to the recent domestic and international acquisitions, Godrej Consumer Products Ltd (GCPL)’s business has transformed from a commodities soap business into the business of value-added personal care and home care products. Hence, we expect its OPM to sustain at around 18% in the coming years. Overall, we expect Godrej Consumer Products Ltd (GCPL)’s bottom line to grow at a CAGR of about 20% over FY11-13.
– We believe increased competitive activity in the personal care and hair care segments and the impact of high food inflation on the demand for its products are the key risks to Godrej Consumer Products Ltd (GCPL)’s profitability.
– At the current market price the Godrej Consumer Products Ltd (GCPL) stock trades at 21.9x its FY12E EPS of Rs17.8. We have a Buy recommendation on the Godrej Consumer Products Ltd (GCPL) stock.
– ITC‘s cigarette business, which dominates the category, continues to be a cash cow for ITC. ITC endeavours to make a mark in the Indian FMCG market and with successful brands such as Bingo, Sunfeast and Aashirwaad, ITC is already in the reckoning among the best in the industry. With the new portfolio of personal care products gaining market share, its FMCG business promises to compete with the likes of Hindustan Unilever and Procter & Gamble.
– After a sharp increase of 16% in Union Budget FY10-11, the government has spared cigarettes from an excise duty hike in the FY2012 budget. Also key states including (Kerala, Karnataka, Andhra Pradesh and Maharashtra) have kept VAT on cigarette unchanged in their respective state budgets. We expect ITC’s cigarette sales volume to grow at mid single digits in FY12.
– ITC’ other businesses, such as hotel, agri, non-cigarette FMCG business and paper, paperboard and packaging, are showing a strong up-move and will provide a cushion to the overall profit in FY11.
-An increase in taxation and the government’s intention to curb the consumption of tobacco products remain
the key risks to ITC’s cigarette business over the longer term.
-We expect ITC’s bottom line to grow at a CAGR of about 20% over FY10-13. At the current market price, the ITC stock trades at 23.4x its FY2012E earnings. We maintain our Buy recommendation on the ITC stock.
IL&FS Transportation Networks Ltd (ITNL)
– IL&FS Transportation Networks Ltd (ITNL) is India’s largest player in the BOT road segment with 10,269 lane km in various stages of development, construction or operation. IL&FS Transportation Networks Ltd (ITNL) has a pan-India presence and a diverse project portfolio consisting of 23 road projects, bus transportation and a metro rail project.
– IL&FS Transportation Networks Ltd (ITNL) is well equipped to capitalise on the huge and growing opportunity in the road infrastructure sector due to its established track record in operating BOT road projects, its execution capabilities and the strong support from IL&FS.
– IL&FS Transportation Networks Ltd (ITNL) has a fair mix of annuity and toll projects in its portfolio which provides revenue comfort. Further, IL&FS Transportation Networks Ltd (ITNL) is present across the value chain except the civil construction services which it outsources to the local contractors. This helps IL&FS Transportation Networks Ltd (ITNL) to handle a large number of projects at a time and diversify geographically, reducing the risk of concentration.
– Thus, we expect the sales and the earnings of IL&FS Transportation Networks Ltd (ITNL) to grow at a CAGR of 45.8% and 25.5% respectively over FY10-12.
– At the current market price, the stock of IL&FS Transportation Networks Ltd (ITNL) is trading at 9.0x and 8.2x its FY11 and FY12 estimated earnings respectively. We maintain our Buy recommendation with a price target of Rs383.
– Lupin‘s Global dominance in certain products, focus on niche, less-commoditised products, a geographically diversified presence in markets such as Japan and a presence in the US branded segment distinguish Lupin among the mid-cap players in the generic space.
– In FY12, Lupin expects to launch 12 products with at least four in niche therapies, like oral contraceptives in the USA. Along with a strong presence in the branded space through Suprax and Aerochamber, Antara has enabled Lupin’s US business to grow at a staggering CAGR of 65% over FY06-10. With the expansion in the branded portfolio through the anticipated launch of Allernaze we expect the US business to grow at a CAGR of 20% over FY11-13. We expect the branded business of Lupin to contribute about 35% of the total US sales over the next two years.
– With the strong core business and aggressive abbreviated new drug application (ANDA) filings (cumulative 132 ANDA filings till date), a differentiated strategy augurs well for Lupin. Niche product launches like generic Geodon, Fortamet ER, Cipro and OCs would drive upwards performance of the stock.
– Potential delays in the US Food and Drug Administration approval for oral contraceptives and its other niche filings, and ramp-up delays in Antara and AllerNaze (expected launch in FY12) are the key challenges for Lupin.
– We expect Lupin to report an earnings CAGR of 19% over FY11-13 with strong margins at the operating level. At 22.1x FY11E and 18.2x FY12E earnings, Lupin offers limited downside from the current levels. We maintain our Buy recommendation on the Lupin stock with a price target of Rs520.
– Its life insurance business, ie Max New York Life (Max India), accounts for 85% of the revenues and is growing at a steady pace. Max India’s annual premium equivalent (APE) has grown 7.8% year till date (YTD) compared to the 12.6% decline in the industry. Further, Max India’s market share (among the private players) has expanded to 6.7% in January 2011 from 4.0% in the corresponding month of the previous year. Given the substantial growth in premiums and better operating metrics, we expect a strong growth in revenues going forward.
– In order to contain cost overruns, Max India has entered into a long-term tie-up with Axis Bank for distribution of its products. As a result, Max India has rationalised its agency force and branch network, leading to a sharp reduction in its operating costs. We expect Max India’s distribution network to expand in line with Axis Bank’s branch expansion plans. This will bring down the operating expenses-to-sales ratio (currently 30%) and contribute significantly to the bottom line.
– Max India is now focusing on traditional policies having a longer tenure (ten years and more). While the other companies are focusing on mass products, Max India is targeting affluent customers, mainly in the top 100-120 cities in India that contribute 80-85% of the revenues. We believe this will lead to a further improvement in the persistency ratio (currently 81%) and increase the operating efficiency.
– Max India is aggressively expanding its healthcare business and plans to add 1,000 beds in FY11. The healthcare business has turned positive at the EBITDA level. We expect it to turn profitable post-expansion. Max Specialty Films (packaging films) continues to grow at a robust pace as it reported EBITDA and PBT of Rs39 crore and Rs26 crore respectively in M9FY11. However, an increase in crude prices will lead to a decline in the margins though not substantially as the price gets negotiated at the beginning of every year.
– Max India is among the best-managed companies in the life insurance space which is evident from its balanced product mix, high persistency ratio, higher average case per agent etc. We remain convinced about the long-term growth prospects of the life insurance industry in spite of the regulatory concerns plaguing insurance sales in the near term. Max India is already done with capital infusion in the life insurance business while the treasury corpus of Rs580 crore and inflows from the life insurance business will take care of the funding requirements of the health insurance and healthcare segments. We maintain Buy with our SOTP based price target of Rs234.
– NIIT Technologies Ltd (NIIT), a mid-sized IT services company, has built strong domain expertise in niche industry verticals like insurance, travel, manufacturing & retail. With the recent surveys/channel checks showing signs of a revival in IT spending and the demand environment getting more broad based, the IT spending in these lagging sectors is likely to catch up in 2011. Moreover, NIIT has the advantage of a well-balanced geographical mix of revenues from North America, Europe and the Asia-Pacific.
– NIIT is one of the few mid-cap Indian IT services vendors that have over the years built up a strong non-linear revenue platform through organic and inorganic initiatives. Currently, NIIT derives around 27% of its total revenues from its non-linear initiatives like managed services and IP asset-based services rather than commoditisable time & material (T&M) kind of pricing model. NIIT’s non-linear initiatives would turn out to be a game changer for the company in the coming years.
– With its strong domain expertise in a few niche verticals and competitive advantage in terms of significant contribution from its non-linear initiatives, NIIT is well placed to benefit from the overall improvement in the demand environment. Consequently, we expect NIIT to show a steady growth of 18% CAGR in its net profit over FY10-13. Moreover, NIIT has healthy cash on the books with minimal debt. This leaves scope for further acceleration in growth through inorganic initiatives and shall act as another re-rating trigger for the stock. We have Buy on NIIT with a 12-month price target of Rs285 (8x FY13 earnings).
– PTC India is the leading power trading company in India with market share of around 33% in CY10. Trading volume growth is secured by entering into long-term power purchase agreements (PPA) with power developers.
– We also expect short-term trading volumes of PTC India to grow at a CAGR of 25% over FY10-13, driven by the rising power generation capacity and rising merchant power capacity. Also, better penetration of the power exchanges would help in boosting the short-term trading market. Overall, the trading volume is estimated to grow 2.3x over FY10-13.
– CERC had earlier fixed a short-term trading margin of 4 paise per unit in 2006. In January 2010, CERC revised the short-term trading margins at a maximum of 7 paise per unit while keeping the base rate at 4 paise per unit.
– This was a positive move for the power trading firms like PTC India which were reeling under cost pressure.
– Driven by an exponential growth in its traded volumes and an uptick in the trading margins, we expect the non-operational contribution to PBT to fall down from 56% in FY10 to 20% in FY13. We feel that accordingly the core RoE would also improve to 9.9% in FY13 from 4.5% in FY10.
– PTC India is estimated to show a robust growth in its earnings over the next few years. In the last few years, PTC India has also made substantial investment in various areas like power project financing via PFS or taking direct equity stake, coal trading and power tolling which have great growth potential in the future.
– Given its niche positioning, de-risked business model and strong growth outlook with improving core RoE, the valuations of PTC India are quite attractive on a sum-of-the-parts basis.
– Sintex is a diversified play on the booming mass housing construction industry, the rising social infrastructure spent, and the buoyancy in automobiles, electricals and textiles.
– Sintex derives 42% of its revenue from the building material segment (which includes monolithic construction and prefabricated structure). The demand for the same is growing at a robust pace with mass housing initiatives and the government’s drive towards building up social infrastructure. Sintex is also a top composite-moulding player with a dedicated clientele and has over the years acquired technical expertise through overseas acquisitions.
– Sintex reported a strong set of results for Q4FY11 (+34% Y-o-Y revenue growth). The over 30% revenue growth has now been seen for the last five quarters while the margin profile has also improved considerably and the future environment continues to look strong on account of a strong order built-up, with synergies on the foreign subsidiaries getting reflected into the margins
– On the back of stupendous order execution by Sintex, the revenue growth in the monolithic division (+50% YoY), the increase in the order book position to Rs2,900 crore (about 2.4x FY11 revenue) executable over 18-20 months gives us comfort with regard to the revenue visibility and the execution capability of Sintex. Further, the revenue growth and the margin expansion being witnessed in the custom molding division, the improvement in the working capital cycle and the addresal of the investor concerns by pulling out of the capital-intensive oil and gas investment provide us with fundamental comfort with regard to the business.
– The attractive valuation (at 8.6x FY13 earnings) keeps us bullish on Sintex. We maintain our Buy rating with a price target of Rs 233. At our target price, the Sintex stock would be trading at 11x its FY13 fully diluted EPS of Rs 21.1.
V-Guard Industries (V-Guard) is a well-established brand in electrical and household goods, particularly in south India. V-Guard started with one product, stabilisers, where it is the market leader. Over the years, it has successfully ramped up its operations and network to become a multi-product company. V-Guard presently manufactures and markets stabilisers, pumps, cables (house wiring, industrial), water heaters, solar water heaters, UPS, electric fans etc.
– Having a strong distribution network in south India, V-Guard has recently forayed into non-south Indian markets and is particularly focusing on the tier-II and tier-III cities where there is a lot of latent demand for its products.
– V-Guard has witnessed a CAGR of 27.3% in its revenues over FY05-10, driven by the successful ramp-up of its operations and distribution network, introduction of new products, entry into non-south Indian markets and the overall robust growth of the consumer durables industry. We expect V-Guard to more than double its net revenues and earnings over FY10-12 driven by a multifold rise in sales from non-south Indian markets, an exponential growth in its newer products like power cables and UPS, and the booming consumer spending.
– At the current market price, the V-Guard stock trades at 10.5x and 7.1x its FY12E and FY13E earnings respectively. We currently have a Buy recommendation on the V-Guard stock with a price target of Rs237. The near-term trigger in the V-Guard stock is its Q4FY11 performance where we are expecting a 41.3% Y-o-Y growth in PAT.
– Given Yes Bank’s robust growth in advances over the initial years (at a CAGR of 54% over FY07-11), the management of Yes Bank expects to sustain the growth momentum with a targeted growth of 35% CAGR in advances over FY11-15. The Version 2.0 marks more diversified growth with increased focus on high yielding SME and retail segments.
– The net interest margin (NIM) of Yes Bank is expected to decline in the rising interest rate scenario, though not substantially due to the strong re-pricing power on the assets side (about 95% of the assets are on floating rates) and favourable asset liability duration. The management of Yes Bank believes that increasing the branch tally to 350-450 (350 branches by June 2012) would be the inflection point and there will be an exponential growth in the deposits (including CASA), which would support the margins.
– Yes Bank maintains the best asset quality in the industry with the lowest NPAs (gross NPAs at 0.23% and net NPAs at 0.03% in FY11). Hence, we do not expect any significant deterioration in asset quality. Yes Bank’s total exposure to microfinance institutions (MFIs) is less than 1% of the loan book (ie Rs250 crore) and the portfolio continues to do well.
– Yes Bank’s return ratios have consistently remained at higher levels (18-20%) despite several rounds of equity infusion. We believe Yes Bank will maintain its RoEs and RoAs at about 20% and 1.4% respectively over the next two years led by a 28% CAGR in its earnings.
– While the advances growth of Yes Bank is likely to moderate from the current levels (52% CAGR over FY07-11), it would substantially be higher than the industry’s, which would result in a strong growth in the earnings. We expect Yes Bank’s advances to grow at a CAGR of 38% over FY11-13, leading to an approximately 28% growth in the earnings. Currently, the Yes Bank stock is trading at 1.9x FY12 BV and 1.6x FY13 BV. We maintain Buy rating on the Yes Bank stock with a price target of Rs415 (2.7x FY12 BV).