ICICI Securities, Top picks for 2011

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ICICI Securities, Top picks for 2011


􀂾 Aurobindo Pharma
􀂾 Axis Bank
􀂾 Balrampur Chini
􀂾 Escorts
􀂾 GAIL
􀂾 TCS
􀂾 HCL Technologies
􀂾 Hindustan Zinc
􀂾 Larsen & Toubro
􀂾 Lupin
􀂾 Natco Pharma
􀂾 Oil India




􀂾 Aurobindo Pharma
The company has changed it self from a pure plain-vanilla Active
Pharmaceuticals Ingredients (APIs) supplier to a niche formulations player.
This transformation is still on and that has improved the EBITDA margin of
the company, recently. Henceforth, the next big growth drivers will be huge
capacity optimisation and monetisation of the huge US Abbreviated New
Drug Application (ANDA) pipeline. Recent deals with MNCs have given the
company a new identity. Aurobindo on account of its proven capabilities
and huge capacities is well equipped to cater to their incremental
requirements.

􀂾 Axis Bank
Axis Bank’s performance is characterised by the consistent profitability
growth of above 30% YoY for the past 24 quarters, one of the best records
industry wide. Healthy CASA ratio of 42% provides a respite to cost of
funds, thus comforting NIM. RoA of above 1.4%, RoE of above 17% and
healthy asset quality (NNPA ratio at 0.3%) warrant a higher multiple at 3x
FY12E ABV. Moreover, the recent price correction offers comfort to
valuation. Currently, it is available at 2.6x FY12E ABV, thus making the stock
attractive.

􀂾 Balrampur Chini
The higher availability of sugarcane would increase the sugar sales volume
of the company by 40% in SY11. With domestic sugar prices crossing | 30
per kg and sugarcane cost at | 22 per kg, the margins for the company
would improve considerably. Simultaneously, an increase in ethanol prices
to | 27 per litre would also add to the margins. We believe the stock is
trading at the lower end of the replacement cost band and looks attractively

valued.
􀂾 Escorts
Escorts, the third largest player in the tractor segment, is expected to gain
market share as tractor sales will move northwards due to newer product
launches in the popular Powertrac and Farmtrac variants. We expect the
growth momentum of agri-GDP led by increasing demand to inject further
steam towards farm mechanisation as labour migration towards urban
areas continue. The construction business has also turned EPS accretive
and is expected to gain further traction due to improvement in
infrastructure offtake in FY12. On the financial perspective, the company
has de-leveraged its balance sheet significantly having brought down its
debt/equity to a comfortable 0.2x from 1.0x in the last couple of years. We
expect the net sales and PAT to grow at a CAGR of 18.7% and 31.9%,
respectively, for FY10-12E.

􀂾 GAIL
GAIL is India's flagship natural gas company, operating in various business
segments including exploration & production, LPG production,
petrochemicals, transmission, distribution and marketing of natural gas.
GAIL plans to double its gas transmission and petrochemicals capacity in
the next few years. The stock is trading at a P/E of 17.9x TTM EPS of | 28.2.
With the current capital expenditure plans in place, GAIL offers a lot of
safety and visibility of earnings growth to investors over the next few years.

􀂾 TCS
TCS, the largest IT company both in revenue (FY11E ~| 37 billion) and
employees (174417) terms, is expected to report broad based volume
growth leading to US dollar revenue growth of 23% CAGR in FY10-FY12E.
Further, we expect ~17% CAGR earnings growth during the same period.
After almost five quarters of relative out-performance compared to Infosys,
we believe the P/E discount rationale would subside.


􀂾 HCL Technologies
HCL Technologies is a leading IT services company with revenues of ~| 15
billion (FY11E) and 46,540 professionals. HCL Technologies is well
positioned to participate in incremental demand with low utilisation,
superior lateral gross hires coupled with operating levers, which could help
sustain operating margins. We expect revenue and earnings to grow at ~
17% & ~ 29% CAGR during FY10-FY12E period.

􀂾 Hindustan Zinc
Hindustan Zinc is engaged in production of Zinc and lead ingots. It is the
world largest integrated player and one of the lowest cost producers of zinc
and lead. It is a debt free company having huge cash and cash equivalent of
~Rs 13000 crores. Going forward any improvement in the zinc prices will
lead to margin expansion for the company. We continue to maintain our
positive outlook on stock, at current market price stock is trading at
EV/EBITDA of 8.1x FY11E and 5.4x FY12E.

􀂾 Larsen & Toubro
L&T has witnessed a strong order inflow in the past few years. At present,
its order backlog is at a historical high. We expect this momentum to
continue in the next few years as capex activity in L&T’s core end-markets
returns on a strong note and as the company diversifies into power
(generation equipment and nuclear energy) and defence (that are
characterised by large, high-value add orders). The management has
guided for 25% growth in order inflows for FY11E. Going ahead, we believe
value unlocking by divesting a stake in its core subsidiaries like L&T Finance
Holdings, L&T InfoTech and L&T IDPL will lead to huge value creation for
L&T’s shareholders. On the valuation front, the stock is trading at 28x and
21x its FY11E and FY12E standalone earnings. This is accompanied by huge
hidden value in the company’s subsidiaries. L&T is expected to deliver a
19% CAGR in earnings over FY10-FY12E.

􀂾 Lupin
With sustained growth for the last many quarters, a strong foothold in
developed markets through a combination of branded and generic
generics, a foray into niche segments such as Oral Contraceptives (OCs) in
the US, good growth in domestic branded formulations and a strong
balance sheet with ever reducing working capital cycle, we believe the
company has achieved the critical mass to warrant a higher multiple.

􀂾 Natco Pharma
With around three Para IV filings (including two FTFs), the company is
taking a calculated risk in order to penetrate the US generic space. Although
most of them are risky ventures, the company has cautiously tied up with
leading marketing players to mitigate litigation risk. One successful product
launch will change the prospects drastically. Being a niche player in the
oncology segment, Natco Pharma should fare well in domestic
formulations.

􀂾 Oil India
Oil India is engaged in exploration, development, production and
transportation of crude oil and natural gas. Going ahead, we believe Oil
India’s large reserve base and new discoveries would create value for
investors. Oil India is trading at 10.7x FY11E and 9.9x FY12E EPS of | 129.7
and | 140.6, respectively.