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UBS Investment Research
India Market Strategy
Increasing mid-cap allocation
Focusing on specific stocks can create alpha
We believe that it is time to focus on select bottom-up stock ideas at the current
market levels in order to generate alpha. To reflect this view, we are modifying our
model portfolio. We become Neutral on Consumers (vs. Underweight earlier) and
turn Underweight on Materials (from Neutral). We are also increasing our
allocation for mid-caps to 12% (from 6% earlier).
Turn incrementally positive on consumers; negative on materials
We become neutral on consumer as we add United Spirits in our model portfolio.
Sunita Sachdev in her Q-Series® report “Are staples a good inflation hedge?”
identifies the company along with ITC as the inflation winners in a high inflation
scenario. Our negative stance on materials is in line with our global view of
potential softness in global commodity prices in the near term.
Key additions-Federal Bank, Maruti, IndusInd, DB Corp, Apollo Hospitals
We believe that Federal Bank is an excellent turnaround candidate under new CEO
Mr. Srinivasan. Federal Bank is attractive at 1.3x FY12 P/B. Maruti is the cheapest
stock in the Indian auto space at 13x FY12 P/E and our auto analyst believes that
the company can surprise on both volumes and margin front. We like IndusInd
Bank for 1) its improving liability franchise, 2) strategy of pursuing profitable
growth, and 3) strong execution track record. DB Corp is a play on regional print
media and on consumption growth in tier 2 and tier 3 cities which will drive
advertising revenues. We like Apollo Hospitals for its secular non cyclical revenue
stream, improving return ratios and attractive IRRs on new hospitals, and fair
valuations. We believe the hospital sector in India will enjoy secular growth for the
foreseeable future.
Sector changes
Consumers (from Underweight to Neutral)
We become neutral on the consumers sector from underweight as we add United
Spirits in our model portfolio. We have assigned 2% weight to United Spirits
and increased our weight on the sector to 7% from 5% earlier
Materials (from Neutral to Underweight)
We become underweight on the materials sector from neutral in line with our
global view of potential softness in global commodity prices in the near term.
Please see our global commodity analyst, Peter Hickson, report “Commodity
Connections Q2 11: Turbulence hits commodities” published on 25 March 2011
for more details.
Stock additions
Apollo Hospitals (Buy, PT Rs650.00)
We add Apollo hospitals to our model portfolio with a 2.0% weight. The
company has a dominant position in the Chennai and Hyderabad healthcare
services market, and is expanding its presence in other metros and tier 1 cities,
and in tier 2 cities. Apollo ranks high on brand, leadership in healthcare
technology, and scale parameters which are critical in health care business.
Hospitals have historically been a long-gestation business. However, Apollo
Hospitals has demonstrated ability to reduce the gestation period involved in
setting up new hospitals. APLH’s new hospitals reached breakeven in the
second year of operations, reflecting its effective cost control and knowledge of
local markets. We believe this will drive improving return ratios, allowing
APLH to accelerate bed additions and, importantly, address market concerns
about hospitals being a low-return business. We estimate its new hospitals could
generate attractive (20% or higher) equity IRRs.
DB Corp (Rs310.00)
We add DB corp to the model portfolio with a weight of 2.0%. DB Corp (DB) is
the largest print media company in India in terms of total readership share of all
its newspapers. Its flagship newspaper, Dainik Bhaskar, is the second-most
widely-read Hindi newspaper in India.
We believe the company will benefit the most from India’s rapidly-growing
regional print sector. DB is well-diversified geographically with presence in 13
states; it also plans to enter the Bihar and Maharashtra markets. Our Media
analyst, Nupur Agarwal, recently initiated coverage on DB Corp with a Buy
rating and price target of Rs310. (Please see the report “The power of print”
dated 06 Apr11for more details.)
Exide (Buy, Rs162.00)
We add Exide to our model portfolio with a weight of 2%. Exide is a market
leader (70%+ market share) in a near-oligopoly automotive battery market. We
believe its share price is attractive at FY12E PE of 13x for the core underlying
business given: 1) our 23% FY11-13E earnings CAGR; 2) high core FY11 ROE
of 45%; and 3) a net cash balance sheet.
Federal Bank (Buy, PT Rs600.00)
We add Federal Bank to our model portfolio as we believe that the stock is at an
inflection point and strong candidate of rerating post the change in management
(new CEO from Standard Chartered). The stock currently trades at 50-60%
discount to other private sector banks which we believe would narrow as its
franchise improve in FY12-13. Our banking analyst, Vishal Goyal, recently
initiated coverage on Federal Bank with a Buy rating and price target of Rs600.
(Please see the report “At the inflection point” dated 07 Apr’11 for more
details.)
Havells (Buy, PT Rs465.00)
We add Havells to our model portfolio with a weight of 2%. Havells India is a
leading Indian consumer electrical goods company. We believe Havells provides
an attractive investment opportunity given robust domestic demand for
consumer durables and strong housing growth. Additionally, Havells could
benefit from the continued launch of new products, which could provide upside
to our estimates.
The stock is trading at 13.6x standalone FY12 PE. This does not include upside
from the Standard Electric (domestic switchgear) division (Standard Electric
reported PAT of Rs134m during 9M FY11; 9M EPS of Rs1.1) and upside from
a Sylvania turnaround. This is very attractive for a company with 30% ROE and
20%+ EPS CAGR
IndusInd Bank (Buy, PT Rs290.00)
We replace SBI with IndusInd in our model portfolio as we like the latter due to
1) its improving liability franchise, 2) strategy of pursuing profitable growth,
and 3) strong execution track record.
Maruti (Buy, PT Rs1,650.00)
We replace M&M with Maruti in our model portfolio as we believe that the
latter is a better play on domestic demand than M&M given that Maruti’s
margins have bottomed out and growth outlook remains robust. Also, we believe
that Maruti is currently trading at attractive valuations
Nagarjuna (Buy, PT Rs180.00)
We add Nagarjuna to our model portfolio with a weight of 2%. We like
Nagarjuna given: 1) strong revenue visibility - Nagarjuna's order backlog at
Rs173bn at the end of 9M FY11 is 2.7x FY12E revenues, 2) margins stability -
Nagarjuna has largely maintained its margins in 9M FY11 on a YoY basis at
9.8%, 3) attractive valuations - the core construction business is trading at about
7x FY12 EPS.
United Spirits (Buy, PT Rs1,550.00)
We add United Spirits with a weight of 2.0%. Our consumer sector analyst,
Sunita Sachdev, in her Q-Series® report “Are staples a good inflation hedge?”
published on 31 March 2011, identifies the company along with ITC as inflation
winners and believes stock performance will be supported by favourable
demographics and rising disposable incomes.United Spirits is a market leader in the Indian made foreign liquor (IMFL,
includes whiskies, brandies, rums, vodka and gins) market and direct beneficiary
of India’s growing young population and rising discretionary spending.
Stock deletions
DLF (Buy, PT Rs400.00)
We believe that DLF may consolidate in the near term given that the stock has
outperformed Nifty by 15% since our last update (28 Feb 2011) and concerns on
high leverage. We believe that there is more upside potential in mid-caps such as
Prestige and IndiaBulls real estate.
Dr Reddy’s (Buy, PT Rs2,000.00)
We remove Dr Reddy’s from our model portfolio as we believe that the strong
outlook on FY12 earnings is already priced in and we see limited visibility on
earnings growth beyond FY12.
Jindal Saw (Buy, PT Rs305.00)
We remove Jindal Saw from our portfolio as we believe that the stock
performance will be muted in the near-term as we think catalysts such as
commissioning of new mines will take a while.
Mahindra & Mahindra (Buy, PT Rs910.00)
We replace M&M with Maruti in our model portfolio since we see better
opportunities in the latter as a domestic play given that Maruti’s margins have
bottomed out and growth outlook remains robust.
Also, M&M has seen a strong re-rating over the last one year, as the auto
business (incl. tractors) has become the key earnings driver, and we believe that
the re-rating is done.
REC (Buy, PT Rs330.00)
We replace REC with Federal Bank in our model portfolio as we see significant
upside potential in the latter in the near-term. REC has outperformed Nifty by
4% in the last month and we believe large part of upside potential is priced in.
SBI (Buy, PT Rs3,150.00)
We replace SBI with IndusInd Bank in our model portfolio as we believe that
there could be some uncertainty in SBI post the recent change in management.
Sesa Goa (Buy, PT Rs400.00)
We remove Sesa Goa from our model portfolio as we believe that the upside
from lifting of Karnataka export ban is priced in. We believe that there could be
downsize to iron ore prices in the near term given monetary tightening in China.
Sterlite (Buy, PT Rs215.00)
We remove Sterlite from the model portfolio as we believe Sterlite’s stock price
could remain under pressure till we get more clarity on Niyamgiri/Bauxite
mining.
UBS India model portfolio performance
As at 08 April 2011, our portfolio had generated a return of 117.8%. This
compares with the BSE Sensex’s 101.2%; the Nifty’s 95.8%; and the MSCI
India’s 105.9% (as on 07 Apr 2011). Key sectors that have outperformed
compared with the BSE Sensex are Banks (90.3% excess return), Auto (38.8%),
IT Services (31.4%), Materials (30.2%) and Power (19.3%) while Telecom (-
131.7%), Real Estate (-129.5%), Petrochemicals (-103.6%), Oil & Gas (-
103.1%) and Pharma (-76.9%) have underperformed.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
India Market Strategy
Increasing mid-cap allocation
Focusing on specific stocks can create alpha
We believe that it is time to focus on select bottom-up stock ideas at the current
market levels in order to generate alpha. To reflect this view, we are modifying our
model portfolio. We become Neutral on Consumers (vs. Underweight earlier) and
turn Underweight on Materials (from Neutral). We are also increasing our
allocation for mid-caps to 12% (from 6% earlier).
Turn incrementally positive on consumers; negative on materials
We become neutral on consumer as we add United Spirits in our model portfolio.
Sunita Sachdev in her Q-Series® report “Are staples a good inflation hedge?”
identifies the company along with ITC as the inflation winners in a high inflation
scenario. Our negative stance on materials is in line with our global view of
potential softness in global commodity prices in the near term.
Key additions-Federal Bank, Maruti, IndusInd, DB Corp, Apollo Hospitals
We believe that Federal Bank is an excellent turnaround candidate under new CEO
Mr. Srinivasan. Federal Bank is attractive at 1.3x FY12 P/B. Maruti is the cheapest
stock in the Indian auto space at 13x FY12 P/E and our auto analyst believes that
the company can surprise on both volumes and margin front. We like IndusInd
Bank for 1) its improving liability franchise, 2) strategy of pursuing profitable
growth, and 3) strong execution track record. DB Corp is a play on regional print
media and on consumption growth in tier 2 and tier 3 cities which will drive
advertising revenues. We like Apollo Hospitals for its secular non cyclical revenue
stream, improving return ratios and attractive IRRs on new hospitals, and fair
valuations. We believe the hospital sector in India will enjoy secular growth for the
foreseeable future.
Sector changes
Consumers (from Underweight to Neutral)
We become neutral on the consumers sector from underweight as we add United
Spirits in our model portfolio. We have assigned 2% weight to United Spirits
and increased our weight on the sector to 7% from 5% earlier
Materials (from Neutral to Underweight)
We become underweight on the materials sector from neutral in line with our
global view of potential softness in global commodity prices in the near term.
Please see our global commodity analyst, Peter Hickson, report “Commodity
Connections Q2 11: Turbulence hits commodities” published on 25 March 2011
for more details.
Stock additions
Apollo Hospitals (Buy, PT Rs650.00)
We add Apollo hospitals to our model portfolio with a 2.0% weight. The
company has a dominant position in the Chennai and Hyderabad healthcare
services market, and is expanding its presence in other metros and tier 1 cities,
and in tier 2 cities. Apollo ranks high on brand, leadership in healthcare
technology, and scale parameters which are critical in health care business.
Hospitals have historically been a long-gestation business. However, Apollo
Hospitals has demonstrated ability to reduce the gestation period involved in
setting up new hospitals. APLH’s new hospitals reached breakeven in the
second year of operations, reflecting its effective cost control and knowledge of
local markets. We believe this will drive improving return ratios, allowing
APLH to accelerate bed additions and, importantly, address market concerns
about hospitals being a low-return business. We estimate its new hospitals could
generate attractive (20% or higher) equity IRRs.
DB Corp (Rs310.00)
We add DB corp to the model portfolio with a weight of 2.0%. DB Corp (DB) is
the largest print media company in India in terms of total readership share of all
its newspapers. Its flagship newspaper, Dainik Bhaskar, is the second-most
widely-read Hindi newspaper in India.
We believe the company will benefit the most from India’s rapidly-growing
regional print sector. DB is well-diversified geographically with presence in 13
states; it also plans to enter the Bihar and Maharashtra markets. Our Media
analyst, Nupur Agarwal, recently initiated coverage on DB Corp with a Buy
rating and price target of Rs310. (Please see the report “The power of print”
dated 06 Apr11for more details.)
Exide (Buy, Rs162.00)
We add Exide to our model portfolio with a weight of 2%. Exide is a market
leader (70%+ market share) in a near-oligopoly automotive battery market. We
believe its share price is attractive at FY12E PE of 13x for the core underlying
business given: 1) our 23% FY11-13E earnings CAGR; 2) high core FY11 ROE
of 45%; and 3) a net cash balance sheet.
Federal Bank (Buy, PT Rs600.00)
We add Federal Bank to our model portfolio as we believe that the stock is at an
inflection point and strong candidate of rerating post the change in management
(new CEO from Standard Chartered). The stock currently trades at 50-60%
discount to other private sector banks which we believe would narrow as its
franchise improve in FY12-13. Our banking analyst, Vishal Goyal, recently
initiated coverage on Federal Bank with a Buy rating and price target of Rs600.
(Please see the report “At the inflection point” dated 07 Apr’11 for more
details.)
Havells (Buy, PT Rs465.00)
We add Havells to our model portfolio with a weight of 2%. Havells India is a
leading Indian consumer electrical goods company. We believe Havells provides
an attractive investment opportunity given robust domestic demand for
consumer durables and strong housing growth. Additionally, Havells could
benefit from the continued launch of new products, which could provide upside
to our estimates.
The stock is trading at 13.6x standalone FY12 PE. This does not include upside
from the Standard Electric (domestic switchgear) division (Standard Electric
reported PAT of Rs134m during 9M FY11; 9M EPS of Rs1.1) and upside from
a Sylvania turnaround. This is very attractive for a company with 30% ROE and
20%+ EPS CAGR
IndusInd Bank (Buy, PT Rs290.00)
We replace SBI with IndusInd in our model portfolio as we like the latter due to
1) its improving liability franchise, 2) strategy of pursuing profitable growth,
and 3) strong execution track record.
Maruti (Buy, PT Rs1,650.00)
We replace M&M with Maruti in our model portfolio as we believe that the
latter is a better play on domestic demand than M&M given that Maruti’s
margins have bottomed out and growth outlook remains robust. Also, we believe
that Maruti is currently trading at attractive valuations
Nagarjuna (Buy, PT Rs180.00)
We add Nagarjuna to our model portfolio with a weight of 2%. We like
Nagarjuna given: 1) strong revenue visibility - Nagarjuna's order backlog at
Rs173bn at the end of 9M FY11 is 2.7x FY12E revenues, 2) margins stability -
Nagarjuna has largely maintained its margins in 9M FY11 on a YoY basis at
9.8%, 3) attractive valuations - the core construction business is trading at about
7x FY12 EPS.
United Spirits (Buy, PT Rs1,550.00)
We add United Spirits with a weight of 2.0%. Our consumer sector analyst,
Sunita Sachdev, in her Q-Series® report “Are staples a good inflation hedge?”
published on 31 March 2011, identifies the company along with ITC as inflation
winners and believes stock performance will be supported by favourable
demographics and rising disposable incomes.United Spirits is a market leader in the Indian made foreign liquor (IMFL,
includes whiskies, brandies, rums, vodka and gins) market and direct beneficiary
of India’s growing young population and rising discretionary spending.
Stock deletions
DLF (Buy, PT Rs400.00)
We believe that DLF may consolidate in the near term given that the stock has
outperformed Nifty by 15% since our last update (28 Feb 2011) and concerns on
high leverage. We believe that there is more upside potential in mid-caps such as
Prestige and IndiaBulls real estate.
Dr Reddy’s (Buy, PT Rs2,000.00)
We remove Dr Reddy’s from our model portfolio as we believe that the strong
outlook on FY12 earnings is already priced in and we see limited visibility on
earnings growth beyond FY12.
Jindal Saw (Buy, PT Rs305.00)
We remove Jindal Saw from our portfolio as we believe that the stock
performance will be muted in the near-term as we think catalysts such as
commissioning of new mines will take a while.
Mahindra & Mahindra (Buy, PT Rs910.00)
We replace M&M with Maruti in our model portfolio since we see better
opportunities in the latter as a domestic play given that Maruti’s margins have
bottomed out and growth outlook remains robust.
Also, M&M has seen a strong re-rating over the last one year, as the auto
business (incl. tractors) has become the key earnings driver, and we believe that
the re-rating is done.
REC (Buy, PT Rs330.00)
We replace REC with Federal Bank in our model portfolio as we see significant
upside potential in the latter in the near-term. REC has outperformed Nifty by
4% in the last month and we believe large part of upside potential is priced in.
SBI (Buy, PT Rs3,150.00)
We replace SBI with IndusInd Bank in our model portfolio as we believe that
there could be some uncertainty in SBI post the recent change in management.
Sesa Goa (Buy, PT Rs400.00)
We remove Sesa Goa from our model portfolio as we believe that the upside
from lifting of Karnataka export ban is priced in. We believe that there could be
downsize to iron ore prices in the near term given monetary tightening in China.
Sterlite (Buy, PT Rs215.00)
We remove Sterlite from the model portfolio as we believe Sterlite’s stock price
could remain under pressure till we get more clarity on Niyamgiri/Bauxite
mining.
UBS India model portfolio performance
As at 08 April 2011, our portfolio had generated a return of 117.8%. This
compares with the BSE Sensex’s 101.2%; the Nifty’s 95.8%; and the MSCI
India’s 105.9% (as on 07 Apr 2011). Key sectors that have outperformed
compared with the BSE Sensex are Banks (90.3% excess return), Auto (38.8%),
IT Services (31.4%), Materials (30.2%) and Power (19.3%) while Telecom (-
131.7%), Real Estate (-129.5%), Petrochemicals (-103.6%), Oil & Gas (-
103.1%) and Pharma (-76.9%) have underperformed.
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