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1QFY12 : Fourth consecutive quarter of margin erosion
> Margins compressed by 188 bp over FY11, hit mainly due to wage inflation and rising input prices
> Our GS Global ECS Research team expects inflation to remain high till summer-end, likely to come down in 2HFY12E
> Defensives like Consumer, Pharma and Telecom are trading close to/above historical average post market sell off
Macro concerns may be close to peaking out
> Macro Cycle – post RBI’s recent repo rate raise by 50 bp, rate hike cycle may have peaked out
> Falling Oil Prices – Brent crude decline over the past few weeks may help mitigate rising input costs
> Weaker global outlook may result in commodity prices easing off
Strategy - Upgrade India to Marketweight
> India’s 12M forward P/E is now trading below its historical mean owing to global macro concerns
> Recent sell off (down 15% in the past month) reduces India’s premium valuation to MXAPJ (down to 23% from 40%)
C f f SC
India’s 12M forward P/E is below its long-term mean MSCI India de-rated sharply, now trading 12.3X forward earnings
> Current valuation premium suggests relative outperformance of MSCI over the next 6-12 month
FY2013 revenue and earnings growth to be lower than FY2012
> Investment Cycle – post RBI’s recent repo rate raise by 50 bp, rate hike cycle may have peaked out
> GS Global ECS Research team builds in 100 bp of rate cuts in FY13E, up from 50 bp forecast in FY12E
> We expect 11% / 17% revenue/earnings growth in FY13E, lower than FY12E forecasts (20%/19%)
Automobiles: Exide Industries (EXID.BO, Buy, on our Conviction List)
• Trailing auto 24 months) is a demand growth (over the previous 24-48 key swing factor for battery industry revenues (correlation implies 57% rsquared),
in our view.
• Indian auto industry experienced its strongest demand growth across segments during FY10-FY11. Thus, trailing auto demand will approach
its peak in FY13-FY14, as a result, we believe India’s battery industry could witness its strongest revenue growth during FY13-FY14, as
vehicles sold in FY10-FY11 require replacement batteries.
Banks: IndusInd Bank (INBK.BO, Buy, on our Conviction List)
• In our view, INBK is best placed to create value for investors buoyed by improved strength of franchise (we forecast branch network to be at
550 by FY2013E vs 310 in FY11), improving profitability and higher growth versus peers (22% earnings CAGR vs. 18%- 20% for the industry).
• We believe the re-rating will continue and over the long-term INBK could potentially surprise with better-than expected execution: (1) CASA
benefits from branch expansion (32.3% by FY2013E vs 27.2%in FY11), (2) fee income to grow by a CAGR of 30% till FY14E and (3) aboveindustry
asset growth.
Cement: Grasim Industries (GRAS.BO, Buy)
• Compelling Valuations: At 4.4X FY12E EV/EBITDA, Grasim is trading at a 20% discount to its mid-cycle of 5.5X and a 37% discount to peers
• This would imply that either (1) the VSF business is trading at a 80% discount to peers, despite better EBITDA margins and returns; or (2) the
implied holding company discount for the cement business is a steep 50%, both of which appear unjustified
Consumer Staples: Marico (MRCO.BO, Buy)
• We expect Marico to exhibit sustained value growth on the back of a strong domestic business led by franchise brands - (Parachute and
Saffola) and the high growth international business
• In our view, current valuations do not capture the high growth and return potential and we see a potential upside of 12%
Healthcare: Cipla Ltd. (CIPL.BO, Sell, on our Conviction List)
• Domestic peers 2 revenue growth to underperform peers. (past 2-yr CAGR was 11% vs. industry CAGR of 17%). We forecast a 12%/14% 3-yr
revenue/EPS CAGR (FY11-FY14E).
• Cipla’s cash returns have declined 900 bp over FY06-FY11 and forecast to remain below sector and offer no valuation support to the stock
• Despite underperforming peers over past 3 years, it trades at premium valuation of 31% and 29% to peers on FY12E P/E and EV/ EBITDA.
Industrials: Larsen & Toubro Ltd. (LART.BO, Buy)
• We expect L&T’s strong order backlog and stable execution cycle of around 30 months to drive revenue growth of 25% in FY12E, while
EBITDA margin will remain stable.
• Though valuations are close to its historical median P/E at 20X, the limited impact of market weakness on the company gives us comfort in our
attractive view on the stock with expectations of 23% EPS CAGR over FY11-FY13E
Infrastructure: IRB Infrastructure (IRBI.BO, Buy)
• Best direct exposure to road development and traffic growth, in our view. We note the company’s execution track record (3,413 lane km under
operation, 2322 lane km under development) and high cash generation ability
• We believe current valuations are attractive (33% discount to historical median 12-m fwd P/E), given 16% EPS CAGR over FY11-FY13E
Information Technology: HCL Technologies (HCLT.BO, Buy)
• We prefer HCL Tech as it continues to transform from a low profile AD&M player to a total outsourcing IT services company with expertise in
Enterprise Application (through Axon) and Remote Infras. Mgmt. Expect a sustained 25%/21% US$ revenue growth in FY12E/FY13E as deal
over past couple of years continue ramp up volumes.
• OP margin recovery to drive EPS growth (25% CAGR in FY11-FY14E ) owing to normalizing attrition / wages, stabilizing SG&A, scale benefits
and recovery in BPO business.
• At 11.9X FY12E P/E, below historical avg. (15X). We expect stock to trade at a premium at 17.4X on FY12E P/E.
Metals & Mining: Tata Steel (TISC.BO, Buy, on our Conviction List)
• In our view the view, current price does not reflect Tata Steel’s strong growth trajectory (46% FY10-FY13E EBITDA CAGR) and improving return
profile, driven by robust profitability at India operations (70% of FY11E EBITDA) and sustainable recovery at Tata Steel Europe. At current price
levels, the negatives, if any, are more than priced in, and the market is assigning unjustifiably low (negative) value to the European business
• On earnings-based multiples, the stock is trading at 4.3X FY12E EV/EBITDA, at 26% discount to mid-cycle of 6.2X and 20% discount to peers
Oil & Gas: Oil & Natural Gas Corporation (ONGC.BO, Buy, on our Conviction List)
• Our Buy (on CL) on ONGC is based on our expectation for stable to improving oil realizations, improving volume growth and attractive valuation.
We also believe implementation of a transparent subsidy-sharing mechanism would reduce uncertainty around ONGC's cash flows.
• Our 12-m EV/GCI-based target price of Rs340 for ONGC implies potential upside of 23%. Note that despite low operating and F&D costs,
reasonable reserve replacement , high reserve life and attractive returns, ONGC is trading at FY12E EV/DACF of 5.5x vs. 8-yr historical range
of 4.0x-9.5x.
Real Estate: Sobha Developers Ltd. (SOBH.BO, Buy, on our Conviction List)
• Sobha recently launched in Bangalore and Gurgaon. Coupled with other upcoming launches in the next few quarters and unsold inventory
represent a revenue and cash flow potential of about Rs65bn and Rs24bn, respectively.
• In addition, we value the company’s contractual and manufacturing business at Rs4bn. This compares favorably with Sobha’s current EV of
Rs34bn.
Telecom: Idea Cellular (IDEA.BO, Buy)
• Attractive risk-reward in the With GSM sector: incumbent operators increasing headline tariffs, we see further potential tariff hikes and see
risk-reward more favorable for Idea given better financial/operating leverage and given that it is a pure wireless operator.
• Valuations not expensive in the context of growth: We see more upside to our Idea TP and find Idea valuations more attractive than Bharti
(BRTI.BO; Buy) (FY12E EV/EBITDA of 7.8X/9.2X for Idea/Bharti and FY11-FY14E EBITDA CAGR of 26%/21% for Idea/Bharti).
Utilities: Lanco Infratech (LAIN.BO, Buy)
• Lanco is down 63% over the past 6 months, which reflects near-term risks in terms of: (1) decline in merchant rates; and (2) increase in fuel
and interest expense costs that are reflected in the share price.
• The stock is currently trading below its five-year historical P/B and is at a 15% discount to its peers on P/E. We believe current market price is
not factoring the projects under development (3,960MW) despite high visibility on project execution.
Reliance Power (RPOL.BO, Sell, on our Conviction List)
• We believe the current market price implies complete execution of 24.3GW of projects under construction and development. With RIL not likely
to ramp up gas production from its KG D-6 basin, we believe the gas-based projects are likely to be delayed further.
• Our calculations indicate that cash flows from near-term projects will not be sufficient to meet equity requirements for projects under
development over the medium term. Further constraints may necessitate further equity dilution or delays in project timelines, in our view.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
1QFY12 : Fourth consecutive quarter of margin erosion
> Margins compressed by 188 bp over FY11, hit mainly due to wage inflation and rising input prices
> Our GS Global ECS Research team expects inflation to remain high till summer-end, likely to come down in 2HFY12E
> Defensives like Consumer, Pharma and Telecom are trading close to/above historical average post market sell off
Macro concerns may be close to peaking out
> Macro Cycle – post RBI’s recent repo rate raise by 50 bp, rate hike cycle may have peaked out
> Falling Oil Prices – Brent crude decline over the past few weeks may help mitigate rising input costs
> Weaker global outlook may result in commodity prices easing off
Strategy - Upgrade India to Marketweight
> India’s 12M forward P/E is now trading below its historical mean owing to global macro concerns
> Recent sell off (down 15% in the past month) reduces India’s premium valuation to MXAPJ (down to 23% from 40%)
C f f SC
India’s 12M forward P/E is below its long-term mean MSCI India de-rated sharply, now trading 12.3X forward earnings
> Current valuation premium suggests relative outperformance of MSCI over the next 6-12 month
FY2013 revenue and earnings growth to be lower than FY2012
> Investment Cycle – post RBI’s recent repo rate raise by 50 bp, rate hike cycle may have peaked out
> GS Global ECS Research team builds in 100 bp of rate cuts in FY13E, up from 50 bp forecast in FY12E
> We expect 11% / 17% revenue/earnings growth in FY13E, lower than FY12E forecasts (20%/19%)
Automobiles: Exide Industries (EXID.BO, Buy, on our Conviction List)
• Trailing auto 24 months) is a demand growth (over the previous 24-48 key swing factor for battery industry revenues (correlation implies 57% rsquared),
in our view.
• Indian auto industry experienced its strongest demand growth across segments during FY10-FY11. Thus, trailing auto demand will approach
its peak in FY13-FY14, as a result, we believe India’s battery industry could witness its strongest revenue growth during FY13-FY14, as
vehicles sold in FY10-FY11 require replacement batteries.
Banks: IndusInd Bank (INBK.BO, Buy, on our Conviction List)
• In our view, INBK is best placed to create value for investors buoyed by improved strength of franchise (we forecast branch network to be at
550 by FY2013E vs 310 in FY11), improving profitability and higher growth versus peers (22% earnings CAGR vs. 18%- 20% for the industry).
• We believe the re-rating will continue and over the long-term INBK could potentially surprise with better-than expected execution: (1) CASA
benefits from branch expansion (32.3% by FY2013E vs 27.2%in FY11), (2) fee income to grow by a CAGR of 30% till FY14E and (3) aboveindustry
asset growth.
Cement: Grasim Industries (GRAS.BO, Buy)
• Compelling Valuations: At 4.4X FY12E EV/EBITDA, Grasim is trading at a 20% discount to its mid-cycle of 5.5X and a 37% discount to peers
• This would imply that either (1) the VSF business is trading at a 80% discount to peers, despite better EBITDA margins and returns; or (2) the
implied holding company discount for the cement business is a steep 50%, both of which appear unjustified
Consumer Staples: Marico (MRCO.BO, Buy)
• We expect Marico to exhibit sustained value growth on the back of a strong domestic business led by franchise brands - (Parachute and
Saffola) and the high growth international business
• In our view, current valuations do not capture the high growth and return potential and we see a potential upside of 12%
Healthcare: Cipla Ltd. (CIPL.BO, Sell, on our Conviction List)
• Domestic peers 2 revenue growth to underperform peers. (past 2-yr CAGR was 11% vs. industry CAGR of 17%). We forecast a 12%/14% 3-yr
revenue/EPS CAGR (FY11-FY14E).
• Cipla’s cash returns have declined 900 bp over FY06-FY11 and forecast to remain below sector and offer no valuation support to the stock
• Despite underperforming peers over past 3 years, it trades at premium valuation of 31% and 29% to peers on FY12E P/E and EV/ EBITDA.
Industrials: Larsen & Toubro Ltd. (LART.BO, Buy)
• We expect L&T’s strong order backlog and stable execution cycle of around 30 months to drive revenue growth of 25% in FY12E, while
EBITDA margin will remain stable.
• Though valuations are close to its historical median P/E at 20X, the limited impact of market weakness on the company gives us comfort in our
attractive view on the stock with expectations of 23% EPS CAGR over FY11-FY13E
Infrastructure: IRB Infrastructure (IRBI.BO, Buy)
• Best direct exposure to road development and traffic growth, in our view. We note the company’s execution track record (3,413 lane km under
operation, 2322 lane km under development) and high cash generation ability
• We believe current valuations are attractive (33% discount to historical median 12-m fwd P/E), given 16% EPS CAGR over FY11-FY13E
Information Technology: HCL Technologies (HCLT.BO, Buy)
• We prefer HCL Tech as it continues to transform from a low profile AD&M player to a total outsourcing IT services company with expertise in
Enterprise Application (through Axon) and Remote Infras. Mgmt. Expect a sustained 25%/21% US$ revenue growth in FY12E/FY13E as deal
over past couple of years continue ramp up volumes.
• OP margin recovery to drive EPS growth (25% CAGR in FY11-FY14E ) owing to normalizing attrition / wages, stabilizing SG&A, scale benefits
and recovery in BPO business.
• At 11.9X FY12E P/E, below historical avg. (15X). We expect stock to trade at a premium at 17.4X on FY12E P/E.
Metals & Mining: Tata Steel (TISC.BO, Buy, on our Conviction List)
• In our view the view, current price does not reflect Tata Steel’s strong growth trajectory (46% FY10-FY13E EBITDA CAGR) and improving return
profile, driven by robust profitability at India operations (70% of FY11E EBITDA) and sustainable recovery at Tata Steel Europe. At current price
levels, the negatives, if any, are more than priced in, and the market is assigning unjustifiably low (negative) value to the European business
• On earnings-based multiples, the stock is trading at 4.3X FY12E EV/EBITDA, at 26% discount to mid-cycle of 6.2X and 20% discount to peers
Oil & Gas: Oil & Natural Gas Corporation (ONGC.BO, Buy, on our Conviction List)
• Our Buy (on CL) on ONGC is based on our expectation for stable to improving oil realizations, improving volume growth and attractive valuation.
We also believe implementation of a transparent subsidy-sharing mechanism would reduce uncertainty around ONGC's cash flows.
• Our 12-m EV/GCI-based target price of Rs340 for ONGC implies potential upside of 23%. Note that despite low operating and F&D costs,
reasonable reserve replacement , high reserve life and attractive returns, ONGC is trading at FY12E EV/DACF of 5.5x vs. 8-yr historical range
of 4.0x-9.5x.
Real Estate: Sobha Developers Ltd. (SOBH.BO, Buy, on our Conviction List)
• Sobha recently launched in Bangalore and Gurgaon. Coupled with other upcoming launches in the next few quarters and unsold inventory
represent a revenue and cash flow potential of about Rs65bn and Rs24bn, respectively.
• In addition, we value the company’s contractual and manufacturing business at Rs4bn. This compares favorably with Sobha’s current EV of
Rs34bn.
Telecom: Idea Cellular (IDEA.BO, Buy)
• Attractive risk-reward in the With GSM sector: incumbent operators increasing headline tariffs, we see further potential tariff hikes and see
risk-reward more favorable for Idea given better financial/operating leverage and given that it is a pure wireless operator.
• Valuations not expensive in the context of growth: We see more upside to our Idea TP and find Idea valuations more attractive than Bharti
(BRTI.BO; Buy) (FY12E EV/EBITDA of 7.8X/9.2X for Idea/Bharti and FY11-FY14E EBITDA CAGR of 26%/21% for Idea/Bharti).
Utilities: Lanco Infratech (LAIN.BO, Buy)
• Lanco is down 63% over the past 6 months, which reflects near-term risks in terms of: (1) decline in merchant rates; and (2) increase in fuel
and interest expense costs that are reflected in the share price.
• The stock is currently trading below its five-year historical P/B and is at a 15% discount to its peers on P/E. We believe current market price is
not factoring the projects under development (3,960MW) despite high visibility on project execution.
Reliance Power (RPOL.BO, Sell, on our Conviction List)
• We believe the current market price implies complete execution of 24.3GW of projects under construction and development. With RIL not likely
to ramp up gas production from its KG D-6 basin, we believe the gas-based projects are likely to be delayed further.
• Our calculations indicate that cash flows from near-term projects will not be sufficient to meet equity requirements for projects under
development over the medium term. Further constraints may necessitate further equity dilution or delays in project timelines, in our view.
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