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India Strategy
5 questions that investors ask
on India
„Another rate hike; but focus to shift to growth post that
The Indian market is down 18% YTD. Apart from global worries, investor focus
has been on persistent inflation and RBI’s policy action. While we still expect
another hike in October, we think RBI will be on hold post that and cut from April,
2012. While markets may see a rally on a RBI pause, we think markets are likely
to be range-bound over next 6 months as market concerns shift from inflation and
rates to slower growth.
#1: When will inflation and rates peak?
„ We think headline inflation will peak at close to 10% levels in October. We
expect RBI to hike rates in October but to likely be on hold thereafter and cut
rates from April, 2012.
#2: Is a cut in interest rates enough?
„ Investment spend is the more volatile component of GDP growth. A 15%+
annual growth rate in investment spend drove GDP growth since FY03.
Investment spend is slowing both anecdotally and based on forecasts of
companies we cover, posing a risk to GDP growth. While a fall in interest
rates will help, we think policy action to improve business confidence and
remove regulatory bottlenecks is more critical.
#3: How do markets react to rate cuts?
„ Rate cuts are positive for markets but typically markets are more concerned
about growth. Markets tend to rally with a lag of 4-6 months.
#4: Is the earnings downgrade cycle over?
„ We still think there are further cuts to go. On a bottom up basis we are
forecasting over 14% CAGR between FY11-13. However, on a top down
basis, we think this will be closer to 10%, still high relative to the 0% from
FY08-10. To put the cuts in perspective: in Jan this year we forecast FY12
Sensex EPS at Rs1285. We think even FY13 will be lower than that.
#5: Is the market cheap?
„ At around 13.7x 1-year forward EPS, markets are only marginally cheaper
than the long term average.
Model Portfolio – Reduce software weight; increase autos
Post the rally in software stocks, we cut our overweight position to neutral. We
correspondingly add weight to autos and increase our position to overweight.
Hero Honda offers a play on the likely rural demand buoyancy from a good
monsoon. While we think Maruti (our other auto exposure) offers value, we expect
stock performance to be muted until labor problems are sorted.
Model Portfolio Methodology
The BofA ML Indian Model Portfolio represents the best research ideas in our
Indian research universe recommended by BofA ML Asia-Pacific research
analysts. It is designed to contain 10-30 Indian stocks at any given time.
Each stock in the Model Portfolio is chosen by the India strategy team. In order to
qualify, the stock must have a market capitalization of US$1Bn and must be rated
by BofA-ML. The aim is to construct an Indian model portfolio that they believe
will deliver significant positive price appreciation and reflect the general themes
being promoted by BofA-ML Research department at the time.
The process is both top-down and bottom up and is largely influenced by sector
and macro themes but sometimes also by individual stock performances. Each
stock will be assigned a weight and remains on the list until the strategy team, at
its discretion, removes the stock. The team regularly monitors the market and the
performance of current stocks on the list, as well as to consider the addition of
new stocks or the deletion of existing stocks.
Price objective basis & risk
Bharti (BHTIF)
Our PO of Rs450/sh values Bharti at a FY13E-EV/EBITDA of around 7.5x postZain. The consolidated valuation places Bharti at nearly 30-40% premium vs
GEM wireless majors on EV/EBITDA. Long-term EBITDA growth for Bharti is
estimated at around 13% vs lower growth of 9-10% for GEM majors. Upside risks
to our PO could stem from 1) stronger than expected profit contribution from
Bharti-Africa, 2) sooner than expected industry consolidation in India, and 3)
unforeseen 3G adoption in India. Weaker than expected subscriber quality and
renewed competitive intensity in India, weak 3G impact, dramatic regulatory
changes and poor execution in Africa pose downside risks.
DLF Limited (XVDUF)
Our preferred valuation methodology is NAV, calculated by discounting the cash
flows from each of the real estate projects. Our price objective of Rs245 is
therefore based on 15% discount to our NAV estimate of Rs288. We expect DLF
to trade at a 15% discount to NAV due to high leverage and poor earnings
momentum. Key assumptions underlying our NAV estimate are WACC of 14.2%,
capitalization rate of 11% and inflation of 5% from FY13 on both selling price and
construction costs. On a P/E basis, at our PO of Rs245, the stock would trade at
26x FY12E earnings. Downside risks are lower-than-expected volume and
higher-than-expected debt.
HCL (XHCLF)
Our Price Objective of Rs500 is at 14x FY13 PE. Our target PE is at close to 10%
discount to that for Wipro and is lower than the average 5 yr PE of 16x. Given our
strong EPS growth forecast, we see potential upside to our target multiple.
Downside risks stem from macro led delays in discretionary IT spending, slower
than expected growth in top 5 accounts, higher than expected wage hike
pressures and Rupee appreciation.
HDFC Bank (XHDFF)
We set our PO at Rs575 (US$40/ADR). HDFC Bank remains the least vulnerable
to the expected credit cycle given its loan profile. Hence, we believe it may
continue to trade at between average and 1 SD above average. We believe
HDFC BK is likely to deliver RoEs of 18/20% on profit growth of +26-28% through
FY12-13. Moreover, we believe the stock, trading at 21x FY12 earnings can
arguably continue to trade at similar levels in FY13 earnings, if there is visibility of
earnings growth sustaining at +25% and comfort on asset quality. Risks: A sharp
rise in NPLs and inability to maintain growth are risks to our price objective.
Hero MotoCorp Ltd (HRHDF)
Our PO of Rs 2,242 is based on 15.5x FY13E P/E (earlier 14x), which is a 20%
premium to its historical average, due to superior growth and ROE. At our PO, the
stock would trade at 11.0x FY13E EV/EBITDA. Upside / downside risks:
Execution risk during transition period and new models from competition.
Lower/higher input costs would also impact profitability.
ICICI Bank (ICIJF / IBN)
We set our PO at Rs1200/USD54. Our PO is currently based on average
historical PB multiple. We think the sharp correction in the share price in past few
days is already capturing much of the earnings risk and asset quality risk.
Moreover, as highlighted earlier, we do believe the risks are overdone as retail is
almost 38% of its loan mix. Moroever, ICICI Bk has amongst the best asset
quality (most seasoned book), the best capitalized bank and one of the well
positioned banks in the current operating environment. Hence, we reiterate our
Buy. Moreover, on a PE basis, our PO implies that the bank sustained its
earnings multiples of 14x, one year forward. Risks are sharp rise in interest rates
could hurt margins (35% of total deosits wholesale for ICICI Bank) and slowdown
in macro growth could lead to lower volume growth and earnings trajectory for
FY12.
Infosys Tech (INFYF / INFY)
Our Price Objective of Rs3,000 (USD64.5/ADR) is at 18x 1yr fwd EPS, at 10%
discount to its 5yr average PE multiple, given the uncertain environment. Our PO
also implies EV/EBITDA to 2yr forward growth multiple of approx 1x, in-line with
its 5year average. Apart from macro risks, key risks to our call stem from Rupee
appreciation beyond Rs48 in next 6 months and beyond Rs.45.6 in FY13, macro
shock led slowdown in discretionary IT services spend, continued distraction post
recent re-organisation and increasing competition.
ITC Limited (ITCTF)
We value ITC on Discounted Cash Flow basis and validate PO with Sum of the
Parts (SOTP) where we compare cigarettes business to international cigarettes
comparable peer and FMCG, Hotels and Paper business with Indian industry
peers. Our DCF based PO of Rs235 is in line with SOTP. PO implies a 1yr fwd
multiple of 24x at a higher end of historical trading range for ITC. We believe this
is justified given improving return ratios, sustained dividend payout and
successful diversification.
Risks: (1) competitive FMCG intensity could delay breaking even, (2) severe
monsoon failure could impact raw material availability and (3) upside risks from
better-than-expected performance in non-cigarette FMCG.
Larsen & Toubro (LTOUF / LTORF)
Our PO of Rs1660 (US$33.9/GDR) for L&T is based on SOTP. The core
business is valued at Rs1258/sh at 15x PER of 1-yr fwd EPS. L&T International is
valued at Rs18/share at 15% discount to 1.5x FY11 BV. L&T Finance (82.6%) at
Rs128/sh at 15% discount to 1.75x 1-year fwd P/BV. The 100% stake in General
Insurance at Rs3/sh at 15% discount to 1.75x FY11 BV.
Its 97.7% stake in L&T IDPL (Infra SPVs) is valued at Rs105/sh based on SOTP -
Road SPVs at Rs48/sh at 1.5x FY13E BV of Investment, b) Hyderabad Metro
(97.7%) at Rs29/sh at 15% discount to DCF, c) Dhamra Port (48.8%) at Rs15/sh
at 15% discount to DCF and d) L&T Urban Infra (73.2%) at Rs13/sh at 30%
discount to DCF.
The investment in 3 other roads SPVs at Rs9/sh at 1.5x 1-yr fwd BV of
investment. L&T Infotech (100%) at Rs61/sh at 15% discount to 10x 1-yr fwd EPS
- in line with niche 2nd tier stocks. Its 51% stakes in L&T MHI Boilers and L&T
MHI Turbine Generators at 15% discount to 15x 1-yr fwd EPS at Rs36 and
Rs6/share respectively.
L&T Power Development is valued at -Rs3/share - a) Rajpura TPP at -Rs6/share
at 15% discount to DCF and Hydro Projects at Rs3/sh at FY11 BV of investment.
The stake in L&T Seawoods (100%), L&T Shipbuilding (100%) and L&T Special
Steel & Heavy Forgings (74%) are valued at Rs14, Rs10 and Rs4 per share
respectively. Other subsidiaries are valued at 2x book value at Rs13/share.
Risks to Price Objective: Slowdown in EPS growth on a higher base, Raw
materials, Competition, Project execution.
Lupin Limited (LPMCF)
Our PO of Rs530 is based on 18x FY13E EPS, which is at par with large pharma
peers average. We expect the multiple to expand, compared to both historical
and mid-cap companies, closer to large cap peers, due to: (1) stronger and
sustainable growth rates (23% sales CAGR, 24% Profit CAGR), and (2) scale of
operations.
Downside risks: (1) earlier than expected competition in US brands (Suprax) (2)
slower approval from USFDA affecting US growth and (3) higher-than-expected
price erosion.
Maruti Suzuki India (MUDGF)
Our PO of Rs 1,460 is based on the sum of (1) the core business, at a 14.5x
FY13E P/E (earlier 12.5x), or Rs 1,189/sh, and (2) cash and equivalents at Rs
271/sh. At our PO, the stock would trade at a 15x FY13E P/E, being the earlycycle recovery multiple on the expected earnings trough this year. Risks: Rising
competition, which would adversely affect volume growth, and adverse currency
movements, which could hurt profitability.
Reliance Inds (XRELF)
Our PO of Rs870 (GDR US$36.76) is a sum-of-the-parts valuation. It includes EV
of RIL's 3 businesses of Rs825/share and net cash of Rs45/share. The EV of the
refining business is calculated based on 7x FY13E EBITDA while EV of
petrochemical business is based on 6x FY13E EBITDA. The EV of E&P business
is calculated on a DCF basis, using a WACC of 11.8pct. Refining and marketing
(Rs342) is 42pct of the EV, E&P valuation (Rs195) 24pct, and petrochemicals
(Rs287) 35pct. Downside risks are (1) 7-year income tax holiday being disallowed
on gas production, which would mean lower cash flow, profit and fair value, (2)
Lower-than-expected oil price, (3) Large disappointments on the E&P front, (4)
refining and petrochemical margins being lower than expected, and (5) Large
acquisitions that are value dilutive. Upside risks are (1)
Refining and petrochemical margins being better than expected, (2) Higher-thanexpected oil price, (3) Higher-than-expected reserve accretion in the next 12-24
months and (4) Large acquisitions that increase fair value significantly.
SBI (SBINF / SBKFF)
Our 12-month price objective on SBI is Rs2700 (US$120/GDR). Our PO is based
on the average historical PB multiple. Risk-return remains positive, with RoEs
(banking biz.) at +20-21% in FY13 (vs +15% in FY11) and the stock trading at
1.2x FY13 BV. Moreover, SBI still is likely to deliver earnings growth of +45/25%
for FY12/13, led by thet top line. Non-bank biz. adds another Rs265/share
(FY13E). Assuming a capital raise in FY12 (US$1.5bn), RoE still is likely at 18%,
with the stock to trade at +1.1x FY13 book. Our PO is benchmarked to the
Gordon model theory, where we assume RoE of 20pct and CoE of 14%, and
assign a +25% premium to theoretical multiples owing to its large liability
franchise and dominant position in the market (+23pct market share at group
level). On a PE basis, the stock is trading at 6.4x FY13E if we adjust the share
price for the subsidiary value. Risks are a sharp rise in NPLs and a hike in
interest rates.
Sterlite Industries India Limited (XTNDF)
Our PO of Rs163(US$3.3) is based on an SOTP valuation of Sterlite's metals and
power businesses. Our PO implies Rs 138 for the metals business and Rs25 for
the power business. At our PO Sterlite would trade at 9.8x FY12 EPS and 4.9x
FY12 EBITDA.
Our NPV for the metals business is Rs138/share based on WACC of 12.5% and
perpetuity growth of 0%. We forecast long-term zinc price of US$2072/t and longterm aluminum price of US$2,380/ton.
Our valuation of the power business implies Rs25 for Sterlite Energy (including
Rs1 for Talwandi Sabo project).
Upside risks: Higher-than-forecast metal prices and higher-than-forecast power
capacity over the next two years. Downside risks: Lower metals prices, delays in
expansions, lower PLF and higher cost at SEL due to coal shortage, VAL BS
stress and increase in VAL stake.
Tata Consultancy (TACSF)
Our Price Objective of Rs1,190 is at 20x FY13E PE. This is in line with the
earnings growth trajectory during FY12-14. It is also in line with Infys 5-yr average
PE and re rated from its own avg PE of 18x, given TCSs track record of superior
and balanced earnings growth in last 3 years.
Risks to earnings stem from double dip recession, protectionism, increasing
competition and specially for TCS, any shock to the banking sector.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Strategy
5 questions that investors ask
on India
„Another rate hike; but focus to shift to growth post that
The Indian market is down 18% YTD. Apart from global worries, investor focus
has been on persistent inflation and RBI’s policy action. While we still expect
another hike in October, we think RBI will be on hold post that and cut from April,
2012. While markets may see a rally on a RBI pause, we think markets are likely
to be range-bound over next 6 months as market concerns shift from inflation and
rates to slower growth.
#1: When will inflation and rates peak?
„ We think headline inflation will peak at close to 10% levels in October. We
expect RBI to hike rates in October but to likely be on hold thereafter and cut
rates from April, 2012.
#2: Is a cut in interest rates enough?
„ Investment spend is the more volatile component of GDP growth. A 15%+
annual growth rate in investment spend drove GDP growth since FY03.
Investment spend is slowing both anecdotally and based on forecasts of
companies we cover, posing a risk to GDP growth. While a fall in interest
rates will help, we think policy action to improve business confidence and
remove regulatory bottlenecks is more critical.
#3: How do markets react to rate cuts?
„ Rate cuts are positive for markets but typically markets are more concerned
about growth. Markets tend to rally with a lag of 4-6 months.
#4: Is the earnings downgrade cycle over?
„ We still think there are further cuts to go. On a bottom up basis we are
forecasting over 14% CAGR between FY11-13. However, on a top down
basis, we think this will be closer to 10%, still high relative to the 0% from
FY08-10. To put the cuts in perspective: in Jan this year we forecast FY12
Sensex EPS at Rs1285. We think even FY13 will be lower than that.
#5: Is the market cheap?
„ At around 13.7x 1-year forward EPS, markets are only marginally cheaper
than the long term average.
Model Portfolio – Reduce software weight; increase autos
Post the rally in software stocks, we cut our overweight position to neutral. We
correspondingly add weight to autos and increase our position to overweight.
Hero Honda offers a play on the likely rural demand buoyancy from a good
monsoon. While we think Maruti (our other auto exposure) offers value, we expect
stock performance to be muted until labor problems are sorted.
Model Portfolio Methodology
The BofA ML Indian Model Portfolio represents the best research ideas in our
Indian research universe recommended by BofA ML Asia-Pacific research
analysts. It is designed to contain 10-30 Indian stocks at any given time.
Each stock in the Model Portfolio is chosen by the India strategy team. In order to
qualify, the stock must have a market capitalization of US$1Bn and must be rated
by BofA-ML. The aim is to construct an Indian model portfolio that they believe
will deliver significant positive price appreciation and reflect the general themes
being promoted by BofA-ML Research department at the time.
The process is both top-down and bottom up and is largely influenced by sector
and macro themes but sometimes also by individual stock performances. Each
stock will be assigned a weight and remains on the list until the strategy team, at
its discretion, removes the stock. The team regularly monitors the market and the
performance of current stocks on the list, as well as to consider the addition of
new stocks or the deletion of existing stocks.
Price objective basis & risk
Bharti (BHTIF)
Our PO of Rs450/sh values Bharti at a FY13E-EV/EBITDA of around 7.5x postZain. The consolidated valuation places Bharti at nearly 30-40% premium vs
GEM wireless majors on EV/EBITDA. Long-term EBITDA growth for Bharti is
estimated at around 13% vs lower growth of 9-10% for GEM majors. Upside risks
to our PO could stem from 1) stronger than expected profit contribution from
Bharti-Africa, 2) sooner than expected industry consolidation in India, and 3)
unforeseen 3G adoption in India. Weaker than expected subscriber quality and
renewed competitive intensity in India, weak 3G impact, dramatic regulatory
changes and poor execution in Africa pose downside risks.
DLF Limited (XVDUF)
Our preferred valuation methodology is NAV, calculated by discounting the cash
flows from each of the real estate projects. Our price objective of Rs245 is
therefore based on 15% discount to our NAV estimate of Rs288. We expect DLF
to trade at a 15% discount to NAV due to high leverage and poor earnings
momentum. Key assumptions underlying our NAV estimate are WACC of 14.2%,
capitalization rate of 11% and inflation of 5% from FY13 on both selling price and
construction costs. On a P/E basis, at our PO of Rs245, the stock would trade at
26x FY12E earnings. Downside risks are lower-than-expected volume and
higher-than-expected debt.
HCL (XHCLF)
Our Price Objective of Rs500 is at 14x FY13 PE. Our target PE is at close to 10%
discount to that for Wipro and is lower than the average 5 yr PE of 16x. Given our
strong EPS growth forecast, we see potential upside to our target multiple.
Downside risks stem from macro led delays in discretionary IT spending, slower
than expected growth in top 5 accounts, higher than expected wage hike
pressures and Rupee appreciation.
HDFC Bank (XHDFF)
We set our PO at Rs575 (US$40/ADR). HDFC Bank remains the least vulnerable
to the expected credit cycle given its loan profile. Hence, we believe it may
continue to trade at between average and 1 SD above average. We believe
HDFC BK is likely to deliver RoEs of 18/20% on profit growth of +26-28% through
FY12-13. Moreover, we believe the stock, trading at 21x FY12 earnings can
arguably continue to trade at similar levels in FY13 earnings, if there is visibility of
earnings growth sustaining at +25% and comfort on asset quality. Risks: A sharp
rise in NPLs and inability to maintain growth are risks to our price objective.
Hero MotoCorp Ltd (HRHDF)
Our PO of Rs 2,242 is based on 15.5x FY13E P/E (earlier 14x), which is a 20%
premium to its historical average, due to superior growth and ROE. At our PO, the
stock would trade at 11.0x FY13E EV/EBITDA. Upside / downside risks:
Execution risk during transition period and new models from competition.
Lower/higher input costs would also impact profitability.
ICICI Bank (ICIJF / IBN)
We set our PO at Rs1200/USD54. Our PO is currently based on average
historical PB multiple. We think the sharp correction in the share price in past few
days is already capturing much of the earnings risk and asset quality risk.
Moreover, as highlighted earlier, we do believe the risks are overdone as retail is
almost 38% of its loan mix. Moroever, ICICI Bk has amongst the best asset
quality (most seasoned book), the best capitalized bank and one of the well
positioned banks in the current operating environment. Hence, we reiterate our
Buy. Moreover, on a PE basis, our PO implies that the bank sustained its
earnings multiples of 14x, one year forward. Risks are sharp rise in interest rates
could hurt margins (35% of total deosits wholesale for ICICI Bank) and slowdown
in macro growth could lead to lower volume growth and earnings trajectory for
FY12.
Infosys Tech (INFYF / INFY)
Our Price Objective of Rs3,000 (USD64.5/ADR) is at 18x 1yr fwd EPS, at 10%
discount to its 5yr average PE multiple, given the uncertain environment. Our PO
also implies EV/EBITDA to 2yr forward growth multiple of approx 1x, in-line with
its 5year average. Apart from macro risks, key risks to our call stem from Rupee
appreciation beyond Rs48 in next 6 months and beyond Rs.45.6 in FY13, macro
shock led slowdown in discretionary IT services spend, continued distraction post
recent re-organisation and increasing competition.
ITC Limited (ITCTF)
We value ITC on Discounted Cash Flow basis and validate PO with Sum of the
Parts (SOTP) where we compare cigarettes business to international cigarettes
comparable peer and FMCG, Hotels and Paper business with Indian industry
peers. Our DCF based PO of Rs235 is in line with SOTP. PO implies a 1yr fwd
multiple of 24x at a higher end of historical trading range for ITC. We believe this
is justified given improving return ratios, sustained dividend payout and
successful diversification.
Risks: (1) competitive FMCG intensity could delay breaking even, (2) severe
monsoon failure could impact raw material availability and (3) upside risks from
better-than-expected performance in non-cigarette FMCG.
Larsen & Toubro (LTOUF / LTORF)
Our PO of Rs1660 (US$33.9/GDR) for L&T is based on SOTP. The core
business is valued at Rs1258/sh at 15x PER of 1-yr fwd EPS. L&T International is
valued at Rs18/share at 15% discount to 1.5x FY11 BV. L&T Finance (82.6%) at
Rs128/sh at 15% discount to 1.75x 1-year fwd P/BV. The 100% stake in General
Insurance at Rs3/sh at 15% discount to 1.75x FY11 BV.
Its 97.7% stake in L&T IDPL (Infra SPVs) is valued at Rs105/sh based on SOTP -
Road SPVs at Rs48/sh at 1.5x FY13E BV of Investment, b) Hyderabad Metro
(97.7%) at Rs29/sh at 15% discount to DCF, c) Dhamra Port (48.8%) at Rs15/sh
at 15% discount to DCF and d) L&T Urban Infra (73.2%) at Rs13/sh at 30%
discount to DCF.
The investment in 3 other roads SPVs at Rs9/sh at 1.5x 1-yr fwd BV of
investment. L&T Infotech (100%) at Rs61/sh at 15% discount to 10x 1-yr fwd EPS
- in line with niche 2nd tier stocks. Its 51% stakes in L&T MHI Boilers and L&T
MHI Turbine Generators at 15% discount to 15x 1-yr fwd EPS at Rs36 and
Rs6/share respectively.
L&T Power Development is valued at -Rs3/share - a) Rajpura TPP at -Rs6/share
at 15% discount to DCF and Hydro Projects at Rs3/sh at FY11 BV of investment.
The stake in L&T Seawoods (100%), L&T Shipbuilding (100%) and L&T Special
Steel & Heavy Forgings (74%) are valued at Rs14, Rs10 and Rs4 per share
respectively. Other subsidiaries are valued at 2x book value at Rs13/share.
Risks to Price Objective: Slowdown in EPS growth on a higher base, Raw
materials, Competition, Project execution.
Lupin Limited (LPMCF)
Our PO of Rs530 is based on 18x FY13E EPS, which is at par with large pharma
peers average. We expect the multiple to expand, compared to both historical
and mid-cap companies, closer to large cap peers, due to: (1) stronger and
sustainable growth rates (23% sales CAGR, 24% Profit CAGR), and (2) scale of
operations.
Downside risks: (1) earlier than expected competition in US brands (Suprax) (2)
slower approval from USFDA affecting US growth and (3) higher-than-expected
price erosion.
Maruti Suzuki India (MUDGF)
Our PO of Rs 1,460 is based on the sum of (1) the core business, at a 14.5x
FY13E P/E (earlier 12.5x), or Rs 1,189/sh, and (2) cash and equivalents at Rs
271/sh. At our PO, the stock would trade at a 15x FY13E P/E, being the earlycycle recovery multiple on the expected earnings trough this year. Risks: Rising
competition, which would adversely affect volume growth, and adverse currency
movements, which could hurt profitability.
Reliance Inds (XRELF)
Our PO of Rs870 (GDR US$36.76) is a sum-of-the-parts valuation. It includes EV
of RIL's 3 businesses of Rs825/share and net cash of Rs45/share. The EV of the
refining business is calculated based on 7x FY13E EBITDA while EV of
petrochemical business is based on 6x FY13E EBITDA. The EV of E&P business
is calculated on a DCF basis, using a WACC of 11.8pct. Refining and marketing
(Rs342) is 42pct of the EV, E&P valuation (Rs195) 24pct, and petrochemicals
(Rs287) 35pct. Downside risks are (1) 7-year income tax holiday being disallowed
on gas production, which would mean lower cash flow, profit and fair value, (2)
Lower-than-expected oil price, (3) Large disappointments on the E&P front, (4)
refining and petrochemical margins being lower than expected, and (5) Large
acquisitions that are value dilutive. Upside risks are (1)
Refining and petrochemical margins being better than expected, (2) Higher-thanexpected oil price, (3) Higher-than-expected reserve accretion in the next 12-24
months and (4) Large acquisitions that increase fair value significantly.
SBI (SBINF / SBKFF)
Our 12-month price objective on SBI is Rs2700 (US$120/GDR). Our PO is based
on the average historical PB multiple. Risk-return remains positive, with RoEs
(banking biz.) at +20-21% in FY13 (vs +15% in FY11) and the stock trading at
1.2x FY13 BV. Moreover, SBI still is likely to deliver earnings growth of +45/25%
for FY12/13, led by thet top line. Non-bank biz. adds another Rs265/share
(FY13E). Assuming a capital raise in FY12 (US$1.5bn), RoE still is likely at 18%,
with the stock to trade at +1.1x FY13 book. Our PO is benchmarked to the
Gordon model theory, where we assume RoE of 20pct and CoE of 14%, and
assign a +25% premium to theoretical multiples owing to its large liability
franchise and dominant position in the market (+23pct market share at group
level). On a PE basis, the stock is trading at 6.4x FY13E if we adjust the share
price for the subsidiary value. Risks are a sharp rise in NPLs and a hike in
interest rates.
Sterlite Industries India Limited (XTNDF)
Our PO of Rs163(US$3.3) is based on an SOTP valuation of Sterlite's metals and
power businesses. Our PO implies Rs 138 for the metals business and Rs25 for
the power business. At our PO Sterlite would trade at 9.8x FY12 EPS and 4.9x
FY12 EBITDA.
Our NPV for the metals business is Rs138/share based on WACC of 12.5% and
perpetuity growth of 0%. We forecast long-term zinc price of US$2072/t and longterm aluminum price of US$2,380/ton.
Our valuation of the power business implies Rs25 for Sterlite Energy (including
Rs1 for Talwandi Sabo project).
Upside risks: Higher-than-forecast metal prices and higher-than-forecast power
capacity over the next two years. Downside risks: Lower metals prices, delays in
expansions, lower PLF and higher cost at SEL due to coal shortage, VAL BS
stress and increase in VAL stake.
Tata Consultancy (TACSF)
Our Price Objective of Rs1,190 is at 20x FY13E PE. This is in line with the
earnings growth trajectory during FY12-14. It is also in line with Infys 5-yr average
PE and re rated from its own avg PE of 18x, given TCSs track record of superior
and balanced earnings growth in last 3 years.
Risks to earnings stem from double dip recession, protectionism, increasing
competition and specially for TCS, any shock to the banking sector.
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