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UBS Investment Research
India Mid-Caps Strategy
W hat to Buy?
�� Heightened investor concerns, companies less so
Our recent investor meetings globally indicate heightened investor concerns, which
have shown up via a sharp reaction in stock prices to any adverse newsflow. Our
meetings with managements of Indian mid-cap companies (including eight non-rated
ones) indicate that they have turned cautious over the past two to three months. We
sense this is more driven by global macro concerns and local policy uncertainty in the
case of some companies. They remain broadly confident of their own business, with
some tempering of growth and profitability outlook.
�� Introducing our model portfolio—across 3 buckets
We introduce the UBS India Mid-Cap model portfolio highlighting our highest
conviction ideas from our current 37-stock coverage. The portfolio is structured into
three buckets: 1) Secular themes/market leaders; 2) Cyclicals—names where we find
valuations attractive with near-term catalysts; and 3) Special Situations/Deep Value—
companies that are highly undervalued.
�� 75% weight for secular themes / market leaders
Given current market uncertainty, we assign 75% weight to ideas from the first bucket.
These are: 1) market leaders with a strong/niche brand (Exide, Havells, Pidilite, Bajaj
Electricals); 2) exposed to non-cyclical and untapped demand like agri e.g.
Coromandel; and 3) present in high-growth markets e.g. Dish TV.
�� Three new ideas
Our three recent initiations are Jubilant FoodWorks (Sell), Redington (Buy), and Bajaj
Electricals (Buy); Redington and Bajaj are part of our model portfolio.
UBS India Mid-caps model portfolio
We introduce the UBS India Mid-Cap model portfolio, highlighting our highest
conviction ideas from our current 37-stock coverage. The portfolio is structured
into three buckets:
�� Secular themes/market leaders. Given current market uncertainty, we assign
75% weight to this bucket. These are:
(a) Market leaders with a strong/niche brand (Exide, Havells, Pidilite,
Bajaj Electricals). Leader in IT distribution—Redington.
(b) Exposed to non-cyclical and untapped demand like agri—Coromandel.
(c) Present in high-growth markets similar to Dish TV and
Cholamandalam.
�� Cyclicals—names where we find valuations attractive and with near-term
catalysts. These are Sintex, Apollo Tyres, United Phosphorus and Voltas.
�� Special Situations/Deep Value—companies that are highly undervalued. We
include Jai Balaji, Monnet Ispat and Tube Investments in this bucket.
What are we seeing among investors
/companies?
Heightened investor concerns
Our recent investor meetings globally indicate heightened investor concerns.
This has shown up via the sharp reaction in stock prices to any adverse
newsflow—stock price corrections in Exide, Havells, Jubilant FoodWorks,
Motherson, and TV18 are good examples.
Investors do remain highly interested in names from the first bucket that are
market leaders or have secular themes, reflected in strong cash flows and
attractive ROEs. Investor interest in the third bucket (deep value names) remains
muted though, despite attractive valuations.
Companies turning cautious but remain confident on
their businesses
Our meetings with managements of Indian mid-cap companies (including eight
non-rated ones) indicate that they have turned cautious over the past two to three
months. We sense this is more driven by global macro concerns and local policy
uncertainty in the case of some.
Managements of these companies remain broadly confident of their own
business, though with some tempering of growth and profitability outlook.
Non-rated company meetings
Table 5: Non-rated companies we visited recently
Company name BBG ticker Mkt Cap (U$ m) Company background
Dhanuka Agritech Ltd. DAGRI IN 102.1 Agrochemicals - It manufactures insecticides, pesticides and other chemicals.
Gitanjali Gems GITG IN 623.6 Branded jewellery - It manufactures and retails jewellery. Gitanjali retails its jewellery in India
and exports to Europe, the United States, the Middle East, and Asia.
Himadri Chemicals HCI IN 383.3 Chemicals - It manufactures and markets chemical products, with a special emphasis on coal
tar and its derivatives which consist of coal tar pitch, naphthalene and oils.
Hindusthan National Glass & Industries Ltd. HNGI IN 316.2 Glass bottle packaging - It manufactures glass bottles and vials.
PI Industries PI IN 288.4
Agrochemicals - It manufactures agricultural and fine chemicals, crop protection, plant
nutrients, and seeds; and engineering plastics for use in the automobile, electrical, and home
appliances industries.
Piramal Glass Ltd. PIRA IN 200.2 Glass bottle packaging - It manufactures glass packaging for pharmaceutical and cosmetic
products.
Radico Khaitan Ltd. RDCK IN 328.4 Branded liquor - It operates molasses and grain distilleries and produces whiskey, rum, brandy,
and vodka. It is the third largest liquor company in India (after United Spirits and Pernod India).
Responsive Industries RESP IN 564.7 PVC based products and wire ropes - It develops several flooring products ranging from vinyl
flooring to rigid PVC.
Source: Bloomberg, UBS
Performance review
Most of the stocks in our coverage universe have done well YTD, outperforming
broad market and mid-cap indices. However, last month’s performance has been
negative as adverse market sentiment has led to sharp reaction to adverse
newsflow for some of these names.
Recent UBS India mid-cap research—three
initiations
We initiated on three companies in September, including Bajaj Electricals,
Redington India, and Jubilant Foodworks.
Investment thesis for Jubilant Foodworks (Sell, PT Rs800): Jubilant
FoodWorks (JUBI) has the exclusive franchise for Domino’s Pizza in India. It is
the market leader in the formal pizza market with a 50% share and a 70% share
in the pizza home delivery segment in India. We believe JUBI is well positioned
to benefit from its strong presence in this high-growth market. We forecast a
25% CAGR for the formal food services industry over FY11-16, with an
implied 45% CAGR for the pizza market over the same period.
JUBI’s FY06-11 EBITDA CAGR was 61%, driven by a 48% revenue CAGR.
We forecast an FY11-13 earnings CAGR of 44%, based on our assumptions of a
43% revenue CAGR, a 170bp improvement in the EBITDA margin over the
same period, and an FY12 ROE of 411%.
Investment thesis for Bajaj Electricals (Buy, PT Rs285): Bajaj
Electricals (BJEL) is the leader in India’s electrical appliances market, with a
market share of approximately 18%. In FY06-11, BJEL’s consumer durables
(electrical appliances and fans) division recorded a 31% revenue CAGR through
market share gains driven by new products and brand launches. We think BJEL
could continue to gain market share, given the highly fragmented market.
Penetration in tier two/three cities is a key growth driver of consumer durables
and lighting products (consumer products) in India. BJEL’s ROE in consumer
products is higher than the company average. It has products and brands across
price ranges to address various consumer segments. We forecast FY11-FY16
revenue CAGRs of 23%/16% for the durables/lighting divisions, which
contribute 80% of our valuation for BJEL. Its consumer durables/lighting
divisions were 47%/23% of revenue and 58%/13% of FY11 EBIT.
Investment thesis for Redington India (Buy, PT Rs120): Redington India
(REDI) is a leading IT distributor with a presence in key, high-growth emerging
markets—it was the second largest distributor in India and Turkey, and the
largest in the Middle East and Africa in terms of revenue in FY11. REDI has
also expanded beyond IT products; non-IT products contributed 14%/18% of
revenue in FY10/11. We expect the company’s strong growth and robust ROE
to continue in this highly consolidated industry.
REDI’s non-IT business recorded 111%/28% revenue CAGR in India/the
Middle East over FY08-11 (IT business CAGR was 6%/21%). BlackBerry has
driven revenue growth over the past two years in the non-IT segment, and REDI
expects smartphones and tablet PCs to drive growth in the future. It also plans to
expand Arena (Turkey’s second largest IT distributor in terms of revenue, and in
which it has a stake) beyond Turkey and into the non-IT product segments.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
India Mid-Caps Strategy
W hat to Buy?
�� Heightened investor concerns, companies less so
Our recent investor meetings globally indicate heightened investor concerns, which
have shown up via a sharp reaction in stock prices to any adverse newsflow. Our
meetings with managements of Indian mid-cap companies (including eight non-rated
ones) indicate that they have turned cautious over the past two to three months. We
sense this is more driven by global macro concerns and local policy uncertainty in the
case of some companies. They remain broadly confident of their own business, with
some tempering of growth and profitability outlook.
�� Introducing our model portfolio—across 3 buckets
We introduce the UBS India Mid-Cap model portfolio highlighting our highest
conviction ideas from our current 37-stock coverage. The portfolio is structured into
three buckets: 1) Secular themes/market leaders; 2) Cyclicals—names where we find
valuations attractive with near-term catalysts; and 3) Special Situations/Deep Value—
companies that are highly undervalued.
�� 75% weight for secular themes / market leaders
Given current market uncertainty, we assign 75% weight to ideas from the first bucket.
These are: 1) market leaders with a strong/niche brand (Exide, Havells, Pidilite, Bajaj
Electricals); 2) exposed to non-cyclical and untapped demand like agri e.g.
Coromandel; and 3) present in high-growth markets e.g. Dish TV.
�� Three new ideas
Our three recent initiations are Jubilant FoodWorks (Sell), Redington (Buy), and Bajaj
Electricals (Buy); Redington and Bajaj are part of our model portfolio.
Emami - Upgrade to Buy – niche product portfolio
Coromandel International - Investor concerns misplaced
Sintex Industries - Attractive valuation, expect good H2 FY12
Exide Industries- Look beyond the headline; target Rs200
TV18 Broadcast- Play on subscription growth
Triveni Engineering - Sugar at cyclical trough, deregulation a potential catalyst
Apollo Hospitals Enterprise - News reports about CBI raids on one of the directors: Nothing newJubilant FoodWorks - Expensive pizza
Havells India - Zumtobel results show that European lighting demand is stable
Redington India - Distribution powerhouse
Bajaj Electricals - Electrical appliances leader charging on
Voltas - Improved risk-reward profile
Motherson Sumi Systems SMFL files draft IPO document
UBS India Mid-caps model portfolio
We introduce the UBS India Mid-Cap model portfolio, highlighting our highest
conviction ideas from our current 37-stock coverage. The portfolio is structured
into three buckets:
�� Secular themes/market leaders. Given current market uncertainty, we assign
75% weight to this bucket. These are:
(a) Market leaders with a strong/niche brand (Exide, Havells, Pidilite,
Bajaj Electricals). Leader in IT distribution—Redington.
(b) Exposed to non-cyclical and untapped demand like agri—Coromandel.
(c) Present in high-growth markets similar to Dish TV and
Cholamandalam.
�� Cyclicals—names where we find valuations attractive and with near-term
catalysts. These are Sintex, Apollo Tyres, United Phosphorus and Voltas.
�� Special Situations/Deep Value—companies that are highly undervalued. We
include Jai Balaji, Monnet Ispat and Tube Investments in this bucket.
What are we seeing among investors
/companies?
Heightened investor concerns
Our recent investor meetings globally indicate heightened investor concerns.
This has shown up via the sharp reaction in stock prices to any adverse
newsflow—stock price corrections in Exide, Havells, Jubilant FoodWorks,
Motherson, and TV18 are good examples.
Investors do remain highly interested in names from the first bucket that are
market leaders or have secular themes, reflected in strong cash flows and
attractive ROEs. Investor interest in the third bucket (deep value names) remains
muted though, despite attractive valuations.
Companies turning cautious but remain confident on
their businesses
Our meetings with managements of Indian mid-cap companies (including eight
non-rated ones) indicate that they have turned cautious over the past two to three
months. We sense this is more driven by global macro concerns and local policy
uncertainty in the case of some.
Managements of these companies remain broadly confident of their own
business, though with some tempering of growth and profitability outlook.
Non-rated company meetings
Table 5: Non-rated companies we visited recently
Company name BBG ticker Mkt Cap (U$ m) Company background
Dhanuka Agritech Ltd. DAGRI IN 102.1 Agrochemicals - It manufactures insecticides, pesticides and other chemicals.
Gitanjali Gems GITG IN 623.6 Branded jewellery - It manufactures and retails jewellery. Gitanjali retails its jewellery in India
and exports to Europe, the United States, the Middle East, and Asia.
Himadri Chemicals HCI IN 383.3 Chemicals - It manufactures and markets chemical products, with a special emphasis on coal
tar and its derivatives which consist of coal tar pitch, naphthalene and oils.
Hindusthan National Glass & Industries Ltd. HNGI IN 316.2 Glass bottle packaging - It manufactures glass bottles and vials.
PI Industries PI IN 288.4
Agrochemicals - It manufactures agricultural and fine chemicals, crop protection, plant
nutrients, and seeds; and engineering plastics for use in the automobile, electrical, and home
appliances industries.
Piramal Glass Ltd. PIRA IN 200.2 Glass bottle packaging - It manufactures glass packaging for pharmaceutical and cosmetic
products.
Radico Khaitan Ltd. RDCK IN 328.4 Branded liquor - It operates molasses and grain distilleries and produces whiskey, rum, brandy,
and vodka. It is the third largest liquor company in India (after United Spirits and Pernod India).
Responsive Industries RESP IN 564.7 PVC based products and wire ropes - It develops several flooring products ranging from vinyl
flooring to rigid PVC.
Source: Bloomberg, UBS
Performance review
Most of the stocks in our coverage universe have done well YTD, outperforming
broad market and mid-cap indices. However, last month’s performance has been
negative as adverse market sentiment has led to sharp reaction to adverse
newsflow for some of these names.
Recent UBS India mid-cap research—three
initiations
We initiated on three companies in September, including Bajaj Electricals,
Redington India, and Jubilant Foodworks.
Investment thesis for Jubilant Foodworks (Sell, PT Rs800): Jubilant
FoodWorks (JUBI) has the exclusive franchise for Domino’s Pizza in India. It is
the market leader in the formal pizza market with a 50% share and a 70% share
in the pizza home delivery segment in India. We believe JUBI is well positioned
to benefit from its strong presence in this high-growth market. We forecast a
25% CAGR for the formal food services industry over FY11-16, with an
implied 45% CAGR for the pizza market over the same period.
JUBI’s FY06-11 EBITDA CAGR was 61%, driven by a 48% revenue CAGR.
We forecast an FY11-13 earnings CAGR of 44%, based on our assumptions of a
43% revenue CAGR, a 170bp improvement in the EBITDA margin over the
same period, and an FY12 ROE of 411%.
Investment thesis for Bajaj Electricals (Buy, PT Rs285): Bajaj
Electricals (BJEL) is the leader in India’s electrical appliances market, with a
market share of approximately 18%. In FY06-11, BJEL’s consumer durables
(electrical appliances and fans) division recorded a 31% revenue CAGR through
market share gains driven by new products and brand launches. We think BJEL
could continue to gain market share, given the highly fragmented market.
Penetration in tier two/three cities is a key growth driver of consumer durables
and lighting products (consumer products) in India. BJEL’s ROE in consumer
products is higher than the company average. It has products and brands across
price ranges to address various consumer segments. We forecast FY11-FY16
revenue CAGRs of 23%/16% for the durables/lighting divisions, which
contribute 80% of our valuation for BJEL. Its consumer durables/lighting
divisions were 47%/23% of revenue and 58%/13% of FY11 EBIT.
Investment thesis for Redington India (Buy, PT Rs120): Redington India
(REDI) is a leading IT distributor with a presence in key, high-growth emerging
markets—it was the second largest distributor in India and Turkey, and the
largest in the Middle East and Africa in terms of revenue in FY11. REDI has
also expanded beyond IT products; non-IT products contributed 14%/18% of
revenue in FY10/11. We expect the company’s strong growth and robust ROE
to continue in this highly consolidated industry.
REDI’s non-IT business recorded 111%/28% revenue CAGR in India/the
Middle East over FY08-11 (IT business CAGR was 6%/21%). BlackBerry has
driven revenue growth over the past two years in the non-IT segment, and REDI
expects smartphones and tablet PCs to drive growth in the future. It also plans to
expand Arena (Turkey’s second largest IT distributor in terms of revenue, and in
which it has a stake) beyond Turkey and into the non-IT product segments.
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