30 September 2011

Emkay: Top Buys and Sells

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Emkay:  Top Buys and Sells

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Top BUYS

ACC


Bajaj Auto


Berger Paints


Bharti Airtel


Cadila Healthcare



Dish TV


Divi’s Lab


Eicher Motors


Glenmark Pharma

Godrej Consumer

Gujarat Gas

Hexaware Technologies

Hindustan Zinc

ICICI Bank

Infosys

IRB Infrastructure Developers

Kajaria Ceramics

LIC Housing Finance

Lupin

Mahindra & Mahindra

NHPC 

Oberoi Realty

Piramal Glass

Rallis India

Reliance Power




Top SELLS



Adani Power


Ambuja Cement

Asian Paints

Axis Bank 

Bank of India 

BHEL

PTC India

Titan Industries




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Titan Industries::Emkay: Top Sells


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TP : Rs225
Investment Rationale
§ While Titan reported stellar volume growth performance - 30%+ in its jewellery segment and 18% in the watches
business during 1QFY12, substantial increase in gold and diamond prices have triggered earnings upgrade
during this quarter.
§ We remain cautious on discretionary spends and sustainability of volume growth in discretionary products
considering the overall macro scenario.
§ Hence, we remain vigilant on the company’s growth outlook as the recent upgrades are driven by sharp price
increases in gold and precious stones and not volume growth.
§ We expect volume growth to remain modest in forthcoming quarters – 30% for jewellery and 10% for watches in
FY13E. We remain watchful of incremental risks to volume growth, especially in its jewellery division, in the near
future.
Valuations
§ Current valuations at 26x FY13E earnings do not offer comfort, being 15% higher than 5-year average PER.
Further, there is risk of sharp de-rating of the stock in event of moderation of volume and earnings growth.
§ We, thus, maintain our HOLD rating on the stock with a target price of Rs 225/share


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PTC India ::Emkay: Top Sells


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TP : Rs65
Investment Rationale
§ Short term volumes (70% of current volumes) witnessing huge competition - unlikely to grow over next 3-4 yrs
§ Current margins of 5-6paise is likely to come down to 3-4paise (few traders already charging low margins)
§ Long term trading is a very risky business - PTC takes market price risk (guarantees CERC returns to developers
under any scenario) and credit risk (SEB default) in its books.
§ But, in case of a scenario where PTC is able to sell at higher than CERC prices, only 5-10% of the upside is kept
by PTC. Thus, its taking a call on the market price but not keeping the returns from the upside
§ To earn ~17% ROE in best case scenario in its trading business - assuming the liquid funds it has to keep in its
balance sheet to transact volumes (for transacting the estimated volumes by FY13E, PTC will need about
Rs10bn liquid funds, which is the current cash in hand).
§ In the tolling business, the cost of generation is likely to be upwards of Rs3.5/unit. We strongly believe that at this
level of cost, PTC is likely to make losses
Valuations
§ Thus, looking at its SoTP - (1) trading business which will earn in the best case scenario, just about cost of
equity, and in other scenarios, it might make losses, has to be valued at significantly less than 1x book, (2)
Tolling business – at best zero value if not negative, (3) Cash is actually working capital and at max it can be
valued at 0.33x (5% yield / 15% cost of equity) and lastly (4) its equity investments in power projects cannot be
valued at more than 1x book when PTC financial services itself is trading at 1x book. Thus, considering that all
the components of SoTP has to be valued at less than 1x book, PTC is trading at near 1x book. Sell


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BHEL ::Emkay: Top Sells


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TP : Rs2,150
Recommendation Rationale
§ Direct play on the power sector à Sector currently plagued with multiple issues
§ Sector witnessing systemic delays owing to à coal linkages, financial closures amidst high interest rates,
collapse of merchant rates
§ Intense competitive atmosphere à both from domestic and international players
§ Looming risk to FY12E order inflows target of 10% growth à could create disappointment
§ In Q1FY12, secures orders worth Rs25 bn or 4% of FY12E target of Rs667 bn - lowest in past 24 quarters
§ Target order inflows factor some contribution from 11X660 MW or 9X800MW NTPC orders - judgment by
Supreme Court awaited
§ Order book down 2% qoq to Rs1596 bn as on Jun’11 à though order book cover remains healthy at 3.7X
§ Expect earnings growth momentum to decelerate to 3% CAGR during FY11-13E period to Rs139.4 per share in
FY13E
Valuations – No earnings or re-rating catalysts
§ At 12.2X FY13E earnings and considering free cashflow generating business model and strong ROIC, valuations
appear not demanding
§ There is a lack of earnings or PER re-rating catalyst – We recommend HOLD rating


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Bank of India ::Emkay: Top Sells


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TP : Rs420
Investment Rationale
§ Concerns on asset quality unlikely to ease – GNPA/NNPA during Q1 were up 20.4%/38.3% respectively.
While the bank has been closely monitoring its slippages and recoveries, given the vulnerable nature of
agriculture and SME segment, we expect bank to report higher GNPA and slippages in Q2 as well. Slippages
stood at 3.1% annualized with credit cost at 0.7%.
§ Capital constraint likely to hinder growth- BOI’s CAR as at end Q1FY12 stood at 11.6% with tier I CAR of
8%. With very high net NPLs/net worth ratio at 15%, the bank has again approached the government for
additional capital. Earlier in March-11, GoI had infused Rs10bn as capital thereby raising its stake to 65.9%. We
expect bank to report 17% CAGR in loan portfolio over FY11-13E.
§ Margin improvement in H2FY12; only positive – Through lending rate hikes and re-pricing of deposits
including shedding of bulk deposits on domestic front and shift in loan portfolio towards ECB financing on
international front will aid margin expansion. Q1FY12 NIM at 2.2% (adjusted for w/off.) was a multi-quarter low.
Valuations
§ At CMP, stock trades at 1.1x FY12E/0.9x FY13E ABV. With average RoE / RoA at 17.8%/0.8, valuations appear
justified given concerns on NPA.


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Axis Bank ::Emkay: Top Sells


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TP : Rs1,380
Investment Rationale
§ Declining CASA proportion to hit margins in rising rate scenario: CASA mix has fallen from ~47% in FY10
to ~41% in FY11. With ~150-200bps increase in deposit rates across all major buckets, we expect the CASA
share to fall by ~200bps over FY12/13 as more people (particularly retail deposits) shift to term deposits in rising
rate scenario.
§ Earnings growth to moderate; margin compression evident: We expect earnings growth to moderate to 19%
CAGR over FY11-13 led by steep 50bps compression in margins and relatively lower advance growth of 23%
over the same period.
§ Exposure to retail and SME could pose risk: The bank slippage rate has moderated to 0.9% in FY11 from
1.5% in FY10. The GNPA stood at 1.0% while NNPA were at 0.3% of advances as on 31st March 2011.
However, with ~34% of loan portfolio being towards vulnerable segment of retail and SME, this could pose risk to
our NPA assumptions .
Valuations
§ At CMP, the stock trades at 2x FY12 ABV of Rs514 and 1.7x FY13ABV of Rs602 with RoE of >20% and RoA of
~1.4-1.5%


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Asian Paints ::Emkay: Top Sells


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TP : Rs3,026
Investment Rationale
§ While domestic paints growth has shown resilience, pace of growth has seen moderation, on the expected lines,
to 14% for 1QFY12 against 17% for FY11. We believe that, being a discretionary product, demand velocity would
be impacted; domestic business would register volume growth of 1.9X GDP in FY12E and FY13E.
§ Implemented 4.4% price hike in May, 2.5% in June and 1.3% in July – however, corresponding increase in raw
material index is 14%
§ Expect raw material pressure to continue… titanium dioxide prices have increased by 40% YTD. This is likely to
remain a key concern and will keep margins under check in future – Expect EBITDA margin to trail cost inflation
and hence, see 60 bps contraction in operating margins during FY12E.
§ Moreover, the company’s international and industrial paints segments, with higher price elasticity, are likely to
report a muted performance in future considering the weak business environment.
Valuations
§ Asian Paints is trading at rich valuations of 26x FY13E earnings. The upside is capped and current valuations do
not provide room for negative surprise.
§ Considering, risk to earnings estimates from lower volume growth and continuing high input cost, we maintain
HOLD rating with target price of Rs 3,026/share.


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Emkay: Top Buys and Sells

Ambuja Cement ::Emkay: Top Sells


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TP : Rs140
Investment Rationale
§ Our major concern for Ambuja remains the volume growth which we expect to be around 5.2% for CY11.
§ The demand growth is impacted by slowdown in government led infrastructure projects and rising interest rates &
project clearance affecting private spends and is now one of the major concerns which has also led to
downgrades in our estimates
§ We remain concerned on the demand as this remains the only trigger to sustain cement prices & help recovery
for the sector.
§ Though the realizations helped post better than expected EBITDA for Ambuja in Q2CY11 the sluggish demand
growth has now started impacting prices.
§ The proposed new mining tax could also pose a threat as it would increase the limestone mining costs by
Rs75+80/t.
Valuations
§ We believe Ambuja’s current valuations at PER of 15.6X, EV/EBIDTA of 8.3X & EV/ton of USD143, leaves little
upside with potential of above mentioned risks not completely factored in.


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Adani Power::Emkay: Top Sells


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TP:Rs82
Investment Rationale
§ Though execution has been a lot better vs. peers, the business model with almost 7000MW+ case I bids (fuel not
a pass through) and fuel coming from Indonesia (cheap cost, has risk to be revised upwards due to regulations)
and coal India (shortage and price changes) - poses structural long-term risk.
§ Taken into consideration best operating parameters (PLF, SHR, Aux, O&M etc), posing a risk of earnings
downgrade – which has been happening since past few qtrs and will continue. Further, have considered
Rs3.6/unit merchant prices in the long-term, which we believe has a downside - again a risk to long-term
earnings.
§ Negative news flow recently - (1) MAT on SEZ, (2) Coal India hiking prices of MCL coal (Mundra linkage from
MCL), (3) Indonesian coal export price regulations and (4) domestic coal shortage aggravating.
Valuations
§ APL is trading at 1.5x FY12E book (not considering FY13E because it depends on PAT in FY12E/13E - which
we believe could be downgraded substantially). Valuations imply long term merchant tariff of Rs4.0/unit (our est.
of sustainable merchant tariffs is Rs2.7/unit). Plus, factors in cheaper fuel, aggressive execution/ operating
parameters & early merchant and do not factor in recent negative news flows and risks. Reduce
§ Fair value for Adani power, taking conservative (vs aggressive currently) operational parameters, is Rs65/Share


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Reliance Power ::Emkay: Top Buys


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TP : Rs155
Investment Rationale
§ Huge captive coal potential with reserves of about 3bn MT and annual production potential of 95mn MT in next
5-7 years offers (1) fuel security and (2) one of the cheapest cost power (fuel cost in the range of Rs0.40/unit)
§ Significant progress achieved in its power plant/coal mine execution -either in line or ahead of schedule
§ Posting excellent operational performance as against other IPPs subdued performance - we have increased its
earnings estimates substantially (+15%) versus other IPPs substantial (-25%) downgrades
§ Merchant capacity only in plants with captive coal - excellent strategy
§ None of the current problems of private power utilities are applicable - fuel (captive), merchant prices (merchant
capacity to be only in captive fuel plants) and SEB bad health (cheap supplies)
§ Even in case of Krishnapatnam, the Indonesian law impact is likely to be insignificant in the worst case scenario
Valuations
§ Mid-term triggers - 1) COD of 4,260MW by Dec12 (incl. 1 unit of Sasan), 2) coal production in Sasan - Jun12, 3)
milestones in Tilaiya & Indonesian mines & 4) gas plant and gas supplies
§ Solidity in the business model and positive triggers are being ignored with Reliance power valuations implying
long term merchant rate of Rs1.3/unit, very safe
§ We foresee RPL as the most sustainable private utility. Buy with Fair value of Rs155/Share


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Rallis India::Emkay: Top Buys


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TP : Rs209
Investment Rationale
§ Rallis is the 2nd largest domestic generic player in extremely regulated market of crop protection and enjoys the
benefit of its well diversified distribution network and age old brand of Tata
§ Its multi pronged strategy to boost revenues through product restructuring, new product launches and focus on
exploring export opportunities and entry into seeds segment along with new initiatives taken like trading of pulses
should help Rallis to post strong revenue growth of 20-22% p.a.
§ Well positioned to tap opportunities in fast growing CRAMS space through its new upcoming facility at Dahej.
Rallis has contracted with leading global players to provide its services under toll manufacturing agreement
§ Growing share of high value branded products, cost reduction initiatives taken by the company and recent fall in
commodities prices is expected to drive its EBITDA margins by 360 bps to 21.4% by FY13E (over FY10)
Valuations
§ At EPS CAGR of 32% (FY10-13E), Rallis offers PEG of 0.5. EBITDA margin expansion of 360 bps over FY10-
13E to improve RoE by 450 bps to 31% by FY13E. With a healthy balance sheet (negative net debt / equity of
0.1) in FY11, Rallis offers attractive investment opportunity. The company also has ‘hidden assets’ like excess
land bank and a minority stake in Advinus, one of the finest pharma research organizations in India


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Piramal Glass ::Emkay: Top Buys


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TP : Rs205
Investment Rationale
§ Well enriched business model - with multiple drivers
§ Cosmetics and Perfumery (C&P) division continues to surge, share to total revenues rises to 56% - Expect
segment revenues to grow at 23.8% CAGR over FY11-FY13E
§ Specialty F&B business has regained growth momentum with robust growth in Sri Lankan operations and revival
in US subsidiary - Expect 15.5% revenue CAGR during FY11-13E
§ Capacity expansion of Rs 2.6bn through Greenfield and realignments is on track and full benefit would realize in
FY13E – To aid revenue CAGR of 15% in FY11-FY13E period
§ Rising share of C&P division to enhance EBIDTA margins – Expect EBIDTA margins to rise from 22.8% in FY11
to 25.2% in FY13E
Valuations
§ At CMP, the stock is trading at a P/e of 8X FY12E and 5.8X FY13E consolidated earnings of Rs16.9 and Rs23.3
per share respectively


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Oberoi Realty::Emkay: Top Buys


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TP : Rs272
Investment Rationale
§ Quality Mumbai-based land bank, strong repute of quality and execution and zero leveraged balance sheet
makes Oberoi Realty (OBRE) less vulnerable in the current macro environment
§ Slowdown in real estate sector will provide attractive opportunities to OBRE for new land acquisition. The
acquisition would be key trigger for stock re-rating, as it would lead to higher yield of 20%+ on growing idle cash
reserves, vis-a-vis current yields of 6% - 7%
§ Factoring in risks pertaining to flat absorption rate, execution timeline extension, lower rentals for leasable assets
and zero price escalation across ongoing projects, our target NAV works out to Rs 272; 21% upside from CMP
§ Annual net cashflows from rentals of Rs 1.0bn from Oberoi Mall and Commerz 1 will substantially meet the
development cost of the ongoing commercial projects, leading to lower erosion of the current cash reserves
Valuations
§ We have initiated coverage with a SOTP NAV of Rs 272 with leased assets, operational hotel asset and cash
accounting for 37% of the NAV
§ 58% NAV concentrated in the Goregaon (E) projects, where as Andheri (E), Mulund (W) and Worli account for 6-
7% each
§ Expect lower ROEs of 14.1% FY12E owing to increase in CWIP and working capital, and with new launches and
higher sales absorption in FY13E the same is seen at 17.1%
§ Cashflows are discounted at 13.7% where as leasaeable assets are valued at 10% capitalisation rate. To
account for business risk in commercial assets, we have further discounted their NAVs by 15%.


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NHPC ::Emkay: Top Buys


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TP : Rs34
Investment Rationale
§ Adj. Core ROE of 21% in FY11 - Including by Rs2.8bn revenue recognition in 1QFY12, related to FY10 and
FY11
§ Grossing up to be at full tax rate for FY12 vs. MAT in 1Q12 - 4Q profits to be higher by about Rs3bn
§ Previous yr sales likely to continue with water cess approval likely in 3Q and two tariff orders likely in FY12 itself
§ Regulatory trigger - CERC contemplating an increase in hydro returns. Consultation paper on the same likely to
be out very shortly
§ Commissioning pick up; as against 120MW in past two years, next five years to witness quantum jump - 515MW
in FY12, 697MW in FY13, 960MW in FY14, 1000MW in FY15 and 1000MW in FY16
§ Likely reduction in working capital driven by issue of tariff orders - about Rs15bn to be realized
Valuations
§ About 25-30% cheaper on ROE adjusted valuations compared with NTPC and PGCIL
§ Fair value of Rs34/Share without regulatory trigger and conservative commissioning targets
§ Only risk present is execution - a significant part of under construction capacity already passed through this
stage


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Mahindra & Mahindra ::Emkay: Top Buys


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TP : Rs930
Investment Rationale
§ Existing product portfolio enjoys strong brand equity with higher share of rural/semi urban demand
§ New launches to provide volume momentum in FY12/FY13 as it has entered into new segments and products
have achieved reasonable success.
§ We expect value accretion from Ssangyong in FY13 as management streamlines operations and looks for
synergies. Pick up in volumes and strong cash flow generation are important near term positives in our view
Valuations
§ We value standalone business at Rs 725 (8x FY13 EV/EBITDA)
§ We value listed subsidiaries and Tech Mahindra at Rs 160 and MVML at Rs 45 (7.5x FY13 EV/EBITDA)
§ Strong potential for higher value from MVML exists as product ramp up happens and earnings visibility improves


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Lupin::Emkay: Top Buys


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TP : Rs501
Investment Rationale
§ Strong execution track record, fair visibility on the earnings, strong pipeline coupled with both Para IVs (15 FTFs)
as well as niche therapies and well diversified presence across the key markets, makes Lupin as one of the
attractive stocks in the Pharma pack
§ Growth in US would be triggered by ramp up in Antara, launch of AllerNaze and 11 ANDAs including 3-4 OC’s
and 2 FTF’s in FY12. The approval for Suprax Chewable Tablets would help the company to address price
erosion in its Suprax franchise
§ Company expects 3-4 products from its OC portfolio to hit the market by Oct’12E (addressable market US$300-
500mn). US likely to witness ~11ANDA launches in FY12E and FY13E each
§ Key FTFs launches -Fortamet (US$70mn, likely launch Jun’11) and Ziprasidone (US1.2bn, likely launch Mar’12)
will drive US revenues. Lupin continues to remain the 5th largest generic player by prescriptions in the US
generics space
§ In India, improved contribution from existing products and 41 new product launches will lead to 18% revenue
CAGR over FY11-13E
§ Growth in Japan would be driven by 7 new launches in FY12 and increased sourcing of products from India
§ Healthy return ratios (RoE> 25%)
Valuations
§ We expect earnings to grow at 14% CAGR over FY11-13E.
§ At CMP, the stock is trading at 22.3x/ 18.7x, FY12E/ FY13E EPS of Rs21/ Rs25 respectively.


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LIC Housing Finance ::Emkay: Top Buys


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TP : Rs250
Investment Rationale
§ Earnings momentum to remain strong: LIC Housing Finance with loan portfolio of US$11bn, is the second
largest housing finance company in India. Strong parentage, domain expertise and rising income levels, we
expect LICHF to witness robust 28% CAGR in its loan book, 37% CAGR in NII and 20% CAGR in net profit over
FY11-13E.
§ Low mortgage / GDP provides ample room for growth : Mortgage/GDP ratio in India has remained in sub-
10% levels providing room for growth. Despite steep price in real estate prices in certain pockets, with rising
income levels, evolution of nuclear family concept and flexible EMI, we expect demand for mortgage to outpace
overall system credit growth.
§ Tighter provisioning norms to act as a cover against uncertainties : Cap on LTV ratio and stringent
provisioning norms towards NPA including provisions towards dual rate scheme are likely to act as a cover in
uncertain environment. GNPA/NNPA at 0.67%/0.18% remain comfortable.
Valuations
§ With average RoE of 26% over FY11-13E, and valuations at 1.9x/1.5x FY12E/FY13E ABV, we believe that stock
offers an attractive investment opportunity.


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Kajaria Ceramics ::Emkay: Top Buys


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TP : Rs143
Investment Rationale
§ Indian ceramics / tiles industry is likely to report volume growth of 14% (FY10-13E) while growth in high-end
segment is likely to remain at 20%. Kajaria with its presence in only high end segment with market share of 5%
will be a strong beneficiary of this growth in high end segment
§ Given the healthy growth prospects of the tile industry in general and high-end segment in particular, Kajaria's
brownfield expansion for manufacture of vitrified tiles comes at an opportune time. Capacity additions in high end
segment will increase share of value added tiles from 10% in FY10 to 30% by FY12E
§ To leverage its well established dealers network and brands, trading of tiles in high end segment, is likely to
remain a growth driver (trading revenues contribute approx 38% to company’s topline) in future
§ Increase in asset turnover ratio is expected to result in improved RoCE from 17.0% to 28.5% and RoIC from
17.2% to 31.0% over FY10-FY13E
§ We expect the company's revenue and EBITDA to grow by 22% and 23% CAGR (FY11E-13E) to Rs 14.2 bn and
Rs 2.3 bn by FY13E, respectively
Valuations
§ At current price, the stock trades at 7.6x FY13 EPS, EV / EBITDA of 4.3x and P/BV of 2.1x. With higher asset
turnover, RoE are expected to improve from 20.4% in FY10 to 31.7% by FY 13E


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IRB Infrastructure Developers::Emkay: Top Buys


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Investment Rationale
§ India Premier road asset, with commendable track record - Bagged 7 NHAI projects over last 4 years with market
share of 7%- port folio set to grow at 29% CAGR over FY08-14E.
§ BOT Revenues to grow 2.6X over FY11-15E at implied CAGR of 28% -7 BOT projects worth Rs112 bn are likely to
commence toll collection over the next 3 years.
§ Ideally Complemented by solid integrated E&C capabilities- E&C order backlog at Rs111.7 bn 6.7X FY11
construction revenues which provides strong visibility – E&C business to gain traction revenue CAGR of 29% over
FY11-13E
§ Robust Cash flows over FY11-14E, Strong balance (FY12 net D:E equity at 1.6X) to drive dilution free asset
accretion - Estimate new project win at Rs30 bn over FY13E, covering ~250 km as the company in 1QFY12 has
already bagged Rs 49bn of order
§ Consolidated revenues to grow at a CAGR of 30%, EBIDTA at 14%, Gross cash accruals at 12% over FY11-13E
§ SoTP Value at Rs250 - Stock trades 54% discount to fair value, even ex the new project wins – other Implied value
drivers providing significant comfort
Key Triggers
§ Pick up in awarding activity by NHAI, Identified list of 100 projects covering 11500 kms
§ 10% Toll hike at Surat Dahisar project expected on 1st Sept 2011 will improve the BOT performance further


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Infosys ::Emkay: Top Buys


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Investment Rationale
§ Infosys continues to be one of the two top picks within the Tier 1 coverage universe on account of
Ø Preparing the business model for future and targeting at 1/3rd of revenues each from Business
operations (apps devt and maintenance), Transformation (package implementation and consulting) &
Innovation (products and platforms) V/s. contribution of 60%/32%/8% currently.
Ø Temporary blips but prepared for the next wave of demand increase by way of new restructuring in
business units
Ø Higher exposure to discretionary spending (~25% of revenues in Q1FY12) expected to help Infosys
grow its US$ revenues at ~19% in FY12 on the back of ~26% growth rate in FY11
Ø Investors expectations more sanguine leaving room for positive surprises. Expect 16%/9%/11% US$
Rev/EBITDA/PAT CAGR over FY11-13E and see margins levers in the form of (1) increase in
utilizations (2) broadening of employee pyramid (3) increasing proportion of non linear revenues
Valuations
§ At CMP of Rs 2,222, the stock is trading at a P/E of 16.8x/15.1x on FY12E/FY13E earnings of Rs 132.4/146.9
respectively.
TP : Rs2,500


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ICICI Bank ::Emkay: Top Buys


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TP : Rs1,200
Investment Rationale
§ NIMs may improve in H2FY12 led by favourable asset liability repricing: The bank has increased its base
rate by 200bps over last two quarters; however yield on advances has increased by just 70bps during the period.
As all advances get fully reprised by December 2011 only, we may see margin improvement from Q3FY12
onwards.
§ Slippage rate to remain stable @ 1.2%: The bank expect it’s slippage rate to stablise at FY11 levels of 1.2%.
The bank draws comfort from the fact that it has only ~5% of its exposure to SME and less than 3% exposure to
unsecured retail portfolio, which normally throw concern in a rising rate scenario. Moreover its infra exposure is
also relatively lower at 10%, as against 14-17% for other peers. Of the total infra exposure, power exposure is
4.5% with very small exposure to SEB’s.
§ Limited exposure to troubled nations: Over the last three years the bank has reduced its banks/ Financial
institutions bonds exposure significantly from USD2.2bn to USD600mn only. Even of this exposure they have a
very miniscule exposure towards UK, Germany, and France and no exposure to PIIGS countries. Moreover its
non India linked credit derivatives exposure also stands at just USD600mn.
§ Valuations and view: Valuations at 1.7x/1.6x FY12E/FY13E standalone ABV does not look unreasonable with
improving operating matrix. Maintain ACCUMULATE rating with TP of Rs1200

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Hindustan Zinc ::Emkay: Top Buys


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TP : Rs173
Investment Rationale
§ World’s largest integrated zinc producer with unit cost of production in the first quartile
§ Reserve and Resource base of 313 million tonnes (almost 30 years mine life) and potential to increase further.
§ Projects commissioning in full swing of 1 lakh tpa lead smelter at Dariba
§ Silver business contribution to overall EBITDA to increase from 10% in FY11 to about 25% in FY13
§ Net cash balance of Rs 157 billion (~ Rs 39 per share) as on 30th June 2011 fetching ~10.25% pre-tax returns
§ Excellent organization with Government nominees on Board. Gives comfort on regulatory compliances
Valuations
§ Being the largest integrated zinc producer in the world with strong cash flows, low cost of production, operations
geographically well positioned and increasing contribution from the silver business it deserves a premium in
valuation multiple over peers
§ At the CMP of Rs 127, the stock is trading at 9.6x FY12 EPS and 8x FY13E EV/ EBITDA. Global zinc and lead
producers are currently trading at 4.4x CY12 EV/ EBITDA, while pure silver producers are trading at 13x CY12
EV/ EBITDA on an average basis. We continue to value the stock at 6.5x FY13E EV/ EBITDA. Maintain Buy with
a target price of Rs 173


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Hexaware Technologies ::Emkay: Top Buys


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TP : Rs80
Investment Rationale
§ Revenue growth momentum to uplift financial performance
Ø Hexaware used the downturn to address its inherent weaknesses by hiring senior talent, revamping the
entire management team as well adopting a vertical led sales approach.
Ø Company’s ability to survive vendor consolidation exercises at several clients has driven strong revenue
growth over the past 5 quarters (9% CQGR) (as clients reverted to normal spending levels)
Ø Margin uptrend (expansion of ~700 bps in last 5 quarters) to continue driven by strong revenue growth,
growth led SG&A leverage and offshore leverage
Ø Estimated to post 23%, 56% and 59% revenue, EBITDA and profit CAGR (24% US$ revenue CAGR) over
FY11-13E, driven by operating leverage
§ Strong revenue growth + margin expansion = a perfect recipe for re-rating
Hexaware has guided for a strong 4.3-5.6% QoQ growth in revenues for Sep’11 at US$ 78-79 mn and raised
annual revenue guidance from US$ 295 mn to US$ 302 mn (+30% YoY) which still builds in QoQ flat revenues in
Dec’11 qtr. We estimate 32%+ revenue growth for FY12 as we expect pickup in discretionary spending to fuel
Enterprise Services revenues.
Valuations
§ At CMP of Rs 80, the stock is trading at a P/E of 9.6x/9.7x on FY12E/FY13E earnings of Rs 7.5/Rs. 7.4
respectively


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Gujarat Gas:: Emkay: Top Buys


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TP : Rs481
Investment Rationale
§ Volumes to grow at a CAGR of 6.6% from 3.4mmsmcd in CY10 to 3.8mmscmd in CY12E, led by huge demand
from industrial and CNG segment to drive volume growth
§ Industrial and CNG segment - Key volume and revenue drivers in the segment:- which provides higher revenues &
better margins. we expect industrial volume to grow at 5.5% CAGR to 1123mmscm in CY12E and CNG volume to
grow at 15.5% CAGR to 166mmscmd in CY12E
§ Supply outlook remains robust backed by long term RLNG and KG D6 gas
§ Increase in selling price across segments result in a margin expansion on QoQ basis: During Q2 CY11
EBIDTA/scm has increased by 26.6% QoQ and 36.5% YoY.
§ Authorization from PNGRB expected soon: positive trigger for GGCL to expand in the existing cities
Valuations
§ Our EPS estimate of Rs.23.1 and Rs.26.4 for CY11E and CY12E respectively, imply an earnings CAGR of 15%
over CY10-12E. GGCL is one of our top picks given its monopoly in cities like Surat, Bharuch, Valsad, and
Ankleshwar, expected volume growth plus zero debt and robust business model with no commodity risk. We
believe that concerns on volume growth and pricing pressure have eased and any dip should be used as an
opportunity to accumulate the stock. At CMP of Rs.452, stock trades at 16.6x, one year forward P/E and 3.6x
P/BV. We recommend BUY on GGCL with a target price of Rs.481 based on SOTP valuation.


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Godrej Consumer:: Emkay: Top Buys


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TP : Rs 474
Investment Rationale
§ Faster growing household insecticide segment (category growth of 20%+) will continue to strengthen its
domestic business of soaps and hair colours, which is likely to witness an improving growth outlook. We expect
domestic business to register 15% CAGR growth over FY11-13E.
§ Increasing presence in international geographies of Indonesia, LatAM and Africa will assist future growth
momentum. International revenue size at Rs 3.6bn for 1QFY12 is considerable and is expected to continue a
healthy growth trajectory in future.
§ Moreover, increasing contribution from household insecticide segment, with modest inflationary input costs
scenario and better margin profile, will likely aid better profitability going forward. We expect operating margins to
increase to 18.1% (up 90bps from FY11) and PAT to grow at 29% CAGR over FY11-13E.
Valuations
§ Valuations at 17.3x FY13E EPS of Rs 23.7/share look reasonable.
§ GCPL is the only stock in the consumers’ space which is providing c12% absolute upside potential from current
levels. Moreover, on a relative basis also, GCPL has under performed its peers in the recent times.
§ Attractive valuations, coupled with robust growth drivers place GCPL in a preferred position and hence, we
maintain our ACCUMULATE rating with a target price of Rs 474/share.


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Glenmark Pharma:: Emkay: Top Buys


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TP : Rs401
Investment Rationale
§ Glenmark has strong product pipeline in the US and in the forthcoming quarters the management has guided for
launch of seven new products in the oral contraceptives, oral solids and semi solids space, as well as exclusive
launches
§ Strong performance from key specialties like the derma, respiratory, CVS and pain management, new
product launches coupled with recent addition to the filed force would lead to 16-18%+ growth in the
Indian business. The total MR strength is ~2400
§ Expect Generic business to grow at a CAGR of 18% and Specialty business to grow at a CAGR of 16% over
FY11-13E
§ Domestic formulations (contributes ~30%) continues to grow above industry rates –cash cow for the company
and we expect it to clock revenue CAGR of 15% during FY11-13E.
§ Expect base business earnings to grow at FY11-13E CAGR of 22% over FY11-13E
Valuations
§ We expect earnings to grow at 22% CAGR over FY11-13E. Value the company at 18x FY12 base business
earnings + adjusted NPV of Rs45 to arrive at a target price of Rs401
§ At CMP, the stock is trading at 13.2x/ 13.3x, FY12E/ FY13E EPS of Rs24.0/ Rs23.8 respectively.


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Eicher Motors:: Emkay: Top Buys


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TP : Rs1,700
Investment Rationale
§ CV volumes to surprise positively driven by higher demand for 7.5-12ton segment during slowdown (~65% of
EML’s portfolio) and its success in 12- 16ton segment (aided by support from Volvo)
§ Two wheeler demand remains strong and enjoys strong brand equity. Higher capacity coming on stream and
clear focus on the business will lead to strong volumes and improved margins
§ Engine outsourcing business to commence from CY13 onwards and provides a strong potential. Capacity
planned is of 85,000 units for engines of Euro II to Euro VI.
Valuations
§ We have valued the existing business (two wheeler at 8x and CV at 7x CY12 EV/EBITDA) at Rs 1,547
§ We value the engine outsourcing business at Rs 153
§ The key trigger for the stock will be strong monthly volumes and quarterly earnings


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Divi’s Lab:: Emkay: Top Buys


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TP : Rs927
Investment Rationale
§ Company’s new multi-purpose plant at Vizag has commenced operation in Q1FY12. We expect this facility to
have a meaningful contribution in FY12. The company is further investing Rs1.75bn as capex in FY12E in order
to address shortfall in capacities in FY13
§ Management has guided for sales CAGR of 20% and EBITDA margins at 40% levels over FY11-13E on back of
good off-take from new products in the Generics segment and sustained momentum in the CSS business
§ Custom Synthesis and Generics business are set to grow at 20% CAGR over FY11-13E on the back of new
capacity additions. Company has set up a new multipurpose facility at Vizag which will be commissioned in
Q1FY12E. The investments in Nutraceuticals will see 100% CAGR with Rs2.5bn revenues over FY11-13E
§ Operating margins at 40% will be driven by a) improved product mix, b) higher contribution of high margin
Carotenoids business, and c) normalization of demand from US and Europe. Moreover with capex investment
stabilizing, benefits from operating leverage would come into play
§ Divi’s continues to maintain strong performance in the CRAMS space vis-à-vis its peers in terms of best-in-class
operating metrics. We value the company at 20x FY13E earnings
Valuations
§ We expect an earnings CAGR of 21% over FY11-13E
§ At CMP, the stock is trading at 18.9xFY12E EPS of Rs37.5 and 15.3xFY13E EPS of Rs46.3


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