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Oct 25, 2011 Top 10 – Investment Picks The recent turmoil seen in the stock market form the past few weeks, that S&P downgraded the US rating. Foreign institutional investors (FIIs) have pressed heavy sales amid the ongoing credit crisis in the euro zone. The sustained selling by foreign funds is a cause of concern for India Inc. Foreign portfolio inflow acts as a catalyst to private corporate capital expenditure in India. Meanwhile, Indian firms relying on European and US markets are worried about a likely economic slowdown in the US and Europe. However, looking to the attractive valuations we feel that it is a good time to enter with investment horizon of more than one year. There is an old saying that buy when no one is willing to buy and sell when everyone wants to buy. This is the stage when people are afraid to buy and that is when historically it has been seen that a long term investor gets maximum return. We think equities will oscillate back-and-forth between fears of growth sustainability and the threat of a US recession and/or a European debt contagion in the coming months. There will be no benefit of the doubt despite the tailwind of attractive valuations and solid corporate earnings. We are suggesting a portfolio of 10 stocks having a strong and sustainable growth potential in the years to come - 1) Petronet LNG Ltd. 2) Sintex Industries 3) IRB Infrastructure Developers Ltd. 4) Gujarat Gas Company 5) Bajaj Electricals 6) ACC 7) Bajaj Auto 8) Infosys Tech 9) ITC 10) PNB Petronet LNG Ltd. Industry : Gas Distribution Investment Rationale CMP (` ) : 161.25 • Petronet LNG Limited (PLL) is the country's biggest liquefied natural gas (LNG) importer. BSE Code : 532522 The company has been promoted by four PSUs - GAIL, ONGC, IOC and BPCL each with an equity stake of 12.5%. The company bears no marketing risk due to back-to-back sales NSE Code : PETRONET agreements with its promoter group. • Petronet LNG is turning into a marketer of natural gas from being just an importer and Key Data regassifier of liquefied natural gas (LNG). The company targets to double its liquefied natural gas (LNG) business in next five years by expanding existing infrastructure and Market Cap (` Cr.) 12187 adding new capacities. Equity Cap (` Cr.) 750 • The company plans to sell gas using cryogenic trucks directly to consumers in regions not Face Value 10 connected by pipelines of GAIL India, to boost profitability. Book Value 39.16 EPS 10.2 • The company is currently undertaking three projects – Kochi terminal and its expansion, setting up a new jetty at Dahej and 1200 MW power plant. Its regassification charges are Dividend Yield (%) 1.23 revised 5% up every year. So, with higher charges, increasing volumes and expansion P/BV (x) 4.55 plans, PLL is on the strong growth path. P/E (x) 13.63 Risk & Concern 52 Week High-Low 185.80 / 105.10 • Delay in timely completion of the projects will significantly increase the costs. Financial Summary Shareholding Pattern (%) (` Crore) FY08 FY09 FY10 FY11 CAGR (%) Public & Net Sales 6555.31 8428.7 10649.09 13197.29 26.27 Others, 14.79 Foreign, 25.18 EBITDA 919.71 977.77 944.29 1284.29 11.77 Interest 102.36 101.21 183.93 193.13 - Institutions, 7.94 Depreciation 102.18 102.52 160.86 184.68 - Promoters, 50 PAT 474.65 518.44 404.5 619.62 9.29 Corporate Holding, 2.09 Source : Capitaline Sintex Industries Ltd. Industry : Plastics Investment Rationale CMP (` ) : 109.8 • Sintex Industries Ltd is one of the leading providers of plastics and niche textile-related BSE Code : 502742 products in the country. The company benefits from government spending in three areas: NSE Code : SINTEX education, health and public housing. The company is focusing heavily on its plastic business for further growth. Key Data • Sintex executes mass housing projects for Indian Railway , university hostel blocks, hospitals and defense. Further, monolithic housing also offers huge opportunities for offtake of related Market Cap (` Cr.) 3075 products manufactured by Sintex . Equity Cap (` Cr.) 27.30 • The company is expanding its prefabricated building systems to cover further north and Face Value 1 northeastern regions in FY12. This will give it a strategic presence in these markets with potential long-term growth. Book Value 84.58 EPS 16.23 • Sintex’s customized moldings business caters to Fortune 500 customers across continents Dividend Yield (%) 0.58 and various sectors. It intends to leverage these customers and potentially enhance domestic manufacturing and outsourcing. This will significantly improve margin in the business over P/BV (x) 1.28 the next couple of years. P/E (x) 6.94 Risk & Concern 52 Week High-Low 237 / 102.75 The prices of its raw materials closely follow the crude oil. Rise in crude prices could increase the margin pressure. Financial Summary (Cons.) Shareholding Pattern (%) (` Crore) FY08 FY09 FY10 FY11 CAGR (%) Public & Others, Foreign, Net Sales 2357.04 3063.88 3281.64 4475.15 23.83 10.75 38.15 EBITDA 442.77 606.33 619.1 869.12 25.21 Interest 64.32 81.95 73.08 108.92 - Promoters, 34.96 Depreciation 76.51 114.4 144.45 149.1 - PAT 230.32 325.12 329 460.01 25.93 Institutions, Corporate 5.84 Source : Capitaline Holding, 10.31 IRB Infrastructure Developers Ltd. Industry : Construction Investment Rationale CMP (` ) : 159.90 • IRB Infrastructure Developers is one of the leading infrastructure development Company BSE Code : 532947 (acting through various SPVs/ subsidiaries) in the country with extensive experience in NSE Code : IRB roads and highways. The company has now a portfolio of about 7000 lane kms of highway across 17 country wide projects. Of these, 10 are already operational, 6 are under implementation and one is under financial closure. Key Data • IRB Infrastructure's order book now stands at Rs 11700 crore, including Rs 9700 crores Market Cap (` Cr.) 5234.67 worth of EPC order book that will be executed over a period of 3-4 years. Equity Cap (` Cr.) 332.36 • The strong uptick in execution of various projects should result in 15% to 20% jump in the Face Value 10 topline of the company for FY 2011-12. Further the company's tolling revenue is also likely to cross 1000 crores for FY 2011-12. EPS 14.11 Book Value 73.19 Risk & Concerns P/E (x) 11.16 • The toll model is normally considered risky, although the revenue potential is high if the P/BV (x) 2.15 project attracts high traffic. Dividend Yield (%) 0.95 • IRB and its subsidiaries carry high levels of debt. While repayment from the offer proceeds would reduce the debt, newer projects could require further raising of funds. 52 Week High-Low 271 / 131.75 Financial Summary – (Cons.) Shareholding Pattern (%) (` Crore) FY09 FY10 FY11 CAGR (%) Foreign, 13.66 Net Sales 991.88 1704.85 2438.11 56.78 Public & Institutions, Others, 4.9 3.98 EBITDA 466.99 847.96 1158.4 57.50 Corporate Holding, Interest 137.66 249.39 357.21 - 2.67 Depreciation 114.38 181.91 225.36 - Promoters, PAT 175.85 385.41 452.38 60.39 74.8 Source : Capitaline Gujarat Gas Company Ltd. Industry : Gas Distribution Investment Rationale CMP (` ) : 422.90 • Gujarat Gas Company is India’s largest private gas distribution company. The company BSE Code : 523477 has outlined its strategy for moving up the value chain through three key areas: the NSE Code : GUJRATGAS industrial-retail market, developing the CNG market, and developing newer applications to ensure better margin. Key Data • Piped natural gas (PNG) is another growth area for the company. GGCL supplies PNG to 2,00,000 domestic households and is rapidly increasing its user base. The company Market Cap (` Cr.) 5412 expects RLNG (regasified liquid natural gas) to play a crucial role in domestic gas market. Equity Cap (` Cr.) 25.65 Risk & Concerns Face Value 2 • Expansion plans to other areas in Gujarat such as Bhavnagar and Kutch, if the company's Book Value 63.69 succeeds in future bids, is also contingent on timely regulatory approvals. EPS 20.97 Dividend Yield (%) 2.84 • Hike in the price of LNG may impact margins, if the company is not able to pass on high costs to customers. P/BV (x) 6.44 P/E (x) 17.63 52 Week High-Low 485 / 306.65 Financial Summary Shareholding Pattern (%) (` Crore) CY07 CY08 CY09 CY10 CAGR (%) Foreign, 16.14 Public & Net Sales 1194.35 1273.94 1386.9 1813.64 14.94 Others, 9.6 Institutions, 7.52 EBITDA 272.88 271.2 303.55 434.64 17.03 Corporate Holding, Interest 0.19 0.11 0.14 0.46 - 1.62 Depreciation 37.08 40.44 46.06 53.07 - Promoters, 65.12 PAT 159.09 158.81 175.12 258.73 17.60 Source : Capitaline Bajaj Electricals Ltd. Industry : Domestic Appliances Investment Rationale CMP (` ) : 195.95 BSE Code : 500031 • Bajaj Electricals Ltd, a diversified player with presence in lighting, consumer durables, and engineering & project. The company derives 70% of its revenues from consumer businesses NSE Code : BAJAJELEC — lighting and kitchen appliances. It enjoys a leadership position in the northern and eastern regions in appliances such as fans, compact fluorescent bulbs and mixer-grinders. Key Data • The company's consumer appliances business has been growing at a compounded rate of 30% annually over the last five years, driven by consumers upgrading to branded products in Market Cap (` Cr.) 1934 electric fans and mixer-grinders. Equity Cap (` Cr.) 19.92 • Rural electrification projects offer immense scope for growth for the E&P business. However, Face Value 2 the muted numbers form its E&P segment in the first quarter we expect that the E&P division would be the major growth driver and boost the company's overall turnover and bottomline in Book Value 60.5 the second half of this fiscal. Dividend Yield (%) 1.43 • The recent correction in copper and aluminium prices and efforts to control working capital EPS 13.63 and inventory may help the company contain margin pressures in this business. P/BV (x) 3.21 Risk & Concern P/E (x) 14.25 • Change in copper and aluminium prices could significantly affect the margins. 52 Week High-Low 333.50 / 160.10 Financial Summary Shareholding Pattern (%) Foreign, 7.05 (` Crore) FY08 FY09 FY10 FY11 CAGR (%) Public & Net Sales 1374.48 1765.71 2227.16 2739.43 25.85 Others, 13.58 Institutions, 10.1 EBITDA 148.2 185.32 240.74 258.4 20.36 Interest 29.34 36.97 31.47 29.08 - Corporate Holding, 3.65 Depreciation 7.45 8.55 9.2 10.76 - PAT 73.1 89.13 117.09 143.79 25.30 Promoters, 65.61 Source : Capitaline ACC Industry : Cement Investment Rationale CMP (` ) : 1190.95 BSE Code : 500410 • Cement sales is likely to improve with the monsoon close to an end. The demand in the rural areas is set to improve as good monsoon will better farmers' earnings. Awarding of road NSE Code : ACC projects and construction activity of metros will boost cement demand. • Cement companies recently hiked prices on an average by Rs 4-5 for a 50 kg bag with the Key Data central and northern region seeing the highest rise of Rs 12 a bag and Rs 9 a bag. Market Cap (` Cr.) 21296 • The sharp increase in cement prices was attributed to demand from large dealers who were Equity Cap (` Cr.) 187.74 stocking up in anticipation of pickup in demand during the festive season. Face Value 10 Risk & Concerns Book Value 334.53 • Earnings likely to remain under pressure as the company may not be able to pass on the Dividend Yield (%) 2.69 entire rise in operational cost till there is a substantial evidence of revival of infrastructure projects. EPS 53.98 P/BV (x) 3.23 • Delay in awarding the road projects and infrastructure activity could reduce the profitability. P/E (x) 20.41 52 Week High-Low 1147.15/ 917.60 Financial Summary Shareholding Pattern (%) (` Crore) CY07 CY08 CY09 CY10 CAGR (%) Foreign, 16.61 Public & Govt. Net Sales 6990.68 7282.87 8027.2 7717.33 3.35 Others, 14.28 Holding, 0.15 EBITDA 2309.23 2070.73 2720.78 1910.91 -6.12 Institutions, Interest 73.87 39.96 84.3 56.78 - 14.46 Depreciation 305.07 294.18 342.09 392.68 - Promoters, PAT 1273.57 1178.4 1606.73 1120.01 -4.19 50.3 Corporate Source : Capitaline Holding, 4.2 Bajaj Auto Industry : Automobile Investment Rationale CMP (` ) : 1760.05 BSE Code : 532977 • At a time when spiraling input costs were eating the margins of its competitors in the last few quarters, Bajaj Auto had maintained its operating margins close to 20% throughout NSE Code : BAJAJ-AUTO due to its superior product mix. Key Data • The company’s profit-centric strategy is focused on exports and strong presence in the interest-rate-insensitive 125-cc-to-below-250-cc motorcycle segment, where it commands 49% market share. This places it in a safe spot as it would take awhile for aggressive Market Cap (` Cr.) 49030 plans of world class players Honda, Yamaha and Suzuki to reach there. Equity Cap (` Cr.) 289.37 Face Value 10 Risk & Concern: Book Value 169.69 • Rising fuel prices and mounting interest rates may hamper the demand of motorbikes Dividend Yield (%) 2.36 among upper middle class level. EPS 102.39 P/BV (x) 9.99 P/E (x) 16.55 52 Week High-Low 1706 / 1165.65 Financial Summary Shareholding Pattern (%) (` Crore) FY08 FY09 FY10 FY11 CAGR (%) Net Sales Foreign, 8663.29 8436.94 11508.5 15998.12 22.69 16.44 EBITDA 1313.68 1106.91 2552.66 4475.28 50.47 Public & Institutions, Others, 16.43 8.33 Interest 5.16 21.01 5.98 1.69 - Depreciation 173.96 129.79 136.45 122.84 - Corporate Holding, 8.79 PAT Promoters, 823.97 794.9 1814.02 2783.55 50.05 50.02 Source : Capitaline Infosys Technologies Industry : Software Investment Rationale CMP (` ) : 2882 BSE Code : 500209 • Infosys Technologies Ltd is a global technology services firm that defines, designs and delivers information technology (IT)-enabled business solutions to their clients. The NSE Code: INFY company also provides software products to the banking industry. Key Data • While the majority of revenues coming from exports the key trends in factors such as deal flows, discretionary spends, vendor rationalisation and performance of key verticals, appear quite favorable to Indian software companies. Market Cap (` Cr.) 158898 Equity Cap (` Cr.) 287.10 • Added to these is the heavy depreciation of the rupee against the dollar to the Rs 49 Face Value 5 levels, which would further boost realisations for software companies. Book Value 452.41 Risk & Concern: Dividend Yield (%) 2.17 • Slowdown in US and European economy could deteriorate the order inflow. EPS 125.84 P/BV (x) 6.12 P/E (x) 21.9 52 Week High-Low 3499 / 2161.5 Financial Summary – (Cons.) Shareholding Pattern (%) (` Crore) FY08 FY09 FY10 FY11 CAGR (%) Public & Net Sales Others, 14.05 16692 21693 22742 27501 18.11 EBITDA 5963 7668 7900 9313 16.02 Promoters, Foreign, 16.04 51.13 Interest 0 0 0 0 - Depreciation 598 761 0 0 - Corporate PAT Holding, 8.06 4659 5988 6219 6823 13.56 Institutions, 10.72 Source : Capitaline ITC Ltd. Industry : FMCG Investment Rationale CMP (` ) : 212.60 BSE Code : 500875 • The FMCG business of the company achieved significant improvement in profitability through a combination of product mix enrichment, higher net realisation and smart NSE Code : ITC commodity sourcing. Key Data • ITC is benefiting from a massive demand boom across the country, especially in the semi-urban and rural areas, due to rising income levels, government-sponsored employment schemes putting income in the hands of those at the bottom of the pyramid, Market Cap (` Cr.) 160959 and a change in spending culture. Equity Cap (` Cr.) 777.30 Face Value 1 • To maintain volume-growth, company is building a strong pipeline of new products and is exploring new categories to enter the domestic market. Further, they are enhancing their Book Value 21.05 distribution reach in the rural India, where growth is much better than that in urban India. Dividend Yield (%) 2.14 The FMCG market will continue to grow on a mix of volume- and price-growth but input costs will be high and competition will remain intense. EPS 5.65 P/BV (x) 9.84 Risk & Concern: P/E (x) 36.63 Rising competition and tight margins, any exponential rise in commodity prices may turn 52 Week High-Low 211.25 / 149 the raw materials expensive. Financial Summary – (Cons.) Shareholding Pattern (%) (` Crore) FY08 FY09 FY10 FY11 CAGR (%) Public & Others, 11.43 Net Sales 14569.1 16556.14 19135.87 22273.66 15.20 Corporate Holding, 6.17 Foreign, 47.15 EBITDA 5162.19 5590.45 6954.59 8184.18 16.60 Interest 6.28 18.69 64.98 50.22 - Depreciation 472.87 580.86 643.9 699.09 - Institutions, 35.23 PAT 3157.76 3324.59 4168.18 5017.93 16.69 Source : Capitaline PNB Industry : Banking Investment Rationale CMP (` ) : 925 BSE Code : 532461 • PNB is India’s second largest bank in terms of business size. The bank has consistently NSE Code : PNB outperformed the industry in loan growth. • The bank has been following a strategy of growing its deposits at a slightly lower pace Key Data than the rate at which it grows its loan book throughout the year. Market Cap (` Cr.) 30736 • At the current level, its credit-deposit ratio is close to 77.3%. It grew faster than the industry average while keeping its asset quality intact. Equity Cap (` Cr.) 316.81 Face Value 10 • Net non-performing assets formed 0.85% of net advances at the end of the March 2011 Book Value 632.5 quarter. PNB has one of the lowest ratios of bad loans among state-run lenders. Dividend Yield (%) 2.27 Risk & Concern: EPS 141.10 • Continuous rise in interest rates would hurt borrowers' ability to repay loans and increase P/BV (x) 1.54 delinquencies. P/E (x) 6.90 52 Week High-Low 1399.9 / 871 Financial Summary – (Cons.) Shareholding Pattern (%) (` Crore) FY08 FY09 FY10 FY11 CAGR (%) Public & Total Income 16737.31 22704.33 25533.83 31287.65 23.19 Others, 3.99 Foreign, 18.79 EBITDA 4221.61 4916.99 7479.91 9331.3 30.26 Provisions & Cont. 720.97 0 1437.25 2556.05 - Institutions, 17.79 Depreciation 0 0 0 0 - Promoters, 58 PAT 2203.09 3197.03 3972.57 4574.73 27.58 Corporate Holding, 1.43 Source : Capitaline Analyst Ajay Kumar Srivastava : email@example.com Swati Saxena : firstname.lastname@example.org Disclaimer This document has been prepared by Religare Retail Research (Religare) is a part of Religare Securities Limited. We are not soliciting any action based upon this material. This report is not to be construed as an offer to sell or a solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It is for the general information of recipients. 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