Diwali Picks

10 November 2012

D I W A L I P I C K S
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Anand Rathi Research

Diwali Picks
10 November 2012

S W A R A J E N G I N E

CMP: 427

Reco: Buy

Expected Value: 527

Sector: Auto
Key Statistics 427 52 W H / L 530 Dividend Yield % 0.56 P/BV 50.61 ROE% 476 / 349 3.05 2.83 31.2

Company Introduction: Swaraj Engines Ltd is in the business of

supplying engines to the swaraj division of Mahindra & Mahindra Ltd and supply of hi-tech engine components in India. Swaraj Engines (SWE), manufactures engines for 20 HP to 50 HP tractors and its growth has been directly proportional to Indias agriculture story. Investment Arguments Its manufacturing plant is located at Mohali (Punjab) where it plans to raise capacity to 75,000 engines (existing 60000) by Dec12, for Rs. 58 crore. Management has indicated its intent to increase production to 100,000 engines at its present location when the need arises. SWE manufactures engines in the 20-50 HP range; of its sales, 10% are engines of lower than 30 HP, 45% of 30-40 HP and 45% of 40-50 HP. We expect its aggressive capex plans to aid growth, catering to further demand for Swaraj tractors.
Year FY 12 FY 13e FY 14e FY 15e Net Sales 448.58 508.64 581.7 670.5 EBIDTA 69.4 80.32 93.3 107.28 PAT 52.85 57.58 66.66 77.11 EPS 42.53 46.63 53.1 62.08 EBIDTA EV/ Margin PE EBIDTA (%) 15.47 5.93 9.99 15.79 5.12 9.11 16.04 4.41 8.00 16.00 3.83 6.85

Price Market Cap (Cr.) Free Float (No. of shares -Cr.) Promoter's Holding %

SWEs growth has been directly proportional to Indias agriculture story. We expect tractors to do well in the long term, led by more scope for productivity, low penetration, need for mechanization, higher MSPs and policies (NREGA). The Company expects to cater to 90% requirement (now ~80%) of Swaraj brand tractors through its ongoing expansion. After this, we expect it to cater not only to the Swaraj brand but to supply engines for other Mahindra brands as well since it is one of the lowest-cost engines. Valuation With additional capacity expected to be on-stream by Dec12, and on expectations of a tractor-cycle recovery in FY14, Swaraj stands to benefit. It operates at a near negative working-capital cycle, is debt free, and would see good earnings growth in the next 2-3 years. Our price target of the stock is Rs. 527 based on 8.5x FY15e EPS of 62 (in line with the last five-year median).

All Figures are in Rs. Crore Except per share data

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Diwali Picks
10 November 2012

B A Y E R C R O P S C I E N C

CMP: 1160

Reco: Buy

Expected Value: 1402

Key Statistics Price 1160 52 W H / L Market Cap (Cr.) 4582 Dividend Yield % Free Float (No. of shares -Cr.) 0.96 P/BV Promoter's Holding % 69.45 ROE%

Sector: Agri.
1190 / 653 0.4 5.81 19.0

Company Introduction: Bayer CropScience is a leader in the areas of crop protection, pest control, seeds and plant biotechnology. The Agri Care business which primarily includes manufacture, sale and distribution of insecticides, fungicides, weedicides and various other agrochemical products. Bayer Crop. is subsidiary of Bayer (Germany). Investment Arguments Bayer CropScience is the largest player of pesticides in India with over 25% market share (organized). Bayer is the biggest beneficiary of increasing consumption of pesticides in India, which is we expect to grow at an 8-10% CAGR from the current consumption of a mere 0.6gms/Ha. Robust R&D backed by parent Bayer AG means the company is very well equipped to launch 3-4 new products every year. Strong R&D also helps the company to roll out new products to target pests that have developed resistance against older molecules.
Year FY 12 FY 13e FY 14e FY 15e Net Sales 2272.30 2514.72 2816.50 3210.80 EBIDTA 298.00 383.54 487.28 537.78 PAT 139.00 247.04 299.34 344.46 EPS 35.19 62.54 75.78 87.21 EBIDTA EV/ Margin PE EBIDTA (%) 13.11 14.06 32.96 15.25 10.93 18.55 17.30 8.60 15.31 16.75 7.79 13.30

On the unlocking of value of the Thane plant (Around 1100 Crore) the company has received the earnest amount of Rs. 260crs on March 2011 and an advance payment of Rs. 260crs on Dec 2011 for the exclusive arrangement. The remaining procedure should be completed at a future date and the receipt of the consideration will be received on or before 30th Nov 2012. High levels of cash coupled with strong balance sheet enables the company to chalk out big expansion (organic or inorganic). Valuation With new product is expected to be launched in FY 14-FY 15, we believe company is building strong platform for sustainable growth in future. Bayer Corp (Parent) is focusing on cost rationalization globally which will be reflected in Indian subsidiary too. We strongly believe stock price is much undervalued vis a vis growth potential. Our FY 14 target value of the stock is 1402 based on 9.5 EV/EBIDTA (median of last 7 years).

All Figures are in Rs. Crore Except per share data

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A

Anand Rathi Research

Diwali Picks
10 November 2012 CMP: 196 Reco: Buy Expected Value: 247
Price Market Cap (Cr.) Free Float (No. of shares -Cr.) Promoter's Holding %

Sector -FMCG
Key Statistics 196 52 W H / L 2890 Dividend Yield % 2.25 P/BV 84.75 ROE% 204 /95 2.1 6.76 30.0

B A J A J C O R P

Company Introduction: Bajaj Corp. is part of Shishir Bajaj Group of companies. The Company's brands include Bajaj Kailash Parbat Thanda Tel, Bajaj Almond Drops Hair Oil, Bajaj Brahmi Amla Hair Oil, Bajaj Amla Shikakai Hair Oil and Bajaj Jasmine Hair Oil. The Company has five production facilities. Investment Arguments Rs. 70bn Indian hair oils market emerged as one of the fastest growing segments in the Indian FMCG industry and amongst it, Light Hair Oils (LHO) lead the pack. We expect hair oil market to touch Rs100bn by FY15, indicating a 13% CAGR over the next three years. The LHO category has managed to grow at a CAGR of 28.3% over the past four years versus 21.3% growth in the total hair oils market. Bajaj Corp Ltd. (BCL), maker of Bajaj Almond Drops emerged as the dominant player in the growing LHO category and enjoys market leadership with a share of 54%.
Year FY 12 FY 13e FY 14e FY 15e Net Sales 473.31 568.40 679.00 811.10 EBIDTA 115.40 139.80 170.40 203.60 PAT 120.10 143.30 174.40 206.20 EPS 7.99 9.53 11.60 13.72 EBIDTA Margin (%) 24.38 24.60 25.10 25.10 EV/ EBIDTA 21.94 18.11 14.86 12.43 PE

BCLs net cash balance stood at Rs3.4bn in FY12 which placed BCL strongly to leverage on inorganic growth opportunities. Over the period, BCL has developed strong distribution networks which spread across India. The company enjoys deep distribution networks in both, the urban and rural India. Currently, BCLs products reach to over 2.16mn retail outlets across India. As on Sep, 2012, BCL has 6036 direct distributors and 11,258 wholesalers, both at the rural and urban markets.

Valuation
25.03 20.98 17.24 14.58

All Figures are in Rs. Crore Except per share data

Most of the FMCG companies are quoting around 20-25x for FY 15 PE multiple. However Bajaj Cor. is attractively valued in-spite of its attractive growth. We valued the stock at 18x for FY15 earning 20% discount to sector median P/E. We value the stock at Rs. 247, at a target PE of 18x FY15e earnings.

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10 November 2012 CMP: 210 Reco: Buy Expected Value: 264 Sector: Power & Mining
220/151 1.43 3.26 26.2

G M D C

Company Introduction: GMDC was established by the Government of Gujarat, in the year 1963, for developing important and major mineral resources of the State. Its product range includes energy minerals like Lignite, Bauxite, Fluorspar, Granite and Marble. Investment Arguments The nearest coal mine is almost 700 Kms away from Gujarat Border makes it bit difficult for companies to transport coal from mines. Transportation cost is again major chunk in total cost of coal which is on upward move (Container corp. recently hike the freight cost by 20-25%). Imported coal is again costly because of rupees depreciation and difficult to accommodate in domestic boilers. Overall cost benefits analysis forced companies to buy the coal from GMDC.
EBIDTA EV/ Margin PE EBIDTA (%) 51.12 8.05 13.73 48.02 7.00 11.51 48.12 6.07 9.51 50.13 5.70 8.52

Key Statistics Price 210 52 W H / L Market Cap (Cr.) 6663 Dividend Yield % Free Float (No. of shares -Cr.) 7.75 P/BV Promoter's Holding 74 ROE%

GMDC is continuously decreasing its dependency on lignite and putting effort to de-risk the business by entering into Bauxite, power; both thermal & Wind alongwith Manganese, Coal, Cement, Lead, Zinc, Copper production. Total Demand for Lignite in India is expected to grow at a CAGR 10% from 55.8 mn tonnes in 2011-12 to 87.8 mn tonnes in 201517. Power sector is major driver of growth. Company has thermal power plant of 250 MW which is running below its optimal capacity, GMDC has outsourced Korean company to enhance the PLF. We expect thermal power will start contribution in EBIDTA from FY 14 onwards. Valuation In PE term stock is quoting at 8.5x FY15E EPS of Rs 24.7 and 9.5x FY14E EPS of Rs 22.1. We see the price target of Rs. 264 based on FY 15, EPS. (Value based on 5 years median PE multiple.)

Year FY 12 FY 13e FY 14e FY 15e

Net Sales 1631.12 1998.34 2300.28 2350.68

EBIDTA 833.80 959.60 1106.90 1178.40

PAT 486.70 580.30 702.40 784.30

EPS 15.30 18.24 22.08 24.66

All Figures are in Rs. Crore Except per share data

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Diwali Picks
10 November 2012

K A R U R V Y S Y A B A N K

CMP: 468

Reco:Buy

Expected Value: 574

Key Statistics Price 468 52 W H / L Market Cap (Cr.) 5018 Dividend Yield % Free Float (No. of shares -Cr.) 8.41 P/BV Promoter's Holding ROE%

Sector: Banking

Company Introduction: Karur Vysya Bank(KVB) Limited provides banking and financial services in India. KVB was started in the year 1916 in Karur. KVB has made profits consistently for the past 95 years of its banking operations. It has also declared uninterrupted divided since its operation. Investment Arguments: KVB is planning to introduce 100 new branches and 400 ATMs during the current fiscal across the country. It aims to reach 540 branches pan-India by March 2013, which will be in line with the long-term goal of achieving a total business of Rs 1, 25,000 crore by 2016. KVB continues to register higher business growth (25%) than the system. At 27.2%, advances grew faster than deposits (23.3%).We expect the bank to continue to register a healthy ~26% CAGR over FY12-15, led by SME and retail loans.
Year FY 12 FY 13e FY 14e FY 15e Net Int. Operating PAT Income profit 917.10 1264.90 1576.70 1960.30 725.70 957.70 1224.10 1529.40 501.70 604.30 748.30 934.50 Adj. Bv 247.60 283.60 333.90 396.10 P/BV 1.91 1.67 1.42 1.20 ROE 20.70 20.80 22.10 23.20 ROA 1.50 1.40 1.40 1.40

482 / 315 3 1.85 20.7

Both in terms of ROA & ROE, KVB has been most consistent player in last 10 years which shows quality of management. In last 10 years we find that it is consistently generating ROA of above 1 & ROE of over 20% (Average). KVB 10 years average ROA is 1.64% which is higher than HDFC which is another best bank, consistently generating higher ROA (average 1.46%) over 10 years period. Gross NPAs decreased 14.4% qoq, with fresh slippages of `613m (1.0% of loans). NPA coverage remained stable at +75%. In 2QFY13, restructured book grew 9.2%qoq to `7.1bn (2.8% of loans). We expect the 75% NPA coverage to be sustained over FY13-15, led by likely stable asset quality and 28.2% CAGR in pre-provisioning profits over the same period. Valuation At the current price of Rs. 390, the stock trades at a PABV of 1.20 xs for FY15e and 1.42x for FY14e. Our target price of Rs. 574 is based on target P/ABV of 1.45 for FY 15 ABV.

All Figures are in Rs. Crore Except per share data

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Anand Rathi Research

Diwali Picks
10 November 2012
CMP: 793 Reco: Buy Expected Value: 947
Key Statistics Price 793 52 W H / L Market Cap (Cr.) 122320 Dividend Yield % Free Float (No. of shares -Cr.) 139.63 P/BV Promoter's Holding ROE%

Sector: NBFC

H D F C

Company Introduction: HDFC is engaged in providing loans for the purchase or construction of residential houses, commercial real estate and loans for certain other purposes in India. Its product range includes loans for purchase and construction of a residential unit, purchase of land, home improvement loans, home extension loans, non-residential premises loans for professionals and loan against property, while its flexible repayment options include Step Up Repayment Facility (SURF) and Flexible Loan Installment Plan (FLIP). Investment Arguments: HDFC is the largest mortgage player in India. HDFC holds 24% in HDFC bank. The company also has two insurance subsidiaries where it holds 74% stake i.e. HDFC life and HDFC Ergo general insurance company. Increase in FDI limit in Insurance sector will help Indian promoters to unlock the value of their investment and improve capital adequacy.
Year FY 12 FY 13e FY 14e FY 15e Net Int. PreIncome Provi.Profit 5318.10 6620.90 7839.90 9065.30 5745.60 7070.90 8369.60 9712.56 PAT 4122.60 5009.80 5925.30 6852.80 Bv 165.37 175.10 200.75 230.86 P/BV 4.80 4.53 3.95 3.43 ROE 25.35 25.23 25.12 24.23 ROA 2.70 2.80 2.82 2.78

805 / 600 1.39 4.8 25.3

Over the last decade HDFC has delivered a PAT CAGR of 22%. Impeccable asset quality, growth and profitability performance has led to market cap CAGR of 30%. HDFC has good distribution franchise owing to banks strong branch network. We believe this will help HDFC to maintain growth momentum going forward. As interest rates seem to have peaked out and expected to decline from FY 14. We believe this will boost profitability as well as ROE. Valuation At the current price of Rs. 793, the stock trades at a PBV of 3.4x for FY15e and 3.9x for FY14e. Our target price of Rs. 947 is based on target P/BV of 4.10 for FY 15 BV.( last 3 years Average.)

all Figures are in Rs. Crore Except per share data

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Anand Rathi Research

Diwali Picks
10 November 2012

H A V E L L S I N D I A

CMP: 595

Reco: Buy

Expected Value: 715

Sector: Capital Goods

Company Introduction: Havells India Ltd.(HIL) is one of the largest electrical and power distribution equipment manufacturers engaged in selling entire gamut of household, commercial and industrial electrical devices. Its products include industrial and domestic circuit protection devices, cables and wires, motors, fans, power capacitors, compact fluorescent lamps (CFLs), luminaries for domestic, commercial and industrial applications and modular switches. Investment Arguments One of the key strengths of HIL is its wide product range from Switchgear, Switches, Cables & Wires, CFL, Luminaries, Fans, Water Heaters and Kitchen appliances. HIL is better placed as compared to competition as it can target the entire distribution channel with its product range, which almost covers the electrical equipment market. It holds a market share ranging from 10-25% and is among the top 5 players in most product categories.
Year FY 12 FY 13e FY 14e FY 15e Net Sales 6518.20 7268.40 8079.10 9290.97 EBIDTA 802.54 733.70 846.82 970.91 PAT 369.92 420.14 514.71 557.46 EPS 29.66 33.69 41.28 44.70 EBIDTA Margin (%) 15.98 14.07 11.48 10.60 EV/ EBIDTA 10.70 11.70 10.14 8.84 PE 20.19 17.78 14.51 13.40

Key Statistics Price 595 52 W H / L Market Cap (Cr.) 7429 Dividend Yield % Free Float (No. of shares -Cr.) 4.91 P/BV Promoter's Holding 30.43 ROE%

708 / 365 1,09 7.8 46.0

HIL is emerging as retail consumer durable brand. Recently it has entered into home appliances space like mixer, iron, grinder, induction stove etc. However this market is crowded but India being a consumer driven market offers ample scope to grow. HIL also established a strong pan India distribution network, which it is looking to enhance further. It currently has more than 5300 dealers in India, which it is looking to increase by about 500 each year in order to expand its reach. Company has very strong relationship with dealers which can be leveraged for selling consumer appliances. Valuation We strongly believe over medium term (3-4 years) company valuation multiple will also improve. As of now co. is treated as player in capital good segment hence commands lower multiple. We expect the stock is ready for re-reating. We valued the company at 16x for FY 15 which gives our target price of Rs. 715.

All Figures are in Rs. Crore Except per share data

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Anand Rathi Research

Diwali Picks
10 November 2012
CA Vivek Gujrati vivekgujrati@rathi.com Tel No: +91 22 4001 3867

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