04/03/2013

Buy ITC Ltd For Target Rs.340 


Excise duty on cigarettes raised 18% after 21% hike last year: The government has increased the excise duty on cigarettes, except for the sub-65mm segment,  by 18% against our expectation of a 10% increase. We note that this is the first time in recent history when excise duty has been increased by 15% plus for two consecutive years (21% hike in FY13). Effectively, excise duty on cigarettes has gone up 43% in two years. However, the structure of the excise duty has been left unchanged.
* Expect ITC to raise cigarette prices by 14-15%: We estimate 9% price hike to neutralize the excise increase and another 2-3% to pass on the VAT increase. Gujarat and Bihar state governments have increased VAT from 25% and 20%, respectively to 30% each. However, to achieve 15% EBIT growth in cigarettes, our workings (exhibit on next page) suggest that a 14% price hike is required.
* Cutting volume growth estimate from 7% to 2%: We cut our volume growth estimate for FY14 to 2% (7% earlier) to factor in the impact of two consecutive years of substantial price hikes and pricing growth estimate to 14% (8% earlier). In FY13, so far, ITC has taken 16-17% price increase in cigarettes. * Possible acceleration of investments in <65mm segment: Excise duty on the sub-65mm segment has not been changed. Consequently, excise differential per stick between the sub-65mm and 65-70mm segment increases from 44% to 53%. This could potentially accelerate investments towards the <65mm segment. ITC has expanded its offerings in the <65mm segment after the previous budget, and we expect further traction, given the excise arbitrage.
* Cutting EPS estimate by 3%: The government has also hiked the surcharge on corporate tax from 5% to 10% for FY14, leading to a 2.3% cut in our EPS estimate. This, coupled with the revision in our volume growth estimate for the year results in a ~3% cut in our EPS estimate for FY14. * ITC has strong pricing power: ITC has strong pricing power in cigarettes –  16.8% EBIT CAGR despite 1.5% volume CAGR over FY07-12. While we expect ITC to deliver 16% EBIT growth in FY14, we believe frequent 15%+ excise duty hikes can cripple volume growth. Though demand for cigarettes is fairly  inelastic, the segment is not equipped to absorb 15%+ price hikes year after year, in our view.
* Maintain Buy with a target price of INR340: Despite the harsh policy measures, we believe ITC offers the best earnings visibility in our staples universe. It remains insulated from competitive headwinds and raw material price fluctuations, though the excise duty hikes more than adequately compensate for the absence of raw material volatility in ITC’s core business. This coupled with improving profitability in the non-cigarette FMCG business can augment cash flows and payout ratios, in our view. We maintain our Buy rating, with a target price of INR340. VAT measures in the forthcoming state budgets would be a key near-term monitorable.
 
Buy Mahindra & Mahindra Ltd For Target Rs.995.00


Mahindra & Mahindra Ltd. is the flagship company of the US$ 15.4 billion Mahindra Group, based in Mumbai, Maharashtra.
* M&M has launched the Verito Executive edition with a priced at Rs 7.75 lacs During the quarter, the robust growth of Net Profit is increased by 26.28% to Rs. 8361.90 million.
* During the current quarter, 2 x 2 Logistics Private Ltd and Holiday on Hills Resorts Private Ltd became subsidiaries of the Company.
* Passenger Utility Vehicle segment, M&M and MVML (Entity) sold 70483 vehicles in the current quarter, a growth of 36%.
* The M&M continued its leadership positionwith a market share of 47.9%. In the Cars segment, the Entity sold 3814 Verito Cars.
* The entity also expanded its UV portfolio with the launch of Ssangyong Rexton.
* During the quarter, the company sold 62522 tractors under the Mahindra & Swaraj brands.
* Net Sales and PAT of the company are expected to grow at a CAGR of 29% and 15% over 2011 to 2014E respectively.

Investment Highlight
Results updates- Q3 FY13,
Mahindra & Mahindra Ltd India’s leading SUV manufacturer has a presence in the automotive industry, agribusiness, aerospace, components,
consulting services, defence, energy, financial services, industrial equipment, logistics, real estate, retail, steel and two wheelers, reported its financial results for the quarter ended 31st Dec, 2012. The growth in the profits of the company despite the relentless increase in material costs is due to a good volume performance by Automotive Sector and tight control on expenses.
The company’s net profit jumps to Rs.8361.90 million against Rs.6621.50 million in the corresponding quarter ending of previous year, an increase of 26.28%. Revenue for the quarter rose 28.47% to Rs.107742.80 million from Rs.83868.10 million, when compared with the prior year period. Reported earnings per share of the company stood at Rs.14.17 a share during the quarter, registering 25.90% increase over previous year period. Profit before interest, depreciation and tax is Rs.12855.10 millions as against Rs.10616.40 millions in the corresponding period of the previous year.

Outlook and Conclusion
*  At the current market price of Rs.882.00, the stock P/E ratio is at 15.00 x FY13E and 12.93 x FY14E respectively.
* Earning per share (EPS) of the company for the earnings for FY13E and FY14E is seen at Rs.58.81 and Rs.68.20 respectively.
* Net Sales and PAT of the company are expected to grow at a CAGR of 29% and 15% over 2011 to 2014E respectively.
* On the basis of EV/EBITDA, the stock trades at 10.05 x for FY13E and 8.35 x for FY14E.
*  Price to Book Value of the stock is expected to be at 3.33 x and 2.65 x respectively for FY13E and FY14E.
* We recommend ‘BUY’ in this particular scrip with a target price of Rs.995.00 for Medium to Long term investment.
 Buy Cadila Healthcare For Target Rs.995


Cadila's revenues grew 15% YoY to INR15.92b (v/s est of INR16.74b), while EBITDA declined 8% YoY to INR2.43b (v/s est of INR3.21b). PAT declined by  31% YoY to INR1.03b (v/s est of INR1.49b) dented by subdued operational performance and significantly higher tax outgo.
* EBITDA decline of 8%YoY was on account of one-off expenses incurred on (1) user fees on ~60 pending ANDA approvals, (2) increased advertisement & promotional spend on Zydus Wellness and (3) donations. Decline in Brazil also impacted the performance (temporary as ANVISA strike been called off). EBITDA margin was at 15.3%, significantly lower than estimated 19.2%.
* PAT fell by 31% due to subdued operational performance and a significantly higher tax rate at 36.1% v/s est of 25% (driven by imposition of MAT onpartnership firms).
* Guidance - Management reiterated its long term top line guidance of USD3b by FY16 to be driven mainly by organic initiatives. Have  indicated of EBITDA margin to remain under pressure for next couple of quarters.
We have cut our FY13E/FY14E/15E EBITDA estimates by 12%/8%/8% to reflect the increased pressure on profitability due to (1) non-recurring expenses incurred in 3QFY13, (2) slower-than-expected ramp-up at Moraiya, (3) adverse product mix in its US formulations and (4) continuing pressure in Brazil due to the ANVISA strike. However, our earnings estimates have witnessed a significant cut - 20%/
15%/13% for FY13E/FY14E/FY15E - due to increased ta x rate as guided by the management (raised from 25-26% to 28%) and higher interest costs. Despite this downgrade, we believe that FY14 will be a year of recovery for CDH. Most of the cost pressures will be absorbed with new launches in the US (20-22 guided for CY13), normalization of operations in Brazil and stable growth in domestic formulations. The stock trades at 19.5x FY14E and 15.9x FY15E EPS. While lowerthan- expected 3Q performance and subsequent cut in estimates may lead to stock's underperformance in near term, we remain positive on long term prospects of CDH. Maintain Buy with a revised target price of INR995 (20x FY15E EPS).

 Buy Ratnamani Metals & Tubes Ltd For Target Rs.151.00


Ratnamani Metals & Tubes manufactures Tubes & Pipes in Stainless Steel/Exotic material & Carbon Steel Pipes, in wide size ranges, for  wide spectrum of applications.
* During the third quarter ended the robust growth in the Net Profit of the company and it is rose by 59.51% to Rs. 316.43 million.
* The Indian Govt increased investment in planned infrastructure from USD 500 billion in 11th Five Year Plan & proposes to increase to USD 1 trillion in 12th Five Year Plan.
* Ratnamani has increased ERW pipe yield by modifying the welder & coil feeding unit.
* The company has booked total orders of Rs. 6610 millions including export orders of Rs. 1810 millions.
* CRISIL has reaffirmed AA- (AA minus) rating for long-term borrowings and A1+ (A1 plus) for short-term borrowings.
* Net Sales and PAT of the company are expected to grow at a CAGR of 15% and 25% over 2011 to 2014E respectively.
Investment Highlights
Results updates- Q3 FY13,
Ratnamani Metals & Tubes Ltd manufacturing Tubes & Pipes in Stainless Steel/Exotic material and also Carbon Steel Pipes, in wide size ranges, for wide spectrum of applications, reported its financial results for the quarter ended 31st Dec, 2012. The Third quarter witnesses a healthy increase in overall sales as well as profitability of the company.
The company’s net profit jumps to Rs.316.43 million against Rs.198.38 million in the corresponding quarter ending of previous year, an increase of 59.51%. Revenue for the quarter decrease 3.18% to Rs.2718.00 million from Rs.2807.13 million, when compared with the prior year period. Reported earnings per share of the company stood at Rs.6.82 a share during the quarter, registering 59.51% increase over previous year period. Profit before interest, depreciation and tax is Rs.613.53 millions as against Rs.423.87 millions in the corresponding period of the previous year.
Outlook and Conclusion
* At the current market price of Rs.135.00, the stock P/E ratio is at 4.53 x FY13E and 3.94 x FY14E respectively.
*  Earning per share (EPS) of the company for the earnings for FY13E and FY14E is seen at Rs.29.80 and Rs.34.23 respectively.
* Net Sales and PAT of the company are expected to grow at a CAGR of 15% and 25% over 2011 to 2014E respectively.
*  On the basis of EV/EBITDA, the stock trades at 2.99 x for FY13E and 2.57 x for FY14E.
*  Price to Book Value of the stock is expected to be at 0.98 x and 0.84 x respectively for FY13E and FY14E.
* We recommend ‘BUY’ in this particular scrip with a target price of Rs.151.00 for Medium to Long term investment.
 Buy Hexaware Technologies Ltd For Target Rs.94.00



Hexaware Technologies Ltd. is a leading  global provider of IT & BPO, consulting services and the key domains focus areas such as  Banking, Financial Services, Insurance, Travel, Transportation, Logistics, Life Sciences and Healthcare.
* Hexaware once again for the year recorded the annual revenue growth rate of 18% above the industry revenue growth during the year 2012.
* During the year ended, 752 employees added and with this the Global headcount increased to 9069 at the end of December 2012. Fresher addition of 525 during CY12.
* During the quarter ended the company has added 11 new clients and added by the end of CY2012. 47 new clients were added .
* Total Dividend payout during the year is at Rs. 1859.00 millions and dividend payout ratio was 57%.
* The company recommended a payment of  interim dividend of Rs.1.20/- per share i.e. 60% on an equity share of Rs.2/- each and shall be paid on May 04, 2013.
* Net Sales and PAT of the company are expected to grow at a CAGR of 19% and 18% over 2011 to 2014E respectively.
Investment Highlights
Results updates- Q4 CY12,
Hex aware is a leading global provider of IT & BPO, consulting services. Reported its financial results for the quarter ended 31st Dec, 2012. The Fourth quarter witnesses a healthy increase in overall sales and adverse impact on the profitability on account of for changes to a project plan in a large engagement for a customer.
The company’s net profit declines to Rs. 661.79 million against Rs. 882.49million in the corresponding quarter ending of previous year, a decrease of 25.01% due to continued investments made by Hexaware keeping the medium term horizon in mind. Revenue for the quarter rose by 16.30 % to Rs. 5022.81 million from Rs. 4318.84 million, when compared with the prior year period. Reported earnings per share of the company stood at Rs. 2.23 a share during the quarter, registering at 25.76% decline over previous year period. Profit before interest,
depreciation and tax stood to Rs. 895.34 millions as against Rs. 1120.89 millions in the corresponding period of the previous year.
Outlook and Conclusion
Hexaware recorded above industry revenue growth once again for the year with 18% annual revenue growth rate in $ term and the gross margin improved by 80 basis points 39.2% from 38.4% and the profit after tax grew to Rs.3276 million up 23 % YoY.
* At the current market price of Rs.84.20, the stock P/E ratio is at 6.59 x CY13E and 5.66 x CY14E respectively.
* Earning per share (EPS) of the company for the earnings for CY13E and CY14E is seen at Rs. 12.77 and Rs.14.89 respectively.
*  Net Sales and PAT of the company are expected to grow at a CAGR of 19% and 18% over 2011 to 2014E respectively.
* On the basis of EV/EBITDA, the stock trades at 5.00 x for CY13E and 4.34 x for CY14E.
* Price to Book Value of the stock is expected to be at 1.57 x and 1.23 x respectively for CY13E and CY14E.
As per the revenue contribution from APAC as a Geographical region is likely to be around 8 % in the year 2013 the Company has continued to make investments steadily in both strengthening & expanding its field force presence globally top capitalize on the growth opportunities in large markets such as Australia, India and ASEAN region.
In order tap the huge maker potential of the emerging technologies the company focusing on new initiatives and has been regularly investing in multiple Centers of Excellence. We expect that the company surplus scenario is likely to continue for the next three years, will keep its growth story in the coming quarters also. We recommend ‘HOLD’ in this particular scrip with a target price of Rs.94.00 for Medium to Long term investment.
  Buy Gujarat State Petronet Ltd (GSPL) For Target Rs.80


Volumes under pressure
* GSPL's Q3FY13 result is lower than our estimates mainly on account of 1). Lower revenue from electricity segment, 2). Higher operating cost and 3). Lower gas transmission volumes. GSPL has reported a PAT of Rs.1.19 Bn, -5.7% YoY and -10.4% QoQ.
* Gas transmission volume is lower by 4.7% QoQ due to decline in RIL's KG gas production but revenue from gas transmission segment has increased by 0.1% QoQ mainly due to higher implied tariff on account of  'take-or-pay' clause.
* We expect gas transmission volume to improve marginally in the shortterm with the increased supply of imported RLNG from proposed expansion of Dahej and Hazira terminals.
* We expect GSPL to report an EPS of Rs.8.99 FY13E and Rs.9.18 FY14E. The recent correction in the stock price discounts most of the negatives and hence we believe there is decent upside in the stock. We recommend BUY rating on GSPL with a target price of Rs. 80/Share.
Valuation & Recommendation
On the basis of our estimates, the stock at current market price of Rs.70 is reasonably  valued at 4.5x EV/EBIDTA, 7.6x P/E and 5.3x P/cash earnings on the basis of FY14E. We recommend BUY rating on GSPL with a DCF based target price of Rs.80/ Share.
 Buy Omkar Specialty Chemicals Ltd For Target Rs.142.00



Omkar Specialty Chemicals Ltd is mainly engaged in the manufacture and sale of Specialty Chemicals and Intermediates for Chemical and Allied Industries.
* During the quarter, the robust growth of Net Profit is increased by 59.89% to Rs. 57.85 million.
* Revenue for the quarter rose 22.43% to Rs.480.42 million from Rs.392.39 million, when compared with the prior year period.
* Omkar Speciality Chemicals Ltd has entered the active pharmaceutical ingredient (API) business with the acquisition of Lasa Laboratory P. Ltd.
* OSCL has announced the commissioning of the plant of its Wholly Owned Subsidiary - Urdhwa Chemicals Co. Pvt. Ltd at Chiplun, Maharashtra with a capacity of 2800 MTs per annum.
* OSCL gets Star Export House status from Ministry of Commerce and Industry.
* Net Sales and PAT of the company are expected to grow at a CAGR of 36% and 41% over 2011 to 2014E respectively.
Outlook and Conclusion
* At the current market price of Rs.127.00, the stock P/E ratio is at 10.93 x FY13E and 8.73 x FY14E respectively.
* Earning per share (EPS) of the company for the earnings for FY13E and FY14E is seen at Rs.11.62 and Rs.14.54 respectively.
* Net Sales and PAT of the company are expected to grow at a CAGR of 36% and 41% over 2011 to 2014E respectively.
* On the basis of EV/EBITDA, the stock trades at 5.01 x for FY13E and 4.14 x for FY14E.
* Price to Book Value of the stock is expected to be at 1.94 x and 1.59 x respectively for FY13E and FY14E.
* We recommend ‘BUY’ in this particular scrip with a target price of Rs.142.00 for Medium to Long term investment.
  Buy Indraprastha Gas Ltd For Target Rs.292.00






Indraprastha Gas, incorporated in 23 Dec, 1998, is a joint venture of GAIL (India), Bharat Petroleum Corporation & the Govt. of the National Capital Territory of Delhi.
* IGL is the sole supplier of CNG and PNG in Delhi, Noida, Greater Noida & Ghaziabad, plans to promote wider usage of gas for various  applications through co-generation, gas geysers, gensets etc.
* IGL has posted a net profit after tax of Rs. 863.38 mn for the quarter ended December 31, 2012 as compared to Rs. 691.50 mn for the quarter ended December 31, 2011.
* Total Income has increased from Rs. 6646.11 million for the quarter ended December 31, 2011 to Rs. 8720.47 million for the quarter ended December 31, 2012.
* Indraprastha Gas Ltd is keen to buy Asian Development Bank’s 5.2 per cent stake in Petronet LNG Ltd.
* IGL has hiked 7% price on the domestic piped natural gas for households in the National Capital Territory (NCT) of Delhi, Noida, Greater Noida and Ghaziabad.
* Net Sales and PAT of the company are expected to grow at a CAGR of 34% and 19% over 2011 to 2014E respectively.

Investment Highlights
Results updates- Q3 FY13,
Indraprastha Gas Ltd, one of India's natural gas distribution companies. IGL was incorporated to implement the compressed natural gas (CNG) expansion programme and the piped natural gas (PNG) project for varied applications in the domestic and commercial sector, reported its financial results for the quarter ended 31 Dec, 2012.
Indraprastha Gas Ltd announced an increase of 24.86% in net profit to Rs 863.3 million for the quarter ended Dec. 31, 2012 as compared to Rs 691.5 million in the prior-year period. Revenue for the quarter rose by 31.11% to Rs.8694.46 million from Rs.6631.34 million, when compared with the prior year period. Reported earnings per share of the company stood at Rs.6.17 a share during the quarter, registering at 24.86% increase over previous year period. Profit before interest, depreciation and tax is Rs.1897.01 millions as against Rs.1519.17 millions in the corresponding period of the previous year.

Outlook and Conclusion
* At the current market price of Rs.261.00, the stock P/E ratio is at 9.95 x FY13E and 8.45 x FY14E respectively.
*  Earning per share (EPS) of the company for the earnings for FY13E and FY14E is seen at Rs.26.24 and Rs.30.90 respectively.
*  Net Sales and PAT of the company are expected to grow at a CAGR of 34% and 19% over 2011 to 2014E respectively.
* On the basis of EV/EBITDA, the stock trades at 5.07 x for FY13E and 4.25 x for FY14E.
* Price to Book Value of the stock is expected to be at 2.29 x and 1.80 x respectively for FY13E and FY14E.
* We recommend ‘BUY’ in this particular scrip with a target price of Rs.292.00 for Medium to Long term  investment.
 Buy State Bank of India (SBI) For Target Rs.2490.00


State Bank of India (SBI) is the largest public sector bank in India which provides a range of banking products through its network of branches in India and overseas, including products aimed at non-resident Indians (NRIs).
* Bank’s Capital Adequacy Ratio registered at 12.21% as on 31.12.12.
* Savings Bank Deposits recorded a healthy growth of 11.69% Y-O-Y to touch Rs. 4109060 mn as on 31st December 2012.
* SBI has signed a Preliminary Non-Binding MOU with Russian Direct Investment Fund, to facilitate advancing bilateral economic cooperation & trade between Russia and India.
* The SBI's second branch in China with a capital of $50 million is set to open at the port city of Tianjin, close to Beijing.
* SBI launches State Bank MobiCash Easy, a Mobile Wallet, in Mumbai and Delhi.
* SBI and its associates plan to set up ‘byinvitation- only’ branches under the ‘Kohinoor’ brand in 20 cities for 24X7 to serve urban-rich clients and non-resident Indians (NRIs).
* Net Income and PAT of the company are expected to grow at a CAGR of 18% and 24% over 2011 to 2014E respectively.

Investment Highlights
Results updates- Q3 FY13
The company’s net profit jumps to Rs. 33960.60 million against Rs. 32630.40 million in the corresponding quarter ending of previous year, an increase of 4.08%. Revenue for the quarter rose 9.70% to Rs. 303436.20 million from Rs. 276614.20 million, when compared with the prior year period. Reported earnings per share of the company stood at Rs. 50.61 a share during the quarter, registering 1.51% a decrease over previous year period. Net Interest Income is Rs. 148029.50 millions as against Rs. 135918.10 millions in the corresponding period of the previous year.

Outlook and Conclusion
* At the current market price of Rs.2224.00, the stock P/E ratio is at 10.32 x FY13E and 9.41 x FY14E respectively.
* Earning per share (EPS) of the company for the earnings for FY13E and FY14E is seen at Rs. 215.48 and Rs.236.39 respectively.
* Net Sales and PAT of the company are expected to grow at a CAGR of 18% and 24% over 2011 to 2014E respectively.
* On the basis of Debt-Equity ratio, the stock trades at 13.68 x for FY13E and 13.55 x for FY14E.
* Price to Book Value of the stock is expected to be at 1.52 x and 1.31 x for FY13E and FY14E respectively.
* We expect that the company will keep its growth story in the coming quarters also. We recommend ‘BUY’ in this particular scrip with a target  price of Rs. 2490.00 for Medium to Long term investment.