Sunday, January 8, 2012

>2012: Key trends & Investment Strategy

■ Market may move in a broader trading range
Unlike 2011, where market was bound in the most narrow range in at least two decades, 2012 is expected to see a wider trading range, making it attractive to trade actively.

■ Long term Sensex returns may bottom out
Long term (5yr rolling) Sensex returns at the end of 2011 were close to 12%. In the previous cycle, long term returns had bottomed out at (-)9% in 1998. A close in the range of 18000-19000 in December 2012 would result in negative 5ry rolling returns to the tune of 11 to 6%.

■ Volatility may rise, more big daily moves likely
Market tops and bottoms have usually been associated with higher volatility. In past two years volatility in Indian markets has been low to moderate. In recent months volatility has shown a tendency to rise. We expect volatility to inch up as the markets look out for a bottom.

■ GDP growth to slow; downgrades likely
We expect FY13 GDP to slow to 6.8% and consensus to cut GDP forecasts over the next few months. GDP growth in the next few quarters is likely to come even lower at around 6.5%. A slower GDP will be led by: (a) a slowing global economy, (b) impact of high rates and (c) slowing investment spend.

■ Earnings downgrades to continue
We continue to expect earnings downgrades, led by slowing sales and sustained margin pressure from rising labor and interest costs. We expect the bottom-up Sensex EPS of Rs1,275 to be downgraded to Rs1,200 (growth of under 10% vs. expectations of nearly 15%).

■ Valuations will see slight de-rating
Based on analysts’ forecasts, Sensex at 13x one-year forward PE is at a slight discount to long-term averages. Slow down in GDP and earnings growth as well as falling RoEs will likely lead markets to trade lower. Secondly, on a relative basis, India still trades at substantial premium to GEM vs. a 10yr average of 17%. 

■ Inflation and rates to peak off
We expect inflation to peak off in 1H12 with a good harvest dousing agflation, commodity prices stabilizing and a tight monetary policy curbing demand. RBI may start cutting rates by 100bp from March onwards. We expect, in follow up to RBI easing, lending rates should ease by 150bps.

■ Strong US Dollar, weak INR
We expect the US Dollar to appreciate to sub-1.30/Euro levels through 2012 on the European crisis. It is expected to peak at 1.25/Euro in March and June and then moderate to 1.30/Euro by December 2012 and 1.35/Euro by December 2013. In tandem, the INR is seen to persist at Rs50/USD levels for the most of the year and appreciate to Rs49/USD by December 2012. Do not expect significant foreign flows in Indian equities in 2012

■ Political stability to continue
We believe the stability of the Congress-led UPA Government is not an issue since: (a) most political parties do not want an election so soon and (b) none of the allies of the Congress want to see the Government fall. They seem content to distance themselves from some measures of the Government and make a show of opposing it, without withdrawing support to the Government. We do not see the situation changing materially post state assembly elections in 5 opposition ruled states in 2012.

■ Global equities: the beginning of the end of great bear market in sight
Despite our short-term caution, we believe that global equities on a 2-3 year view look compelling. Investors enter 2012 in a fearful state, but we believe any sharp falls in equities in 2012 should be bought. The ingredients for equity outperformance over the medium-term are being put in place and 2012 could represent the beginning of the end of the great bear market in equities.

■ The US economy to slow down sequentially
While 2011 is ending on a strong note, we expect the US and European fiscal crises to lower growth to just 1% in Q4 2012.

■ Large scale deleveraging will pull down DM growth in 2012
We expect the need for higher Tier 1 capital ratios in Europe and falling real estate values in US will likely keep developed economies on a deleveraging mode. In fact, the deleveraging cycle that affects 50% of the global GDP and twothirds by wealth will likely remain a significant impediment to growth in developed markets. Burgeoning government deficits, unfavorable demographics, and fractious politics will likely continue to prevent the textbook Keynesian response.

■ Easy policy and high liquidity will keep markets afloat
Easy policy and high liquidity has so far helped to counterbalance large-scale deleveraging in developed economies by holding down debt service ratios and supporting asset values. Heading into 2012, real interest rates should remain low, and we expect the Fed and the European Central Bank to fight the growing deflationary pressures with quantitative monetary easing.

■ Global inflation to remain elevated, EMs may suffer more
The quid pro quo of easy liquidity is higher tolerance of inflation, which is already hitting real incomes as energy, food and other commodity prices keep on rising fuelled by negative real rates, in our view. The impact of higher commodity prices is greater on emerging markets where energy and food make up 9% and 27% of the CPI basket respectively, although rising incomes somewhat mitigate the higher costs. On the other hand, G5 economies face stagnant incomes, while energy and food make up 8% and 15% respectively.

■ Commodities – headwinds for cyclicals, gold to reach US$2000/oz
Given expectations that demand growth for cyclical metals will slow, micro fundamentals are important and we see substantial divergence on that front. We see limited upside in Crude oil on improved demand supply balance, dated Brent crude oil to average US$108/bbl in 2012. We expect gold reach US$2000/oz led by continued Central Bank demand and persistent negative real rates.

■ Key global risks: Euro break-up, Iran & China hard-landing
A deeper-than-expected Euro zone recession could lead to a sequential drop in both equity and commodity prices. US Treasuries would outpace credit in this case. Meanwhile, increased Middle East tensions could lead to another largescale physical oil supply disruption and exacerbate the recession in Europe. Finally, we think two key risks worth highlighting are those coming from faster than expected US fiscal tightening next year, and the perennial China hardlanding scenario.

Investment strategy

Moderate strategic asset allocation, u/w equities
We expect the markets to continue moving in a broad range in 2012. During next several months the Sensex may keep oscillating mostly between the range seen in 2011 with occasional violations on either side. Given the high opportunity cost of holding equities, we continue to suggest a moderate strategic asset allocation — predominantly high yielding debt, adequate cash and select large cap defensive equity portfolio.
■ Overweight high yielding debt
 Overweight cash
 Underweight equities

We prefer expensive defensives vs. inexpensive cyclicals
One of the key decisions facing investors at the moment is whether to continue paying a premium for expensive defensives or to position in inexpensive cyclicals in preparation for the next economic upturn.

In our view, expensive defensives are preferable at this stage, for the simple reason that in slowing growth environment, fraught with significant uncertainties, defensives have historically outperformed.

To read the full report: KEY TRENDS

>Who is an Insider? & Should one follow Insider’s foot steps? (CHOLAMANDALAM SECURITIES LIMITED)

Who is an Insider?
Insider is a person who is/was connected to the Company or has or deemed to have had access or expected to have access to unpublished price sensitive information in respect of shares of company. As per SEBI (Prohibition of Insider Trading) Regulations 1992, no insider shall either on his own behalf or on behalf of any other person deal in securities (shares) of a Company listed on any stock exchange when in possession of any unpublished price sensitive information or communicate, counsel or procure directly or indirectly any unpublished price
sensitive information to any person who while in possession of such
unpublished price sensitive information shall not deal in securities.

Should one follow Insider’s foot steps?
We hereby consolidated the Insider trades happened during the last fortnight. Insider acquiring shares in the open market should be viewed from a longer term perspective. Insider typically increases their stake for foreseeing value enhancement over an extended period, to raise their control over management or to avoid the potential take over threat. With the Insider committed to the company over the long term, in most occasions typically the time horizon does not match with that of the minority investors.

While a sale need not be always perceived as negative as at times insider pare their stake to bring in a new investor or to deploy the money in its own business. However, caution has to be exercised depending upon the utility of the proceeds and as well if the quantum of stake sale is substantial.

Insider trade in many instance doesn’t warrant into a near term price reaction. So it’s not prudent to follow the Insider’s each and every foot steps as this could happen for various reasons. However it is vital to keep a track on Insider’s activity.

Please read the Insider trades.

>IPO NOTE: Multi Commodity Exchange of India Limited (Press Release) & Detailed Grading Rationale

CRISIL Research has reaffirmed CRISIL IPO grade of ‘5/5’ (pronounced ‘five on five’) to the proposed initial public offer (IPO) of Multi Commodity Exchange of India Ltd (MCX). (CRISIL Research has undertaken a fresh grading exercise for MCX as the grade assigned to the company on June 15, 2011 had expired.) This grade indicates that the fundamentals of the IPO are ‘strong’ relative to other listed equity securities in India. However, this grade is not an opinion on whether the issue price is appropriate in relation to the issue fundamentals. The grade is not a recommendation to buy, sell or hold the graded instrument, or a comment on the graded instrument's future market price or its suitability for a particular investor.

The grade reflects MCX’s leadership position in the Indian commodity futures market over the past four years, with ~82% share of the overall traded turnover in FY11. It is a leader in the trading of bullion, crude oil, copper and natural gas (accounting for ~85% of MCX’s traded turnover in FY11). Historically, metals and energy commodities have also witnessed lower regulatory intervention. With a strong technologybacked trading platform and infrastructure (supplied by its promoter Financial Technologies India Ltd, or FTIL), MCX has been able to provide high liquidity and low impact cost of transactions – key criteria for the success of any exchange. The grade also draws support from MCX’s strong management team and its
ability to attract talented and experienced personnel. Further, while new commodity exchanges have been set up over the past few years, they have not been able to nudge MCX from the top. However, given the high profitability and cash-churning nature of the business, we expect competition to intensify in the future.

MCX’s financial performance in the past three years indicates healthy revenue growth and profitability. Operating revenue has grown at 32% CAGR over FY09-11 with EBITDA margin and adjusted PAT margin averaging ~58% and ~37%, respectively. In the medium term, MCX’s strong market position and continuous focus on product innovation will act as growth drivers. In the long term, the introduction of new instruments (like options) and participation by institutional players, once the necessary regulatory reforms take place, are likely to spur growth.

About the company and the issue
MCX was incorporated on April 19, 2002. It is promoted by FTIL with a pre-IPO stake of 31.18%. FTIL is a software developer and a technical service provider of automated electronic solutions for foreign exchange, commodities and equities. The proposed IPO is in the form of an offer for sale of 6.4 mn shares by the promoters and some of the investors. Subsequent to the IPO, the promoters' stake in the company will reduce to 26%.

Around 85% of MCX’s traded turnover comprises metal and energy commodities, which are benchmarked to international prices. Globally, MCX is the largest silver exchange; the second largest gold, copper and natural gas exchange; and the third largest crude oil exchange in terms of the number of contracts traded in each of these commodities (in CY10). It is also the sixth largest commodity exchange globally in CY10 and fifth largest during the six months ended June 30, 2011, in terms of the total number of contracts traded
(Source: Futures Industry Association, websites of relevant exchanges).

About CRISIL IPO Grading
CRISIL IPO (Initial Public Offering) Grading is an opinion on the fundamentals of the graded issue that reflects CRISIL's independence and expertise. This opinion is expressed as a relative assessment in relation to other listed equity securities in India. The assessment is based on a grading exercise carried out by industry specialists from CRISIL Research. A CRISIL IPO Grade 5/5 indicates strong fundamentals and a CRISIL IPO Grade 1/5 indicates poor fundamentals. CRISIL IPO Grading reflects its assessment of the graded company's equity fundamentals as distinct from an assessment of debt fundamentals. A CRISIL IPO
Grade should not be construed to mean a comment on the price of the graded security nor is it a recommendation to invest or not to invest in the graded security.

Grading summary
CRISIL Research has reaffirmed CRISIL IPO grade of ‘5/5’ (pronounced ‘five on five’) to the proposed initial public offer (IPO) of Multi Commodity Exchange of India Ltd (MCX). (CRISIL Research has undertaken a fresh grading exercise for MCX as the grade assigned to the company on June 15, 2011 had expired.) This grade indicates that the fundamentals of the IPO are strong relative to other listed equity securities in India. However, this grade is not an opinion on whether the issue price is appropriate in relation to the issue fundamentals. The grade is not a recommendation to buy, sell or hold the graded instrument, its future market
price or suitability for a particular investor.

The grade reflects MCX’s leadership position in the Indian commodity futures market over the past four years, with a share of ~82% of the overall traded turnover in FY11. It is a leader in the trading of bullion, crude oil, copper and natural gas (which accounted for ~85% of MCX’s traded turnover in FY11). Historically, metals and energy commodities have witnessed lower regulatory intervention. With a strong technology-backed trading platform and infrastructure (supplied by its promoter Financial Technologies India Ltd), MCX is able to provide high liquidity and low impact cost of transactions – key criteria for the success of any exchange. The grade takes into account the benefits that MCX will derive from amendments to the Forward Contracts (Regulation) Act, which will allow trading of options and indices, and participation by institutional investors, leading to increase in the traded turnover on commodity exchanges. The
 grade also draws support from MCX’s strong management team and its ability to attract talented and experienced personnel.

While new commodity exchanges have been set up over the past couple of years, they have not been able to nudge MCX from the top. However, given the high profitability and cash-churning nature of the business, we expect competition to intensify in the future.

MCX’s operating income has grown at a CAGR of 32% over FY09-11, with healthy profitability. EBITDA margin and adjusted PAT margin were 60.4% and 39.4%, respectively, in FY11.

To read the full report: MCX


>MARKET OUTLOOK & EQUITY STRATEGY: Large Cap Ideas & Mid Cap Ideas

It is that time of the year when everybody, who is anybody in the capital market, starts making annual prediction as to what lies ahead for us in the year 2012.

At the moment, it has become fashionable (acceptable?) to come out with a very pessimistic view, paint a scary picture and thereby, attract media attention.

But, the fact is that predicting the markets (for 2012) couldn‟t have been more challenging. However, one thing seems distinctly possible for our markets – it could get worse first before it gets better.

The year 2011 was tumultuous (understatement) for investors and equity markets across the globe, with India suffering from the dubious distinction of being one of the worst performer and the broader indices shedding nearly 23 per cent during the year.


EUROPE: While Europe will remain the single largest „wild‟ factor, there is a distinct possibility that as we go beyond the first few months of 2012, Europe will no longer have the same bearing on the Indian markets a much as much as what it did in the year gone by.

And, even as the European leaders have seemingly hashed out a crisis deal, the debt saga is surely far from over. Debt won‟t go away and people in Europe will have to learn to accept lower standard of living, leading to less consumer spending, higher unemployment and sluggish economic growth.

INFLATION &; INTEREST RATES: Inflation continued to remain a „dirty‟ word for the equity markets in 2011. However, there is a distinct possibility of the same coming down in 2012(also aided by the „base‟ effect), thereby prompting the RBI ( which had come out with a series of 13 interest rate hikes over a period of 19 months) to cut rates. We expect atleast 100 bps of rate cut in 2012.

COMMODITY PRICES &; RUPEE DEPRECIATION: Commodity prices, which have already started weakening could, remain lower on global growth concerns (China is experiencing a distinct slowdown). While this is definitely positive news for India and her „inflation‟ problem, a lot will depend on the Indian currency.

GROWTH: Economic growth has clearly slowed down and estimates have been scaled down considerably to 7 p.c or even lower (from around 9 p.c. at the beginning of the fiscal) for 2011-12. The year 2012 could be a tough walk for the government and the RBI.

Government inaction on the policy front (read „policy paralysis‟) has been spoken and written about in great depth and not much is being expected from the policy makers as regards „economic reforms‟ are concerned.

However, this is something where we could experience a major positive trigger. Post-the UP elections in February, if we see the FDI in multi-brand retail going through (repeatedly mentioned by the PM and the FM, but, who believes them? Sad…) and a proper plan being put in place for other economic reforms (electricity distribution, introduction of GST, enhancing FDI in insurance, etc.) the market will certainly look at it favourably.

The slow economic growth has resulted in lower-than-expected December quarter advance tax payments. Also, with disinvestment of PSUs just not taking off this fiscal, the government is finding itself seriously short of funds. On the other hand, the government has to exhibit its generosity and take care of a mounting food and fertilizer subsidy bill, besides bailing out an Air India and the cash-strapped (and, close-to-being declared „bankrupt‟) SEBs. The State Bank of India needs immediate funds and the other PSU banks need to be capitalised. The OMCs continue to bleed (the falling rupee to be blamed to some extent) and they too need the government‟s largesse. All this should ensure that the government will revise its borrowing programme for the fiscal 2011-12, leading to firm bond yields, which could spell further trouble for the equity market.

A distinct stress is brewing in the banking sector. Even as the earning has been good, the quality of earning has deteriorated considerably. Over the last year, there has been a near 100 p.c. growth in NPAs and a threefold increase in the growth of gross impaired assets.

Some of the PSU banks have been shamelessly postponing NPAs to the future by restructuring these loans. In a macroeconomic situation of a slowdown, the likelihood of these loans turning around is bleaker than before. So, banks are sitting on NPAs without providing them adequately. Today, nearly 80 p.c. of the total NPAs of the banking sector are in infrastructure, real estate and priority sector lending. Add to these numbers, the impending power sector problems – the mounting losses of distribution companies and probable payment defaults of state electricity boards – and, one can sadly conclude that all is not well with the banking sector.

VALUATIONS: Considering that we have lost nearly 23 per cent in 2011, we feel that an interesting opportunity awaits equity investors in 2012 where we could see a 20-30 per cent rebound in the stock indices from 2012-low, prompting some of the better names, among stocks, to record even a 30-50 per cent appreciation from their 52-week lows. While we are sticking to our SENSEX EPS of Rs.1180 for 2011-12, assuming just 8 percent corporate growth, we expect a SENSEX EPS of Rs.1275 in 2012-13 and Rs.1450 for 2013-14. And, considering that next year this time, the market will start looking at 2013-14 earnings, we could have a SENSEX of over 18500 in place (13 times the earnings estimate for the NIFTY). Corresponding level for nifty is 5600.

However, considering the fluid nature of the markets at the moment, we are advocating a defensive strategy for our investors. We have identified 20 scrips (10 among large caps and 10 belonging to the mid-cap space) for investment in 2012. Most of these names are from the better-performing sectors, have a decent business model in place, don‟t have much exposure to foreign currency issues, are not over-leveraged (in some cases, have decent cash in the books). We believe that the next fall in the markets (we are not ruling it out) could happen anytime over the next six months. That could provide a lovely opportunity for earning 30-50 p.c. on individual scrips, when a rebound materializes. At that point of time, one could possibly shift from defensive stocks to slightly aggressive bets. We will come with a fresh list of recommendations when we come to that. Till then, these 20 scrips should suffice.

SUMMARY: As of today, the four important factors that could dictate the market trend in 2012 (in order) are:
1. Government finances and how it manages to convince marketmen that it is making a conscious attempt to address the growing deficits – fiscal, current account and trade.
2. Europe: If the European Union splits, GOD help investors across the globe.
3. Rupee depreciation and capital inflows
4. Price of Oil: Iran should not cause a problem
5. Reforms back on track? If the government acts fast post-UP elections in February on the reforms front, it could turn out to be a big positive trigger.

Adopt a defensive approach. We have identified 20 scrips where we do not see much damage from present levels. As and when things show signs of improving or, on the other hand, the broader indices have come off sharply (10-15 p.c.) for any reason (whichever happens first), one could start switching from ‘defensive’ stocks to slightly more ‘aggressive’ stocks. The rebound when it materializes, could yield 30-50 p.c. returns (in solid frontline stocks) from the bottom levels. However, stay clear of stocks of companies where promoters have pledged over 50 p.c. of their holding or where the company is highly over-leveraged and has huge exposure to debt.


1. Asian Paints (Present price: 2600)
Asian Paints is the market leader in the domestic paint industry, accounting for around +50% overall market share and +60% share in the decorative market. The company has clocked 20% higher than industry growth in volume terms over the last five years. Asian Paints has a strong brand, enhanced dealer network with 27000 outlets and focus on premium emulsion segment. The company has clocked a net profit of Rs.472.4 crore on net sales of Rs.4511 crore during H1FY‟12, translating into an EPS of Rs.49.25. The company‟s products have a strong replacement demand which should help it sail through tough times. With improving demographics, increasing brand awareness, we expect Asian Paints to emerge as a key beneficiary.

2. Dabur India (Present price: 100)
The brandname, Dabur has become synonymous w. The company with its wide range of products is emerging as a key player in the Indian FMCG market. With the acquisition of Fem Care Pharma and Balsara's Hygiene and Home products businesses, the company is strategically placed to reap the benefits. At present, the company is rejigging its distribution structure and increasing the number of outlets and doubling the rural reach by penetrating sparsely populated areas, the complete benefits of the same should be visible from FY‟13E onwards. Dabur India should clock an EPS of Rs.3.6 and Rs.4.3 by FY‟12E and FY‟13E respectively.

3. Dr. Reddy’s Laboratories (Present price: Rs.1550)
The company registered strong Q2FY‟12 results on the back of significant improvement in the topline. We expect this trend to continue going forward also. We expect significant improvement in earnings by FY‟13E since Russia and CIS which contribute 15% to the turnover, are expected to grow by ~20% on the back of significant volume growth in 20 key brands.

4. Gas Authority of India (GAIL) (Present price: Rs.380)
Post ~30% correction from its 52-week high levels, GAIL (India) Limited‟s share has emerged as a significant value-buy at the present levels. The company is the leader in the gas transmission and trading and continues to maintain this position going forward also. With the demand for natural gas from the end-user industry rising, demand for transportation of the same is expected to remain robust going forward. During H1FY‟12, the company registered a PAT of Rs.2079.1 crore on net sales of Rs.18566.4 crore, translating into an EPS of Rs.16.4.

5. HDFC Bank (Present price: Rs.425)
The Bank has grown it‟s net profit consistently at a CAGR of +30% over the last several years. More commendable is the fact that this growth has been achieved along with consistent improvement in asset quality. The Bank‟s loan book is equally divided between the retail and the corporate segments. In the corporate segment, HDFC Bank finances mostly working capital loans in case of corporates. The Bank has a strong liability franchisee with CASA ratio quoting at 47% of the total deposits. A high CASA ratio leading to effectively lower cost of funds has helped the Bank clock the highest NIMs ( next only to Kotak Bank) in the banking space. During H1FY‟12, the Bank has registered an Interest Income of Rs.12695.7 crore, an increase of 37.6% y-o-y. The net profit for the corresponding period stood at Rs.2284.3 crore, an increase of 32.5% y-o-y.

6. Idea Cellular Limited (Present price: Rs.80)
We feel that inspite of a number of policy overhangs, telecom stocks have a significant potential for appreciation going forward. We believe that tariff hikes have seen their bottom levels, which would lead to improvement in revenues as well as margins. Since Bharti is grappled with foreign debt in its books to fund the African acquisition, MTM loss on this debt would lower its PAT, Idea Cellular should emerge as a key beneficiary in the sector.

7. IndusInd Bank (Present price: Rs.230)
With the new management under the leadership of Mr. Romesh Sobti in place, IndusInd Bank‟s net profit has registered an almost eight-fold jump to Rs.577 crore in FY‟11 from Rs.75 crore in FY‟08. The Bank has clocked higher than industry growth and almost doubled the Balance Sheet size and the income earned during this period. The CASA ratio has also doubled during FY‟08-11 from 14% to 28%. The management has targetted for CASA deposits for FY‟14 stands at 34%. Over the next two years, the management has guided for almost doubling of the branch network compared to the present figure of 350. The major growth in the loan book should come from the consumer finance segment and the enhanced branch network should provide a significant opportunity to cross- sell, leading to higher growth in fee income compared to the loan book growth.

8. Infosys (Present price: Rs.2740)
Unlike in 2008, the IT sector has shown a significant resilience this time and Infosys should be a key beneficiary of the same. The depreciating rupee also augurs well for IT companies and Infosys has the highest proportion of unhedged receivables amongst the top IT players. The management has guided that it may not abe able to achieve the top-end of the guidance, however, we feel that this negative element is already being factored in the present price.

9. ITC Limited (Present price: Rs.200)
Cigarettes contributed 64% and 80% to the FMCG revenues and gross total revenues during H1FY‟12. The contribution of the cigarette segment to the consolidated EBIT stood at 80% during the same period. Cigarette sales are least impacted by factors which impact the markets in general, whether interest rates or high commodity prices. The company has been able to not only sustain volume growth inspite of hike in duties on cigarette but also maintained margins very well. ITC is the second largest hotel-chain operator and the largest paperboard and packaging companies in the country. The company has scaled up rapidly in the FMCG space, which not only requires establishment of new manufacturing operations but efficient and widespread distribution channels.

10. Sun Pharma (Present price: Rs.495)
Sun Pharma holds 4.4% market share in the highly- competitive domestic pharma market, per latest AIOCD report. The company is now ranked no.1 based on share of prescription classes of specialists. Sun Pharma has 388 ANDA filings till date with 150 ANDAs pending for approval. This is the highest number of filings by an Indian pharmaceutical company. The company has reported excellent financial numbers with net sales and PAT registering a CAGR of 28% and 27% respectively. The company has clocked a 30% growth in topline during H1FY‟12. We expect the same trend to continue for the balance portion of the year also.


11. Arshiya International(Present price: Rs.125)
Arshiya International has pioneered the unique concept of setting up Free Trade Warehousing Zones(FTWZ) in the country with first FTWZ already set up at Panvel. The company‟s other FTWZs are expected to come up at Khurja in the north, Nagpur in Central India and Chennai in South India which would be eventually linked through the rail route. With it‟s own FTWZs, distriparks and rail network, Arshiya should be able to provide an end-to-end logistics connectivity to all its clients.

12. Delta Corp (Present price: Rs.57)
With 3 out of 6 off-shore licenses in the state of Goa, Delta Corp is the largest and the only listed casino operator in the country. The gaming positions in the company are expected to increase from the present figure of 690 to +3000 over the next 9 to 12 months on the back of addition of a new vessel, Horseshoe, to the existing fleet and commencement of operations of “Thunderbird Resorts” in Daman. The company has got the best parcel of land in Sri Lanka and would be setting up a five-star hotel and a casino.

In addition, the company also operates real estate business in Kenya through a 40: 60 JV with a subsidiary of Reliance Industries Limited. Delta Corp would build around 1.2 million square feet of real estate space in Kenya.

13. Goodyear India (Present price: Rs.295)
Goodyear has one of the strongest Balance Sheets in the tyre sector. The net cash and cash equivalent of the company stood at Rs.217.9 crore, translating into a cash per share of Rs.94.4. This figure is equivalent to more than 30% of the present price of the company. The company has posted a PAT of Rs.44.3 crore on net sales of Rs.1118.8 crore during 9MCY‟11. We expect the operating profit margins to improve going forward on the back of fall in the price of its key raw material, natural rubber. The parent company had come up with a delisting offer in April 2010 which eventually did not go through.

14. MRF (Present price: Rs.6900)
The company has got an excellent Balance Sheet with reserves to equity ratio quoting almost 400 times. The company has posted a net profit of Rs.338.7 crore on net sales of Rs.9743.9 crore during FY‟10(September year-ending company). On a small equity of Rs.4.24 crore, the EPS stood at Rs.798.8. At the present price, the stock is available at 8.3x its TTM earnings. We expect the company to post an improvement in margins going forward on the back of weakening rubber prices.

15. Navneet Publications (Present price: Rs.51)
The company is one of the pioneers in education field and has a strong foothold in the states of Maharashtra and Gujarat. The company has almost doubled its revenues and PAT over the five year period FY06-11. Navneet has a debt-free Balance sheet and recently the company has entered the Andhra Pradesh education sector by acquiring a stake in K-12 which manages schools under the brandname – Gowtham.

16. NIIT Technologies (Present price: Rs.180)
NIIT Technologies has a strong order book and the company‟s valuations are compelling at the present levels considering a turnover of Rs.1400 crore and a PAT of Rs.182 crore, translating into an EPS of Rs.30.9 in FY‟11. During H1FY‟12, the company has clocked a turnover of Rs.700 crore and a PAT of Rs.87 crore. The net cash and cash equivalent in the company‟s book as on September 30, 2011 stood at Rs.25 per share (~14% of the present price). The company has a decent dividend yield of approximately ~4.5%. NIIT Technologies has had an excellent dividend payment track record. The dividend ratio for FY‟11 stood at 75% and payout ratio stood in excess of 25% over the last five years. We expect this payout policy to continue in future also.

17. Pfizer (Present price: Rs.1100)
This MNC pharma company has a debt-free, cash-rich Balance Sheet with net cash and cash equivalent totaling to Rs.294 per share. This is equivalent to ~27% of the present price. The company has clocked a PAT of Rs.88.2 crore on net sales of Rs.513.7 crore during H1FY‟12. This translates into an EPS of Rs.65 for FY‟13. At the present price, the stock is available at 12x 1-year forward earnings(after knocking off the cash). The stock has corrected by one-third from it‟s 52-week high levels.

18. Polyplex Corporation (Present price: Rs.155)
There is significant value in Polyplex Limited after the correction in the stock price over the last one and a half year. The company has a clean Balance Sheet and is funding the expansion plans in Thailand, USA through internal accruals only. During H1FY‟12, the company has posted a net profit of Rs.124.6 crore on net sales of Rs.1251.9 crore, translating into an EPS of Rs.38.9.

19. Vivimed Laboratories (Present price: Rs.225)
Vivimed Laboratories has registered phenomenal growth in performance over the last few years. The net sales of the company stood at Rs.416 crore in FY‟11 from Rs.276 crore in FY‟09. The net profit during the same period has grown from Rs.19 crore to Rs.48.8 crore. The company has acquired Spain-based Uquifa and has joined the big league of pharma companies to clock a turnover in excess of Rs.1000 crore in FY‟13 ( compared to Rs.650 crore in FY‟12). The company would be able to maintain the PAT margins equivalent to ~10%, a figure which it had been maintaining in the past also, leading to a two-fold growth in PAT compared to FY‟10 figure of Rs.31.01 crore.

20. VST Industries (Present price: Rs.1080) 
VST Industries has reported the best sales and PAT figure for FY‟11 in it‟s history inspite of an increase in duties on cigarette imposed during the Union Budget 2010. The company has been clocking a dividend pay-out ratio in excess of 80% over the last three years and we expect the same trend to continue going forward also. During H1FY‟12, the company has registered a PAT growth of 61%. We expect the company to end FY‟12 with an EPS of atleast Rs.78 and a dividend of Rs.60 per share. This translates into a dividend yield of ~5.5%. VST Industries has a debt-free, cash-rich Balance Sheet to the tune of Rs.134 per share as on September 30, 2011.


>BRITANNIA INDUSTRIES: Engages in the production and sale of bakery and dairy products in India and internationally; Holds an equity stake in Dynamix Dairy

Q2 FY12 Results Update
Britannia Industries has posted net profit of Rs 378.50 million for the quarter ended Sept 30, 2011 as compared to Rs 318.30 million for the quarter ended Sept 30, 2010, representing rise of 18.76%. Net sales surged by 18.05% to Rs.12956.80 million from Rs.10975.30 million as compared to same quarter last year. Total income has increased from Rs 13051.80 million for the quarter ended Sept 30, 2010 to Rs 11072.40 million for the quarter ended Sept 30, 2011, representing increase of 17.88%. The EPS of the company is stood at Rs.15.84 for each share for the quarter ended Sept 2011.


  • At the current market price of Rs.446.25, the stock is trading at 31.38 x FY12E and 27.30 x FY13E respectively.
  • Earning per share (EPS) of the company for the earnings for FY12E and FY13E is seen at Rs.14.22 and Rs.16.35 respectively.
  • Net Sales and PAT of the company are expected to grow at a CAGR of 20% and 19% over 2010 to 2013E respectively.
  • On the basis of EV/EBITDA, the stock trades at 16.71 x for FY12E and 14.81 x for FY13E.
  • Price to Book Value of the stock is expected to be at 8.58 x and 6.53 x respectively for FY12E and FY13E.
  • 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.504.00 for Medium term investment.


>RELIANCE INDUSTRIES LIMITED: Refining Segment, Oil & Gas Exploration, Production Segment, Petrochemical Segment & Deal with TV18

Bottom line to hit, due to cyclical weakness in refining & Petchem margins

A) Refining Segment
1) GRM for Q3FY12 would remain in range of $5.9-6.9/bbl. Pressure on middle distillates will continue for remaining period of the year due to addition of new refining capacity in CY12 of 0.8mnbpd across the world.
2) Petcoke & Sulphur spreads are continuously in negative zone and heavy weightage to LPG, Naphtha & gasoline in RIL’s product slate is dragging RIL’s GRM discount to Singapore complex GRM ($7.8/bbl in Q3FY12).
3) Flexibility in reconfiguration of RIL’s refinery product slate is limited to 10% only
4) Arab Heavy- Light differentials are on downward trend ($3.2/bbl in Q3FY12).
5) Domestic gas (KG-D6) is totally replaced by Imported LNG (Contracted+Spot) for refinery captive power plant. Going forward we do not see any domestic gas flow to power plant.

B) Oil & Gas Exploration & Production Segment
No positive guidance on gas output from KG-D6. The company has guided for gas production to be in the range of 40-45mmscmd in FY13. Ramp up in gas production is expected only in FY14. The company is negotiating current gas price ($4.2/mmbtu) with government, which is based on crude prices at level of $60/bbl. The company is demanding the revision of the prices to the current crude prices of $110/bbl. Shale gas production is expected to touch 350-400bcf by the end of FY14. The company is also planning to acquire more shale gas assets in US. Q3FY12 avg gas output is seen at 41mmscmd.

C) Petrochemical Segment: Polyester & Polymer deltas are showing negative trend during Q3FY12.

D) Deal with TV18:-RIL plans to invest in the range of Rs 1700-4000cr in TV18/Network18 promoter group. Network18 and TV18 together are issuing rights worth Rs 4000cr to fund the ETV acquisition. Independent Media Trust (IMT) would be set up for the benefit of RIL which has agreed to fund the promoters of Network18 and TV18 through OCDs to enable them to subscribe to the above proposed rights issue 

We strongly believe 1) The company would maintain GRM of $ 7.5/bbl over H2FY12 2) RIL to benefit from preferential access to TV18 and Network18 content for its 4G services. 3) Proper deployment of cash and strong balance sheet. Hence, we maintain our BUY rating on the stock with a price objective of Rs 1020/share, an upside potential of 44%.