>LARSEN TOUBRO: Presence in diversified businesses LIKE Turnkey projects, construction, engineered products & systems, electrical & electronic products & systems, IT& Engineering services, Machinery Valves etc

■ Best stock to play the Indian infrastructure theme
We believe L&T is best placed to benefit from the gradual recovery in the capex cycle, given its diverse exposure to sectors, strong balance sheet and cash flow generation as compared to its peers, which grapple with issues such as strained cash flow, high leverage and limited net worth and technological capabilities.


■ Presence in diversified businesses
Larsen & Toubro’s business as a whole are diversified in nature with the presence in different areas of businesses like Turnkey projects, construction, engineered products & systems, electrical & electronic products & systems, IT& Engineering services, Machinery Valves & Industrial Consumables, Financial Services, Shipbuilding etc would help the company to withstand the concerns in particular sectors.


■ Strong order book
As of 3QFY2012, L&T stands tall on an order backlog of 1, 45,768 crore against Rs 114,882 crore at the end of Q3 FY11 and Rs 142,185 crore at the end of Q2 FY12. With the current order book, book to book ratio (BTB ratio) stands at 3x its TTM revenue. L&T’s order book is majorly dominated by the infra (40%) and power (29%) segments. Process (15%), hydrocarbon (11%) and others (5%) constitute the balance part of the order book.


■ Outlook and Valuations: Attractive; Initiate Coverage with ‘BUY’
Larsen and Toubro (L&T) had posted good set of numbers for 3QFY2012, which mainly on account of robust top-line growth and higher other income. Order inflow for the quarter grew by stunning 28.2% to 17,129 crore covering some of the lost ground in 1HFY2012. We prefer L&T over its peers being the market leader and fundamentally the strongest infrastructure company. We maintain L&T as our top pick in the sector. Hence, we initiate a ‘Buy’ recommendation on Larsen with the target price of Rs. 1433 with a ‘Buy’ below Rs.1075 for those who have a moderate to aggressive risk appetite, as the stock looks very attractive at the current levels, given the steep price correction in the recent past and the improved outlook on the infrastructure space going ahead. Risks At the macro level, the current global economic scenario is the most worrying risk factor, as a fall of the global economy into a double-dip recession may lead to a slower growth in our economy. Apart from that, the other concerns include the stiff competition in each of the industries which would cause aggressive bidding and a drop in order inflow, persistence of the higher interest rate leading to drop etc. The company may also get affected by the delays in the execution of the long gestation projects, which might affect the cash flow from the projects that have a specific concession period. Apart from these, the increasing debt level also poses some risk to the future journey of L&T as it will increase the financial burden in the form of interest. The company’s debt to equity ratio, currently, stands at 1.52:1, which is further poised to go up as more projects are set to kick in.


To read the full report: L&T
RISH TRADER

>STOCKS FOR 2012 (HEDGE EQUITIES)

BANKING

Syndicate Bank Limited 

Investment Profile: Aggressive                                                                    Horizon: 1-1.5 Yrs

Business Summary
Syndicate Bank Limited (SBL) is a Karnataka based public sector bank that has a strong presence in the rural and semi urban locations of the country. SBL seeks to position itself as “A Small Man‟s Big Bank”.

Yes Bank Limited 

Investment Profile: Aggressive                                                                     Horizon: 1-1.5 Yrs

Business Summary
Yes Bank Limited (YBL) is a new generation private bank that is based on the „One bank‟ model that seeks to provide a slew of value added services (rather than plain vanilla transactions) over the lifecycle of its clients. Its business model is based on three key pillars namely: - Product, Knowledge and Relationship. Currently it mainly services institutional clients but is looking to become a more granular bank by 2015.

Axis Bank Limited 

Investment Profile: Moderate                                                                         Horizon: 1-1.5 Yrs

Business Summary
Axis Bank Limited (ABL) is considered to be India‟s third largest private sector bank in the country with strengths in both retail banking as well as corporate banking. It has a widespread pan-India network of 1390 branches and 6270 ATMs.




NBFC

Shriram Transport Finance Company 

Investment Profile: Aggressive                                                                  Horizon: 1-1.5 Yrs

Business Summary
Shriram Transport Finance Company (STFC) is a deposit taking NBFC primarily involved in the financing of 2nd hand and new Commercial Vehicles. It enjoys the distinction of being India‟s largest Asset Financing NBFC with a market share of 25% in the pre-owned CV (Commercial Vehicle) financing segment and a market share of 8% in the new CV financing segment.

IDFC 

Investment Profile: Aggressive                                                                      Horizon: 1-1.5 Yrs

Business summary
IDFC was incorporated on January 30, 1997 in Chennai; it was set up on the recommendations of the 'Expert Group on Commercialization of Infrastructure Projects' under the Chairmanship of Rakesh Mohan. The company focuses on developing and leveraging its knowledge base in the infrastructure space to devise and provide appropriate financing solutions to their customers. The company's strong capitalization reflects the crucial role that it plays in infrastructure development. It provides financial assistance to various segments such as power, roads, and ports, telecommunications, Information Technology, Urban Infrastructure, Health care, education Infrastructure, food and agri business infrastructure, health care and tourism. IDFC provides financing through various routes such as Senior Debt-Financing through Debentures, Mezzanine products-Subscribing to preference capital or debts, proprietary equity, private equity, Debt Capital, are amongst its product offerings.




AUTOMOBILE

Maruti Suzuki India Limited 

Investment Profile: Moderate                                                                   Horizon: 1-1.5 Yrs

Business Summary
Maruti Suzuki India Limited (MSIL) is India‟s largest passenger vehicle maker with a market share of 45%. Primarily known for its expertise in the manufacture of low cost and fuel-efficient cars, it has gradually expanded its portfolio across the 4-wheel automobile value chain with 14 brands and 150 variants.

Exide Industries Limited 

Investment Profile: Aggressive                                                                 Horizon: 1-1.5 Yrs

Business Summary
Exide Industries Limited (EIL) is the biggest lead acid battery manufacturer in the country. The company manufactures a wide range of storage batteries for industries such as automobiles, railways, telecom, power plants, solar cells and submarines (incidentally EIL is just one amongst 5 companies in the world that can manufacture submarine batteries).


CAPITAL GOODS

BHEL

Investment Profile: Moderate to Aggressive                                               Horizon: 1-1.5 Yrs

Business Summary
BHEL is the largest engineering and manufacturing enterprise in India in the energy related/infrastructure sector today. BHEL was established in 1964, ushering in the indigenous Heavy Electrical Equipment industry in India. BHEL is amongst world‟s rarest few who have the capability to manufacture entire range of power plant equipment. BHEL is maintaining a consistent track record of growth, performance and profitability since 1976-77.

Larsen & Toubro Limited 

Investment Profile: Moderate                                                                         Horizon: 1-1.5 Yrs

Business Summary 

Larsen & Toubro Limited is an Indian multinational conglomerate; The Company has business interests in engineering, construction, manufacturing, information technology and financial services. L&T is India's largest engineering and Construction Company with a dominant presence in India's infrastructure, power, hydrocarbon, machinery and railway related projects. In recent years, L&T has expanded its global presence and international projects contributed 9% of its overall order book for the 2010-11 period. Considered to be the "bellwether of India's engineering sector", L&T was recognized as the Company of the Year in 2010. L&T has featured four times in Forbes Fab 50 list of the best public companies in the Asia-Pacific region. L&T works under operating divisions of Engineering & Construction Projects, L&T Power, Heavy Engineering, Construction, Electrical & Electronics, Information Technology and machinery & Industrial products.


OIL & GAS

Gujarat State Petronet Ltd 

Investment Profile: Moderate                                                                    Horizon: 1-1.5 Yrs

Business Summary
Gujarat State Petronet Ltd (GSPL), a GSPC group company, is a pioneer in developing energy transportation infrastructure and connecting natural gas supply basins and LNG terminals to growing markets. It is the only company in India to transmit natural gas for its clients without trading in it.


To read the full report: STOCKS FOR 2012
RISH TRADER

>TRENDS IN THE INDIAN BANKING SECTOR; SYNDICATE BANK LIMITED

Intensified competition
Currently the rural market is mainly dominated by NBFCs and other unorganized sources of funding. Also PSU banks are better positioned than the private sector banks in rural Indian. Going forward one will see things changing as greater thrust from the authorities will see the share of the NBFCs and unsecured institutions diminish. Currently some of the major NBFC players enjoy strong entry barriers in niche segments such as 2ND hand CV financing, equipment finance, gold loans, etc. This is mainly so as it takes years of experience to understand this client segment and their characteristics. Banks while initially reluctant to dabble with this segment have had time to develop their expertise and will soon start foraying into NBFC dominated areas. Within the banking segment itself there will be intensified competition. The RBI is likely to dole out fresh bank licenses very soon and one could see an influx of new banks as they seek to ensure greater financial participation and inclusion.


Greater emphasis on service and technology
In this era of intense competition banks will have to position themselves differently. While there is only so much one can alter in the banking business model, the key differentiators will be service quality and technology. PSU banks which were previously believed to shirk service have stepped up their game in recent years. The importance of technology while quite obvious in any industry could prove to be a huge differentiator. Mobile banking is expected to be a huge opportunity in the years to come. According to the Boston Consulting Group, payment and banking transactions through mobile phones could reach $350 billion by 2015. While the prospect of this happening is quite far away there could also come a day where one could have a branch-less banking system.


Fee based income
At the start of the previous decade Indian banks had a very limited fee based income component. While this has changed over the years, it is still far from the global average. Now in this long term structural era of rising interest rates where banks struggle to boost their NIMs one will see the banks focusing a lot more on their fee based activities. New generation banks are well stocked to provide these services (card services, guarantees, Investment banking, escrow, letter of credit, advisory services, etc.) but PSUs haven’t resorted to this in a big way. Going forward one is likely to see more impetus on the fee based income services.


Questionable if sizeable treasury gains can be made
Treasury yields have been low for the last decade or so, infact globally it has been low for over three decades. Now with the rapid rise in commodities, inflation has remained stubbornly high, thereby resulting in bond holders demanding a greater yield to hold onto bonds. This consequently makes bond investments less than appealing (inverse relationships of bond prices and yields) and it is questionable if treasury income will therefore be as high as it was in the previous decade, particularly for those banks who stick to HTM (Held to Maturity) as opposed to MTM (Mark to market).


To sum up..
Banks who manage and allocate capital well, have robust capital and liquidity buffers, possesses exceptional risk management, alternative fee based services have wide spreads, emphasize on service quality and seek to position themselves in a niche, differentiated manner in the eyes of the customer will prosper.


Near term outlook for banks
While inflation is expected to stay above the RBI’s comfort level there has been a decline or easing off of non food inflation. Besides the high base effect of the previous year will see the inflation number trend down in the months ahead. Commodity prices are a wild card and much could depend on liquidity driven initiatives taken by the West. On the other hand, the RBI has already tightened rates considerably and credit demand has certainly fallen off. Corporates are now resorting to borrowing from the overseas markets where rates are much lower. Thus weighing both sides of the coin it is fair to say that perhaps the rate cycle may be coming to an end.


Non food Credit outlook for the year as portended by the RBI is 18% while deposit outlook is pegged at 17%. Credit quality issues could crop up in this high interest rate regime so one is expecting to see a provisioning boost up. In the previous quarter results, one could see a clear deterioration in asset quality for most banks. Restructured assets as well are expected to rise.

SECTOR

The Indian growth story- Are banks good proxies to capture this growth?

‘The Indian growth story’ a popular phrase in investor circles may appear to be increasingly trite for the skeptics off late, but if one were to actually look at the larger picture and assuage the near term fears there is genuine merit in those four words. GDP which serves as the moniker for growth may have taken some sort of beating over the last few quarters and the year end FY12 expected figure leaves much to be desired. But if one were to widen the time period there is no doubt that the country is extremely well set to figure in the upper echelons of the growth table. Experts expect GDP to be anything between 7.4% to 7.8% for the current year but the long term median is expected to be 8-9%+. According to a report by PWC, India is poised to become the 2nd biggest economy in the world by 2050, with GDP in PPP terms expected to be $43180 billion, second only to China. Growth is expected to be more balanced and inclusive (though that is not the case currently) with services, industry and agriculture all expected to play crucial roles. Banks are fitting proxies in this attractive growth story for a whole host of reasons, none more important than the fact that they serve as intermediaries between savings and investment. According to McKinsey, based on how effectively banks capitalize on India’s growth potential, the banks could account for as much as 7.7% of the country’s GDP or 2.3% of the country’s GDP. Currently the figure stands at 2.5%. In a separate report PWC shows that from 2000-2010 while the Indian banking industry grew from $250 billion to more than $1.3 trillion at a CAGR of 18% compared to the average GDP growth of 7.2% for the same time period.


To read the full report: BANKING SECTOR 


RISH TRADER

>BHEL LIMITED: a healthy order book of At the end of Q2 FY12, of INR 1,61000 crores

■ In a sweet spot due to structural deficit

Power sector plays a crucial role in the economic progress of the country given the importance of electricity in the economic activity. Currently, at the end of August 2011, the power generation capacity stood at 176,990.40 MW including the renewable energy sources such as wind, solar etc. However the country faces a peak power shortage of 13 percent as rising demand from industry, homes and shopping malls outstrips capacity growth. The energy-hungry nation needs to add over 75,000 megawatts in the five years to March 2017 to support its target of 9 percent GDP growth

■ Mammoth orders in book

Though the order inflow is muted during the year under review, BHEL has an outstanding order book of Rs. 1, 61,000 Crore as on September 2011, which comes at 3.30 times FY12E revenue, gives a clear revenue visibility for the next three years, coupled with strong execution capabilities. The company is also looking to get into agreements with many State Governments and other organizations which clearly signify the company‟s prospect for the next 3-4 years.

■ Minimal debt and cash rich company

Bhel is a low leveraged company having only 1% debt in the total financing coupled with a huge cash reserve of Rs.9000 crore, with which the company could withstand the effects of higher interest rate prevailing in the economy and finance the projects with much ease

■ Outlook and Valuations: Attractive; Initiate Coverage with ‘BUY’

Our DCF model with 15.3% discount rate values the company at Rs.400 per share giving an upside of 53.8% from the current level of Rs.260. We initiate coverage with a „BUY‟ recommendation for a target price of Rs.400. Those with a moderate to aggressive risk appetite can consider investing in BHEL at current level.

■ Risks

At the macro level, the current global economic scenario presents the most highly risk factor as any fall of the global economy into a double-dip recession can lead to a slower growth in our economy. Apart from that, the other concerns include the possibility for unusual further surge in the prices of commodities such as copper and steel, competition from the overseas players, persistence of the higher interest rate and higher coal prices causing delaying of projects etc. We expect all these concerns to ease in the medium term, which would otherwise impact the prospects of the company.

To read more about BHEL

RISH TRADER

>JSW ENERGY LIMITED (HEDGE SECURITIES)

Company Profile: JSW Energy Ltd (JSWEL) is a fast growing power services company that is part of the prestigious, $4 Billion valued Jindal South West (JSW) group. The group has diversified interests in areas ranging from steel, energy, minerals and mining, aluminum, infrastructure and logistics, cement and information technology. Formed in the year 1994, as a joint venture between the JSW group and Tractebel S.A. of Belgium, JSW Energy commenced operations in the year 2000 as an Independent Power Producer (IPP), setting up a 260 MW power generating unit. The company was initially called ‘Jindal Tractebel Power Company Ltd.’, but after Tractebel S.A. sold their stake in 2001, the company was renamed as ‘Jindal Thermal

Power Company Limited’. The company secured its current name ‘JSW Energy’ once the JSW group secured a 100% stake in the company. The company has the distinction of being the

first Independent Power Producer (IPP) to set up operations in the state of Karnataka, initially installing 2 units of 130 MW each, with both units generating power using corex gas and coal. In addition to power generation, the firm is also involved in power trading (playing the role of a

power supplier to JSW Steel Ltd. and other Power Trading Corporations), power distribution, providing operation and maintenance services, mining and the manufacturing of super

critical boilers. The company follows very strict environmental standards and its Environmental Management system (EMS) has been certified as ISO 14001 compliant by BVQI. JSW Energy is

also an ISO 9001-2000 and ISO 18001 certified company.

To read the full report: JSW ENERGY

>BALMER LAWRIE & COMPANY LIMITED (Hedge equities)

COMPANY PROFILE
Balmer Lawrie & Co Ltd is an Indian government owned entity that is managed under the guidance of The Ministry of Petroleum and Natural Gas. The company derives its name from two Scotsman (George Stephen Balmer and Alexander Lawrie) who established the firm under a partnership agreement in 1867 at Kolkata. In 1924, it then became a private company only to be converted into a public limited company in 1936. Having dabbled in a range of businesses (including tea, shipping and banking) during its formative years, it has consolidated operations over the years and is now known as a multi-product, multitechnology and multilocation conglomerate, with a strong network of local and global joint ventures and subsidiaries. The company has manufacturing facilities in Chennai, Kolkata, Mumbai, Mathura and Silvassa and international offices in U.K. and UA.E.

BUSINESS
This public sector behemoth offers a wide and diversified array of services, rendered under five broad segments namely Industrial Packaging, Logistics Infrastructure and Services, Travel and Tours, Greases and Lubricants and Others (Tea, Leather Chemicals and Refinery and Oil Field Services). Of these segments the biggest revenue growth driver is the Travel and Tours segment followed by the Logistics Infrastructure and Services sector.

Industrial Packaging: Thought this segment contributes less than 1/5th to the company’s overall revenue, it has garnered a huge reputation within industrial circles, and is considered to be the largest manufacturer of industrial package containers. The firm manufactures 165, 200 and 210 ml steel drums that are utilized for safe packing, transport and storage of goods. Utilizing its strong R&D facilities and 6 manufacturing units (Mumbai, Kolkata, Chennai, Panipat, Silvassa and Asaoti) it is able to provide a comprehensive series of drums to its diversified client base that ranges from food companies to chemical companies.

Logistics Infrastructure and Services: The Company has considerable experience in the logistics sector where its involvement dates back to the nineteenth century. It has the distinction of being the only major PSU to offer comprehensive logistic based services. The logistics segment of Balmer Lawrie is further sub-divided into the logistics infrastructure segment and logistics services segment. Under the logistics infrastructure segment, the firm offers warehousing and distributing services and maintains 3 stateof- the-art container freight stations (CFS). Due to its superior infrastructure it is able to offer value added services such as palletisation, shrink wrapping, labeling, re-bagging, repacking, sorting, inland transportation, supply chain intention is to serve as a one-stop shop for its customer’s EXIM needs. As part of its logistic services segment, the firm offers air freight services, ocean freight services, air chartering, ship chartering, express cargo movement and projects logistics management. This firm has a world-wide network in over 50 countries, managed by professionals in the logistics field and it will certainly prove to be a crucial contributor to the firm’s future prospects. Currently this segment contributes almost 24% to total revenue and this figure is expected to increase in the future.

Travel and Tours: Nearly 40% of the firm’s revenue comes from this segment and much of the company’s overall fortunes will depend on this sector. This segment of Balmer Lawrie had the unique distinction of handling the Commonwealth Youth games in 2008. The firm has a large base of IATA approved agents (1500) and over 15000 non IATA approved agents to help it service this largely fragmented industry. Revenues and profits from this firm have grown at a healthy rate over the last 5 years (Revenue CAGR of 17.1% and profit CAGR of 19% from 2005-2009) and this is mainly due to the company’s widespread network all over India.

Greases and Lubricants: This is another segment in which the company has a dominant position, being considered amongst the top 10 grease manufacturers in Asia and the largest in the country. In India 65% of the client base for grease and lubricants consists of automobile companies and the remaining 35% consists of industrial and marine companies. This unit generates sales by selling its flagship lubricant Balmerol and grease processing business and
manufacturing services for other companies.

Others (Tea, Leather Chemicals and Refinery and Oil Field Services): The other segment is the lowest contributor to the overall revenue. The tea business is one of the oldest and traditional businesses of Balmer Lawrie, but the firm has reduced its dependence on this sector. There have been suggestions that the company might do away with its tea business in the long run, but as it is a low contributor to revenue, one does not expect dramatic alterations to the firm’s overall prospects. However the company’s tea continues to be a popular product both domestically and abroad and the company is one of the largest suppliers of bulk and packet tea to Russia & CIS, West Asia and various North African countries. As part of its Leather chemicals business, the firm manufactures and markets performance chemicals for leather processing and is considered to be the market leader in fat liquors. The leather industry is essentially an export oriented industry and this segment’s performance is dependent on the performance of the export sector in general. The refinery and oil field segment provides mechanized tank and lagoon cleaning services and vapour loss prevention measures for various oil refining companies. Because these services are essentially specialized, the firm has been able to establish long standing associations with various refinery companies.

To read the full report: BALMER LAWRIE

>TATA ELXSI (HEDGE EQUITIES)

Company Profile: Tata Elxsi Limited is engaged in providing systems integration and software development services in the information technology field. From Automotive to Aerospace, Enterprise to Consumer Electronics, Entertainment to FMCG, Media to Storage, Semicon to Telecom, Tata Elxsi provide customized design solutions to companies across the globe. The Company operates in four divisions: product design services, industrial design division, visual computing labs, system integration services Tata Elxsi ensure cost-effective, time-to-market solutions through a highly motivated skilled workforce driven by strong design principles, highest levels of quality and ethical business practices.

IT Sector in India
From a few million dollars worth exports in early 1990, today India becomes the major player in global software industry. IT-BPO exports (including hardware exports) grew by 16 per cent from US$ 40.9 billion in FY 2007-08 to US$ 47.3 billion in FY 2008-09. And the government expects to grow at an annual rate of 30 percent per annum, expect s US$ 80 billion export turnover by 2011. According to NASSCOM software and IT services contributed US$ 59.6 billion this year. Springboard Research expects the Indian IT services market to remain the fastest growing in the Asia-Pacific region with a CAGR of 18.6 per cent.

DESIGNING FOR GROWTH

Global financial crisis coupled with the severe pricing pressure has affected the demand for IT services in the first half of 2009-10. But , expecting an improvement in the second half of 2009-10, and believe to be pick up in the December 2009 and March 2010 quarters. Despite the drawbacks, it is believed that the Indian information technology sector continues to be one of the sunshine sectors of the Indian economy showing rapid growth and promise.

Outlook and Scope
After a sluggishness in the business due to the global financial crisis and sluggishness in the economy, now this sector has regaining the strength as the world economy is recovering from the crisis. this sector is still a multimillion dollar industry and it is still a growth engine for the Indian economy. And the Tata Elxsi has the creative leadership in hard-core technology and strength in design. It has the ability to provide point services and end-to-end solutions across the product lifecycle with Augmenting company’s expertise capabilities.

Major Investors: SBI Mutual Fund, Reliance Capital, Life Insurance Corporation of India

Valuations: Global financial crisis has muted the growth rate of the company. Since the world economy is recovering company getting newer orders and global growth in the sales of smart-phones and increased demand for the automotive electronics has amplified the possibility for increased outsourcing of design services. All these have paved the way for a better performance for the company in coming years. At the current market price of Rs.169.70 the stock trades at 9 multiple of its FY-09 earnings and 8 multiple of FY-10E earnings, and 7 multiple of FY-11E respectively.

To read the full report: TATA ELXSI