>RELIANCE CAPITAL (INDIABULLS)

Downgrading to Hold after the recent price performance
For the FY 2009, Reliance Capital (RCap) reported a moderate 21.6% yoy growth in the operating income; however, net profit growth was relatively muted at 0.7%, primarily on account of increased general insurance claims and a higher cost of funds in the consumer finance business. We have a positive outlook on the Company based on its diversifying business profile, under-penetration in financial services segments along with aggressive approach towards expanding the business segments. However, we are downgrading the stock from a Buy to Hold after the recent share price performance, although we are raising our fair value to Rs. 897 per share based on our SOTP valuation methodology.

Growth in life insurance premiums decelerating; however, profitably in general insurance looks likely For the FY 2009, Reliance Life’s new business premium increased 27.7% yoy to Rs. 35.1bn against the decline of 6% for the industry. The NBAP margin for the FY 2009 increased to 20.9% compared to 18.8% for the nine months ended December 2009. For FY 2010, we do not expect the insurance business to see a faster growth as ULIPs - which account for a large chunk of the total insurance sales - are presently not a preferred form of investment because of the volatility in the capital market. We have assumed a growth of about 25%-30% in FY 2010.

During the year, GWP decreased 1.6% yoy to Rs. 19.1bn mainly due to economic slowdown and the ongoing focus on improved profitability and not topline revenues. Despite the increase in the claim ratio, the Company’s combined ratio declined from 129% to 114%, primarily on account of several cost-cutting measures initiated by the management.

Maintaining market share but AUM witnessing a slowdown
Average AUM decreased by 11% yoy to Rs. 809bn against the industry’s decline of 7%. Further, the proportion of equity in the total AUM declined, from 35% in FY 2008 to 29% in FY 2009, given that the retail investors are moving away from the market led by market volatility. However, with the sharp rise in capital market post elections, we expect equity proportion to increase. This may positively impact the Company’s bottom line as equity funds command a higher fee income vis-à-vis debt funds. Thus, for FY 2010, we expect the AUM to increase by around 35%-40%.

To see full report: RELIANCE CAPITAL

>MAN INDUSTRIES (SHAREKHAN)

Key points

■ A smart play on the pipe sector: With equal capacity for both HSAW and LSAW pipes, MAN Industries (India) Ltd (MIL) offers an exciting play on the Indian pipe industry. The pipe makers around the world are expected to benefit from the expected revival in global E&P capex on the back of the hardening crude oil prices and allaying concerns over the global economic scenario. The global opportunity for pipes is pegged at over $80 billion over the next few years while the domestic opportunity remains strong led by the heavy capex of GAIL, GSPL etc.

■ Strong order book: With the win of a huge order of Rs1,340 crore from the Persian Gulf, the current order backlog of the company stands at Rs2,000 crore. MIL also has L1 position in orders worth Rs1,100 crore which are likely to be awarded soon. Moreover, the margins were maintained in FY2009 despite a challenging environment and we expect them to sustain going forward as well.

■ Capacities already expanded; US plans put on hold: In the last couple of years, MIL has substantially raised its capacity to 1 million tonne currently. With its capex already completed, it does not have any meaningful capex lined up for the future. It has also put on hold its plans to set up an HSAW plant in the USA. In fact, the company has decided to buy back its FCCBs and the purchase would be funded out of the unutilised FCCB money and internal accruals.

■ Realty portfolio adds to the attraction: MIL’s subsidiary, Man Infra, is currently executing two commercial projects in Bandra and Vile Parle, and one residentialcum- commercial project at Nerul. In our valuations, we have not considered the value of the real estate portfolio as the realty business is at a very nascent stage. However, we have valued the realty projects of the group at Rs103.4 crore and if this value is included in our estimates the same could add about
Rs19 to the sum-of-the-parts valuation.

■ Attractive valuations: The stock is currently trading at about 3.1x FY2011E earnings and at an EV/EBIDTA of 1.2x, which is significantly lower than its historic average (of about 9x). With an expected revival in the industry, the valuation multiples are likely to improve. Further, its valuation gap with the larger pipe makers had widened significantly in recent times but the same is likely to narrow down. Assuming a substantial discount to the average multiple, we have valued MIL taking the average of 5x one-year forward PE multiple and 2x one-year forward EV/EBIDTA multiple. We recommend a Buy on the stock with a price target of Rs66.

To see full report: MAN INDUSTRIES

>SALORA INTERNATIONAL (CENTRUM)

Infocom disappoints

■ Revenue falls sharply: Salora International (SIL) reported sharp 48.2% YoY (25.4% QoQ) decline in revenues. This drop was mainly due to 50.4% YoY decline in its Infocom business in addition to 22.7% YoY drop in its consumer electronics division. FY09 sales fell 35.8%
YoY to Rs7.1bn.

■ EBITDA margin turns negative: With revenues plummeting to half the value, SIL’s EBITDA margin fell steeply by 627bp YoY and 338bp QoQ to -2.7%. SIL ended FY09 with a margin of 2.1%. Absolute EBITDA at Rs147mn was down 56.4% YoY. For FY09 it incurred a PAT loss of Rs2.8mn Rs242mn profit in FY08

■ Expect margins to improve: We expect SIL’s margin to improve 40bp in FY10E and FY11E on the back of 7.8% and 18.5% YoY increase in its revenue during the period, respectively. Recovery in its infocom business would primarily drive this growth. We expect its infocom business to register a growth of 9.5% in FY10E and 20.5% in FY11E.

■ Introducing FY11E, Retain Buy: A recovery in SIL’s infocom business and entry of HP products in its portfolio will provide the necessary growth opportunities during the downturn. At CMP, stock trades at 3.6x FY11E EPS of Rs10.2per share. We reiterate Buy on the stock
with target price of Rs42.

To see full report: SALORA INTERNATIONAL

>FUNDAMENTAL PICK OF THE WEEK (ICICI DIRECT)

Indraprastha Medical

Established in 1995, Indraprastha Medical Corporation has established itself well over the past 10 years. The company’s commitment to continuous improvement and focus on clinical outcomes has resulted in a significant improvement in resource utilisation. Increased focus on pathways, faster turnaround of operation theatres, decreasing length of stay and the use of minimally invasive surgeries has significantly contributed to growth in revenues while lowering cost to the patient. With a shortage of hospital beds coupled with growing medical tourism and rising demand for private healthcare services, Indraprastha Medical is well placed to leverage the growth opportunities due to its low debt-equity ratio and strong cash position.

Company Background
Indraprastha Medical is an associate company of Apollo Hospitals, in which the latter holds nearly 18.25% stake. It is a healthcare company, which operates through Indraprastha Apollo Hospital. Indraprastha Apollo, a 695-bed specialty hospital, was commissioned in December 1995 in collaboration with the New Delhi administration. The company offers various healthcares services. It provides diagnostic, medical and surgical facilities through its chain of hospitals. Its services include surgical services, dental, cardiothoracic, neuro, vascular, joint, plastic, cosmetic and general surgeries. It is India's first corporate hospital. It primarily operates in India and is headquartered in New Delhi.

Future plans
To capitalise on the long-term growth opportunity in the healthcare space, the company is expanding itself gradually. The company has recently announced plans to augment its facilities by an additional 175 beds. The project is expected to be complete within a year. It further plans to set up more than 10 satellite clinics in and around Delhi to facilitate easy availability of Apollo-type medical services to a larger cross-section of society. These clinics are slated to take the shape of mini-hospitals with all basic back-up emergency services aimed at providing posttreatment facilities to Apollo Hospitals patients. The hospital is also investing in upgrading technology. The demand for quality healthcare infrastructure and services in India far exceeds the supply. Thus, any addition to capacity would have incremental positive impact on its bottomline.

Sector outlook
In India, the demand for quality healthcare infrastructure and services far exceeds the supply. Rising literacy rates and growing healthcare awareness will further drive the demand for quality healthcare in India. This is further supplemented by the rapid increase in middle and rich segments of the population. According to Technopak Advisors report ‘India Healthcare Trends 2008’, India needs investments of $82 billion in order to fill up the long standing gap in demand and supply. The government can meet only 15% of this demand. Moreover, the public sector healthcare delivery infrastructure and facilities are in a poor state. Thus, the overall outlook for private players in this sector is expected to remain positive. Indraprastha Medical is well placed to leverage the growth opportunities due to its low debt-equity ratio and strong cash position.

To see full report: INDRAPRASTHA MEDICAL