>ICSA INDIA LIMITED (ICICI DIRECT)

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ICSA (India) is a Rs 1100-crore company, with embedded products and infrastructure project services as offerings. The company primarily addresses the energy saving needs of Indian power
distribution companies (DISCOM) as they face huge aggregate technical and commercial losses. ICSA has unique metering products for the power sector like intelligent automatic meter reading (IAMR), theft detection device (TDD), distribution transformer monitoring system (DTMS), which are patented and others for pipeline application.

Business model
The company has almost 70% of its current order book of Rs 2010 crore from infrastructure project and services while the rest is from embedded solution, which is executable over the next 18 months. Previously, the company used to derive almost 65% of its revenue from embedded products but due to delay in release of funds by the government for Accelerated Power Development and Reforms (APDRP) II scheme and Rajiv Gandhi Grameen Vidyutikaran Yojna scheme (RGVVY), the company’s revenue mix has changed completely. The company has a strong in-house built in capabilities with an R&D team of 120 people, who do high value added work, beginning from research, product design, product development, product testing and pilot deployment. Low value services like manufacturing of hardware and deployment is outsourced. Therefore, it has a capital light revenue model for embedded solutions.Therefore, the embedded products business is high margin and is less capital intensive whereas the infrastructure project services are low margin and capital intensive projects. This is the reason that the EBIT margins and return ratios for the company have dipped and will be under stress in the near term.

Going forward
Since we are at the mid way mark of the Eleventh Plan proposed by the government to improve the status of DISCOMs, we believe the funds under APDRP II and RGVVY will start getting released by the end of FY10. This will help he company to get huge incremental orders for its embedded solution. This will once again change their revenue mix to 60:40 for embedded products to infrastructure services from 40:60 today. This will not only bolster its operating margin but also boost revenue growth as well as return ratios.

The company is currently trading at more than 48% discount to other midcap IT players in terms of P/E(x) FY11 EPS or EV/EBITDA(x) FY11 EBITDA. It is trading at very attractive valuations given its return ratios and huge order book size.

To see full report: ICSA INDIA LIMITED

>HARRISON MALAYALAM LIMITED (ICICI DIRECT)

MANAGEMENT MEET UPDATE

Harrison Malayalam Ltd (HML) is engaged in many businesses including tea and rubber plantations, aqua and plant tissue culture, engineering and clearing & shipping. However, tea and rubber production contribute 90% of total revenues. The company owns roughly 23,417 hectares of land. Of this, around 6,030 hectares is used for tea plantation. Almost 7405 hectares is used for rubber plantation while the rest is used for fuel wood and other plantations. HML owns nine tea estates in Kerala and one in Tamil Nadu. The company produced 17.1 million kg of tea and 12.0 million kg of rubber in FY09. HML also produces smaller quantities of a variety of other exotic horticultural crops like areca nut, banana, cardamom, cocoa, coffee, coconut, pepper and vanilla as well as limited quantities of organic tea and spices.

■ Soaring tea prices
Tea prices have surged above Rs 130 per kg, almost 30% higher than last year. A decline in tea production due to severe drought conditions in key tea exporting countries like Kenya and Sri-Lanka has resulted in a radical rise in tea prices in international markets. Simultaneously, lower area under tea cultivation coupled with truant monsoons has led to lower production in India further aggravating the situation. With incremental consumption growing at a 3.8% CAGR over 2000-2007 and the relatively lengthy gestation lag of a tea plant, which typically lasts for around five years, we believe that tea production is unlikely to register any significant growth in the near term. This, in turn, would keep tea prices firm, going forward.

■ Volatile crude increases natural rubber prices
Volatile crude prices have lead to an increase in synthetic rubber and natural rubber prices. Despite increasing imports, prices of natural rubber have remained buoyant throughout 2009 on the back of a shortfall in global production. Rubber imports by tyre companies have reached about 79,573 tonnes during April to August 2009 as compared to 24,264 tonnes during the corresponding period. A shortfall in rubber production has lead to an increase in natural rubber prices to Rs 110 per kg. This would result in a significant improvement in the company’s margin from the rubber segment as the rubber division contributed 50% of the company’s revenue.

To see full report: HARRISON MALAYALAM

>GLENMARK PHARMACEUTICALS (CITI)

Upgrade to Hold: Worst Appears Behind

■ Upgrade to Hold (2M) — We believe the risk reward is more balanced post the recent underperformance & lower risk on R&D, leading us to lower risk rating to Medium. We reduce FY10/11 core biz EPS estimates by 9%/5% (building in a slower pace of recovery) but raise TP to Rs250 (roll over to 15x Sep '10E).

■ Lower risk; More reasonable valuations — We were worried about the risk from Oglemilast-related newsflow. With that behind us, and following a c.17% fall in the last two weeks, we believe risk is lower. At c.12x FY11E EPS, there appears to be no upside built in for R&D, while all R&D cost is expensed. We thus view the risk on Glenmark to be similar now as that in most other generics stocks.

■ Encouraging trends in the base biz — Growth has picked up in all markets in 1QFY10, as credit availability and currencies stabilized, leading to a smart QoQ rise in financials. We believe the worst is behind, with forecast sales and PAT FY09E-11E CAGR of 19% and 35% respectively. Cash flow is set to rise, as capex and working capital are reined in, allowing Glenmark to correct its high leverage.

■ Don’t rule out R&D — Despite setbacks on two of its lead NCEs, Glenmark’s R&D pipeline could be a key value driver. Its capabilities have been validated by three deals with large partners (income: US$117m). Progress on melogliptin and crofelemer would be key to watch out for. With our view that no value is currently built in for R&D in the stock, this could provide a clear catalyst.

■ Why not a Buy? — There are multiple moving parts in Glenmark's biz. While early signs on the core biz indicate that the worst may be behind, it is difficult to gauge the pace of recovery. R&D is another factor that could swing margins either way. Thus, while more positive than before, we await confirmation that the early signs of recovery are sustainable before getting more constructive.

To see full report: GLENMARK PHARMACEUTICALS

>BANK OF BARODA (ICICI DIRECT)

A pure banking play...

Bank of Baroda (BoB) is the third largest public sector bank (PSB), differentiating itself on account of higher share of international business, conservative approach and qualitative growth. We expect its profits to grow at 18% CAGR over FY09-FY11E to Rs 3117 crore while market share is likely to consolidate at current levels.

■ Business growth: Conservative yet consistent
The balance sheet of BoB grew at 26% CAGR to Rs 227406 crore. This resulted in an improvement in its market share from 3.5% to the 4% level in the last three years in spite of stiff competition from private banks. BoB has cautiously not reduced BPLR below 12%. Most loans
are now priced near PLR, reducing sub-PLR loans gradually, whereby margins are maintained at 2.6-2.7%. We anticipate balance sheet growth of 17% CAGR over FY09-FY11E to Rs 310995 crore. The bank’s stressed assets (GNPA and restructured) are lowest among comparable PSBs at approximately 4.2% of advances. This gives some comfort on asset quality concerns.

■ Productivity improving due to CBS implementation and employee mix
In spite of high growth, employee strength has reduced from 39529 to 36838. This hasimproved productivity whereby business per employee is up 28% CAGR to Rs 7.6 crore in FY09 from Rs 4.6 crore in FY07. Also, profit per branch has improved from Rs.40 lakh to Rs 80 lakh in three years.

■ Valuation…
We value the core business of the bank at 1.1x FY11E ABV, a discount of 20% to it P/ABV multiple of 1.4x as per single stage Gordon growth model due to uncertain market conditions. We have considered cost of equity at 13.9%, perpetual growth of 3% and sustainable RoE of 18%. This translates into fair value of Rs 514 per share for the bank. With RoE of 17-18%, RoA of over 1%, NIM@ 2.6-2.7%, well controlled asset quality and a well diversified loan book, we believe the bank’s valuations at 0.95x is quite attractive. We value its 25% stake in UTI. AMC at Rs 18/ share (valued @4% of weighted average AUM for the previous three months). Hence, on an SOTP basis we have arrived at a target price of Rs 532 and rate the stock as an OUTPERFORMER.

To see full report: BANK OF BARODA