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ENAM Securities Direct 1
NewYearPicks2011
Strictly Confidential December 31, 2010
ENAM SecuritiesDirect
Wish you all a
Happy & Prosperous
New Year 2011
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Top Picks for New Year - 2011
Therecommendedstocksareexpectedtobemajorbeneficiariesof theinfra/energy
theme & consumptionboom in India. They arebackedby strong managements,havehealthybalance sheets and some of them have corrected from their all timehighsrenderingthemcheap.Alltherecommendedcompaniesare in aposition to
reportgrowthintoplineandbottomlinegoingforward.
ENAM Securities Direct 2
NewYearPicks2011 Upside%Company CMP(Rs) Target(Rs)
CoalIndia 308 385 25%
Powergrid 97 125 29%
Elgiequipments 92 127 38%
PrismCement 52 66 27%
Whirlpool 282 355 26%
HitachiHome 217 279 28%
Redington 81 99 22%
PantaloonRetail 364 485 33%
SterliteTech 74 115 55%
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Coal India (CMP: Rs 308)
Excellentresource
play,
spotlight
on
washed
coal
CIL is undergoing a metamorphosis from a mere production driven company to a production plus
profitabilityfocusedminingbehemoth.Itissettingup111mntonnesofnewwashingcapacity for its
existingproductionand~90%ofincrementalproductionwillhave dedicatedwasheries.
Since washed coal realization is ~2.3x that of raw coal, we expect huge EBITDA margin expansion
(45% inFY17vs.27% inFY10)going forward.LedbybetterrealizationsandavolumeCAGRof6%,
weexpectEBITDAandPATtogrowataCAGRof23%and22%respectivelybyFY17.
Astrongbalancesheet withnetcashofUSD8.2bn(FY10)andconservativeaccountingpractices,the
overburden reserves of USD 2.7bn can increase book value by USD 1.8 bn (post tax) under the
proposedIFRSregime.
Ouroneyeartargetprice (basedonDCF)standsatRs385.Inthelongterm,CILhaspotentialtodeliver
23% CAGR return over next 5 years inline with earnings growth. With a target P/E of 15x and our
EPSforecastofRs62forFY17,CILcantradeatRs929 fiveyearshence.
Company MCap(Rscr)CMP
(Rs)
Adj.EPS(Rs) ROE(%) TargetPrice(Rs)
Upside(%)FY10 FY11E FY12E FY10 FY11E FY12E
CoalIndia 194,576 308 15 17 19 41 34 31 385 25
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Power Grid (CMP: Rs 97)
RoEexpansion
through
merchant
power
sales
PGCIL captures the merchant power opportunity through sale of its spare capacity on a shortterm
openaccess(ST)basis.Itchargesonanaverage~Rs0.16/kWhandretains25%oftherevenueandthere
are NORoE caps. With anexpected increase inmerchant power sales, this would aid PGCILs ROEexpansion.InFY10STcontributed~100bpstocoreRoE.
Recently,evenincaseofadelayingenerationlinkedtransmissionproject,CERChasallowedPGCILto
bill
transmission
charges
retrospectively
to
its
customer
from
the
original
date
of
commercial
operation.
ThiswashighlypositiveforPGCILasitfacedamajorriskofstrandedassetsduetodelayingeneration
linkedprojects.
We have valued PGCIL at Rs 125/shbased on P/B of 2x FY12E core invested equity in transmission
assets17%coreRoEand7%LTgrowth).
Company MCap(Rscr)CMP(Rs)
Adj.EPS(Rs) ROE(%) TargetPrice(Rs)
Upside(%)FY10 FY11E FY12E FY10 FY11E FY12E
PowerGrid 44,723 97 5 6 7 14 14 15 125 29
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Aproxy
to
Industrial
capex
Elgiisaleadingmanufacturerofcompressorscateringtoindustrieslikemining,power,transportand
textiles.Itisalsoengagedinmanufacturingofautomobileservicestationequipments.Thecompressor
industry is an oligopoly industry with only four playersElgi, Kirloskar Pneumatic, Atlas Copco and
IngersollRand.
The
industry
has
huge
entry
barriers
in
the
form
of
technology.
Elgimanufacturesawiderangeofcompressorscateringtolargenumberofindustriesthusinsulatingit
fromdownturninasingleindustry.Thecompanyisfocusingonincreasingexports(exportsaccountfor
15%oftheElgistandalonebusinesscurrently).Elgiisalsoincreasingitsinternationalpresenceandhas
acquiredSABelairwhichhasgivenitastrongfootinginEurope.Ithasastrongbalancesheetwithcash
ofRs.122cr.Elgihasbeenable toreduceworkingcapital tosales from22% inFY06 to7.5% inFY10
(onstandalonebasis).
The company is virtually debtfree and has ROE of ~25% in FY10. Compressors contribute 86% to
revenueand92%toEBITofthecompany.Thecompanyhasaveraged ~50%growthinnetsalesoverthe
last
three
quarters
on
a
standalonebasis.
We
expect
revenue
to
grow
at
a
CAGR
of
~31%
over
FY1012E(onastandalonebasis).WehavevaluedElgiatRs.127/share givinganupsideof38%.
Elgi Equipments (CMP: Rs 92)
Company MCap(Rscr)CMP
(Rs)
Adj.EPS(Rs) ROE(%) TargetPrice(Rs)
Upside(%)FY10 FY11E FY12E FY10 FY11E FY12E
Elgiequipments 1,460 92 4.2 6.4 8.0 25 33 29 127 38
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Prism Cement (CMP: Rs 52)
Goingup
the
value
chain
Indias leading integratedbuildingmaterialplayerwitha robustbusinessmodelgeneratingFCFand
sustainablecompetitiveadvantage. Presence inCentral& Eastern Region where cement demand has
grown by 19% & 17.5% respectively vs. Industry growth of 10.6% in FY 2010. Robust demand
&
superior
realization
to
benefit
from
the
next
cement
up
cycle
by
leveraging
on
its
recently
concluded
capextakingitscapacityto6.6mntonnes.
Significant ease in input cost (FY 13 onwards): Captive coal mine + reduced power tariff rates
(power surplus due to est.~ 17,000 MW), to cause quantum leap in profitability in a scenario of
increasinginputcost.Wehavenotcapturedthebenefitsarisingfromcoalmineinourvaluations.
Synergies across divisions Acquisition of RMC + TBKbusiness with ROCEs of over 15% wouldprovideastrategicroutetomarketforcementbusinesswhoseextensivenetworkcanbeusedtofurther
nurtureRMC&TBKbusinesses.
Prismisavailablemerelyat4xEV/EBITDA&6xitsFY13Eearnings.Capturingthevaluechainofallthe
businesssegmentsthroughourSOTPvaluation,wehavearrivedat apricetargetofRs.66pershare.
Company MCap
(Rscr)CMP
(Rs)
Adj.EPS(Rs) ROE(%) TargetPrice
(Rs)
Upside(%)FY11E FY12E FY13E FY11E FY12E FY13E
PrismCement 2,607 52 1.9 5.1 8.9 8 18 27 66 27
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Whirlpool (CMP: Rs 282)
Directplay
on
Indian
consumption
Whirlpool is a direct play on Indian consumption industry. The company hasbeen able to straddle
acrosssegmentsfromrefrigeratorsandwashingmachinestoair conditioners,microwavesandwater
purifiers.Focusingonboththemassandthepremiumsegmentsgivesitanedgeovertheotherplayers.
We believe there is a great potential for Whirlpool to grow considering the lower refrigerator
penetrationlevelinIndianmarket.Currently,thesizeofrefrigeratorindustryisonly5.5mnunitswith
penetrationofaround17%.Therefrigeratormarketcangrowto25mn by2020(growingataCAGRof
16%).The industry sizeofACs inFY10 isonly2.5mnunits (penetration level of only 3%)which is
poised
to
grow
to
18
mn
by
2020
(CAGR
of
22%).
Uninterrupted
power
supply
will
also
give
a
fillip
to
thismarket.
Whirlpoolhasastrongdemandpullandthecompanyisfastexpandingitspresenceintier2,3,4towns
where the growth rates are higher coupled with its strong product portfolio and large distribution
network..WebelieveWhirlpoolcanregisterasalesgrowthCAGRof22.8%fromFY1013E.Wehavea
targetpriceofRs.355(basedon18xFY13EEPSofRs.19.7)givingpotentialupsideof26%.
Company MCap
(Rscr)CMP
(Rs)
Adj.EPS(Rs) ROE(%) TargetPrice
(Rs)
Upside(%)FY11E FY12E FY13E FY11E FY12E FY13E
Whirlpool 3,577 282 13 16 20 39 33 31 355 26
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Hitachi Home (CMP: Rs 217)
Directplay
on
Indian
consumption
HitachiHome(India)isaprominentplayerinthepremiumairconditioningsegment.Thecompanyhas
twoplantsinJammuandKadiwithatotalcapacityof4lakhunits.
Webelievethemarketsizecangrowto18mnby2020from2.5mn currently(growingataCAGRof
22%) increasing the penetration to 25%(which is still lower considering Chinas penetration of
51%today).
We
believe
because
of
the
strong
brand
name
and
definitive
road
map
laid
by
the
management,
Hitachi
willpostbettergrowthandincreasemarketsharetodoubledigitsfromthecurrent67%.
LookingatthegrowthprospectsoftheHitachialongwithitsrobustfundamentals,webelievethestock
looksattractiveatthecurrentlevels.WearriveatatargetpriceofRs.279basedon14xitsFY12EEPSof
Rs.19.9,givinganupsideof28%.
Company MCap
(Rscr)CMP
(Rs)
Adj.EPS(Rs) ROE(%) TargetPrice
(Rs)
Upside(%)FY10 FY11E FY12E FY10 FY11E FY12E
HitachiHome 498 217 20 15 20 37 21 22 279 28
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Redington (CMP: Rs 81)
Smartgrowth
driven
by
BLACKBERRY
In India,demandcontinues to remain strong driven by corporate capex 3G investments by telecom
companies from H2FY11 onwards would add to the momentum. Smart phones sales continue tobe
strong.
TheNBFChasshownstronggrowthwithnodelinquencies.InInternationalmarkets,improvementin
economicoutlook&increasingshareofvalue/nonITbiz wouldleadgrowthinthelongterm.
GivenlowPCpenetration inRedingtonsoverseasmarkets MiddleEast,Africa&Turkey, longterm
demand
outlook
seems
encouraging.
Addition
of
valuebased
products
in
the
recently
acquired
Turkishentity (Arena)willaddtotheearningsvisibility overnextfewyears.
WeexpectYoYtoplinegrowthof~23%&24%inFY11E&FY12ErespectivelywithPATYoYgrowthof
~27%&19%inFY11E&FY12Erespectively(includingArena).MaintainBUYratingwithatargetprice
of
Rs
99.
Company MCap
(Rscr)CMP
(Rs)
Adj.EPS(Rs) ROE(%) TargetPrice
(Rs)Upside
(%)FY10 FY11E FY12E FY10 FY11E FY12E
Redington 3,207 81 5 6 7 14 17 18 99 22
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Pantaloon Retail (CMP: Rs 364)
Aggressiveroll
out
plans
/Financial
Restructuring
Aggressive rollout plans, ~ 2 mn sq ft p.a. (currently 12 mn sq ft) over next 3 years, along with
Same storesalesgrowthwilldriverevenuesby~22%p.a. overthenext2years.Moreoveroperating
cashflows
are
sufficient
to
fund
this
expansion.
Increasedefficiency frombetter inventorymanagement (reduce inventory/sq ftby~15%)will improve
the working capital cycle.Reduced debt through QIPproceeds,willease interest burden and drive
earningsby~55%CAGRoverthenext2years.Financialrestructuring(divestingInsurancearm)will
unlockvalue.
Keytriggerstowatchoutforwouldbe:turnaroundintheelectronicbiz,divestmentoffinancialvertical
andimprovementincapitalefficiency.WemaintainaBuyratingonthestockwithaSOTPbasedTarget
PriceofRs485/
Company MCap
(Rscr)CMP
(Rs)
Adj.EPS(Rs) ROE(%) TargetPrice
(Rs)Upside
(%)FY10 FY11E FY12E FY10 FY11E FY12E
PantaloonRetail 7,808 364 9 12 16 6 6 8 485 33
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Sterlite Tech (CMP: Rs 74)
LongTerm
Intact
SterliteTechnologiesLtd (STL) isaplayon thehighgrowthTelecomandPowersectors inemerging
markets.ParentageofSterliteGroup lends strength toSTL.TheGroup,among the lowest costmetal
producersglobally,hasanenviable track record inexecuting largeprojectscontinuously, ina timely
manner.
STL isonlyoneof67playersglobally,having technology toproduceOpticFiber fromsilica,and is
oneof the lowest costproducers in the world.Volume growth in Optic Fiber and Optic Fiber Cable
(OFC)
will
drive
margin
expansion.
We
expect
EBITDA
from
Telecom
vertical rising
to
~60%
in
FY12E.
GivenburgeoningcapexinpowersectorandValueaddpotentialthroughBOTintransmissionlineswe
expectEBITDAfromPowervertical tomoveto~40%inFY12E.Capacityexpansionwillpropelittobe
among the top3players globally in bothsegments.Given the longtermgrowthprospectswehave
BuyratingwithatargetpriceofRs115basedon13xPEFY12E.
Company MCap
(Rscr)CMP
(Rs)
Adj.EPS(Rs) ROE(%) TargetPrice
(Rs)Upside
(%)FY10 FY11E FY12E FY10 FY11E FY12E
SterliteTech 2,644 74 6 7 9 32 26 27 115 55
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Thank You !!!
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