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JULJULJULJULJUL Y 2011 Y 2011 Y 2011 Y 2011 Y 2011
Index
MOSt Value1-6MOSt Momentum7-9MOSt Mutual10-13MOSt Insurance14-15MOSt PMS16-17MOSt Commodities18-19
‘‘ Whenthe gapbetween perceptionand realityis the maximum, price isthe best’’
Dear Investor,Market movements were volatile in June. The market corrected from 18,600 to 17,400points with IIP numbers lower at 6.3% against 7.1% a month earlier, repo and reverserepo increase of 25 basis points, Indo-Mauritius tax treaty issues and concerns overthe pledging of promoter holdings in mid-cap companies. Bad news seems to bepouring in for Reliance Industries with the CAG audit report and Niko's resourcesdowngrade.The markets recovered smartly through the past eight trading sessions of June to end2% higher MoM at 18,800 due to a correction in crude prices and the government'saction in raising fuel prices, cutting duty, releasing coal blocks from "No-go" zonesand conditional clearance to the Cairn-Vedanta deal.4QFY11 was marked by widespread earnings downgrades, hurting equity valuations.We expect earnings to stay weak in 1QFY12, causing headwinds for meaningful upmoves in markets.1QFY12 numbers starting from the second week of July are to be seen as June isanother tough quarter for earnings. We expect PAT growth to be modest even in2QFY12 and 3QFY12 at 16-18% before picking up in 4QFY12 to reach 25%. Marketswill be positively surprised if FY12 earnings estimates remain largely unchanged afterthis earnings season.We expect inflation to peak in June-July and then gradually moderate. The RBI'smonetary tightening is also expected to pause after 3QCY11. These factors, coupledwith fresh reform impetus by the government (Parliament session in August will becrucial for this), augur well for the markets.The markets have been consolidating in a narrow range over the past 18 months withglobal headwinds, strained government finances and interest rates at a decade high.Our model portfolio reflects our positive investment bias as we believe another quarterof consolidation at current levels will make markets attractive. Our earnings estimatesfor FY12 and FY13 still imply a strong 18% CAGR. Our top large-cap bets are
ICICIBank, Bajaj Auto, NTPC, Infosys
and
Tata Steel.
Other key additions to the portfolioare
Lupin, DLF, BPCL
and
Yes Bank.
Happy investingSincerely yours,
Rikesh ParikhVice President
From the desk ofRikesh Parikh
Snapshot on Value Investing
MOSt
Wealth-2-
Midcap Research
An Extract
Central Bank Of India
Central Bank of India (CBOI) has 3rd largest network of branches(3800+) after State Bank of India and Punjab National Bank andCBOI has balance sheet size in excess of
`
2tn. The marketcapitalisation per branch for CBOI is
`
2cr, which is lowest in theindustry, with industry average of
`
6.2cr. We believe that thecurrent valuations are not discounting the huge physical presenceand the business potential, which it presents.
Improvement in RoA(
Return on Assets)
a key trigger:
CBOI's return on total assets between FY06-11 has been in therange of 0.4%-0.7%. The average ROA for PSU space in FY11was1%+. We believe that the improvement in efficiency was, dueto i) more business per branch and ii) more focus on otherincome combined with lower NPLs (Non Performing Loan) andstable NIMs(Net Interest Margin) will result in improved ROAfor CBOI, going ahead. We expect the ROA to be 0.9% in FY12and will eventually reach ~1%+ in coming years, which willbridge the valuation gap it has with peers.
Robust business growth :
Central Bank's advances grew at 23% year on year (YoY) inFY11. We expect the bank to achieve NII(Net Interest Income)& PAT CAGR of 21% and 34% respectively, over FY11-13.Business growth remains strong for CBOI and with strongfranchise we expect growth momentum to sustain. Strongoperating profits and management guidance of moderation inslippages augurs well for bank's future profitability.
Valuation Attractive, BUY
We expect CBOI to report EPS of
`
30/36 during FY12E/13E andABV(Adjusted Book Value) of
`
139/
`
167 during FY12E/FY13E.It trades at 0.9x/0.7x FY12E/13E P/ABV, which is at discount inexcess of 30% as compared to stocks listed in PSU bankingspace. We believe, with improvement in RoA and RoE, thevaluation discount with PSU Banking space is set to narrow. Werecommend BUY with 12 month target price of
`
208 (P/ABV1.5x FY12E, P/E 6.9x FY12E)
Gruh Finance
GRUH Finance (a subsidiary of HDFC Ltd. holding ~61%) provideshousing finance to customers in deeper geographical pockets in semiurban and rural areas.
Loan book/PAT CAGR of 23%/24% over FY11-13:
Between FY08-11, GRUH's disbursals and loan book have grown38% and 34% respectively. We expect GRUH to register a 23% growthin its loan book and 24% CAGR in PAT during FY11-13.
Net Interest Margins to be maintained at current levels :
GRUH's asset quality is one of the best among housing financecompanies. The Net NPAs are NIL since last 5 consecutive years.Loan loss provisions have been in the range of 0.1% - 0.7% ofadvances over the last 5 years. Its provisions for standard assets aremore than required even after recent increase in requirementsby NHB.GRUH's PAT has CAGR of 31% over the last 10 years. Hereon,broadening of customer base and geographic diversification will bringin scale benefits through lower operational costs, which will in turntranslate to greater traction in net profits. GRUH is available at 16x/ 12x FY11/FY12E EPS & 5.4x/4.3x FY11/FY12E ABV. We believe, currentvaluations will roll over the next year owing to strong parentage andhigh quality predictable growth, which brings in an upside potentialof ~25% over next year. Recommend ACCUMULATE with target of
`
508. (15xFY12e EPS & 5.2xFY12eBV) in 12 months.
Midcap Research StocksTotal
Stocks Intitiated33Partial/Booked Profit11Open Positions28
Performance of Midcap Research Stocks
We have booked profit in
Eclerx, Unichem
,
CMC
,
Ajanta Pharma
,
AmaraRaja
and
Page Industries
. Partial profit booked in
Deepak Fertilsers
,
GEShipping, Nesco
and
Bajaj Corp
.
Snapshot on Value Investing
MOSt
Wealth-3-
Model Portfolios
AGGRESSIVE - High Risk, High ReturnsScripMBP*Wtg.*
Infosys3000H SBI2500H Sterlite Industries180HCentral Bank135HTata Steel625HBHEL2100MBharti Airtel400MBGR Energy500MM&M750MTata Motors DVR600MNagarjuna Constructions90M Sintex Industries190MYes Bank350MCash10Total100
Our Aggressive Portfolio works on the principle of ‘no pain no gain’. The target returns arehigh at 30%+. Portfolio includes commodity, cyclical and small-cap stocks.
Select the portfolio that best suits your risk profile
The Sensex ended June 2011higher by 2% MoM after a sharprecovery of 7% during the last two weeks of June due to policyreforms by the government in the form of its increasing LPG anddiesel prices, duty cuts and a sharp decline in crude prices.Capital goods gained 6% MoM (LT up 11% and BHEL up 5%)due to strong order inflows. The FMCG and banking sectors gained5% and 2% respectively. The oil & gas sector corrected 4% MoM(Cairn fell 8%, Reliance fell 5%, ONGC fell 2.5%). Cairn reactednegatively to the renegotiation of the Cairn-Vedanta deal and dueto pre-conditions put up by the CCEA for approval of the deal. Ifthe royalty precondition is implemented, it will lower Cairn India'svaluation by ~
`
55/share. Reliance corrected due to CBI action onthe CAG report and a government roadblock to further capex inthe KG-D6 block.Tata Motors DVR replaced MRF in our aggressive portfolio andLupin replaced GSK Pharma in our defensive portfolio. BPCLreplaced IOC in our moderate and defensive portfolios as IOC willbe relatively subdued given the FPO. We are adding Central Bank in our defensive portfolio with high weightage. We have reducedthe weightage of BHEL in all our portfolios to medium as thegovernment has announced an FPO.After these changes we will be invested to the tune of 90% in theaggressive, moderate and defensive portfolios. We will use thecash to invest in stocks during the month after first quarter results.
MBP*:Maximum Buying Price. One should not buy the stock if Price is above MBP.Wtg.*:Weightage refers to the size of the position recommended. H-10%, M-5%
MODERATE - Medium Risk, Medium ReturnsScripMBP*Wtg.*
Infosys3000H SBI2500H Sterlite Industries180HTata Steel625HCentral Bank135HM&M750HPower Grid110HBHEL2100MBharti Airtel400MYes bank350MBPCL680MCash10Total100
Some moderation is achieved in this portfolio by investing in large and growth stocksavailable at value. The aim is to generate 20%+ annualized returns with less risk.
DEFENSIVE - Low Risk, Low ReturnsScripMBP*Wtg.*
Infosys3000H SBI2500H Sterlite Industries180HM&M750HPower Grid110HICICI Bank1150HCentral Bank135HBHEL2100MGAIL500MBharti Airtel400MBPCL680MLupin460MCash10Total100
Our Defensive portfolio works on the principle of balanced growth to outperform themarket. The aim is to get annualized returns in excess of 15% taking minimal risks.
TOP PICK TOP PICK TOP PICK
Allocation (%)SectorAgg.Mod.Def.
Automobiles101010Banking252525Capital Goods1055Construction5--IT101010Metal202010Oil & Gas-510Other5--Pharma-5Telecom555Utility1010Cash101010
Grand Total100100100
Additions or deletions of stocks are being communicated through our morning conferencecalls, Most Market Action emails or on AWACS during market hours.
Snapshot on Value Investing
MOSt
Wealth-4-
India Strategy
An Extract
July 11
DUSK or DAWN?
The full picture's not yet clear … but the scenes aregetting betterIndian markets underperform in 1HCY11:
The BSE Sensex closed 1HCY11 at 18,800 levels, down 8% overDecember 2010. A late rally towards June-end helped Indianmarkets to recoup part of the losses made over the last few months.India has been among the most underperforming markets duringthis period, led by heightened concerns on inflation and slowingindustrial activity. During this period, FY12 earnings estimates havebeen cut by 5%, and FII flows have been negligible at USD1bn v/s USD23bn in 2HCY10 and USD7bn in 1HCY10.
Biased for DAWN:
Our model portfolio reflects our positive investment bias, as we believethat another quarter of consolidation at current levels will make marketsattractive. Our earnings estimates for FY12 and FY13 still imply astrong 18% CAGR. Our Economist expects inflation to peak in June-July and then gradually moderate thereafter. RBI's monetary tighteningis also expected to pause post 3QCY11. These factors, coupled withany fresh reform impetus from the government (Parliament session inAugust will be crucial for this), dawn well for the markets.
1QFY12 - A tough quarter for earnings:
June quarter will mark another tough quarter for earnings. Whileaggregate earnings seem healthy with PAT growth (excluding RMs)of 15% YoY, the growth is not widespread. Excluding Oil & Gas,PAT growth is sub-8%. Most sectors are likely to report a drop inEBITDA and PAT margins. We expect PAT growth to remain modesteven in 2QFY12 and 3QFY12 at 16-18% before picking up in 4QFY12to 25%.
Aggregate PAT to grow 15% YoY; Sensex PAT 11% YoY
1QFY12 is set to be a tough quarter in terms of corporate earnings.The key highlights are:
•
Aggregate PAT growth (ex RMs) is modest at 15% YoY
•
But this is almost single-handedly driven by upstream oil.Excluding Oil & Gas, PAT growth is less than 8% YoY
•
12 of 15 sectors will see de-growth in EBITDA and PAT margins
•
1QFY12 Sensex PAT growth low at 11%
•
This is the second in the series of lowest 4 consecutive quarters ofSensex PAT growth excluding global crisis period.
Some of the key macro assumptions for 1QFY12 earnings:
•
Interest rates have increased by an average of 50bps over 4QFY11.The total interest cost of MOSL Universe is estimated to increase by12.6% over 4QFY11, post a 7.5% CAGR in 2HFY11. We modelaverage interest costs for corporates to be higher by 180bps in FY12over FY11.
•
Indian rupee is unchanged in June-end over March-end levels at44.5. We model similar levels of 44.5 for rest of FY12.
•
Oil prices have averaged USD116 in 1QFY12 vs USD105 in 4QFY11.We model FY12 average at USD105, implying ~USD100 averagefor the balance 9 months of the year. Our metal price assumptionsare unchanged in FY12 over 1QFY12.
1QFY12 Sensex PAT growth low at 11%:
•
We expect Sensex Sales growth of 24% YoY, EBITDA growth of 16% YoY and PAT growth of 11% YoY. The growth ex SBI's one-off clean-up mode is much healthier at 16% YoY.
•
The dominance of Oil & Gas is visible here too - ONGC accounts for35% of PAT growth followed by Reliance with 21%.
•
The top five PAT growth Sensex companies are expected to be SterliteIndustries (+62%), ONGC (+36%), HDFC Bank (+32%),ICICI Bank (+25%) and Bajaj Auto (+24%).
•
The bottom five PAT growth companies are expected to beSBI (-45%), DLF (-27%), RCom (-27%), Bharti (-16%) andRCom (-9%).
•
This is the second in the series of lowest 4 consecutive quarters ofSensex PAT growth ex global crisis period
Top bets:
Meanwhile, sectors where valuations have corrected and/orheadwinds are expected to subside will likely perform well. In ourmodel portfolio, we are raising Autos to Overweight, increasingexposure to NBFCs, and introducing several mid-caps. Our toplarge cap bets are
ICICI Bank, Bajaj Auto, NTPC, Infosys
and
Tata Steel.
Other key additions to the portfolio are
Lupin, DLF,BPCL
and
Yes Bank.