Preferred Picks - 19 Mar 09

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Preferred Picks

19 March 2009 Private Client Research

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INDEX Company

Current Price

Last Report

Recomendation

(Rs)

Date

Price (Rs)

Target (Rs)

Banking Axis Bank HDFC Bank Union Bank

345 828 128

12-Jan-09 12-Mar-09 27-Jan-09

487 799 144

645 1035 196

BUY BUY BUY

Construction IVRCL Infrastructure Nagarjuna Construction Patel Engineering Sunil Hi-tech Engineers

115 47 120 66

2-Feb-09 28-Jan-09 2-Feb-09 18-Mar-09

110 50 147 55

222 100 227 100

BUY BUY BUY BUY

Engineering / Capital Goods Voltas Thermax AIA Engineering Nitin Fire Protection Everest Kanto Cylinder

39 177 113 167 97

9-Mar-09 29-Jan-09 21-Jan-09 30-Jan-09 30-Jan-09

33 158 130 149 102

55 230 200 275 175

BUY ACCUMULATE BUY BUY BUY

Information Technology Infosys Technologies Mphasis TCS

1295 192 515

27-Feb-09 2-Mar-09 16-Jan-09

1236 168 510

1430 242 617

BUY BUY BUY

Logistics Gateway Distriparks

51

19-Feb-09

47

80

BUY

Media Zee News

30

5-Mar-09

29

41

BUY

Metals & Mining Sesa Goa

85

30-Jan-09

81

123

BUY

NBFCs LIC Housing Finance

204

5-Feb-09

206

310

BUY 2

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BANKING AXIS BANK (CMP: Rs.345) Positives ¾ Consistency in its earning growth (grown over 30% YoY in 34 out of the last 36 quarters) ¾ Robust asset quality despite strong growth in assets during last couple of years ¾ One of the highest CASA (38%), next only to HDFC Bank & SBI. ¾ Diversified loan book – well spread across all segments.

Last Report Price (Rs) Target (Rs) Reco

ABV (Rs) P/ABV (x) EPS (Rs) P/E (x)

: : : :

12 Jan 2009 487 645 BUY

FY08A 238.2 1.4 29.9 11.5

FY09E 265.2 1.8 45.2 10.8

FY10E 308.4 1.6 58.6 8.3

¾ Has strong technology, expanding distribution franchise ¾ & large array of products

Risks ¾ Ripple effect of financial crisis in US & Europe ¾ Downside risk arises from hard-landing of our economy ¾ Further deterioration in the asset quality

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BANKING HDFC BANK (CMP: Rs.828) Positives ¾ Consistency in its earning growth (grown around 30% YoY in past 27 quarters)

Last Report Price (Rs) Target (Rs) Reco

¾ One of the highest CASA (low cost deposits) & NIM in the industry ¾ Robust asset quality despite strong growth in assets during last couple of years ¾ Has strong technology, expanding distribution franchise & large array of products

ABV (Rs) P/ABV (x) EPS (Rs) P/E (x)

: : : :

12 Mar 2009 799 1035 BUY

FY08A 317.1 2.6 40.1 20.6

FY09E 326.8 2.5 49.7 16.7

FY10E 376.8 2.2 59.1 14.0

Risks ¾ Ripple effect of financial crisis in US & Europe ¾ Expensive acquisition of CBoP and prevailing integration risks. ¾ Downside risk arises from hard-landing of our economy ¾

Higher unsecured loan exposure could lead to faster deterioration in asset quality

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BANKING UNION BANK (CMP: Rs.128) Positives ¾ Operating efficiency among the best in the industry

Last Report Price (Rs) Target (Rs) Reco

: : : :

27 Jan 2009 144 196 BUY

¾ Improved focus on margins & profitability ¾ Strong presence in western India, the financial hub of the country. ¾ Healthy asset quality

Risks

ABV (Rs) P/ABV (x) EPS (Rs) P/E (x)

FY08A 108.8 1.2 27.5 4.7

FY09E 135.7 1.1 32 4.5

FY10E 166 0.9 35.7 4.0

¾ Ripple effect of financial crisis in US & Europe ¾ Downside risk arises from hard-landing of our economy ¾ Deterioration in the asset quality, if any, would require higher provisioning. ¾ Need for recapitalization because of its lower tier-I capital.

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CONSTRUCTION IVRCL INFRASTRUCTURE (CMP: Rs.115) Positives ¾ Diversified business model hedges company against slowdown in any particular segment ¾ Commissioning of BOT projects from FY10 to add to the revenue growth ¾ Stock is currently trading at very attractive valuations

Last Report Price (Rs) Target (Rs) Reco

: : : :

2 Feb 2009 110 222 BUY

EPS (Rs) P/E (x)

FY09E 15.8 7.3

FY10E 18.7 6.1

Key risks and concerns ¾ Slowdown in order inflow ¾ Delay in payments from IVR Prime Urban developers ¾ Steep increase in working capital requirements

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CONSTRUCTION NAGARJUNA CONSTRUCTION (CMP: Rs.47) Positives ¾ Robust order book and strong order inflows provide revenue visibility for next 2 years ¾ Operating margins are expected to remain stable on account of focus on high margin projects as well as diversification ¾ Stock is currently trading at very attractive valuations

Last Report Price (Rs) Target (Rs) Reco

: : : :

28 Jan 2009 50 100 BUY

EPS (Rs) P/E (x)

FY09E 7.2 6.5

FY10E 8.8 5.3

Key risks and concerns ¾ Slowdown in order inflow ¾ Delays or cancellation in projects carried out in joint venture with Maytas Infra ¾ Steep increase in working capital requirements

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CONSTRUCTION PATEL ENGINEERING (CMP: Rs.120) Positives ¾ Company is among the key players in niche hydro power segment.

Last Report Price (Rs) Target (Rs) Reco

: : : :

EPS (Rs) P/E (x)

FY09E 15.4 7.8

¾ Operating margins higher than industry due to focus on high margin hydro power projects ¾ Stock is currently trading at very attractive valuations

2 Feb 2009 147 227 BUY FY10E 17.4 6.9

Key risks and concerns ¾ Higher than expected increase in borrowings ¾ Slowdown in order inflow

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CONSTRUCTION SUNIL HI-TECH ENGINEERS (CMP: Rs.66) Positives ¾ Power capacity addition not to be impacted by current economic slowdown

Last Report Price (Rs) Target (Rs) Reco

¾ Niche player for doing Balance of Plant (40%) work of power plants ¾ Forayed into chimney and cooling tower business SHEL can now on its own do 80% of BOP work

EPS (Rs.) PE (x)

: : : :

18 Mar 2009 55 100 BUY

FY09E 22.0 3.0

FY10E 25.0 2.6

¾ Successfully forayed into EPC with 30 MW EPC contract ¾ Order book at Rs.13.0 bn, which is 4.2x FY08 revenues of Rs.3.1 bn – clear visibility

Key Risks ¾ Prolonged slowdown in economy would lead to cancellation or significant delays in orders of private players which would negatively impact the financials. ¾ Significant economic slowdown would impact the demand for power. Thus, it would also impact the company's growth prospects.

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ENGINEERING / CAPITAL GOODS VOLTAS (CMP: Rs.39) Positives ¾ Order book growth is healthy providing 41 months of revenue visibility for the projects segment. ¾ Business model is not asset and working capital intensive. Debt free and significant cash surplus equivalent to Rs 10 per share. ¾ Attractive valuations at 5.8x FY09. Price target of Rs 55.

Last Report Price (Rs) Target (Rs) Reco

: : : :

9 Mar 2009 33 55 BUY

EPS (Rs) P/E (x)

FY09E 6.7 5.8

FY10E 7.2 5.4

Concerns ¾ Real estate slowdown in the Middle East is a concern. ¾ Risk of longer payment cycles and bad debts as real estate developers are facing credit crunch

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ENGINEERING / CAPITAL GOODS THERMAX (CMP: Rs.177) Positives ¾ Thermax is one of the market leaders in the industrial boilers segment and we see limited risk to this position.

Last Report Price (Rs) Target (Rs) Reco

: : : :

EPS (Rs) P/E (x)

FY09E 22.5 7.9

¾ Healthy revenue visibility of 14 months of FY09 revenues ¾ The company also generates significant cash as reflected by its negative working capital of 21 days (cash positive). Cash on books at the end of FY08 was Rs 6.2 bn equivalent to Rs 52 per share. Moreover, the company is debt-free.

29 Jan 2009 158 230 ACCUMULATE FY10E 24.7 7.2

¾ Dividend yield at the current price works out to 4.6%.

Concern ¾ Subdued near-term earnings growth outlook. ¾ Roll back/deferment of capex plan should hurt growth prospects

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ENGINEERING / CAPITAL GOODS AIA ENGINEERING (CMP: Rs.113) Positives ¾ Near monopolistic in nature in mill internals for cement business in India.

Last Report Price (Rs) Target (Rs) Reco

¾ Capacity expanded from 650000 TAP to 165000 TPA. ¾ Looking at backward integration to ensure steady raw material supply

EPS (Rs.) PE (x)

: : : :

21 Jan 2009 130 200 BUY

FY09E 18.1 6.2

FY10E 21.5 5.3

¾ Commenced supplying mill internals for the mining industry (annual replacement demand of 2.5 MMTPA) ¾ Debt free company with ~3.5% dividend yield

Key Risks ¾ Lower then expected capacity utilisation could lead to lower revenues and profitability. ¾ Adverse forex movement could impact the financials in the short term as more then 50% of revenues are out of exports.

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ENGINEERING / CAPITAL GOODS NITIN FIRE PROTECTION (CMP: Rs.167) Positives ¾ Stabilized operations of 500,000 CNG cylinders per annum plant at Visakhapatnam ¾ CNG Cylinders for automobiles great opportunity – supreme court order on 28 cities – also strong demand from middle east and neighboring countries

Last Report Price (Rs) Target (Rs) Reco

: : : :

30 Jan 2009 149 275 BUY

EPS (Rs.) PE (x)

FY09E 27.0 6.2

FY10E 32.5 5.1

¾ Steady growth in fire protection industry with Intelligent building management solution for malls ¾ Acquired 40% stake in profit making Dubai based fire protection company

Key Risks ¾ Seamless steel is the main raw material for making cylinders. Thus, any increase in prices or disruption in its availability could impact the profitability of the company. ¾ Further slowdown in the economy could delay the infrastructural development which in turn would impact the fire protection business of the company.

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ENGINEERING / CAPITAL GOODS EVEREST KANTO CYLINDER (CMP: Rs.97) Positives ¾ Leader in CNG cylinder manufacturing in India

Last Report Price (Rs) Target (Rs) Reco

: : : :

30 Jan 2009 102 175 BUY

¾ CNG Cylinders for automobiles great opportunity – ¾ supreme court order on 28 cities – also strong demand ¾ from middle east and neighboring countries

EPS (Rs.) PE (x)

FY09E 15.0 6.5

FY10E 18.0 5.4

¾ Acquired CP Industries USA for Jumbo cylinders ¾ Order book at Rs.6.5 bn, which is 1.2x FY08 revenues of Rs.5.3 bn – clear visibility

Key Risks ¾ Any delay in its various expansion plans would lead to flat or marginal growth for the company. ¾ Seamless steel is the main raw material for making cylinders. Thus, any increase in prices or disruption in its availability could impact the profitability of the company.

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INFORMATION TECHNOLOGY INFOSYS TECHNOLOGIES (CMP: Rs.1295) Positives ¾ Best suited to handle slow-down / recession in US, though near term sentiment to remain impacted

Last Report Price (Rs) Target (Rs) Reco

: : : :

EPS (Rs) PE (x)

FY09E 102.9 12.6

¾ Several levers to restrict impact on margins ¾ Relatively less hedged; rupee depreciation to help ¾ Valuations not demanding

27 Feb 2009 1236 1430 BUY FY10E 103.9 12.5

Risks ¾ Deeper recession in developed economies will impact earnings estimates ¾ Cross currency movements may impact US GAAP performance ¾ Further client specific issues, if any

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INFORMATION TECHNOLOGY MPHASIS (CMP: Rs.192) Positives ¾ Consistent high volume growth in past 2 – 3 quarters

Last Report Price (Rs) Target (Rs) Reco

: : : :

2 Mar 2009 168 242 BUY

EPS (Rs) PE (x)

FY08 24.3* 7.9

¾ HP support is the major differentiator, we believe ¾ EBIDTA margins at 26% - better than most large peers ¾ Available at 5.3x FY09 (October end) earnings; attractive, in our view

FY09E 36.2 5.3

* Annualised. FY08 was a 7-month year

Risks ¾ Cross currency movements may impact US GAAP performance ¾ Further client specific issues, if any ¾ Deeper recession in developed economies will impact earnings estimates ¾ Potential conflict of interest with captive operations of HP in India

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INFORMATION TECHNOLOGY TCS (CMP: Rs.515) Positives ¾ Largest company in the sector, better suited to handle slowdown / recession in US, though near term sentiment to remain impacted ¾ Provisions already made for all known client specific issues, till date

Last Report Price (Rs) Target (Rs) Reco

: : : :

16 Jan 2009 510 617 BUY

EPS (Rs) PE (x)

FY09E 55.0 9.4

FY10E 59.9 8.6

¾ Valuations not demanding at 8.6x FY10E earnings. ¾ Value TCS at a discount to Infosys, due to differences in growth rates, margins and relatively aggressive accounting policies of TCS

We prefer Infosys over TCS Risks ¾ Deeper recession in developed economies will impact earnings estimates ¾ Cross currency movements may impact US GAAP performance ¾ Further client specific issues, if any

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LOGISTICS GATEWAY DISTRIPARKS (CMP: Rs.51) Positives ¾ Own rail linked ICD at Delhi and recently commissioned Ludhiana ICD – third ICD at Faridabad to be operational by December 2009

Last Report Price (Rs) Target (Rs) Reco

: : : :

EPS (Rs.) PE (x)

FY09E 8.1 6.3

¾ Commenced operating high margin EXIM trains ¾ Expanding from currently 13 trains to 20 trains by March 2010 ¾ Dominant CFS player at India's Premier port – JNPT (Own +Punjab Conware) CFS also at Chennai, Vizag and Kochi.

19 Feb 2009 47 80 BUY FY10E 9.0 5.7

¾ Acquired snowman frozen foods for Cold chain ¾ At Rs.51, the stock is trading at 5.7x FY10E EPS of Rs.9.0. ¾ Recommend BUY with a Target Price of Rs.80

Key Risks ¾ Further significant slowdown in economy would impact the port volumes and thus it would impact the operations of the company. ¾ In order to fund the capex, GDL or its subsidiary i.e. GRFL could raise funds that may lead to equity dilution.

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MEDIA ZEE NEWS (CMP: Rs.30) Positives ¾ Ensuing general elections expected to channelise advertising spends and mitigate to a extent, slowdown in key sectors. ¾ Better placed than peers given competitive positioning of bouquet. ¾ Relative resilience of regional ad spends v/s national may also help. ¾ Long term potential exists in pay revenue stream given continuing strong growth in DTH market and addressability. ¾ Valuation at 11x FY10 reasonable, ZNL only broadcaster that is expected to provide growth, in a challenging macro. Only BUY in sector.

Last Report Price (Rs) Target (Rs) Reco

EPS (Rs.) PE (x)

: : : :

5 Mar 2009 29 41 BUY

FY09E 2.1 14.0

FY10E 2.6 11.3

Risks ¾ A sharp slowdown in the economic growth trajectory, which will impact advertising revenue growth and company financials negatively. ¾ Loss in viewer ratings and competitive positioning. ¾ Hyper-competition impacting player and industry profitability negatively. ¾ Lower than estimated pick-up in the subscription revenue stream.

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METALS & MINING SESA GOA (CMP: Rs.85) Positives ¾ Exploration results of iron ore mines at Goa and Karnataka which might be announced in next 2 months would considerably boost the iron ore reserves. ¾ Sesa Goa has ~ Rs.22000mn in cash & cash equivalents and Rs.10000mn as advance to group company and has zero debt. Balance sheet strength provides cushion to any further unexpected turmoil in the global economy. ¾ Iron ore sales volumes for Q4 would be close to 5 to 5.5 MnTe which would help in decent earnings for Q4FY09E. ¾ Almost 90% of the iron ore sales is happening in the spot markets, so the hit in earnings from sharp fall in contract prices stands reduced. ¾ Most concerns are discounted, in our opinion, the downside risks get limited.

Last Report Price (Rs) Target (Rs) Reco

EPS (Rs) P/E (x) EV/EBITDA (x) P/B (x)

: : : :

30 Jan 2009 81 123 BUY FY09E 23.1 3.7 1.3 1.5

FY10E 22.5 3.8 0.8 1.1

Concerns ¾ Iron ore sales from Orissa and Karnataka mines has been continuously disappointing and puts company’s aggressive volume guidance at risk. ¾ In last few months, Indian and Australian iron ore miners have gain market share in exports to China at the expense of world’s top iron ore major Brazil’s Vale. This trend might not last for long. 20

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NBFCs LIC HOUSING FINANCE (CMP: Rs.204) Positives ¾ Strong parentage of LIC of India, which holds 41% in the company.

Last Report Price (Rs) Target (Rs) Reco

: : : :

EPS (Rs) P/E (x) P/ABV (x)

FY08 45.6 4.5 1.0

¾ Mortgage loan growth to remain healthy during FY09 and FY10 at ~23% and ~20% respectively. ¾ Improving NIMs coupled with improving asset quality, would support strong earning growth.

5 Feb 2008 206 310 BUY FY09E 56.7 3.6 0.9

¾ Attractively priced at 0.9x its FY09E ABV, with decent return ratios.

Concerns ¾ Delayed revival in retail real estate sales may impact future growth. ¾ Change in domestic liquidity conditions may impact cost of funds and threfore profitability.

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Thank You

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Research Team

Name

Sector

Tel No

E-mail id

Dipen Shah

IT, Media

+91 22 6621 6301

[email protected]

Sanjeev Zarbade

Capital Goods, Engineering

+91 22 6621 6305

[email protected]

Teena Virmani

Construction, Cement, Mid Cap

+91 22 6621 6302

[email protected]

Apurva Doshi

Logistics, Textiles, Mid Cap

+91 22 6621 6308

[email protected]

Saurabh Gurnurkar

Media, IT

+91 22 6621 6310

[email protected]

Saurabh Agrawal

Metals, Mining

+91 22 6621 6309

[email protected]

Saday Sinha

Banking, Economy

+91 22 6621 6312

[email protected]

Sarika Lohra

NBFCs

+91 22 6621 6313

[email protected]

Shrikant Chouhan

Technical analyst

+91 22 6621 6360

[email protected]

K. Kathirvelu

Production

+91 22 6621 6311

[email protected]

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