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Indian Union Budget review 2010-2011

By Angel Broking

 

Finance Minister, Mr. Pranab Mukherjee, managed to do the unexpected in the Budget. In what was largely being feared as an exercise that could have put some friction to the recovery that the Indian economy is currently witnessing, it actually turned out that the Finance Minister has managed to effectively conclude this exercise in a highly balanced fashion. This has left a lingering 'feel-good factor' in the minds of most segments of the society; be it corporates, individuals, economists, etc.

Some of the important features of Budget 2010-11 were:

GDP: Despite the expected negative growth contribution from the Agriculture sector, which forms over 15% of India's GDP, the Indian economy is expected to end the year with a growth of 7.2% yoy. Further, while the immediate target is to get back to the 9% growth rate trajectory, the FM expressed confidence that even double-digit growth is possible, aided by private investments. FY2011 GDP growth is projected at 8.5%, which we believe is achievable given the recovery in the consumption cycle and the consequent expected recovery in the investment cycle.

 

 

 

 

Fiscal Deficit: As expected, the FM laid down a clear roadmap for achieving fiscal consolidation, which was one of the big concerns for the Indian economy. While the Fiscal Deficit is expected to settle at about 6.9% for FY2010, it is expected to be reduced to 5.5% in FY2011 and further to 4.8%, 4.1% and 3% in the ensuing three years hence. Thus, fiscal deficit is estimated to stand reduced from Rs4.1lakh cr in FY2010 to Rs3.8lakh cr in FY2011E. Expected Tax revenue buoyancy and proceeds from Disinvestment and the 3G auction are expected to help the government achieve this objective. We believe that the laying down of a clear roadmap to achieving fiscal consolidation will send the right signals to the global community and is a step in the right direction towards earning improved sovereign credit ratings for the country. Moreover, lower fiscal deficit will also ensure that the government borrows less from the market for deficit financing, in turn putting lesser upward pressure on interest rates.

 

 

 

 

Disinvestment: Encouraged by the response received to the issue of government paper in FY2010 and recognizing this source of revenue as an opportunity that can be effectively explored, the FM has set a higher target from disinvestment proceeds in the coming fiscal. While the government is expected to earn about Rs25,000cr from its disinvestment programme in FY2010, it expects to raise about Rs40,000cr in FY2011 from the sale of shares through IPOs in companies like Coal India, NMDC, Satluj Jal Vidyut Nigam along with some follow on public offers (FPOs). We believe that such receipts would help the government meet its responsibilities towards the social sectors along with keeping a tab on the fiscal deficit position of the country.

Total Expenditure: Another factor that has aided the control in fiscal deficit is the mere 8.6% yoy increase in Total expenditure outlay from Rs10.2lakh cr in FY2010BE to Rs11.1lakh cr in FY2011BE. Within this, while the plan expenditure is expected to increase by 15% yoy to Rs3.7lakh cr, the non-plan expenditure is expected to rise by 6% yoy to Rs7.4lakh cr. Notably, the limited increase in total expenditure could be attributed in part to the fact that FY2010 witnessed the government bear the additional impact of the 6th Pay Commission revision as well as higher spending through the stimulus packages announced by the government.

Direct Taxes: This was a major surprise delivered by the FM in the Budget. Contrary to expectations of no change in tax rates or tax slabs considering that the implementation of the Direct Tax Code (DTC) is on the anvil, the FMs move of a major overhaul in the Personal Income Tax slabs was a welcome surprise. This will put an additional disposable income of upto Rs51,500 in the hands of the consumer, which in turn will encourage greater spending by the consumers and also take care of the partial withdrawal of stimulus measures by the government.

 

 

 

Apart from the above, to promote savings as well as to ensure their utilisation for the thrust area of infrastructure, a deduction of an additional amount of Rs20,000 for investment in long-term infrastructure bonds was announced. This would be over and above the existing limit of Rs1lakh on tax savings. Also, the surcharge on domestic companies was reduced from 10% to 7.5% even as MAT was increased from 15% to 18%. These, along with the other direct tax announcements are expected to result in a net revenue loss of Rs26,000cr for FY2011.

Indirect Taxes: As far as the indirect taxes were concerned, while the expected 2% hike in Excise Duty came through, the FM maintained status quo on Service Tax at 10%, which was another positive for the market. However, as always, with the aim of widening the service tax net considering that over 50% of the economy is services led, some new segments of the economy have been brought under this tax. These, along with the other indirect tax announcements are expected to result in a net revenue gain of Rs46,500cr for FY2011.

Other announcements: As far as the announcements pertaining to the roadmap for implementation of the GST and the DTC was concerned, the FM merely expressed his "earnest desire" to implement the former while indicating that the government is "aiming" to implement the DTC from April 1, 2011. This was what was broadly being anticipated by us in wake of the lack of consensus still apparent between the Centre and the States pertaining to various issues/discussions pertaining to the GST and the DTC.

Verdict: The markets have already given thumbs up to the Budget as the Sensex soared by over 400 points before giving up some gains. What has aided market sentiments is the fact that the expectations had been quite low in the weeks prior to the Budget. Also, the apprehensions with respect to the extent of the stimulus withdrawal possible in the Budget had kept market participants shying away from investing. However, not only was the stimulus much gradual than anticipated, the FM has managed to please a large section of the economy without compromising on fiscal responsibilities, which was accepted well by the market. Thus, at the current juncture, one can safely conclude that there seems to be no brake on the momentum being witnessed in the economy as the FM has been calculative enough to initiate a move towards fiscal prudence without jeopardizing the country's growth prospects.

 

 

Agriculture

The Union Budget 2010-11 has once again turned out to be a pro-Farmers' Budget. The Finance Minister (FM) has chalked out a strategy to counter food inflation, plans to boost farm production, promote balance usage of fertiliser, reduce overall subsidy burden, reduce food loss and promote the Food Processing Sector. The FM has increased the agriculture credit target by 15% from Rs325,000cr in FY2009-10 to Rs375,000cr for FY2010-11. FM has also granted Rs400cr to extend the Green Revolution to the Eastern region of the country. Last year, the FM had announced short-term loans for crops at the rate of 7%. The current Budget further specifies that if the farmers made the payment on a timely basis, interest rate would stand reduced by 200bp to 5%. The FM has extended the dateline for loan repayment for farmers by six months from December 31, 2009 to June 30, 2010.

The new Fertiliser Policy announced recently concurs with the FM's focus on reducing the Subsidy burden and alleviating the long-term food security problem. However, absence of new guidelines encouraging new fertiliser plant (especially in case of Urea) was the minor setback in the Policy. Further, we expect Irrigation Sector and Water Infrastructure spend to increase substantially as the Budget has increased allocation for the Rashtri Krishi Vikas Yojana by Rs300cr for Irrigation and Rs66,100cr towards rural development. The governments’ plan to set up 5 mega food park projects, in addition to the 10 already under construction would provide further impetus to sector.

 

 

 

 

 

Automobile

Union Budget 2010-11 came in marginally better than expected for the Automobile Sector. With the government keen on increasing its tax base, the Budget hiked Excise Duty by 2% to 10% (from 8% earlier). The industry however, was expecting the duty hike to the extent of 4%. Similarly, the ad valorem component of Excise Duty on large cars, multi-utility vehicles and sports-utility vehicles increased by 2 percentage points to 22%, though impact of the same would not be very significant.

Broad measures like thrust on rural, infrastructure and road development would benefit the Sector to clock consumption-based growth in volumes. Another positive for the Auto companies was the weighted increase in research and development (R&D) exemption from 150% to 200%, which would further encourage R&D within the Sector. The MAT rate has been increased from 15% of book profits to 18%, which is negative for companies like Tata Motors, Mahindra and Mahindra (M&M) and Ashok Leyland.

 

 

 

 

Banking

The Union Budget 2010-11 generally contained positive measures for the Banking Sector, especially for PSU Banks. There was the usual increase in Priority Sector lending targets, continuation of various forms of interest subventions, etc. But the real stand-out points were the possibility of new banking licenses being awarded to private players and NBFCs, as well as the estimated decline in market borrowings by almost 13%.

The Centre's Fiscal deficit has been targeted to be brought down to about 5.5% in FY2011 and as low as 4.1% by FY2013. The decline in Fiscal deficit appears realistic, as it is predicated on tax buoyancy from rising corporate profits (Rs45,000cr increase), 3G auctions (Rs40,000cr) and divestments (Rs40,000cr). This will help in graduating the rise in interest rates, going forward, once credit growth starts gaining momentum in FY2011E.

 

 

 

 

 

Capital Goods

The Budget 2010-11, though it did not have many significant direct measures for the Capital Goods sector, it sent a positive signal with regards to the continued impetus being provided to the Infrastructure and Power Sector of the country. The government's relentless focus to commit increased resources to Infrastructure development in the country should augur well for the Capital Goods sector in the long run.

As regards the specific demand by BHEL and L&T to increase import duty on foreign equipment, which cited the lack of a level playing field for domestic manufacturers, the Finance Minister has ignored the same and kept the rates unchanged.

Nonetheless, the government has increased the allocation to programs promoting renewable and clean energy sources, which should be positive for companies such as Moser Baer, Suzlon Energy etc.

 

 

 

 

 

Cement

Various measures introduced in the budget to stimulate rural growth in infrastructure and an increased allocation in various infrastructure projects is expected to sustain the demand; In all Rs1,73,552cr has been provided for infrastructure development.

Excise duty on cement increased from 8% to 10% for Cement prices above Rs 190 per bag. The specific rates of duty applicable to portland cement and cement clinker have also been adjusted proportionately upwards.

The Industry had requested for abatement of 55% on the MRP of the cement bags. The industry's demand was completely unaddressed during the budget 2010-2011. Although the budget was silent in addressing the demands of the cement industry, various measures introduced in the budget to stimulate rural growth in infrastructure and an increased allocation in infrastructure and housing incentives will help sustain the demand

 

 

 

 

FMCG

 

The Union Budget 2010-11 continues with its thrust on Rural Development. The approach of the Government focuses on increasing the disposable income in the hands of the people, by reducing indirect taxes and by expanding public expenditure on programs like the Mahatma Gandhi National Rural Employment Guarantee Scheme and Rural Infrastructure.

The Finance Minister has envisioned Fiscal consolidation for FY2010-11. As part of the Fiscal consolidation, the MAT rate has been increased from the current 15% to 18% of book profits, and there are various structural changes in the customs and excise duties.

Finally, the revision in Personal Income Tax Slabs is positive iterms of boosting savings and consumer spending, which is macro positive for the entire Media sector.

 

 

 

 

 

Hotels

The Union Budget 20010-11 has provided impetus to the tourism sector, by granting investment-linked deduction to new hotels with a 'Two Stars' rating and above, under Section 35AD of the Income Tax Act. We believe that the announcement to be positive for the industry. The income tax incentive allows a 100% deduction in respect of the whole of any expenditure of capital nature (other than on land, goodwill and financial instrument) incurred wholly and exclusively, during the previous year in which such expenditure is incurred. The investment-linked deduction will be applicable to hotels that start functioning after April 1, 2010. The proposed change is likely to result in a lower tax burden for hoteliers in expansion mode and which have capital expenditure lined-up in the years to come.

However, the other expectations of the industry, like the grant of infrastructure status, increase of the depreciation rate on hotel buildings to 20%, extension of section 80ID benefits to hotels across countries were not granted in the Budget.

 

 

 

 

 

Infrastructure

The Union Budget 2010-11 continued to lay stress on physical infrastructure development, citing it as one of the key catalysts in maintaining and pump priming the economic growth rate. The Finance Minister (FM) has provided 46% (Rs1,73,552cr) of the total Plan allocation for infrastructure development in line with the yearly targets. Allocation for Road Transport has been raised by over 13% to Rs19,894cr, whereas allocation required for improving Railway infrastructure has been upped by 6.0%.

IIFCL, a government established Infra Finance company has been authorised to refinance bank lending to infrastructure projects, which is expected to more than double over FY2011. The take-out financing scheme announced in last year's Budget is expected to initially provide finance for projects worth Rs25,000cr over the next three years. The FM also announced tax deductions on investments in long-term Infrastructure bonds, to the tune of Rs20,000 pa. (under a new Section 80CCF) besides the existing limit of Rs1lakh under Section 80C.

 

 

 

 

 

Media

The Union Budget 2010-11 is overall positive for the Media industry, particularly for Film and Distribution companies.

The Customs duty would now be charged only on the value of the carrier medium (cinematographic films or digital media) and the customs duty on the balance value will be exempt, which is positive for Film and Distribution companies. Moreover, the import status provided at a concessional customs duty of 5%, with full exemption from special additional duty to the initial setting up of "Digital Head End" equipment by multi-service operators, will positively impact Distribution companies in specific and the Broadcasting industry as a whole.

 

 

 

 

 

Metals

Overall, the Union Budget 2010-11 was neutral for Metal and Mining companies. The partial withdrawal of the stimulus package in the form of an increase in excise duty to 10% from the current levels of 8% is likely to have a Neutral impact, as it would be passed on to the end user industries. The proposal to introduce a competitive bidding process for allocating coal blocks for captive mining and setting up a Coal Regulatory Authority is likely to facilitate the speeding up of the coal allocation process. Additionally, the present custom duty of 5% on steel, copper and aluminium was kept unchanged.

Export duty on iron ore was kept unchanged, which was positive for mining companies like Sesa Goa and NMDC. A clean energy cess of Rs50/tonne on coal produced in India and imported coal is likely to increase the cost of production marginally.

The government's continued focus on rural and infrastructure spending in the Budget would be Positive for the overall Metal Sector, as it would help boost demand for metals in the country. The Government increased fund allocation for the road transport sector by 13% to Rs19,894cr and for railway infrastructure by 6% to Rs16,752cr.

 

 

 

 

 

Oil & Gas

The Union Budget 2010-11 was a non-event for the Oil and Gas Sector. In line with our expectation there was no mention on the deregulation of Auto fuel prices in the Budget.

Customs Duty on crude and petroleum products has been increased to garner more funds for the government. Similarly, Excise Duty on petrol and diesel has been increased by Rs1/litre. However, with OMCs passing through the increased tax, the impact on them is neutral.The increase in Customs Duty is likely to benefit ONGC and Cairn India due to increase in import parity crude prices. We believe, with the hike in duties, chances of potential deregulation have further reduced.

MAT rate has been raised from 15% to 18% thereby affecting RIL and Cairn India as it is likely to increase the tax outflow. However, the tax surcharge has been reduced from 10% to 7.5%, which is a positive for the full tax paying companies. Similarly, the reduction in surcharge will also help companies with high dividend payout. Thus, ONGC and GAIL stand to benefit from this measure.

 

 

 

 

 

Pharmaceutical

The Union Budget 2010-11 is a non-event for the Pharmaceutical Sector as the positive on the R&D front is negated by the increase in MAT rate. The Finance Minister (FM) finally increased the weighted deduction on the 'in-house' R&D to 200%, which would incentivise the Pharma companies to increase there spend on R&D and in turn accelerate the growth momentum. Further, the tax surcharge on Domestic companies has been reduced from 10% to 7.5%.

On the negative front, the MAT rate has been increased from 15% to 18% thereby affecting most of the companies under our coverage. We do not expect the Tax expense in P&L to increase as all companies claim MAT credit. However, the tax outflow is likely to go up. As for Excise, the rate on API has been increased by 2%, which would marginally increase the input cost for the Pharma companies.

In a bid to provide affordable Healthcare to the underprivileged, the FM increased the Plan allocation for the Ministry of Health & Family Welfare by Rs2,766cr to Rs22,300cr for FY2011.

 

 

 

 

 

Power

The Union Budget 2010-11 reiterated that the government accords the highest priority to capacity addition in the power sector. The Budget also noted that the framework for the induction of supercritical technology in the large capacity power plants of NTPC is now in place.

The budget also said that the Mega Power Policy has been modified, and is consistent with the National Electricity Policy, 2005 and the Tariff Policy, 2006, which would help in lowering the cost of generation and the cost of power purchased by distribution utilities.

The Budget also said that it proposes to introduce a competitive bidding process for allocating coal blocks for captive mining, to ensure greater transparency and increased participation in production from these blocks.

 

 

 

 

 

Retail

The Union Budget 2010-11 had no significant new initiatives specially aimed at the sector; however, we believe that the budget will have a positive impact on the sector due to various other policy measures announced. Increase in the tax exemption limits will lead to a higher disposable income in the hands of people, thereby leading to higher consumption of goods and services.

We expect Titan Industries, Shoppers Stop and Pantaloon Retail to witness a marginally positive impact due to the outright exemption from additional duty of customs of 4% on watches, ready-made garments in pre-packaged form and those intended for retail sale.

The reduction in excise duty on rhodium from 10% to 2% is likely to be positive for Titan, while the change in customs duty on gold and platinum is expected to have a neutral impact on Titan.

 

 

 

 

 

Real Estate

The Budget is a Neutral for the Real Estate Sector. Service Tax will be levied by builders to prospective buyers for providing preferential location and other amenities other than vehicle parking. This will lead to increase in prices for such properties.

The Budget also announced extension of 1% interest subvention on housing loans up to Rs10lakh where the cost of the house does not exceed Rs20lakh. 80IB has been extended by one year for pending housing projects approved before March 2008. This extension of 80IB would have been positive if allowed for forthcoming projects as well as most of the projects launched before March 2008 are nearing completion and revenues from the same have already been booked in the P&L.

The Budget announced extension of tax exemption by six months up to July 2010 for profits derived from the business of a two, three or four star category hotel and a convention centre located in the National Capital Territory (NCT) of Delhi and the districts of Faridabad, Gurgaon, Gautam Budh Nagar and Ghaziabad, which will benefit Anant Raj.

 

Increase in allocation for Rajiv Awas Yojana (RAY) for the slum dwellers and urban poor to Rs1,270cr from Rs150cr will benefit players like HDIL and Orbit Corp.

 

 

 

 

Software

The Union Budget 2010-11 was a low key affair for the Software Sector. The Budget skipped mentioning extension of fiscal benefits under the STPI Scheme for Exp/ort of Software Services, which is due to expire in 2010-11.

However, the Software companies in the business of providing services for school education are expected to benefit from the increased allocation of funds for school education by the Budget. The Finance Minister (FM) also increased outlay for Unique Identification Authority of India (UIDAI) projects, which would benefit the Indian Software vendors working on such e-governance projects in the domestic market.

Hike in the Minimum Alternate Tax (MAT) from 15% to 18% of book profits would result in opportunity lost on increased cash outflow.

 

 

 

 

 

Telecom

The Union Budget 20010-11 was a low key event for the Telecom Sector. Even though there were no major expectations from the Budget, increase in the MAT rate came as a sentiment dampener for the competition-stressed Telecom Industry. The hike in MAT rate from 15% to 18% of book profit would further strain the cash flow of the players, who are in dire need of funding ahead of the 3G and BWA auctions in the coming fiscal.

However, the Budget was largely favourable for the rural population. This would indirectly benefit the Telecom players, as overall development would lead to increased consumption and penetration of mobile telephony in the rural market.

 

 

 

 

 

Agriculture

 

Bayer CropScience (BCS)

- BCS is a leader in the Indian Agrichemical Sector with a market share of 23%. We believe there exists substantial opportunity for BCS to grow its Domestic business considering the abysmal penetration of Pesticides in India.

- BCS's Export Revenues registered robust 32.2% CAGR during CY2005-FY2009. Around 80% of the company's Export Revenues from outsourcing by Bayer AG's group companies. This indicates the company's strong ability to grow internationally despite its parent having a global presence.

- BCS has shut down its Thane plant post extending a VRS scheme to the employees of the plant. Currently, the plot (around 108 hectares (ha) as per media reports) is lying vacant and could come up for sale at appropriate valuations.

Valuation

At current levels, the stock is available at attractive valuations of 13x and 12x FY2011E and FY2012E Earnings, respectively. We have arrived at a SOTP Target Price of Rs713, which includes value of BCS's Core business (Rs612/share at 12x FY2012E EPS), and 50% discounted value of the Thane land (Rs101/share, post-tax). We maintain a Buy on the stock.

 

 

KS Oil (KSO)

- KSO is the largest player in the Indian mustard oil category with share of 11% in overall market and 30% share in the Branded Segment. KSO has been the biggest beneficiary with the introduction of VAT, as the Unorganised Segment (competing on tax evasion) finds it difficult to compete with the Organised players due to inefficiencies.

- KSO is expanding its capacity across segments like crushing, refining and vanaspati, respectively. Such expansion, we believe would aid KSO achieve strong Volume growth going ahead.

- KSO has acquired 138,000 hectares for palm plantations in Indonesia. With this, KSO plans to enter the world's largest edible oil market of Palm Oil. The acquisition will ensure steady supply of crude palm oil to the company's Refining unit. As a result, the company is expected to register EBITDA Margin of around 50% once the plant matures over the next 3-4 years.

 

Valuation

KSO has maintained a healthy growth rate, on account of its increasing presence in the Branded Segment in the Indian Edible Oil market. Going ahead, the company is likely to continue its focus on Branded Sales, and growth will primarily be driven by its proposed capacity expansions. At the CMP, the stock is trading at attractive valuations of 7x FY2012E Earnings. We maintain a Buy on the stock, with a Target Price of Rs94.

 

 

Agriculture

Rallis India (RAIL)

- Globally, India has the lowest average pesticide consumption. We believe that RAIL is well placed to seize this opportunity due to its wide distribution network, strong brands and robust new products pipeline.

- We estimate RAIL's EBITDA Margin to expand from 13.3% in FY2009 to 19.1% and 18.9% in FY2011E and FY2012E respectively, with contribution from its domestic business increasing and benefits of various cost-cutting initiatives (DISHA) fructifying.

- RAIL plans to focus on Contract Manufacturing for Exports and selectively target and supply to the top players. To facilitate the same, the company is setting up a new plant at Dahej (to be commissioned by July 2010). Overall, RAIL targets to achieve cumulative Revenues of Rs1,000cr over the next five years from this Segment alone.

 

Valuation

At current levels, the stock is trading at attractive valuations of 13.3x and 10.5x its FY2011E and FY2012E Earnings, respectively. Going ahead, on the back of improving Return Ratios and Net Profit growth, we expect the stock to trade at higher valuations than its historical average. We maintain a Buy on the stock, with a Target Price of Rs1,464.

 

 

Automobile

Maruti Suzuki

- Car penetration in India is estimated at around 12 vehicles/1,000 people in FY2009 compared to around 21 vehicles/1,000 people in China. Increasing penetration is estimated to drive 16% CAGR in domestic volumes over FY2009-12E for the company.

- Suzuki Japan is making Maruti a manufacturing hub to cater to increasing global demand for small cars due to rising fuel prices and stricter emission standards.

- We estimate the company's export volume to register around 55% CAGR over FY2009-11E. Moreover, R&D capabilities, so far largely housed at Suzuki Japan, are progressively moving to Maruti. The company is targeting to achieve full model change capabilities over the next couple of years, which will enable it to launch new models and variants at a much faster pace.

 

Valuation

We believe that Maruti's valuation would be largely determined by its ability to maintain market share amidst intensifying competition. At Rs1,464, the stock is trading at 15.1x and 13.3x FY2011E and FY2012E Earnings, respectively. We maintain a Buy on the stock, with a Target Price of Rs1,873. On account of the favourable relative tradeoff, going forward the stock could continue to gather momentum on any positive surprises on the Volume or Operating performance front.

 

 

Tata Motors

- Strong recovery in CV volumes aided by improving industrial production trend augurs well for the domestic CV leader, Tata Motors (TML). TML has recorded substantial improvement in CV volumes in the last few months clocking YTD jump of about 32% yoy.

- Full recovery in the domestic CV cycle in FY2011E is expected to reduce pressure on cash flows and facilitate debt repayment. Further, with the positive trend in the external environment in financial markets and improvement in general liquidity, Tata Motor has met its overall funding requirements (including JLR) at reasonable terms.

- JLR's key European and US markets have shown signs of improvement in recent months, and are expected to recover over the next 3-4 quarters, which could help to improve TML's consolidated performance going forward.

 

Valuation

We estimate TML to record full recovery FY2011E on a consolidated basis. At Rs711, the stock is trading at 11.8x FY2012E Consolidated Earnings. We have valued the stock on SOTP methodology, and recommend a Buy, with a Target Price  of Rs859. We have valued the Core business at Rs551, assigning EV/EBITDA of 7x and P/E of 13x on FY2012E basis. Our embedded value of the subsidiaries and investments in TML's books (including JLR) works out to Rs308 per share.

 

 

Banking

Axis Bank

- We believe that the bank is strongly positioned for marketshare gains, as GDP and capital market activity revives. The Bank has expanded its branches at a CAGR of 35% since FY2003, driving a four-fold increase in CASA marketshare to 3.8% by FY2009 (40bp yoy increase in FY2009). In our view, such gains (30-50bp every year) will continue, going forward, especially as network expansion (200+ additions, about 20-25% yoy) remains strong.

- Fee income contribution across a spectrum of services has been a meaningful 1.7% of assets (almost twice the level in PSBs) over FY2007-09. With the capital markets reviving, appetite for equity-based savings instruments increasing and general loan growth picking up, fee income growth is also expected to gain traction (29% CAGR over FY2009-12E), taking the contribution to 2.1% of assets by FY2012E.

 

Valuation

At the CMP, the stock is trading at attractive valuations of 2.1x FY2012E ABV - an almost 25% discount to HDFC Bank, despite similar earnings quality, profitability and growth expectations over FY2010-12E. We value the stock at 2.8x FY2012E ABV (at the higher end of its 5-yr range) to arrive at a Target Price of Rs1,450.

 

 

ICICI Bank

- ICICI Bank is decisively executing a credible strategy of consolidation that is resulting in an improved deposit and loan mix. Further, in our view, the Bank's substantial branch expansion and large Capital Adequacy, especially on Tier-1 are a precursor to marketshare gains that will contribute to substantial Core business growth, as the macro environment continues to improve. We believe that, on account of this, the bank will be well-positioned by FY2010E to capitalise on the imminent revival in overall GDP growth, resulting in a materially improved balance sheet and earnings over the next two years.

- The distinguishing feature of the performance of the bank in 9MFY2010 is the improvement in the Bank's CASA ratio to 40% (transformative, considering that the ratio was as low as 22% at the end of FY2007 and 29% even as recently as FY2009). In light of this change in liability-mix, we are convinced about the bank's ability to improve its NIM to 2.7% in the current fiscal (2.6% in FY2009) and to 2.8-3.0% over FY2011-12E.

 

Valuation

At the CMP, the Bank's Core Banking business (after adjusting Rs307 per share towards the value of the subsidiaries) is trading at 1.4x FY2012E ABV of Rs377. Including subsidiaries, the stock is trading at 1.7x FY2012E ABV of Rs512. We value the Bank's subsidiaries at Rs307 per share of ICICI Bank and the core Bank at Rs848 (2.25x FY2012E ABV). We maintain a Buy on the stock, with a Target Price of Rs1,155.

 

 

Capital Goods

Crompton Greaves

- Crompton Greaves (CGL) surprised the markets positively with regards to margin expansion during the past few quarters, as against margin compression witnessed by its peers. The management attributed margin expansion to value-engineering / better product designing leading to lower material consumption, coupled with the advantages of the global sourcing of materials. Hence, we expect the margin expansion to be sustainable, rather than being one-off in nature.

- CGL, with a minimum 18 months lead in domestic manufacturing, has a clear competitive advantage over its peers in the 765kV transformers space. With PGCIL increasing the proportion of domestic manufacturing to 50% from 33% earlier, it augurs well for the company, as it would be able to command better margins, on account of lower domestic manufacturing costs, as against higher costs incurred by its competitors at their overseas facilities.

- Over the past few years, the company has made several strategic overseas acquisitions, which besides plugging in the technology gaps have strengthened its product portfolio and provided it with access to the key European and American markets. Notably, the existing gap remains in the area of MV switch gear, the HVDC segment, industrial drives and automation, where the company is actively scouting for acquisitions to bridge the same as well.

 

Valuation

Crompton Greaves is one of the leading players in the power transmission and distribution space in the country. The company has a diversified business presence, with revenues accruing from multiple streams that are spread across geographies. Besides, over the past few years, the company has made several strategic overseas acquisitions, which, in addition to plugging in technology gaps, have provided the necessary scale to its operations.

During FY2009-12E, we expect the company to register a Top-line and Bottom-line CAGR of 11.8% and 20.7%, respectively. At the current price, the stock is quoting at 17.5x and 15.5x FY2011E and FY2012E EPS, respectively, which we believe is attractive compared to its peers ABB and Areva T&D. We maintain our Buy recommendation, with a Target Price of Rs537.

 

 

Thermax

- Power deficit has been a constant and continued scenario within the economy, with the peak load deficit hovering around 12.0% levels in FY2009. Given the current demandsupply dynamics, we believe that power deficit is here to stay for a foreseeable future, which would structurally be a long-term positive driving growth for the captive power players. Besides, with the existence of heavy cross-subsidies in the sector, the captive route is turning out to be an economical option for the industrial users as well.

- After attaining its leadership position in the small and medium-sized industrial boilers market, the company has gradually been focusing on the huge opportunity arising from the utility boilers market. The utility foray is expected to impart a greater revenue visibility for the company, reducing the high cyclicality associated with its earnings.

 

Valuation

Thermax will continue to witness near-term growth challenges, with the macroeconomic slowdown bound to adversely impact its FY2010E Earnings. However, we expect FY2010E to be a trough year, with a strong bounce back happening in FY2011E, on the back of the rebound in the domestic economy driving the order momentum for the company.

At the current price of Rs589, the stock is quoting at 19.4x and 15.6x FY2011E and FY2012E EPS, respectively. Against the backdrop of a strong order backlog, the utility boilers' foray, a healthy balance sheet and the strong management team, we maintain our Buy recommendation on the stock, with a Target Price of Rs754.

 

 

Jyoti Structures

- The government has envisaged an investment in the Transmission sector of Rs1.4lakhcr for the 11th Plan (an increase of over two times from the investments made in the 10th Plan) and Rs2.4lakhcr for the 12th Plan. Around 40-45% of the total Transmission capex and 15-20% of total APDRP and RGGVY spend works out to be a potential opportunity for transmission EPC players. Factoring around an 80-85% achievement, we estimate the total opportunity to be around Rs60,000-65,000cr during the 11th Plan period alone.

- JSL has a healthy order book of Rs4,030cr (1.9x its FY2010E revenues), which provides good revenue visibility to the company and cushions it from short-term order fluctuations. Besides, unlike its peers, a large domestic presence (with exports constituting only around 5% of its order backlog), which has a price variation clause, helps to insulate its margins from raw material price fluctuations and volatile currency movements.

 

Valuation

Jyoti Structures is among the top three players in the Transmission Engineering Procurement Construction (EPC) space in India. We believe that the company will continue to ride high on the back of the massive investments lined up in the Transmission Sector of the country.

At the current price of Rs154, the stock is quoting at 10.9x and at 9.1x its FY2011E and FY2012E EPS, respectively, well below its average P/E of 13-13.5x in the past five years. Going ahead, we expect the stock to outperform and maintain our Buy recommendation on the stock, with a Target Price of Rs220.

 

 

India Cements

- The company is the largest cement player in the southern region. The company's current capacity (which stands at 14mtpa) is expected to go up to 15.5mtpa by FY2011E, with the addition of a 1.5mtpa Greenfield plant at Rajasthan. The work orders for this plant have been released. This capacity addition is expected to help the company to venture into the northern region

- The company is also in the process of setting up two captive power plants of 50MW each in Tamil Nadu and in Andhra Pradesh. The EPC order has been finalised for the Tamil Nadu plant and is expected to be completed by March 2011. The company has planned for a total capex of Rs700cr during FY2011E.

- India Cements owns a franchisee of the Indian Premier League (IPL) under the name Chennai Super Kings, which was acquired at a cost of US $91mn for 10 years in 2008. The IPL governing council had decided in December 2009 to add new franchisees at a base price of US $225mn each. The company's IPL franchisee-ship provides it with a major value unlocking potential.

 

Valuation

At the CMP of Rs117, India Cements is trading at an EV/EBITDA of 3.4x and an EV/tonne of US $62/tonne, according to its FY2012E estimates. We have arrived at a Target Price of Rs136 for the stock, by valuing its Cement business at an average of a Target EV/EBITDA of 4x and Target EV/Tonne of US $65. Hence, we maintain a Buy on the stock.

 

 

JK Lakshmi Cements

- JK Lakshmi Cement's (JKL) current cement capacity stands at 4.8mtpa. The company which is currently commissioning a 0.6mtpa split grinding capacity, is also setting up a 2.7mtpa green-field cement plant in Chattisgarh by October 2012, taking its total cement capacity to 8mtpa.

- In-line with its strategy to generate sufficient captive power in line with cement capacity, the company is also increasing its Power capacity from 36MW to 66MW by FY2012E, which will be sufficient to meet 95% of its captive power requirement. JKL has also entered into strategic tie-ups with VS Lignite for the purchase of 21MW power every year at a cost of Rs3.2/unit. (As of now, JKL sources power at Rs4.2/ unit from grid).

- JK Lakshmi Cements caters mostly to the Northern and Western markets, with a higher concentration in the North (including Rajasthan), which contributes almost 60% of the total sales. However, 30% of the cement is sold in Gujarat and 10% in Maharashtra. The cement demand in the regions in which the company has a presence is expected to have robust growth going ahead, auguring well for the company.

Valuation

On the valuation front, we have valued JK Lakshmi Cements at an average of a Target EV/EBITDA of 3.5x and an EV/tonne of US $65/tonne, to arrive at a fair value of Rs88, which is at a discount to the replacement cost. The stock trades at a P/E of 4.5x, at an EV/EBITDA of 3.4x and at an EV/tonne of US $61/tonne, according to its FY2012E estimates. We maintain a Buy on the stock.

 

 

Madras Cements

- Madras Cements (MAC) is a major cement player in the southern region had a total capacity of 10mtpa at the end of FY2009. The company had recently set up a 1mtpa at East Midnapore, West Bengal, taking its overall capacity to11mtpa.

- The company has been adding up its windmill capacity to reduce dependence on the State grid for power requirement. MAC's windmill capacity currently stands at 181MW, which is sufficient to handle close to 75% of its total power requirements

- MAC was affected by a decline in realisations in 3QFY2010, due to the floods and political uncertainty in Andhra Pradesh. MAC also faced pressure on its operating margins, due to a steep increase in the raw material costs. However, the demand has started to pick up in the southern region, due to the improving political situation in Andhra Pradesh.

 

Valuation

At the CMP of Rs110, Madras Cements is trading at an EV/EBITDA of 3.3 and an EV/tonne of US $58/tonne, according to its FY2012E estimates. On the valuation front, we have valued MAC at an average of a Target EV/EBITDA of 4x and an EV/tonne of US $65/tonne, which is at a discount to the replacement cost, to arrive at a fair value of Rs141. Hence, we maintain a Buy on the stock.

 

 

FMCG

GCPL

- Godrej Consumer Products (GCPL) is one of the leading companies among India's Fast Moving Consumer Goods, with Personal and Home Care Products. Its international businesses are spread across Europe, South Africa, Australia, Canada and Middle East.

- The company's insecticide division operated under Godrej-Sara Lee is growing at the rate of 10-12%. Godrej Sara Lee is a 49:51 JV with US-based Sara Lee. The company has recently got shareholder's approval to acquire the remaining 51% stake of the JV, and has received approval to raise up to Rs3,000cr by share sale through FCCB, debentures and ADR for various corporate purposes.

- Prominent brands for the company include Cinthol, Godrej No.1, Godrej Expert, Godrej Protekt, Renew, Color Soft and Ezee.

 

Valuation

FY2010E has been a year of strong growth for GCPL, driven by significant Gross Margin expansion, improved traction in its International business and consolidation of GSL's business. However, going ahead, we expect the growth momentum to decelerate and accordingly GCPL would post a 15% CAGR in its Top-line and a 16% CAGR in Earnings during FY2010-12E. We maintain our bullish stance on the stock, given GCPL's wider portfolio (GSL's brands and new launches/variants), stronger performance by its International business and potential upside trigger from a large acquisition (GCPL has passed a resolution to raise funds up to Rs3,000cr). At the CMP of Rs246, GCPL is trading at modest valuations of 17.2x FY2012E Earnings estimate of Rs14.3. Hence, we maintain a Buy on the stock, with a Target Price of Rs310.

 

 

ITC

- ITC is one of India's foremost private sector companies, with a diversified presence in Cigarettes, Hotels, Paperboards & Specialty Papers, Packaging, Agri-Business, Packaged Foods & Confectionery, Information Technology, Branded Apparel, Personal Care, Stationery, Safety Matches and other FMCG products. While ITC is an outstanding market leader in its traditional businesses of Cigarettes, Hotels, Paperboards, Packaging and Agri-Exports, it is rapidly gaining market share even in its nascent businesses of Packaged Foods & Confectionery, Branded Apparel, Personal Care and Stationery

- ITC's Agri-Business is one of India's largest exporters of agricultural products. The company is a fore runner in innovation and its 'e-Choupal' initiative is enabling Indian agriculture to significantly enhance its competitiveness, by empowering Indian farmers through the power of the Internet.

- Excise duty hike on cigarettes, as announced in the Union Budget 2010-11, is a marginal negative for the company. However, this is likely to be offset via an additional 5-8% price hike, which could have a potentially negative impact on volume growth.

 

Valuation

Moderation of losses in ITC's Non-Cigarette FMCG business, pick up in the Paperboard Division (driven by capacity expansion), improved Profitability of its Agri-business and better performance by the Hotel Business, aided by a substantial improvement in both occupancies and average room rates are likely to improve ITC's growth trajectory over FY2010-12E. At Rs232, the stock is trading at 18.6x and 16.7x its FY2011E and FY2012E EPS of Rs12.5and Rs13.9, respectively. We maintain a Buy on the stock, with a Target Price of Rs300.

 

 

Hotels

TAJGVK

- TAJGVK is the market-leader in the Hyderabad market, where it has a share of 29% in premium-segment rooms. In order to strengthen its foothold further and to tap mid-market room demand, the company is coming up with a 189-room property in Begumpet.

- To diversify its presence, the company came up with Taj Mount Road in Chennai, in December 2008. With this, it has toned down Hyderabad's concentration to 59% (78% earlier) of the total room inventory in FY2009. It is also planning to enter Bangalore and is exploring the possibility of entering the mid-market segment through tie-ups with IHCL's 'Ginger'.

- TAJGVK is adding 189 rooms at its Begumpet property, using an asset-light strategy. we expect the company's debt-equity ratio to be at a comfortable level of 0.3x in FY2012E, which provides TAJGVK with adequate room to plan further expansions, without hampering its balance sheet.

 

Valuation

With the economic recovery gathering steam, we expect the business destinations (like Hyderabad, Chandigarh and Chennai) to significantly benefit, where TajGVK has a presence. Considering the improving demand, the company's dominant position in Hyderabad, the growing demand for its recently launched Chennai property, and its on-track expansion plans, we estimate the top-line and bottom-line to witness a CAGR of 23.7% and 60.3%, respectively over FY2009-12E. At Rs152, the stock is trading at attractive levels of 12.5x its FY2012E Earnings, 2.3x its FY2012E P/BV and an EV/Room of Rs1.2cr. We maintain our Buy rating on the stock, with a Target Price of Rs240.

 

 

Infrastructure

IVRCL Infra

- In a restructuring program, IVRCL will transfer its BOT assets to IVR Prime, benefitting both the companies: 1) IVR Prime will have consistent Revenue stream and leverage its idle Net Worth to win more BOT projects, and 2) IVRCL will focus on EPC work and see traction in Order Inflow on enhanced asset portfolio of IVR Prime.

- IVRCL has robust Order Book of Rs17,500cr or 2.8x FY2010E Revenues, with strong L1 status of Rs4,500cr. Robust Order Book provides visibility in Top-line for the next 24-30months.

- Around 27% of IVRCL’s Order Book is from AP (facing crisis) due to which the stock underperformed in the last three months. However, we are positive on IVRCL, which offers exposure to the Road and Irrigation theme of India's Infra story.

 

Valuation

We expect Top-line to register a CAGR of 21.4% over FY2009-12E primarily on account of Strong Order book position and good execution capability. IVRCL is expected to marginally improve on the EBITDA margin front on account of commodity prices and being selective in bagging orders. On the Bottom-line front we expect IVRCL to post a CAGR of 16.5% over FY2009-12E. We have been factoring in higher working capital cycle for the company on account of ongoing crisis in AP. However, any positive development on that front would pose upside risk to our numbers. We have valued IVRCL on an SOTP basis. Its core Construction business is valued at a P/E of 14x FY2012E Earnings (Rs360/share), IVRCL's stake in IVR Prime and in HDOR is valued on a MCap basis and contributes Rs90/ share and Rs18/share respectively. At Rs322, the stock is trading at 9.2x and 8.3x FY2011E and FY2012E adjusted P/E, respectively. We maintain a Buy on the stock, with a Target Price of Rs468.

 

 

Madhucon Projects

- We expect substantial investments in the Road and Irrigation Sectors, MPL's forte, over the next two years. Therefore, we expect MPL to be one of the key beneficiaries of these investments. We also expect lot of action on the Roads front and have factored in further Order Inflows for MPL, given that its BOT assets are near completion and no further equity commitment is required in the ongoing BOT assets.

- Over the past three years, MPL has invested heavily in building its portfolio of assets in the Roads, Power and Coal Segments. We believe that MPL is on the cusp of reaping the benefits of the same. Our management interaction reveals that the company is very close to getting the required approvals from the lenders for the transfer of assets (BOT Road, Power and Coal) from MPL to its 100% subsidiary, Madhucon Infra, which would be tapping the markets for raising capital. Therefore, we have factored in dilution for Madhucon Infra owing to:1) overall improved liquidity situation, and 2) satisfactory progress in work on assets as they are nearing important milestones.

- We expect MPL to outperform its peers on the back of attractive valuations, diversified portfolio of assets and positive triggers in place, viz. 1) MPL plans to raise money at the subsidiary level, which would unlock value, and 2) As MPL's assets start reaching important milestones, it would enhance visibility and markets would start valuing these assets.

 

Valuation

We expect the company to post Top-line and Bottom-line CAGR of 24.0% and 20.2% respectively, over FY2009-12E mainly driven by its current Order Book. We have valued MPL on an SOTP basis, valuing its Core Construction business at 10x, on FY2012E Earnings ( Rs117/share ). We have valued its stake in Madhucon Infra on P/BV basis ( Rs94/share). We continue to value its land parcel at 50% discount to acquisition costs (Rs3/share). At Rs161, the stock is trading at 6.2x and 5.7x FY2011E and FY2012E adjusted P/E, respectively. We maintain a Buy on the stock, with a SOTP Target Price of Rs214.

 

 

Media

DCHL

- Deccan Chronicle Holdings (DCHL) is the publisher of Deccan Chronicle, India's prominent English daily. A dominant player in South India, the company enjoys a leadership position in Andhra Pradesh and has made significant inroads in Chennai, a market dominated by The Hindu. In addition, DCHL also publishes daily, weekly and monthly editions of Andhra Bhoomi (regional publication in Telugu) and Asian Age (English daily circulated in the metros) through its subsidiary, Asian Age Holdings.

- Following the launch of its Bangalore edition, DCHL registered a total daily Circulation of 1.35mn during Jan-June 2009, according to the Audit Bureau of Circulation (ABC, latest Circulation figures), an increase of 1.2% over Jan-Dec 2008 and 25.9% over Jan-June 2008. We believe that its enhanced presence places DCHL in a significantly better position in terms of offering bundled advertising to any media planner looking for a pan-South India platform.

- Deccan Chargers Sporting Ventures (DCSVL) houses the Hyderabad IPL team, Deccan Chargers (100% stake), which won the second season of the IPL. With IPL's recent announcement of an auction (slated for March 06, 2010) of two new franchises for the 2011 edition at a base price of US $225mn, we believe that DCHL might renew its interest to dilute a stake in its IPL team. We remain optimistic on IPL's moneymaking prospects and reiterate that any news flow on the stake sale front will trigger a re-rating of the DCHL stock. With addition of two new teams, we expect: 1) Media telecast rights with Sony will be revised upwards (higher central revenues for IPL teams), and 2) number of matches to increase from 59 to 94 (higher gate/sponsorship revenues)

 

Valuation

During FY2010E-12E, we expect DCHL to post a CAGR of about 14% in standalone Revenues and Earnings. At Rs146, the stock is trading at an attractive valuation of 10x FY2012E standalone EPS of Rs14.7. Moreover, if one was to remove Rs43 per share value for the IPL Team, DCHL is trading at extremely attractive valuations of 7x FY2012E standalone Earnings ( about 65% discount to its peers). We value DCHL on an SOTP Basis and maintain a Buy on the stock, with a Target Price of Rs216, based on: 1) Rs173 per share value for its core Print Business (12x FY2012E Standalone Earnings), and 2) Rs43 per share value for its IPL Team (based on the US $225mn floor price set for the auction of new teams).

 

 

Jagran Prakashan

- Jagran Prakashan (JPL) is a pioneer in print media. The company's principal activities are printing, and publishing newspaper and magazines. It operates with 37 editions, which covers 11 Indian states.

- JPL is the publisher of India's largest-read and circulated daily newspaper Dainik Jagran and enjoys a dominant position across the Hindi belt (covering almost 40% of the country's population). JPL also publishes magazines like Sakhi and Jagran Varshiki.

- Besides its strong presence in Print Media, the company is also present in alternative media vehicles like Out Of Home (OOH) advertising (via Jagran Engage), Event Management (via Jagran Solutions), value-added mobile services (via J9) and Internet portals (via its co-branding tie-up with Yahoo).

 

Valuation

We expect Jagran to post a modest 16.8% CAGR in its Top-line during FY2010-12E, driven by a 20.3% CAGR in Advertising Revenues (on account of a higher proportion of colour ads, rate hikes and a pickup in Ad spend after 2HFY2010) and a 6.9% CAGR in Circulation Revenues. In terms of other businesses (OOH, Event Management and SMS Services), we factor CAGR of 15.5% during the period, on account of the company's improved traction. In terms of Earnings, we expect Jagran to report a modest CAGR of 17.9% in its Bottom-line over FY2010- 12E, driven largely by Top-line growth and sustained Margins. At Rs119, the stock is trading at 14.9x FY2012E Earnings of Rs8. We maintain a Buy on the stock, with a Target Price of Rs160.

 

 

PVR

- PVR is one of the leading and premium Multiplex Cinema Exhibitors. It pioneered the multiplex revolution in India by establishing the first multiplex cinema in 1997 and the largest 11-screen multiplex cinema in the country in 2004. Currently, the company has an exhibition capacity of 108 screens and 26 properties, with a strong domain presence in the North India

- PVR operates a film distribution and production business through PVR Pictures, a subsidiary of the company, in which PVR holds a 60% shareholding, with the balance 40% stake held by JP Morgan Mauritius Holding Ltd and ICICI Venture in equal proportion (20% each). The movies co-produced by PVR Pictures include Taare Zameen Par, Jaane Tu Ya Jaane Na, Contract and Mere Khwabon Mein Jo Aaye.

- PVR has a JV with Thailand-major Cineplex Group, to bring lifestyle entertainment concepts to Indian consumers. The JV sets up bowling alleys, karaoke centers, ice skating rinks and gaming zones across the country to enhance the outof- home entertainment experience for Indian consumers.

 

Valuation

We are extremely enthused with the improved traction in subsidiaries of PVR like PVR Pictures and Blu-O-Ray (as was reflected in the 3QFY2010 results). We believe that PVR's superior management bandwidth, integrated business model and strong set of properties (in terms of location) make it the most preferred play in the exhibition space. Hence, we maintain a Buy on the stock, with a Target Price of Rs211.

 

 

Metals

JSW Steel

- JSW Steel's volumes are expected to grow at a CAGR of 32% over FY2009-FY12E, higher than its peers, as it benefits from the recently expanded 3.0mn tonne capacity. The company is further enhancing its capacity by 3.2 mn tonnes, taking its total capacity to 11.0mn tonnes by March 2011, providing visibility of volume growth beyond FY2011E.

- With the commissioning of the 5.0 mtpa HSM mill and the expansion of the blooming mill by 0.4 mtpa, semis proportion is expected to decrease from 15.9% in FY2009 to 2.3% in FY2012E. Also, lower conversion costs of ~US $150/tonne will help expand its standalone margins by 400bp over FY2009-12E to 24%.

- Despite capex of US $2.7b