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February 02, 2013

Sharekhan Top Picks
The market continued to move in a fairly narrow range in January 2013. The better than expected results in the initial part of the result season, positive global cues and monetary easing (policy rate cut by 25 basis points and cash reserve ratio reduced by 25 basis points) failed to push the market beyond the 6100 level on the Nifty. The foreign investors continue to keep faith in the Indian market but the persistent selling by the domestic investors seems to be putting pressure on the market. Consequently, the market has been largely flat since our last update on January 1, 2013. Accordingly, the Top Picks basket has also remained marginally negative in this period. With the important event of Union Budget ahead, we are making three changes in the Top Picks basket this month. As part of the churn in the pharmaceutical sector, we are replacing
Absolute outperformance (returns in %)
210.0% 180.0% 150.0% 120.0% 90.0% 60.0% 30.0% 0.0% -30.0% -60.0% CY2012 CY2011 CY2010 CY2009 Sensex Since Jan 2009 Nifty

Dishman Pharma with a more stable and front-line company, Sun Pharmaceuticals. Given the government’s focus on reforms in the oil & gas sector, we are introducing Oil India in place of Bharat Heavy Eelectricals, which is struggling to procure fresh orders due to tough conditions in the power generation sector. Lastly, we believe that it is better to avoid Mahindra and Mahindra (M&M) before the Union Budget as the noises related to a higher tax on diesel vehicles are getting louder. Moreover, the move to reduce diesel under-recoveries by regularly hiking the retail price of diesel would also affect sentiments for M&M due to the company’s dependence on the diesel-powered portfolio of automobiles. We are introducing United Phosphorous in place of M&M due to the latter’s strong performance in Q3FY2013 and attractive valuation.
Constantly beating Nifty and Sensex (cumulative returns in %)
300 250 200 150 100 50 0 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Sharekhan Sensex Nif ty

Sharekhan (Top Picks)

Name CanFin Homes Federal Bank GCPL ICICI Bank Larsen & Toubro OIL India Relaxo Footwear Reliance Sun Pharmaceutical Industries United Phosphorous Zee Entertainment Enterprises
* CMP as on February 01, 2013

CMP* (Rs) 169 511 711 1,171 1,535 526 809 893 720 132 231

FY12 7.9 11.3 36.1 20.9 22.1 9.2 24.3 14.6 28.8 11.0 37.9

PER (x) FY13E 6.4 10.3 26.4 16.4 19.6 8.5 18.7 14.2 25.4 8.4 31.2

FY14E 5.0 8.6 21.0 14.2 17.4 7.9 13.9 13.7 21.4 8.1 25.4

FY12 13.3 14.4 26.3 11.2 18.1 27.0 20.3 11.5 21.3 13.3 18.1

RoE (%) FY13E 14.5 14.1 23.2 13.0 17.7 28.2 20.4 10.6 19.1 15.2 19.2

FY14E 16.4 15.0 27.4 13.8 17.3 26.8 20.6 9.9 19.0 13.8 20.7

Price target 220 590 811 1,320 1,790 600 885 1,010 775 171 280

Upside (%) 30 15 14 13 17 14 9 13 8 30 21

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Further. shift the loan book to better-rated corporates. .9 PER (x) FY13E 6. Under a new management the bank is working on a strategy to gain pan-Indian presence. The asset quality of the company is strong as its gross NPAs were under 1% of the advances and its net NPAs were nil in FY2012. Thus. Consequently. we expect CanFin’s NIM to sustain at over 3% going ahead.4 14. become more efficient and improve the asset quality. with the initiatives undertaken the recoveries could pick up and the NPAs may decline. It has added 26 branches since March 2011 which amounts to an increase of close to 60% in its current branch network of 67 outlets. The company’s branches are strategically located (outside cities) and serve customers requiring relatively smaller loans (of below Rs10 lakh).4x FY2014E book value [BV]) and maintained our Buy rating on the stock.3 10.3 8. We expect an RoE of ~16% and an RoA of around 1. However.sharekhan top picks Name CMP (Rs) CanFin Homes Remarks: 169 FY12 7.4 Price target 220 Upside (%) 30 CanFin Homes has renewed its focus on growth and the recent aggressive expansion of its branch network has put it on a high-growth path for the next few years. we expect the company’s disbursement to grow at about 60% CAGR resulting in a 38% CAGR in the loan book over FY2012-14.0 590 15 Federal Bank is an old private bank with a network of over 1.4 FY14E 5.3 RoE (%) FY13E 14. the loan growth is likely to be in line with the industry while risk adjusted margins may improve. This is mainly possible due to stringent credit appraisals (customer referrals preferred) and efficient recoveries. We have revised the price target to Rs590 (1. The slippages from the SME and retail accounts have declined substantially while the slippages from the corporate accounts remain stable. which are eligible for interest subvention. The asset quality of the bank has remained steady after showing some strain initially. Federal Bank’s loan growth has slowed over the past few quarters as the bank is cautious in view of the weakness in the economy.5 FY14E 16. Going forward. the company gets refinancing from the National Housing Board at competitive rates due to lending in semi-urban rural areas (that account for about 40% of its loan book).000 branches and a dominant presence in south India.1 15. increase the fee income. Federal Bank Remarks: 511 11. thereby driving the operating performance.6 14. We continue to value the company at 1x FY2014E BV and recommend Buy with price target of Rs220. The bank’s return ratios are likely to go up led by an increase in the profits. We believe the operational performance and return ratios of CanFin are improving which should lead to a rerating of the stock.0 FY12 13.2% by FY2015 led by a 17% CAGR in the earnings.

sharekhan top picks Name CMP (Rs) GCPL Remarks: 711 FY12 36 PER (x) FY13E 26. This has led to a sharp reduction in the provisions and an increase in the profitability.7%.0. Moreover.320 13 ICICI Bank continues to report a strong growth in advances with stable margins of ~3%. given the improvement in the profitability led by lower NPA provisions.4 FY14E 21. We believe the increased competitive activity in the personal care and hair care segments and the impact of high food inflation on the demand for its products are the key risks to the company’s profitability. This would be driven by a 21% CAGR in profits over FY2012-15. the household insecticide business is expected to grow by ~20% YoY.1% by FY2015 while the RoA would improve to 1.2 FY14E 27. we expect GCPL to sustain the market share in its core categories of soap and hair colour in the domestic market.320. Overall. hair care and home care segments in India.2 11.4 14.0 13. Therefore. Led by a pick-up in the business growth and an improvement in the margins the RoEs are likely to expand to about 15. The stock trades at 1. At the current market price. In the international markets. we expect its OPM to be in the range of 16-18% in the coming years. On the other hand. a healthy growth in the core income and improved operating metrics we recommend Buy with a price target of Rs1.7 and 26.3 RoE (%) FY13E 23.1x FY2013E EPS of Rs19. We expect the advances of the bank to grow by 20% CAGR over FY2012-15. and advertising and promotional support.4 Price target 811 Upside (%) 14 Godrej Consumer Products Ltd (GCPL) is a major player in the Indian fast-moving consumer goods (FMCG) market with a strong presence in the personal care.9x FY2014E BV. Going forward. Due to the recent domestic and international acquisitions. On the back of a strong distribution network. This along with the recently acquired Darling Group would help GCPL to post a top line CAGR of ~24% over FY2012-15. ICICI Bank Remarks: 1. ICICI Bank’s asset quality has shown a turnaround as its NPAs have continued to decline over the last eleven quarters led by contraction in slippages. we expect GCPL’s bottom line to grow at a CAGR of above 25% over FY2012-15. The recent acquisitions (in line with the 3x3 strategy) have immensely improved the long-term growth prospects of the company. the Indonesian and Argentine businesses are expected to achieve a revenue growth of around 25% and 35% CAGR respectively over FY2012-15. continuing its strong growth momentum.171 20.0 FY12 26.3x FY2014E EPS of Rs27. we expect the NPAs to decline further which will lead to lower NPA provisions and hence aid the profit growth.2 13. This should lead to a ~21% CAGR growth in the net interest income in the same period.8 1. the company’s business has transformed from a commodities soap business into the business of value-added personal care and home care products. Sharekhan 3 February 2013 .9 16. the stock trades at 36.

the stock is trading at 17. there appears a huge scope for growth.3 Price target 1.2 26.5 7. Further. We have also seen order inflow traction in recent quarters.sharekhan top picks Name CMP (Rs) Larsen & Toubro Remarks: 1. the company’s reserve-replacement ratio (RRR) is quite healthy at 1.1 RoE (%) FY13E 17. Despite challenges like deferral of award decisions and stiff competition. bulging order book and strong performance of its subsidiaries reinforce our faith in L&T. L&T continues to impress us with its good execution skills. Sharekhan 4 February 2013 . Recent proposal by the oil ministry to partially deregulate the diesel prices and the proposal by the Rangarajan Committee to increase the price of gas up to $8. In addition to the huge oil reserves. A sound execution track record. railways.5 per mmbtu augurs well for the company and will significantly increase the earnings of the company going ahead.535 FY12 22.790 Upside (%) 17 Larsen & Toubro (L&T).1 PER (x) FY13E 19.2 8. OIL has cash of around Rs10. reporting decent numbers throughout the year despite the slowdown in the industrial capex cycle. The stock is likely to be rerated on account of the partial deregulation of diesel prices.4 FY12 18.0 28.8 600 14 Oil India Ltd (OIL) has several hydrocarbon discoveries across reserves in Rajasthan and the north-eastern region of India. Oil India Remarks: 526 9.3%) which provides comfort to the investor.42x which implies a comfortable level of accretion of oil reserves through new discoveries. At the current market price. is a direct beneficiary of the strong domestic infrastructure development and industrial capital expenditure (capex) boom. the company has given respectable guidance of a 15-20% growth in revenues and order inflow for FY2013. PE and EV/EBIDTA valuation methods).0-8.7 FY14E 17.4x its FY2014E consolidated earnings. The total 1P (proven) and 2P (proven and probable) reserves of the company stood at 505 million barrels (mmbbls) and 944mmbbls in March 2012. With the company entering new verticals. The fair value works out to Rs600 per share (based on the average fair value arrived at using the DCF. The key risks remain any adverse movement in the price of crude oil and failure in proper utilisation of the huge cash. We believe the company will manage to meet its guidance. namely solar and nuclear power. and defence. We remain bullish on OIL because its huge reserves and healthy RRR would provide a reasonably stable revenue growth outlook and its stock is available at an attractive valuation. the largest engineering and construction company in India.6 FY14E 17.935 crore (Rs182 per share) as of March 2012 and offers a healthy dividend pay-out (a dividend yield of 4.9 27.

6 Price target 885 Upside (%) 9 Relaxo Footwears is present in the Indian organised footwear market and is involved in the manufacturing and trading of footwear through its retail and wholesale networks.010 13 Reliance Industries Ltd (RIL) has a strong presence in the refining. Sharekhan 5 February 2013 .9x its FY2014E EPS of Rs58.5 10. the gas production from the Krishna-Godavari-D6 field has fallen significantly in the past one year. Sparx.2 13. Further. The company’s top brands. In case of the upstream exploration business. the stock trades at 18. The key concerns remain a lower than expected GRM. Flite and Schoolmate. With an established distribution set-up and aggressive plans of opening own retail outlets called “Relaxo Retail Shoppe”.9 FY12 20. the company has recently got the nod for further investments in exploration at the Krishna-Godavari basin.7 11. have an established presence among their respective segments. namely Hawaii. which augurs well for the company and could address the issue of falling gas output. However.7x its FY2014E EPS. The company has displayed an impressive growth rate in its top line and bottom line in the last couple of years and is expected to maintain the performance going forward. The softening rubber prices should provide a boost to the company’s margins and profitability.6 14. At the current market price the stock is trading at PE of 13.3 RoE (%) FY13E 20.3.4 FY14E 20.9 1.6 9.2 and 13. we believe production will improve going ahead.3 PER (x) FY13E 18. declining profitability of the petrochemical division and the company’s inability to address the issue of falling gas output in the near term.sharekhan top picks Name CMP (Rs) Relaxo Footwears Remarks: 809 FY12 24. Relaince Remarks: 893 14. The refining division of the company is the highest contributor to the company’s earnings and is operating efficiently with a better gross refining margin (GRM) compared with its peers in the domestic market due to the ability of its plant to refine more of heavier crude. At the current market price. We believe a rise in the raw material prices and a continuous slowdown in the discretionary spending remain the key risks to our volume and profitability estimates. the company should be able to gain market share in the coming years. With the government approval for additional capex.7 FY14E 13.7x its FY2013E EPS of Rs43. petrochemical and upstream exploration business. the new gas pricing formula recommended by the Rangarajan panel augurs well for the company and could provide further upside to the earnings.

4x FY2013E and 21. Due to provisions of Union Budget 2012-13.8 171 30 United Phosphorus Ltd (UPL) is the leading global producer of crop protection products.1 13. specialty chemicals and other industrial chemicals. Italy.3 15. fumigants. With a strong cash balance. Vietnam. we have increased our price target to Rs171 and maintained our Buy rating on the stock. The performance of UPL in Q3FY2013 was ahead of our estimate and its margin was largely in line with our estimate.4 8. which implies 23x FY2014E EPS. We maintain our Buy recommendation on the stock with a price target of Rs775. The business environment for the agro chemical industry is likely to witness a gradual improvement. and China) and capability in applied R&D.1 FY14E 19.sharekhan top picks Name CMP (Rs) Sun Pharma Remarks: 720 FY12 28.4 FY12 21. Sun Pharma seeks to acquire the remaining equity in Taro and. but we expect a better performance from Sun Pharma going forward mainly driven by (1) the resumption of sales from the US based subsidiary Caraco Pharma post-USFDA clearance.0 8. We have broadly maintained our earnings estimates for the company and rolled over our target multiple to the FY2015 estimate. two in Spain. The company is already recording a good growth in India and the Rest of the World markets due to the favourable weather conditions. It is the largest manufacturer of agro chemicals in India. driven by strong agri-commodity prices and a low base effect. and (3) the launch of key products in the US and emerging markets including India. herbicides. it manufactures a wide range of products including insecticides. Europe is also witnessing a recovery in growth as the environment is becoming favourable for agriculture. as has been reflected in the 50% Y-o-Y growth in revenues and a 55% growth in the profit in H1FY2013. Sun Pharma is well positioned to capitalise on the growth opportunities. The commentary of the management also indicated a revival in demand along with a growth in volume in Latin America and North America. At the current market price. Its debt-free balance sheet insulates it from the negative impact of volatile currency. four in France. Sun Pharma’s earnings are likely to reduce by 9% in FY2013. Consequently.3 RoE (%) FY13E 19. one each in UK. which imposed Alternate Minimum Tax on partnership-based units availing of various tax concessions.4x FY2014E EPS respectively. they will also reduce the seasonality in the business. Though Taro may not show a similar performance in the next quarter. Sun Pharma is trading at 25. Sharekhan 6 February 2013 . fungicides. Netherlands. United Phosphorus Remarks: 132 11. three in Argentina.8 PER (x) FY13E 25. While these acquisitions will be the key growth driver over the next two to three years. (2) contribution from newly acquired Dusa Pharma and URL Pharma in the USA. as UPL now has a reasonable presence in both the northern and the southern hemisphere. With the acquisition of SIB and DVA Agro Brazil it has established a strong foothold in one of the largest markets for agro-chemicals. intermediates.2 13. PGR and rodenticides. if successful.4 FY14E 21. UPL ranks amongst the top 5 post-patent agro chemical companies in the world.0 Price target 775 Upside (%) 8 The combination of Sun Pharma and Taro offers an excellent business model for Sun Pharma. We expect 22% and 16% revenue and PAT CAGR respectively over FY2012-1E. that will not only help achieve better synergy but also boost earnings from the first year itself. It has 23 manufacturing sites (nine in India.

The broadcasters would benefit from higher subscription revenues at the least incremental capex as the subscriber declaration improves in the cable industry. Zee TV climbed to the top position in the Hindi GEC (general entertainment channel) hierarchy in the fourth week of 2013. Without limiting any of the foregoing. the stock trades at 26x on FY2014E and 21x FY2015 earnings estimates.(SHAREKHAN) This Document is subject to changes without prior notice and is intended only for the person or entity to which it is addressed to and may contain confidential and/or privileged material and is not for any type of circulation. 2013. availability or use would be contrary to law. Zee TV’s return to the number 1 spot among the GECs is a positive development for ZEE’s advertisement revenues and the company’s ability to command premium advertisement rates compared with its competitors. Sharekhan 7 . SHAREKHAN & affiliates may have used the information set forth herein before publication and may have positions in.2 FY14E 20. SHAREKHAN may from time to time solicit from.9 PER (x) FY13E 31. where such distribution. contributing 31 gross rating points. Kindly note that this document does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. country or other jurisdiction. strong cash levels would drive the management to reward the shareholders which would act as a positive trigger for the stock. and should consult its own advisors to determine the merits and risks of such an investment. We maintain our Buy rating on the stock with a price target of Rs280. as Zee TV collected 237 points in the week ended January 26. its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article. ZEE’s earnings are expected to grow at a CAGR of 25% over FY2013-15. regulation or which would subject SHAREKHAN and affiliates to any registration or licensing requirement within such jurisdiction. While we would endeavour to update the information herein on reasonable basis.4 FY12 18. computing or compiling the information have any liability for any damages of any kind. Also. SHAREKHAN will not treat recipients as customers by virtue of their receiving this report. This report is not directed or intended for distribution to. any of its affiliates or any third party involved in. compliance. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved). Any review. SHAREKHAN. may from time to time purchase or sell or may be materially interested in any of the securities mentioned or related securities. Affiliates of Sharekhan may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. We do not undertake to advise you as to any change of our views. This document is prepared for assistance only and is not intended to be and must not alone betaken as the basis for an investment decision. Any comments or statements 2013 February made herein are those of the analyst and do not necessarily reflect those of SHAREKHAN. in no event shall SHAREKHAN. not all customers may receive this report at the same time.sharekhan top picks Name CMP (Rs) Zee Entertainment Enterprises Remarks: 231 FY12 37. or other services for. after almost 19 weeks. Sharekhan Limited. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. We do not represent that information contained herein is accurate or complete and it should not be relied upon as such. The information contained herein is from publicly available data or other sources believed to be reliable.9 Television Viewer Rating (TVR). 1 position was driven by Zee Cine Awards. The user assumes the entire risk of any use made of this information. there may be regulatory. retransmission. The investment discussed or views expressed may not be suitable for all investors.1 RoE (%) FY13E 19. we expect broadcasters to be the prime beneficiary of the mandatory digitisation process initiated by the government. At the current market price of Rs236. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. or any other use is prohibited. Disclaimer This document has been prepared by Sharekhan Ltd. publication. Further.7 Price target 280 Upside (%) 21 Among the key stakeholders of the domestic TV industry.2 FY14E 25. Zee TV's upward crawl to the No. their directors and employees (“SHAREKHAN and affiliates”) are under no obligation to update or keep the information current. state. any person or entity who is a citizen or resident of or located in any locality. any company mentioned herein. which got a whopping 3. or perform investment banking. or related to. or other reasons that may prevent SHAREKHAN and affiliates from doing so. Though disseminated to all the customers simultaneously. its subsidiaries and associated companies. or use by.

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