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This report does away with all the short term distractions that you read everyday. Certain stocks (SUPER STOCKS) are all set to reap the benefits from their stronghold in their SUPER SECTORS and these are the stocks that you should just buy and forget. We believe India’s real GDP will grow at a CAGR of 9% over the next decade translating to a nominal GDP of ` 205 Trn (USD 4.3 Trn. we’ll in this report tell you your exact action points. growing middle class. Certain sectors (SUPER SECTORS) will grow well beyond the 13% nominal GDP growth. rising income levels with stable and growing household savings make India’s medium to long. India has come a long way since the economic reforms in 1991.3x to ` 6.3x to ` 10. moving from the Hindu growth rates of 5% into the orbit of 7-9% growth rates. These significant changes will manifest in three key investment themes for the next decade savings. Pantaloon Retail . In nominal terms we expect growth over the next decade at 13% (Long term inflation projection of 4%). Coal India is the primary beneficiary of the structural deficit of coal in India. 2011 .biggest beneficiary. consumption and infrastructure.Executive Summary CAS Research Desk Edelweiss Research This Independence day you have one additional reason to celebrate! Edelweiss is pleased to release its report ‘Financial Freedom this Independence Day’. Fundamental factors like young population (median age of 26).5 Trn) by 2020. classic domestic consumption bet.3 Trn. FDI in retail to bring in the global biggies. We’ve identified in this report the key sectors that are set to benefit from the long term growth India is set to witness and we’ll not just leave you in terms of broad economic numbers and jargons. 2|P a g e 11th August. Organized retail to grow 6. FMCG the trump card. AXIS a front-runner to capture this opportunity.term growth secure. Banking revenue set to grow 5. literally forget! SUPER STOCKS Coal India WHY World’s largest coal reserve holder. This growth has been structurally driven by economic reforms. private entrepreneurship and linkages to the global economic boom. Domestic Consumption ITC Ltd Cigarettes business to remain robust. everywhere from Europe crisis to US downgrades and focuses entirely on the long term big picture – India growth story and how you can make the best of it.6 Trn. SUPER THEMES Resources Financial Services Axis Bank Organized Retail Pantaloon Retail Automobiles Mahindra & Mahindra Automobile market forecast to grow ~5x to ~ ` 4. 5 stocks you should buy for the next 10 years.
there is significant power capacity being added with fuel resource being coal.330 242.001 267. Its product portfolio consists largely of thermal coal (90%) with the balance being coking coal.3 FY12E 609.8 FY13E 12. Income Statement (` Mn) Year to March Revenues EBITDA PBT Net profit EPS FY11 502.3 11th August.336 134. COAIND would have a 25% share of washed coal.7 3.5% beneficiated coal (2x realizations of raw coal). the stock trades at a PE of 13.626 194.Coal India Limited (COAIND) Fundamental – CAS Research Desk BUY CMP -` 386 Sector Edelweiss Research Mkt Cap (` Cr.4 4.1 8. a Maharatna company. India being a power deficit country.791 165.000 52W High ` 422 52W Low 289 Energy Coal India (COAIND) is the world’s largest coal reserve holder and producer and also controls ~80% of the Indian coal market. 2010. Currently most private companies building power capacities have been signing up long term Fuel Supply Agreements (FSAs) with foreign players due to shortage of coal domestically. By FY17.2 15. It sells ~10% of its production based on the e-auction route and ~3.319 28. The management of CIL has indicated that it is putting in place a system for producing more of washed coal to match the quality of imported coal. It currently operates ~471 mines in India and is also scouting for international mines to increase global presence and assure its resources.640 179. it is one of the least cost producers of coal in the world.144 289.6 7.13 crore tons in FY10 and their reserve position (extractable reserves) stands at 2175 crores tons as of April.66x FY12E earnings and 12. COAIND. This translates into 51 years of production capacity going by current production rates.) ` 241. The average realization for CIL is 50% lower than import parity price of coal. is one of the largest public sector companies in India in terms of turnover. we believe that CIL is a great opportunity to own a critical resource. The big trigger for COAIND comes due to the pricing differential between raw coal that CIL sells and washed coal that is imported from mines abroad. We believe there is enough demand for coal and further scale up of production by CIL would find more than enough takers. COAIND produced 43. The company enjoys a near-monopoly position in the lucrative coal market and is more of a utility player due to assured volume off-take and minimal chance of a product price cut. Moreover. Going by the reserve position.7 FY12E 13.049 30. It is going to be the primary beneficiary of the structural deficit of coal in India.64x FY13 earnings. We believe that Coal India Ltd is an excellent investment and would prove to be a multi-bagger in the long term.4 FY13E 674. On the demand side.7 Valuations Year to March Diluted PE (x) EV/Sales (x) EV/EBITDA (x) FY11 22.725 217. This would require capex of `350/ton but would improve realization and margins manifold. At the CMP of ` 386.6 2. as prices already remain at ~50% discount to internal benchmark prices. Beneficiated coal volumes are expected to rise significantly to ~150 mtpa by FY17 (25% of total volumes). The margin for CIL per ton is currently close to ` 400/ton. 2011 3|P a g e .234 108.674 17.
Axis Bank has registered buoyant loan growth on a balanced portfolio skewed towards corporate advances than retail (as compared with its private peers). 2011 4|P a g e .325 82.5-1.170 70.057 31.860 FY11 15. it has better scope for aggressively expanding across segments where it has a low presence.0-1.284 57.631 233.4 trillion by FY20E .3 34.0 76. Led by stable to improving margin coupled with benign asset quality we expect Axis Bank to deliver a healthy 25% earnings CAGR over FY11-13E.237 102.157 33.0 1.0 Banks We believe that the current stage of economic growth in India.951 47.` 1211 Sector Edelweiss Research Mkt Cap (` Cr. over the next ten years nominal GDP (excluding agriculture) is expected to grow at ~13%. The bank’s loan book is expected to grow at a brisk pace of 25% plus in FY09-11E with SME. and revenues from the financial services sector (which would lead this growth) are expected to grow at 22% to ` 266.) ` 51.686 FY12E 12.7 19. agri.860 177. The bank earns substantial fee income from transaction and merchant banking activities.8 FY11 31. Other key contributors to fee income will be project advisory.6 FY12E 156.9 FY13E 21.6 FY13E 176.516 226.7 97.686 175.4 1.454 52.5 462.0 2. Income Statement (` mn) Year to March Net Revenues Operating Exp Preprovision Profit Net profit EPS Book Value Growth Metrics % NII Growth Fees Growth Net profit EPS FY11 111.5 tn. Core to our hypothesis is our belief that.7 655. Thus.2 38.3 20.9 26.846 180.2 1.9 30.Axis Bank Ltd (AXIBAN) Fundamental – CAS Research Desk BUY CMP . offers serious opportunities in financial intermediation. As Axis Bank delivers consistent earnings we expect the current valuation discount of 40% with HDFC Bank to come off to ~25%.150. debt syndication.880 FY12E 140. We believe.857 216. and third party distribution of insurance.1 29.8 24.9 21.225 26.794 64.8 33.931 42. allowing RoE to move closer to 20% in a capital efficient manner.6 11th August.9 FY12E 22.562 233. The bank’s strategy of moderating pace of loan growth will enable it to build a more formidable retail franchise and achieve consistently higher RoA.9 546.3 1. housing.0 2.609 52W Low ` 1.522 216.251 FY13E 171.531 33.508 52W High ` 1. with a balance sheet of ` 1.6% against 1.6 Balance Sheet (` mn) Year to March Shareholders’ funds Borrowed funds Sources of Funds Total fixed assets Net current assets Uses of Funds Valuations Diluted PE (x) Price/BV (x) ROAE (%) ROA (%) FY11 141.846 FY13E 10.431 127.2% a few years ago. It has a network of over 1000 branches and extension counters across the country. Retail advances contributed 20% to the total loan portfolio.8 24.. credit cards) will further drive growth in retail fee income. Rapidly growing franchise and new product offerings (viz. Axis Bank is the third-largest private sector bank in India in terms of asset size. and personal loan segments likely to be the key growth engines. It is also spreading across geographies and targeting presence in more than 75% of India’s districts in the next five years. it can sustain higher RoA of 1.945 226. The bank is also intensifying efforts to penetrate the remittance business by aggressively spreading its international operations.182 63.780 74. where savings and capital formation are at ~34% of GDP.7 27.003 75.
The long term prospects backed by changing consumer behavior in favor of larger discretionary spend has set the stage for a healthy growth in the retail space over the next few years.980 3.` 311 Sector Edelweiss Research Mkt Cap (` Cr. The big opportunity lies in the growing share of organized retail with the growing trend among consumers to allocate a larger share of income to consumption and gradual improvement in lifestyle. music.188 11.4 * Nos represent core retail business (PRIL+ FVRL) 11th August. and Blue Sky (fashion accessories). followed by Food Bazaar. 2011 5|P a g e .8 1. Depot (books.875 14.988 9.6 FY12E 32.000 52W High ` 528 52W Low ` 228 Retail Pantaloon Retail Ltd is a leading Indian retail company with presence across most sectors of organized retail.647 2.2 Valuations Year to March Diluted PE (x) EV/Sales (x) EV/EBITDA (x) FY11 32. benefitting retail firms. At the CMP of ` 311. By opening the retail sector for FDI. In 2001.607 3.) 7. entered modern retail in 1997 with the opening of its department store format Pantaloons.6 FY12E and 24. two years back. (represented by the core retail business).9 FY13E 164.383 2. Media reports suggest that the Cabinet could clear the proposal to allow FDI in multi-brand retail in the near term.344 4.9 9. it now operates over 20 formats which include Central (seamless malls located in city centers). the stock trades at a PE of 32. futurebazaar. Shoe Factory (footwear). Collection I (home improvement products).7 8. organized retail penetration can swell significantly. A five format company. Nod to the proposal seems likely post the backing of the Prime Minister Manmohan Singh and Finance Minister Pranab Mukherjee. We believe this will be a positive for Indian retail sector especially for larger players like Pantaloon Retail.6 FY12E 134. PRIL launched Big Bazaar.0x FY13E earnings. gifts and stationeries).6 0.com.336 16. The Indian retail landscape is evolving with interplay of several demographic and economic factors.967 1. We rate Pantaloon as a ‘Buy’ for the long term. Income Statement (` Mn) Year to March Revenues EBITDA PBT Net profit EPS FY11 109.Pantaloon Retail Ltd (PANRET) Fundamental – CAS Research Desk BUY CMP . aLL (fashion apparel for plus‐size individuals).0 11.443 11. setting the stage for the entry of large chains by the FY12 end. It has recently launched its e‐tailing venture.9 FY13E 24.107 9. a hypermarket chain.0 0. The company. a supermarket chain.
845 52W High ` 827 52W Low ` 585 Automobiles Mahindra & Mahindra (MAHMAH) operates in nine segments—automotive.796 161.3 3.870 43.0 17. financial services.1 7. particularly considering MAHMAH’s impressive track record in unlocking value of subsidiaries.0 201 FY13E 315. other new businesses (two wheelers.0 25. Systech.7 FY12E 15.5 FY13E 13. MAHMAH. Further.177 53. We believe.) ` 44. and others.5 10.2 17.796 187.8 27.530 34.926 33.7 FY12E 16.284 161.752 7. two wheelers and investment. hospitality. 2011 6|P a g e . is well entrenched with strong brands.4 1. aftermarket.6 3. Mahindra & Mahindra dominates the domestic tractors market.053 130.555 26. IT services.837 34.411 45.627 40.855 187.8 11th August.975 100. Income Statement (` mn) Year to March Revenues EBITDA PBT Net profit EPS Book Value Growth Ratios (%) Year to March Revenues EBITDA PBT Net profit EPS FY11 234. Three key structural factors—higher farm product prices. Ssangyong’s current financial performance seems to suggest a turnaround.730 33.252 (6.041 119.492 28.177 FY11 26.2 18.9 FY13E 15.9 14. as the leader in the utility vehicle (UV) segment. The returns over a three year period though could be substantial.039 33. the company enjoys pricing power.2 14. These factors are likely to drive long-term tractor demand.860 93. which consists of logistics.211 47.7 14.0 1. At the same time.730 FY12E 123. MAHMAH is the leader in the UV segment and has managed to keep its market share above 55% currently.0 4.1 22. Apart from the M&HCV space (JV with Navistar). farm equipment. and greater commercial usage of tractors—have significantly increased rural incomes and brought smaller farmers (owning <4 hectares of land) into the “tractor purchasing” ambit. incremental volumes could come from the LCV/ minivan segment. Ssangyong Motors acquisition is a strategic fit with MAHMAH’s ambitions of being a global SUV player.869 47.3 13.9 168 FY12E 273.3 20. which consists of automotive components and other related products and services.621 40.241) 130. MAHMAH is in a sweet spot as demand for tractors and utility vehicles are benefitting from rising rural incomes and government’s increased rural thrust. commanding 41% market share. firmer labour wages (notably NREGA).043 33.6 1.0 FY11 18.779 55.3 9.0 18.1 24. which Mahindra & Mahindra (M&M) is well-positioned to capitalize on. where we expect the company to regain lost market share with the launch of its sub tonne Maxximo and Gio.` 729 Sector Edelweiss Research Mkt Cap (` Cr.Mahindra & Mahindra Ltd (MAHMAH) Fundamental – CAS Research Desk BUY CMP . defense or logistics) require minimal investments.101 38.0 242 Balance Sheet (` mn) Year to March Shareholders’ funds Borrowed funds Sources of Funds Net Block Investments Net current assets Uses of Funds Valuations Year to March Diluted PE (x) Price/BV (x) EV/Sales (x) EV/EBITDA (x) ROE (%) FY11 103.870 FY13E 148. with a dominant market share and low competition in the segment.422 4.0 17. infrastructure.134 24.9 18.
5 FY13E 16.22. multiple usage of products offer further upside.9 20.349 9. as the new supply will just be sufficient to meet the additional demand.0 18. other businesses have grown over the years.030 72.776 Balance Sheet (` mn) Year to March Shareholders’ funds Borrowed funds Sources of Funds Net Block Investments Net current assets Uses of Funds Valuations Year to March Diluted PE (x) Price/BV (x) EV/Sales (x) EV/EBITDA (x) ROAE (%) FY11 FY12E FY13E 1.261 8.678 48.90.9 21.13.1 19.0 39.591 2.0 FY12E 24.8 9.7 FY12E 88.75.2 14. we expect the FMCG market to cross the ` 2 tn mark by 2015.828 1. Recently.6 6.678 2. Though the cigarettes division is still the major source of revenue. contributing ~49% to net sales and ~34% to gross sales in FY10. Low penetration and low per capita daily consumption offers room for further growth.4 FY12E 17.0 2.52. from ~` 1 tn currently ITC is one of the largest FMCG companies in India with businesses spanning cigarettes. ITC's pricing power is strong due to relatively inelastic demand profile of cigarettes and the company's ~80% market share.179 6. Increasing rural penetration to urban penetration levels presents another growth opportunity.0 21.458 29.495 98.9 7.778 52W High ` 211 52W Low ` 149 FMCG Favourable macroeconomic drivers such as GDP and population growth.6 21. contributing positively to the bottom line.382 48. With the Indian economy slated to grow at about 8% for FY11E.1 18.4 20.` 199 Sector Edelweiss Research Mkt Cap (` Cr. which can help it transform into a retailing giant.13.2 FY13E 3.477 1.678 2.0 33.ITC Ltd (ITCLTD) Fundamental – CAS Research Desk BUY CMP .07.0 tn by FY15. and biscuits.2 7.547 45.0 20.1 18.60.1 18. hotels.246 1.678 21.04.737 2.90. paper and packaging.7 5.6 8. This translates into increasing margins for ITC as compared to any other FMCG company. coupled with rising income levels and lifestyle changes to drive the FMCG market growth in India.01.0 FY13E 20.0 11th August.0 36. 2011 7|P a g e .75.046 846 1. and agri-commodities.077 74.) ` 1.678 48.638 61.092 90.837 1. The e-Choupal network established by ITC gives it a phenomenal sourcing edge.5 19. The FMCG division is expected to scale up and turn profitable in FY13.439 1. going forward.03.79.839 1.255 1.621 1.255 1.349 50. it has set up a branded foods division with products such as staples.4 17.64. The demand-supply conditions are in favor of the paper businesses. IMF expects the Indian economy to be ~USD 2. we expect cigarettes volumes to continue to witness growth momentum. We expect cigarettes volume growth to be 6-7% with upward bias for FY12. confectionery. Assuming FMCG spend/GDP trend to continue.1 18. Income Statement (` mn) Year to March Net Revenues EBITDA PBT Net profit EPS Book Value Growth Ratios (%) Year to March Revenues EBITDA PBT Net profit EPS FY11 74. Cigarettes volume growth of 8% in Q1FY12 surprised positively against our expectation of 6%.123 FY11 16.1 FY11 29.4 26.9 21.05.123 91.0 23.
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