Highest Conviction Buys & Sells

Highest Conviction Buys & Sells

Analyst: Saurabh Mukherjea, CFA, saurabhmukherjea@ambitcapital.com, Tel: +91 99877 85848

ITC:

No more uncertainty (ITC IN, mcap US$34.4bn, BUY, TP `239, 7% upside)

Analyst: Anand Mour, anandmour@ambitcapital.com, Tel: +91 22 3043 3169

Now that the excise hike uncertainty is out of the way, the effective 15% excise impact on ITC is likely to be met easily by the company by passing on the increase to the consumers. Factoring this into our earnings, we we expect ITCs cigarettes PBIT to grow at 21% CAGR in FY13. Key points driving this growth are: Strong earnings growth in cigarettes business: We expect the cigarettes PBIT to grow 21% in FY13driven by 1% volume growth and 16% realisation hike. EPS upgrades: In light of more certainty on the excise structure and strong growth in the FMCG business, we expect EPS upgrades on the stock. Our FY13 EPS estimate on ITC is `9.9, which is 7% ahead of consensus. Call option of 65mm cigarettes: We also point to our note "Tobacco: Call option for cigarette companies 65mm" on March 19, 2012, where we highlight that whilst the Union Budget has introduced an ad-valorem duty on cigarettes (10% of 50% of maximum retail price), it also raised the lowest slab from cigarettes exceeding 60mm to cigarettes exceeding 65mm. We believe this has potential to change the industry dynamics as 65mm can replace 69mm significantly. Our two scenarios highlighted in the note point to the potential upside from these levels. In this scenario, ITC's EPS has potential to increase to `10.7.

The stock currently trades at an earnings multiple of 22x FY13E and at EV/EBITDA multiple of 16x FY13E

Not yet out of the woods SBIN IN, mcap US$28.1bn, SELL, TP `1,775, 19% downside)
Analyst: Krishnan ASV, vkrishnan@ambitcapital.com, Tel: +91 22 3043 3205
Asset quality challenges unlikely to be surmounted: Challenges from asset quality and the uncertainty around equity infusion have been widely known and acknowledged by SBI and the investor community alike for some time now. We continue to view incumbent asset quality and the uncertainty around equity infusion as key challenges for SBI to surmount. While we acknowledge the impressive core performance as reflected in recent NII performance, we do not judge the P&L performance in isolation. We remain cognizant of the balance sheet risks that SBI is vulnerable to, especially in light of the sectors that have contributed to SBI's incremental loan book growth (Iron & Steel, Other Metals, Infrastructure, Gems & Jewellery, Engineering and Textiles are the highest contributors to incremental loan book growth). Given that these sectors are heavily dependent on domestic as well as global growth outlook (on which we remain reasonably bearish), we see further stress building up in SBI's books. Over and above this, SBI is especially vulnerable to further stress from its exposure to the large domestic business conglomerates. Such big ticket corporate exposure further accentuates our asset quality concerns vis a vis SBI (even AAA-rated corporates can and do slip). Incremental pressure on earnings from relatively low provisioning coverage: With its reported provisioning coverage ratio (PCR) diluted over the last two quarters to ~62%, we expect incremental loan loss provisioning to exert a downward pressure on earnings. Valuation: Quoting at 1.9x our FY13E standalone ABVPS of `1,150, we remain SELLers with a valuation of `1,775.
Ambit Capital Pvt Ltd 21 March 2012, Page 1

State Bank of India:

Highest Conviction Buys & Sells

Wipro: Priced to disappoint, reiterate Sell

(WPRO IN, mcap US$21bn, SELL, TP ` 300, 29% downside)
Analyst: Ankur Rudra, CFA, ankurrudra@ambitcapital.com, Tel: +91 22 3043 3211
Wipro tends to be the worst performer when clients are operating under a volatile economic environment and looks acutely vulnerable to a downturn, in the midst of its restructuring and realignment of management. Despite business confidence recovering sharply across Americas corporate sector and positive commentary from Oracle, we believe that (a) the already frozen IT budgets (flat to slightly negative) are unlikely to be revised upwards as worries still persist regarding the sustainability of the recovery and (b) in an election year (2012) large outsourcing decisions do face greater scrutiny adding a further headwind to Indian vendors. Market appears to be not considering this volatile environment and has priced in strong expectations of a recovery that has led to a rebound of share prices in the last two months. However, we think that the assumptions of a recovery are based on (a) the performance of just one quarter, which was supported by a few milestone payments which helped pricing and (b) Guidance of 1-3% US$ sequential revenue growth which implies better sequential growth than that of Infosys. Wipro trades at a small discount to Infosys on one-year forward P/E (Infosys: 17.5x and Wipro 16.3x) but more importantly at par on a CY12 EV/EBITDA basis (Infosys: 11.9x and Wipro 12x). We reiterate our strong SELL recommendation on Wipro and caution investors for a probable low-to-poor growth environment as against consensus' expected high growth. We reiterate SELL.

HUL: All factored in the price

(HUVR IN, mcap US$17.2bn, SELL, TP `403, 2% upside)
Analyst: Anand Mour, anandmour@ambitcapital.com, Tel: +91 22 3043 3169
HUL has seen renewed aggression in enhancing its distribution capabilities (direct reach increased by 50% over the last two years) and a reinforced portfolio (over 50% of its brands launched/relaunched during last two years with portfolio gaps are being filled in), we expect HUL to average 8% volume growth over FY11-FY14. This should lead to revenue and PAT growing at 16% and 20% CAGR respectively over FY11-FY14. However, all this is reflected in the stock price. We are concerned with the deceleration in the personal products revenue growth in the December quarter. Our interaction with trade suggests that volume growth for HUL has begun to see decleration, which was echoed in media by the management as well. Moreover, when P&G has seen 'Pantene, the company's shampoo brand, clocking a growth of over 80% during October-December 2011 in India, largely on account of sachet distribution, while its laundry volume is up by nearly 25%". We believe risk of competitive intensity increasing, reflecting in either lower gross margins or higher ad spends. The personal products PBIT margin in 3QFY12 (third quarter is seasonally the best quarter for personal products margin due to high winter portfolio) is the lowest at least since FY04 for the Oct-Dec quarter. This highlights the multiple headwinds HUL faces in the coming quarters - volume growth slowdown, personal products margin under pressure, risks of higher ad spends. The stock currently trades at an earnings multiple of 28.4x FY13E and at an EV/EBITDA multiple of 21x FY13E.

Ambit Capital Pvt Ltd

21 March 2012, Page 2

Highest Conviction Buys & Sells

HCL Tech: Robust deal win momentum, attractive valuations

(HCLT IN, mcap US$6.8bn, BUY, TP ` 534, 11% upside)
Analyst: Ankur Rudra, CFA, ankurrudra@ambitcapital.com, Tel: +91 22 3043 3211
The last month has seen business confidence recovering sharply across Americas corporate sector boosted by better than expected employment number and positive commentary from Oracle indicating license sales bouncing back. However, we believe that (a) the already frozen IT budgets (flat to slightly negative) are unlikely to be revised upwards as worries still persist regarding the sustainability of the recovery and (b) in an election year (2012) large outsourcing decisions do face greater scrutiny adding a further headwind to Indian vendors. Given this uncertainty, as highlighted in our note - Who wins a downturn- we believe HCLT & TCS will do better when clients are operating under a volatile economic environment. This is further evidenced by HCLTs robust deal win momentum (18 deals with a total TCV of US$1 bn for Dec-11 ending quarter and several announced since) that will maintain the growth momentum of its industry-leading RIM business over CY12-14. Promising deal wins further give relatively better revenue visibility for HCL Tech (which is restricted to two quarters for most IT firms). In difficult times, scale service lines focussed on cost savings (RIM, BPO & AM) tend to outperform discretionary services and this gives HCL Tech a better positioning over its Tier 1 peers. We find HCLT as the most attractive BUY recommendation in our IT services coverage universe given a) Its strong positioning in RIM and b) Relatively attractive valuations (12x FY13E, TP of ` 534, 9% upside), reiterate BUY.

Maruti Suzuki:

Competitive headwinds persist (MSIL IN, mcap US$7.7bn, SELL, TP `1,000, 25% downside)

Analyst: Ashvin Shetty, ashvinshetty@ambitcapital.com, Tel: +91 22 3043 3285

While Maruti Suzukis February volume were marginally better than our expectations and going forward the company is likely to benefit from the increased availability of diesel engines (post tie-up with Fiat for procurement of diesel engines) and incremental contribution from new models such as the New Swift Dzire (launched wef February 1, 2012), our volume growth estimates at 21% YoY for FY2013 (10% over FY2011 volumes) largely factor in these positives and leave little scope for upgrades to our existing volume estimates. Also we expect short term negative impact on the volumes (industry as well as Maruti Suzuki) from excise duty hike (around 200bps) announced in the recent budget. At the current market price, the stock trades at 16xFY2013 net earnings which seems to ignore these concerns. Maintain SELL.

Ambit Capital Pvt Ltd

21 March 2012, Page 3

Highest Conviction Buys & Sells

Bank of Baroda:

Most defensive play among state-owned banks (BOB IN, mcap US$6.3bn, BUY, TP `930, 18% upside)

Analyst: Krishnan ASV, vkrishnan@ambitcapital.com, Tel: +91 22 3043 3205

Measured pace of asset book growth: Bank of Baroda (BOB), with a loan book of ~$7bn, has consistently exhibited loan book growth a few percentage points ahead of the system and has gradually pipped larger and older banks (with a longer history) to emerge as the third largest state-owned bank in the system, behind State Bank of India (SBI) and Punjab National Bank (PNB). BOB has benefited from a large overseas book (~1/4th of the total portfolio) that offers a perfect complement to the bank's domestic lending operations (diversified avenues for deployment often help balance the bank's blended profitability in terms of fund-based as well as fee-based income). Disciplined underwriting drives best-in-class asset quality: BOB has demonstrated a disciplined approach towards underwriting that reflects in system-lowest incremental delinquencies (1% annualized as of Dec'11) despite an economic environment that is not particularly conducive to sustaining such superior asset quality. Over the last 3 years, BOB has gradually re-positioned itself as the most defensive play among state-owned banks from an asset quality perspective. Sustainable cross-cycle RoAs at ~1.3% and RoEs in excess of 20%: Widely considered as a sensible judge of its own risk appetite, BOB boasts a consistent record of high profitability, superior efficiency ratios (one of the lowest cost-to-income ratios in the system) and high return ratios (with RoAs consistently clocking in the range of ~1.3%). Valuation: At its CMP of `800, BOB quotes at 1.1x our FY13E ABVPS of `700 and is best positioned among stateowned banks to hold its asset quality and return ratios in this environment.

Margins to remain under acute pressure (LICHF IN, mcap US$2.2bn, SELL, TP `184, 25% downside)
Analyst: Pankaj Agarwal, CFA pankajagarwal@ambitcapital.com, Tel: +91 22 3043 3206
Despite disappointing quarterly results over the last two quarters, LICHF has outperformed its peers over the last two quarters as: (i) The ongoing equity capital raise through preferential allotment to the promoter LIC followed by a QIP has been taken favorably by the street due to it being BVPS accretive (~15% BVPS accretive assuming all new cash comes at the current price of `250/share) despite being 5% EPS dilutive and reducing the RoE from 21% to 18%; (ii) Moreover, expectation of a sharp increase in net interest margins in FY13 to 2.8%-3.0% has helped valuations of the company. However, we believe that the company will miss consensus FY13 EPS expectations by ~15%-20% as NIMs of the company will continue to remain under pressure due to: (i) cost of funding continuing to remain high due to elevated bond yields and the liability profile of the company; (ii) Increased competition from banks and the regulatory changes on removal of penalty on prepayments and uniform rates for old and new borrowers will continue to put pressure on yields; (iii) The company will repay `7.5bn of interest free liabilities back to its parent by the end of FY12, which will mitigate to some extent the impact of additional equity on NIMs and; (iv) We do not see the developer portfolio growing any time soon based on recent disbursal trends and interaction with the management. Hence the companys EPS growth will not be able to meet consensus high expectations and will miss expectations by 15%-20% in FY13. This will lead to derating of the stock, which is currently priced at 11.7x FY13 P/E and 1.8x FY13 P/BV after taking into consideration dilution at `250/share.

LIC Housing Finance:

Ambit Capital Pvt Ltd

21 March 2012, Page 4

Highest Conviction Buys & Sells

The pioneer is well placed to benefit from excess demand (PLNG IN, mcap US$2.4bn, BUY, TP `190, 17% upside)
Analyst: Dayanand Mittal, dayanandmittal@ambitcapital.com, Tel: +91 22 3043 3202
PLNGs competitive positioning in the LNG regasification business due to its pro-active capacity expansion, that too at lower capex, makes it our preferred play on the domestic gas consumption story. We expect LNG demand from the industrial segment to likely remain strong, as LNG prices are 11%-25% lower than the prices of alternative liquid fuel. PLNG has high earnings visibility as it does not bear any pricing, volume or margin risk for 80%-85% of its regas volumes, as they are based on long term (+20 years) and back-to-back contracts with LNG suppliers and gas offtakers. We have a BUY rating on the stock with a target price of `190/share (17% upside). The key trigger for the stock is the signing of the 2mmtpa-3mmtpa of long term/short term LNG contract, which could provide volume growth visibility for its upcoming Kochi capacity. Our interaction with the management as well as industry sources suggest an increasing likelihood of: a) the company entering into an LNG supply agreement with US-based LNG exporters and b) conversion of its existing 2.5mmtpa LNG supply MoU with Gazprom into a legally binding agreement. The stock is currently trading at an attractive valuation of 11.6x FY13 EPS.

PLNG:

Torrent Power: A torrent of cash

(TPW IN, mcap US$1.9bn, BUY, TP `322, 50% upside)
Analyst: Bhargav Buddhadev, bhargavbuddhadev@ambitcapital.com, +91 22 3043 3252
Operationally, Torrent Power has the best efficiency in the sector (FY11 average PLF was~83% and average T&D losses were ~7.2% compared with Indias average PLF of ~75.1% and T&D losses of ~25%) and stellar cash flow generation (FY11 CFO/PAT stood at 1.5x v/s peers 1.1x). It also has one of the strongest balance sheets (FY11 net debt:equity was 0.6x), minimal exposure to merchant power (~20%) and zero exposure to Chinese equipment. This compares favourably with its private sector peers (Adani Power, Lanco Infratech, KSK Energy, JSW Energy) for whom net debt:equity is at 2.6x, exposure to merchant power is in the range 20%-72% and have a majority of their equipment purchased from Chinese vendors. The stock is trading at FY12P/BV of 1.7x, which is at a discount of ~20% v/s peers (we have only considered NTPC and Adani Power given that the stock prices of other companies are severely beaten down given concerns around fuel availability, offtake, land acquisition and leveraged balance sheets). We believe the discount to peers is not justified given Torrent's superior cash flows (FY12 FCF yield of ~16% and a dividend yield of 3%), higher RoE (24% v/s 13% for peers) and improving visibility on pipeline. Note that in our DCF-based SOTP (which values the company at `322, 48% upside) we have modelled excess cash to earn a pretax return of 6%. In the event Torrent makes an acquisition (given that there are several projects up for sale due to distressed valuations), it will act as a big positive for the stock given that equity IR` on a minimum are likely to be 3x our assumed pretax return on excess cash (note Torrent generated operating cashflows of `19bn in FY11, which is equivalent to it doubling its installed capacity assuming debt:equity of 70:30).

Ambit Capital Pvt Ltd

21 March 2012, Page 5

Highest Conviction Buys & Sells

Thermax:

Challenges in core and new businesses (TMX IN, mcap US$1.1bn, SELL, Last Published TP `429, 10% downside)

Analyst: Bhargav Buddhadev, bhargavbuddhadev@ambitcapital.com, +91 22 3043 3252

Whilst Thermax is a superb franchise (given strong competitive positioning in the captive boiler market and its focus on operating cashflow generation) run by a top class management team, we are SELLers given challenges both in its core (shrinking captive boiler market) and the new business (overcrowding of suppliers in the utility boilers market). The reason why we are SELLers: Shrinking captive market: Thermax's bread and butter market is shrinking. Our discussions with primary data sources point to ~20%-25% YoY drop in captive boiler sales in India in FY12 on the back of declining merchant realizations, a shift by industry participants in favour of becoming IPPs (from being captive power plant operators earlier) and poor access to coal, the cheapest fuel for power plants. Competition is cut-throat in the captive market: Also one needs to look at Thermax's competitors like Cethar Vessels, Thyseen Krupp, BHEL and IJT who are equally hungry for orders. This is corroborated from their (excluding BHEL) very aggressive bidding for orders, which is unlike the strategy of Thermax and BHEL. In other words, there is a risk of Thermax losing market share even further. Note that it has already lost market share to, now, ~<40% from the earlier 55%+ around FY2006. We are not including L&T here, which is another company that has reported 50%+ YoY decline in order inflows for 3Q. With pressure on Ravi Uppal, President (Power), L&T, to step up, we do not rule out a scenario wherein he may look at the captive power market in addition to bidding aggressively in the IPP market. No longer a play ONLY on the captive power market: Note that Thermax is no longer a play ONLY on the captive power market given that Thermax's share of investment in the JV for supercritical boilers is a sizeable `3.5bn (boiler capacity is 3gW) compared to its March 2012 net block of `7.9bn. Whilst relative to BHEL,its dependence on IPPs can be said to be lower (BHEL has less than 15% of revenues arising from this segment), if Thermax has to grow its earnings from hereon, it will have to resort to booking orders from IPPs (see point 4 below on why we think the captive market will not give earnings growth) wherein visibility is poor given the current challenges relating to fuel, environment clearances and land acquisition. Improving scenario on industrial capex does not imply major growth in order intake: Note that FY13 order inflow for Thermax in a scenario of a recovery in industrial capex coupled with low visibility on orders from IPPs, is unlikely to result in a significant YoY growth in order inflow. This is because the per annum captive boiler market is unlikely to grow significantly from the current ~3gW (`60bn) given issues in the availability of imported coal. Going forward, imported coal is likely to be used up by IPPs given that 13gW of imported coalbased projects are currently under construction (compared to the less than 10gW that is currently operational). On the top of this, infrastructure challenges in transporting such a huge quantity of imported coal are likely to further alleviate challenges.

Valuation: Based on our DCF model (assuming WACC of 13.5% and a terminal growth rate of 4%), our last published valuation for Thermax was `429 implying an FY12 P/E of 12.4x and an FY13 P/E of 13.3x respectively. On a relative basis, Thermax trades at a ~30% premium to BHEL which we believe is unjustified primarily because BHEL has a far more superior order coverage ratio (~3x of FY12 revenues v/s ~1x for Thermax). In a scenario wherein orders are hard to come by, it is preferable to invest in a company which at least has a good order book coverage as this implies good visibility in terms of future revenues. This coupled with the fact that Thermax is under pressure to maintain a negative working capital cycle (one of the main reasons why investors preferred hermax) is likely to reduce its premium to BHEL.

Ambit Capital Pvt Ltd

21 March 2012, Page 6

Highest Conviction Buys & Sells

Gujarat Gas:

On the backfoot (GGAS IN, mcap US$1.0bn, SELL, 8% downside )

Analyst: Dayanand Mittal, dayanandmittal@ambitcapital.com, Tel: +91 22 3043 3202

GGass business model could face challenges due to: (i) Rising dependency on LNG (due to decline in supply from the matured PMT field) while its limited exposure to the CNG/PNG business would mean a low chance of incremental domestic gas allocation: (ii) Relatively weak pricing power due to its presence in the not-socompetitive Industrial segment and high taxes on CGD in Gujarat; and (iii) Volume growth stagnating at ~5% due to saturating industrial segment demand. We have a SELL rating on the stock with a target price of `369/share (8% downside). GGas is currently trading at a rich valuations: 1-year forward PE of 15.4x, EV/EBITDA of 9.9x and PB of 4.5x. But the low volume growth and pressure on its margins would mean that CY11-CY14E earnings CAGR will likely be muted at only 4%.That being said given that BGs 65% stake is up for sale (and given that this will be followed by a 26% open offer), a significant take-out premium could result in shares trading well above our fundamental valuation.

Eicher Motors:

A new commercial vehicle powerhouse (EIM IN, mcap US$1.0bn, BUY, TP `2,051, 8% upside)

Analyst: Ashvin Shetty, ashvinshetty@ambitcapital.com, Tel: +91 22 3043 3285

WE continue to highlight Eicher Motors as our conviction BUY in the auto sector on the following grounds: a) We expect increase in market share in heavy tonnage trucks from 3.1% currently to 8.2% by CY2015 on the back of positive user feedback on quality and fuel efficiency, improved availability of spare parts and after-sales network, keen involvement of Volvo and the duopoly industry structure (which makes it vulnerable to competition); b) We expect margin improvement in commercial vehicle business from 9.1% in CY11 to 10.2% by CY2015 (for core Eicher trucks and buses) on the back of narrowing pricing discounts v/s peers, reduction in sales incentives/selling expenses and operating leverage benefits; c) With premiumisation on the rise in the Indian motorcycle market, we believe Royal Enfield is batting on a good wicket given its leadership in the 250cc and above bikes and strong brand appeal. With near doubling of capacity by 1QCY13, we expect volume CAGR of 21% over CY11-CY15. Our DCF model values the motorcycle business at `600/share, implying 9x CY13 EBITDA, a 10% discount to Hero MotoCorp and Bajaj Auto. Our DCF valuation for VECV yields `1,451/share, implying 7.3x CY13 EBITDA (i.e. 5% premium to Ashok Leyland). This gives us an SOTP-based value of `2,051 i.e. 8% upside from the current levels.

Jubilant Foodworks:

Rapid new-entry in QSR; rising marketing

spends (JUBI IN, mcap US$1.4bn, SELL, 42% downside)

Analyst: Rakshit Ranjan, CFA, rakshitranjan@ambitcapital.com, +91 22 3043 3201
Jubilant Foodworks currently trades at 50x FY13 earnings. We expect a slowdown in earnings momentum due to a combination of market share related limitations to growth, fierce competition from established peers (especially Pizza Hut Delivery) and an annual run rate of over US$200mn of investment from private equity in this space over the past two years. We expect the decline in same store sales growth rates to below 30% YoY to be a key negative catalyst for the stock. Also, an increase in marketing spend will lead to lack of margin expansion and hence disappointment on consensus forecasts of rapid margin expansion for the company. We reiterate our SELL recommendation.

Ambit Capital Pvt Ltd

21 March 2012, Page 7

Highest Conviction Buys & Sells

Kotak Mahindra Bank:

A call option on the recovery (KMB IN, mcap US$8bn, BUY, TP `609, 13% upside)

Analyst: Pankaj Agarwal, CFA pankajagarwal@ambitcapital.com, Tel: +91 22 3043 3206

Call option on recovery: Whilst at 2.6x FY13 P/B Kotak Mahindra Bank (KMB) is not inexpensive, consistency in earnings growth driven by robust loan growth, robust fee income growth and stable net interest margins (supported, hopefully, by a recovery in the capital markets) should continue to support valuations. Low exposure to big ticket loans in stressed sectors such as telecom, power, infra and aviation insulates KMB from negative surprises on credit quality, a parameter to which most other large Indian banks are exposed. We remain BUYers with a valuation of `609/share.

VA Tech Wabag: Order flow pick up can drive growth

(VATW IN, mcap US$220mn, BUY, TP `615, 48% upside)
Analyst: Nitin Bhasin, nitinbhasin@ambitcapital.com, Tel: +91 22 3043 3241
VA Tech through its excellent project management skills and technical strengths of blending its understanding of evolving fragmented water treatment technologies, offers unique solutions to clients in the water/waste water treatment industry. A high-quality reference list and a cash rich balance sheet (0.1x debt: equity) provide real substance to its strategy of cultivating newer geographies in the populous and water-scarce regions of Asia and Africa. Government of Indias recent announcement in the FY13 budget including: (a) Increase in allocation of funds by 27% YoY for improvement of the rural water and sanitation sector; (b) Setting up of the Government owned Irrigation and Water Resource finance company for the channelization of funds for sectors like microirrigation, waste water management/sanitation, and (c) Increase in allocation of funds under the Accelerated Irrigation Benefit Programme (AIBP) by 13% YoY, will drive the investments in the Indian municipal water/waste water treatment sector. Given that VA Tech has ~40% market share in municipal water/waste water treatment segment, increased budgetary allocation implies strong order flow and revenue growth visibility for VA Tech. Further, on-track and profitable completion of the Chennai Desalination Plant (expected to complete in 1HFY13) can be a near-term catalyst for the stock, as it will reinforce VA Tech's superior execution capabilities v/s its peers. VA Tech is currently trading at 13x FY13 estimated EPS of `32 which appears to be at a premium to mid-sized construction/engineering companies. But digging deeper, it appears more than justified in the light of certainty of competitive and balance sheet strengths. We expect VA Techs valuations to rerate, as the higher order flow and revenue growth will drive EPS and RoICs to levels north of 17% (adjusted for 50% cash holding).

A solid, sensible contractor developer (SADE IN, mcap US$460mn, NOT RATED)
Analyst: Nitin Bhasin, nitinbhasin@ambitcapital.com, Tel: +91 22 3043 3241
Sadbhav is a strong and a sensible contractor developer with superior cash flow generation profile, no immediate equity dilution risks and a strong balance sheet for capturing growth when the Indian infrastructure and construction sector recovers. In our competitive mapping of the Indian construction sector, Sadbhav not only stands as the strongest player, it has continuously gained competitiveness over the last theree years as its steady gross block turnover, lower fixed and financial costs make it a leader on cost competitiveness . Amongst the developers, it stands out as the strongest in terms of execution, and moderately, in terms of core profitability (RoCEs). We expect consolidated returns (RoCEs and RoEs) to improve with rising cash flow generation and profitability of the operational BOT assets and the large assets getting commissioned over the next quarter. The stock presently trades at 1.8x FY13 book vale and 7.8x FY13 EBITDA and despite no dilution risk and expected improvement in profitability, the stock trades at a discount of 40% to its five-year average of one-year forward book and EBITDA.

Sadbhav Engineering:

Ambit Capital Pvt Ltd

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Highest Conviction Buys & Sells

Info Edge: Cementing leadership in real estate

(INFOE IN, mcap US$740mn, BUY, TP ` 875, 23% upside)
Analyst: Ankur Rudra, CFA, ankurrudra@ambitcapital.com, Tel: +91 22 3043 3211
As an undisputed leader in Indian online classifieds, Info Edge enjoys several strengths including ability to maintain super normal profitability in its core recruitment business and excellent cash conversion that affords it the ability to diversify into attractive high growth verticals including real estate, financial aggregation and Web 2.0 businesses. We expect 40% FY11-14 earnings growth supported by growth in real estate (99acres) and operational leverage as more businesses break even. This makes the shares look attractive at 23xFY14 P/E and 15x FY14 EV/EBITDA. Our SOTP based 3 stage DCF valuation points to ` 875, implying 23% upside and FY14 P/E of 27x.

Sobha Developers:

Ticks all the right boxes (SOBHA IN, mcap US$600mn, BUY, TP `462, 53% upside)

Analyst: Rakshit Ranjan, CFA, rakshitranjan@ambitcapital.com, +91 22 3043 3201

Sobha is outperforming its peers on all fundamental metrics including the ratio of 'CFO/interest cash outflow', ongoing sales run rate in FY12 and new launches and deliveries over the past 3 years. Consequently, we do not expect to see signs of stress on Sobha's balance sheet in future. The company's land bank of over 2,500 acres is valued at a net cost of around `18bn on the balance sheet. Using current land prices in the respective locations, or using a long term DCF on land development, the worth of this land bank is likely to be at least `60bn (3x-4x cost). Our base case scenario attaches a value of `36bn (2x cost) to the land bank and uses a conservative DCF approach for its ongoing and forthcoming projects. The stock currently trades at an FY12 P/B multiple of 1.4x, in line with the sector average. However, given its understated net worth, undervalued land bank and superior visibility on cash flows, Sobha deserves a premium rating relative to its peers.

Blue Star: To remain in the red

(BLSTR IN, mcap US$245mn, SELL, TP `165, 15% downside)
Analyst: Nitin Bhasin, nitinbhasin@ambitcapital.com, Tel: +91 22 3043 3241
Historically Blue Star has been a better project management company in the MEP E&C space but over the last couple of years it has lost its competitiveness because of its poor choice of clients and poor capital allocation towards loss-making/low return generating acquisitions. Whilst there has been some improvement in the balance sheet as visible in the 3QFY12 results, we find from our primary data checks, a continuing aggressive bidding from Blue Star to win projects at low costs or with payment risks from poor quality clients. Recent high attrition and continuing high leverage in the balance sheet will restrict its capability to effectively execute past orders and also win new orders when clients (especially from infra segment) are expected to be a little stingy on payments. The unitary cooling products business may grow at a rate higher than the industry but we expect the gains of growth to be offset by the lower profitability on account of higher marketing and penetration spends. The stock is presently trading at 16x FY13 earnings and 3.6x FY13 book, which are at 15% and 45% discount to their 5-year historical averages, respectively. We expect these discounts to continue and possibly widen as we do not expect material balance sheet improvement from hereon and losses to continue for another couple of quarters.

Ambit Capital Pvt Ltd

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Highest Conviction Buys & Sells

Institutional Equities Team

Saurabh Mukherjea, CFA Research Analysts Aadesh Mehta Anand Mour Ankur Rudra, CFA Ashvin Shetty Bhargav Buddhadev Chhavi Agarwal Dayanand Mittal Gaurav Mehta Hardik Shah Jatin Kotian Krishnan ASV Nitin Bhasin Pankaj Agarwal, CFA Parita Ashar Puneet Bambha Rakshit Ranjan, CFA Ritika Mankar Mukherjee Ritu Modi Shariq Merchant Sales Name Deepak Sawhney Dharmen Shah Dipti Mehta Pramod Gubbi, CFA Sarojini Ramachandran Production Sajid Merchant Kausalya Vijapurkar Production Editor (022) 30433247 (022) 30433284 sajidmerchant@ambitcapital.com kausalyavijapurkar@ambitcapital.com Regions India / Asia India / Asia India / Europe India / Asia UK Desk-Phone (022) 30433295 (022) 30433289 (022) 30433053 (022) 30433228 +44 (0) 20 7614 8374 E-mail deepaksawhney@ambitcapital.com dharmenshah@ambitcapital.com diptimehta@ambitcapital.com pramodgubbi@ambitcapital.com sarojini@panmure.com Industry Sectors Banking / NBFCs FMCG Technology / Telecom / Education Automobile Power / Capital Goods Construction / Infrastructure Oil & Gas Derivatives Research Technology / Education Services Metals & Mining / Healthcare Banking Construction / Infrastructure / Cement NBFCs Metals & Mining / Media / Telecom Power / Capital Goods Mid-Cap Economy Cement Consumer Desk-Phone (022) 30433239 (022) 30433169 (022) 30433211 (022) 30433285 (022) 30433252 (022) 30433203 (022) 30433202 (022) 30433255 (022) 30433291 (022) 30433261 (022) 30433205 (022) 30433241 (022) 30433206 (022) 30433223 (022) 30433259 (022) 30433201 (022) 30433175 (022) 30433292 (022) 30433246 E-mail aadeshmehta@ambitcapital.com anandmour@ambitcapital.com ankurrudra@ambitcapital.com ashvinshetty@ambitcapital.com bhargavbuddhadev@ambitcapital.com chhaviagarwal@ambitcapital.com dayanandmittal@ambitcapital.com gauravmehta@ambitcapital.com hardikshah@ambitcapital.com jatinkotian@ambitcapital.com vkrishnan@ambitcapital.com nitinbhasin@ambitcapital.com pankajagarwal@ambitcapital.com paritaashar@ambitcapital.com puneetbambha@ambitcapital.com rakshitranjan@ambitcapital.com ritikamankar@ambitcapital.com ritumodi@ambitcapital.com shariqmerchant@ambitcapital.com Head of Equities (022) 30433174 saurabhmukherjea@ambitcapital.com

Ambit Capital Pvt Ltd

21 March 2012, Page 10

Highest Conviction Buys & Sells

Explanation of Investment Rating

Investment Rating Expected return (over 12-month period from date of initial rating) >5% <5%

Buy Sell
Disclaimer

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Additional information on recommended securities is available on request.

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Ambit Capital Pvt. Ltd. Ambit House, 3rd Floor 449, Senapati Bapat Marg, Lower Parel, Mumbai 400 013, India. Phone: +91-22-3043 3000 Fax: +91-22-3043 3100 21 March 2012, Page 11