a strong presence across the entertainment industry value chain of
content production, distribution, and exhibition, Adlabs becomes the
consumption and leisure spends will remain buoyant as disposable
incomes rise across the country fuelling growth at Adlabs.
produces and distributes films, and is a dominant player in the
multiplex segment. It has also acquired 51 per cent stake in television
content producer Synergy Communications, the maker of Jhalak Dikhhla
Jaa and Kaun Banega Crorepati.
the FM radio business, its subsidiary, which runs Big FM has 44 FM
licenses across India. This could also become a value unlocking
opportunity going forward.
the past three years, Adlabs has impeccably delivered a top line growth
of over 100 per cent y-o-y, along with high profitability. In the
September 2007 quarter, it raked in a whopping 69 per cent operating
going by the past numbers, operating margins have remained in excess of
50 per cent consistently, with net profit margins at over 22 per cent.
The stock has appreciated three-fold since January 2007 and should do
Bank of Baroda
Bank of Baroda has a strong presence in western
India —a key zone for retail and industrial growth—with equally good
Further, the bank is one
of the few banks having a substantial international presence, which
contributes 18-20 per cent to total business and 30 per cent to
profits. This business is expected to rise further with the bank
growing its global presence.
bank has improved its fundamentals over the past several years on key
parameters such as net interest margins (NIMs) and asset quality
despite growing at a robust pace (asset growth CAGR of 19 per cent in
FY04-07). Going ahead, the bank’s focus on NIMs backed by moderate
growth augurs well.
its initiatives such as online trading services, and joint ventures in
insurance and asset management, will help it create value for its
triggers could be in the form of consolidation within the public sector
bank space. All this put together makes this stock, which is reasonably
valued at 1.4 times its FY09 estimated book value, an attractive
Though Bharat Bijlee has risen by a whopping 228.5 per cent in the last one year, even at current levels, it is inexpensive.
Consider this: The company has investment in various companies including Siemens, HDFC and ICICI Bank.
At current rates, their
combined value works out to Rs 317 crore, or about Rs 560 per share.
Excluding this, the core business is valued at attractive valuations of
20 times FY08 earnings and 15 times FY09 estimated earnings.
company is capitalising on the emerging opportunities in the power
transformer sector, which accounts for 65 per cent of its total
revenues with the balance from motors.
the Eleventh Five Year Plan, a total power generation capacity of
78,000 mw is planned. This augurs well for transformer manufacturers
such as Bharat Bijlee.
company on its part has recently expanded its transformer capacity to
11,000 MVA from 8,000 MVA. The motors business is also witnessing 25
per cent growth and Bharat Bijlee has forayed into higher frame motors
of up to 400 kw. All this put together make Bharat Bijlee a good pick.
Stocks of shipbuilding companies have been
re-rated on the back of rising order book-to-sales to over seven times.
The stock price of ABG Shipyard has gone up 267 per cent, while Bharati
Shipyard is up 107 per cent over the last one year.
gain has been higher in the case of ABG Shipyard, thus stretching its
valuation at 33 times its FY08 estimated earnings. Bharati Shipyard is
still trading at a comfortable 18 times estimated FY08 EPS and 13 times
its current order book of about Rs 4,639 crore (11 times its FY07
revenue) is strong enough for maintaining 50 per cent growth for the
next three years.
is building a greenfield shipyard which will enable it to build six
vessels up to 60,000 dwt (dead weight tonne) against 15,000 dwt
currently by December 2008. This will enable Bharati to improve its
execution speed and bid for more projects.
it is planning to invest Rs 2,000 crore along with Apeejay Shipping to
set up a shipbuilding yard on the eastern coast, which will be
commissioned in FY 2011. A relatively lower valuation and strong
earnings visibility makes this stock an attractive investment.
the biggest constraint in the power sector is the supply of equipment,
especially the critical power equipment required for the larger
for Bhel, which commands about 65 per cent market share in the domestic
power equipment industry, this provides long-term earnings visibility.
competition is rising with new players like L&T and Chinese
companies vying for a share, Bhel’s order book of Rs 62,400 crore,
almost 3.6 times its FY07 revenues, instils confidence. The successful
acquisition of orders for super critical boilers and high technology
gas turbines required for the bigger projects would only improve its
order book further.
the huge order backlog and the orders in pipeline, Bhel is expanding
its capacities by 67 per cent to 10,000 mw by January 2008, which will
further increase to 15,000 mw by December 2009.
is also expanding its forging and casting capacities and a new
fabrication plant to help reduce its dependence on imports. These
should also help lower costs in the years to come. Overall, a better
industry outlook, strong order book and expansion of existing
capacities will drive the stock from the current levels.
With a mobile subscriber base of 51 million,
Bharti Airtel is India’s largest mobile service provider. While it has
added an average of 2 million subscribers a month in Q2, it is expected
to crack the 100 million subscriber mark by FY10.
the company has experienced good growth, its ARPU has fallen by 10 per
cent over the last three quarters, much ahead of the 4 per cent decline
experienced by Reliance Communications. Even then, operating margins
have improved, on the back of higher margin in broadband business and
forward, increase in scale of operations will keep costs in check.
Capital and operating expenditure is also likely to come down after the
formation of Indus, a tower infrastructure company, which will manage
the tower infrastructure of Bharti, Vodafone and Idea.
trigger for the stock could be the listing of Bharti Infratel, the
tower division and which holds 42 per cent in Indus. Bharti Infratel
already has 20,000 towers and plans to set up more.
will be the biggest threat for the company if it manages to soon roll
out its GSM services across 15 circles. Additionally, any unfavourable
outcome over the spectrum issue will have its impact; it could lead to
increased investments in upgradation of existing equipment.
conclude, Bharti’s revenues should grow by 35 per cent in the next two
years on the back of subscriber expansion, start of Sri Lankan
operations by March 2008, and launch of IPTV and DTH. A sum-of-parts
valuation puts the per share value of Bharti at Rs 1,200, a 27 per cent
upside from the current levels.
central air conditioning major, Blue Star, is a key beneficiary of the
economic boom in the country across sectors like IT/ITES, retail and
is reflected in the strong CAGR of 32 per cent and 40 per cent in sales
and operating profit respectively in the past three years.
such strong growth traction is expected to continue as the company is
sitting on a strong order book position, which is at Rs 1,030 crore as
on September 2007. It is likely to get repeat orders from its existing
customers as they expand operations.
is expanding its capacities by investing about Rs 60-70 crore, which
will lead to economies of scale and rationalisation of costs leading to
margin expansion. Its return on equity and return on capital employed,
which were at 34 per cent and 26 per cent respectively in FY07, will
the full benefits will be reflected only from the next financial year.
The macro factors too continue to be robust, with huge investments
planned in all the above mentioned sectors.
Dishman, a pharma outsourcing player, is moving up
the value chain from being a commoditised chemicals supplier to a
research partner for innovator companies.
acquisition of Swiss-based Carbogen-Amcis (CA), which offers drug
development and commercialisation services, has helped it tap into the
client base of CA that includes seven of the top ten US drug companies.
three projects in phase-III development, and likely to hit commercial
production in two years, CA’s revenues are expected to grow 15 per cent
annually to Rs 400 crore by December 2008.
caters to 50 per cent of Dutch pharma major Solvay Pharma’s requirement
of eposartan mesylate, an anti-hypertension medication. Its acquisition
of Solvay’s Vitamin-D business will boost revenues. Its foray into
China to manufacture Quats, a catalyst, is also seen positively.
these should help reduce Solvay’s share of 25 per cent in Dishman’s
revenues going forward. With earnings expected to grow between 25-30
per cent in the next two years (Rs 12 in FY08, Rs 15 in FY09 and Rs 20
in FY10), the stock can deliver 28-30 per cent returns in one year.
Educomp, the market leader in Kindergarten-12
education products, is a successful niche player. It has made some
smart acquisitions, entered new areas. and garnered a client base of
almost 6,000 schools across India besides, a small presence in
Singapore and the US. Its first mover advantage makes it difficult for
competition to catch up anytime soon.
the company has so far acquired and built the abilities to design and
create content for schools, learning and school infrastructure
management solutions, online teaching solutions, community building
solutions and more recently into setting up its own schools.
Financially, Educomp’s top line has almost doubled every year and operating margins have been maintained above 50 per cent.
the growth potential in the Indian education industry, Educomp is
likely to keep its juggernaut rolling for the coming few years. In
FY09, Educomp will double its top line again and grow its earnings by
75 per cent. Although there has been a concern over valuations, the
consistent earnings growth justify the same.
is an ideal play on the gamut of financial services. Besides market
dominance in housing finance, it provides huge potential for value
unlocking from its investment in banking, insurance and mutual fund
proposed UTI Mutual Fund IPO, stake sale by Reliance Capital in its
mutual fund entity and the probability of listing of insurance
companies though in the long term, should provide triggers. Moreover,
there is a possibility of a merger with HDFC Bank.
core business–housing finance will continue to do well. Its loan book
is expected to witness a CAGR of 25 per cent over the next two years.
Its net interest margins are expected to remain stable at around 3 per
HDFC is known for its asset quality. HDFC’s stock trades at about 5
times FY09 estimated book value (adjusted for the value of its
subsidiaries, which is about 30 per cent of HDFC’s market
capitalisation), and is a worthy pick.
India Infoline is another company representing financial services, except the lending business.
Its stock price has
grown more than fourfold in the last one year amid many positive
triggers like capital raising for expansions, tie-up with strategic
investors for investments in subsidiaries and restructuring of its
equity broking, it has expanded its product basket to include
institutional equities broking, commodities broking, margin finance,
investment banking and, distribution of life insurance, mutual fund and
is investing towards building a strong distribution network (596
branches in 345 cities) and customer base (5 lakh clients) for its
various services. Accordingly, the share of its traditional broking
business of about 56 per cent in FY07 revenues is expected to come down
over the years.
stock trades at 51 times and 44 times estimated earnings for FY08 and
FY09 respectively. While it looks cheaper than Edelweiss, in terms of
market capitalisation to revenues, it trades at a higher P/E than
it has the most de-risked business model compared to other players.
Given India Infoline’s aggressive growth strategy, the stock is ideal
for long term investors.
Jain Irrigation, which is in the businesses of
micro irrigation systems, food processing and plastic pipes and sheets,
is a direct play on the growing emphasis on agriculture. Irrigation
systems account for 30 per cent of its revenue. It’s revenues from
micro irrigation have grown at 70 per cent annually.
will be maintained on the back of its plans to launch new irrigation
systems, higher replacement demand, focus on geographical
five overseas acquisitions, including a 50 per cent stake in NaanDan of
Israel, the world’s fifth largest micro-irrigation company, will help
in terms of access to technology and access to large markets such as
South Africa, US, and Europe.
food processing, which accounts for 14 per cent of total income and
grew by 74 per cent in FY07, Jain produces juices and dehydrated
vegetables for companies like Coco Cola, Nestle, etc. This business to
grow at healthy from hereon.
plastic pipes and sheets, its products find application in agriculture
(30 per cent market share) and telecom (70% share) among others and,
should continue to grow at a healthy pace.
sum up, Jain is operating in high growth areas, while exports too are
expected to grow rapidly, which makes it a good investment case.
Saw, the most diversified Indian pipe manufacturer, makes submerged arc
welded (Saw), seamless and ductile iron spun pipes, which are used in
diverse applications like oil & gas and water-based infrastructure.
company is expanding its capacities in phases which will bring
economies of scale– longitudinal Saw pipes (by 25 per cent), helical
Saw pipes (233 per cent) and seamless pipes (150 per cent) — by FY09.
These expansions are well-timed due to strong demand for pipes on
account of surging demand for oil and gas globally.
the next three-four years, global demand (including India), for Saw
pipes is estimated at 200,000 km involving an investment of $60
Saw is likely to gain due to restructuring of the investment holdings
in Jindal Group companies, wherein it has substantial investments in
Nalwa Sons, Jindal Stainless, JSW Steel and Jindal Steel & Power,
are worth about Rs 2,200 crore. Excluding the value of investments, the
stock trades at 9 times its FY09 estimated earnings, which is
attractive as compared with 17 times for Welspun Gujarat.
Larsen & Toubro
Reinventing itself and successfully developing new
businesses are among L&T’s key strengths. That, along with the
domestic infrastructure and global hydrocarbon investments, is
responsible for the rising revenues and order book. It is now targeting
a turnover of Rs 30,000 crore by FY10 as compared with Rs 18,363 crore
forward, there is more business to come, as the government has
estimated an infrastructure investment of $500 billion during the
Eleventh Five Year Plan. Besides, a lot of money will also be spent by
domestic players in the metal, oil and gas, power and other industries.
wonder, L&T’s order book has been rising. As of September 2007, the
engineering and construction division had an order book of Rs 42,000
forward, L&T is also focusing on the overseas markets and has
targeted exports to increase to 25 per cent of 2010 sales. It is
entering shipbuilding, railway locomotives, power generation and power
equipment as well.
all these investments in different businesses will help sustain future
growth, the medium term continues to be robust. Some of it is already
rubbing off positively on the share price. Although the stock seems
richly valued, it can fetch good returns.
On the back of a sound foundation of existing
products (13 models priced between Rs 2 lakh and Rs 15 lakh), strong
distribution, efficient service network and new product launches,
Maruti Suzuki will maintain its dominant position.
company has 52 per cent market share by volume of the Indian car market
and 62.5 per cent of the small car segment, which is commendable given
the stiff competition from global majors.
grew at a scorching 18 per cent, compared with the 13 per cent recorded
by passenger car market in H1 FY08. For eight months ended November
2007, sales volume was up 19.7 per cent to 500,108 vehicles led by 49
per cent growth in exports. Notably, exports are expected to grow 40
per cent annually for the next two years; its share in total sales is
likely to move up to 12 per cent in 2010 from 7 per cent in FY07.
is already augmenting capacities by 3 lakh in a phased manner by FY10
to a million units. Besides, it has lined up Splash (A2 segment) and
the concept car A-Star (A1 segment), while a Swift sedan is on the
cards. These will help earnings grow by 20 per cent annually in the
next two years. Aggressive pricing, enhanced margins on the back of
improved product mix, indigenisation and scale benefits, will help
Maruti do well.
exploration companies are set to benefit from the current high oil
prices and firm outlook. India’s largest oil exploration company, ONGC
is the best bet in this space. ONGC with interest in 85 domestic blocks
including 52 offshore fields, has made 28 discoveries in the past two
years, of which, 14 were made in FY08 itself.
its 100 per cent subsidiary, ONGC Videsh has stakes in 26 blocks across
15 countries and is expected to be the key growth driver with its share
in ONGC’s consolidated revenues and profits expected to rise to 20 per
cent (14 per cent now) and 14 per cent (9 per cent now) respectively.
substantial interests in MRPL, Petronet LNG, GAIL and Indian Oil
Corporation are the topping. Moreover, the IPO of Oil India in the next
few months could provide further triggers.
also makes ONGC attractive is that it is the cheapest among its Asian
peers trading at 10.1 times estimated FY09 earnings and enterprise
value per barrel oil equivalent of about 7.5 times for FY09.
ahead, exploration successes especially in the KG basin and favourable
announcement on various issues like sharing of subsidy burden, cess and
deregulation in gas prices will be big positives.
Patel Engineering, which is having an order book
of Rs 5,400 crore almost 4.8 times its FY07 revenues, would be the key
beneficiary of the boom in the construction, power and real estate
power sector, the 11th Five Year Plan has an outlay of Rs 70,000 crore,
adding another 18,000 mw in hydropower generation. Patel Engineering
has 22 per cent market share in the domestic hydropower construction,
which accounts for 60 per cent of its current order book.
Also, the company has pre-qualified for new projects worth over Rs 6,000 crore as on September 30, 2007.
its entry into own power generation setting up of 1,200 mw thermal
power plant at an investment of Rs 5,000 crore are positive triggers.
Meanwhile, its core businesses including construction of dams,
transportation and micro-tunneling are growing at a faster pace thus
providing sustainable earnings growth.
immediate trigger would come from its real estate business. Patel
Engineering has transferred a land bank of about 1,000 acres spread
across Bangalore, Chennai, Hyderabad and Mumbai to Patel Realty India,
a 100 per cent subsidiary.
to estimates, the real estate business is valued between Rs 500-520 per
share. All of these make Patel Engineering an attractive investment.
Reliance Communications (RCOM) has a mobile
telephony market share of 18 per cent and subscriber base of 38
million, which is rising by a million every month. And this should
continue to rise as RCOM penetrates into smaller towns.
more interesting is that despite concerns over declining, operating
margins have improved to 42.2 per cent in Q2 FY08, thanks to the
benefits of larger scale.
is expected to improve further if RCOM gets the go-ahead to operate an
additional 15 GSM circles as 65 per cent of passive infrastructure such
as telecom towers, is common to both GSM and CDMA technologies and the
investments in its existing networks will be incremental.
Additionally, it is the value unlocking in its subsidiaries that are likely to provide further triggers.
2008, RCOM is likely to announce a stake sale and subsequently list its
tower subsidiary, Reliance Telecom Infrastructure, list its submarine
cable subsidiary, FLAG Telecom, hive off of its SEZ and BPO businesses
and the launch IPTV and DTH services by the first quarter of 2008.
estimate that a conservative sum-of-parts valuation based on FY09
numbers for RCOM comes to Rs 850-Rs 900 per share, which indicates an
appreciation of 17-24 per cent from current levels.
In 2008, Reliance Industries’ (RIL) exploration
and production (E&P) division, which accounts for 50 per cent of
its sum-of-parts valuation, will start selling gas from the KG Basin.
The only ambiguous aspect here seems to be the pricing of gas and
settlement with the ADA group and NTPC.
Within a few months, Reliance Petroleum will also start operations, all of which should lead to a jump in RIL’s profits.
the bids for NELP VII will be awarded by July 2008. While further wins
will add to reserves, new discoveries at existing reserves should
further add to valuations and the possible de-merger of RIL’s E&P
division would unlock value.
the company is yet to prove its mettle in its retail and SEZ
initiatives, given its track record managing mammoth projects, one can
hope to see positive results here as well.
analysts maintain their bullish outlook on the core businesses.
Refining margins for RIL, already the best among global players, should
remain firm until FY11, while petrochemical margins are expected to be
stable with good growth in volumes. At a P/E of under 12 times FY09
estimated core earnings, RIL is a worthy investment.
State Bank of India
SBI’s move to merge State Bank of Saurashtra with
itself has the potential to trigger the re-rating of public sector
banking stocks by pushing the much needed consolidation process.
further expedite consolidation, the boards of SBI and its other six
associate banks are meeting in January to consider merger. Should that
happen, SBI’s standalone balance sheet size will grow 1.5 times to Rs
8.20 lakh crore, almost double the size of ICICI Bank’s.
its branch network will jump 50 per cent to 14,400 branches. But, the
improvement in valuations (re-rating) should get a boost when the
merged entity is able to rationalise costs and extract benefits from
will raise Rs 17,000 crore through a rights issue that should provide
fuel for future growth. In a competitive Indian banking business, it is
important for banks to achieve size and scale to be globally
for investors, it is more important to find such banks at reasonable
valuations. SBI meets both these criteria. SBI’s stock trades at 2.2
times and 2 times its estimated consolidated book value for FY08 and
Further, SBI has investments in mutual fund and life insurance subsidiaries, which make valuations more compelling.
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