Multiple Growth Drivers
Aditya Birla Nuvo is a diversified Indian conglomerate with a consolidated turnover of Rs 21.8 billion in FY12. It has interests in businesses such as telecoms (a 25.3% stake in listed company, Idea Cellular), insurance (74% stake in unlisted Birla Sun Life Insurance), asset management (51% stake in Birla Sun Life Asset Management Company) and apparel retail. ABNL also has interests in IT/ITES through its subsidiary, Aditya Birla Minacs. ABNL’s bread-and-butter business is manufacturing (carbon black, insulators, rayon, textiles and fertilizers), which has supported the company’s venture into the services sector.
Our analysis values the company at Rs 1500 using a sum-of-the-parts (SoTP) methodology. ABNL’s 25.3% stake in Idea at a price target of Rs 210, implies a per share valuation of Rs 966. The life insurance business carries a valuation of Rs 382 per share using a traditional embedded value and structural value method.
Current Price: Rs 1,103, Target Price: Rs 1500, Potential Growth: 36%
More Gas To Remedy Flatulence
Reliance Industries the country’s largest private sector firm on all major financial parameters. Its the first private sector company from India to feature in the Fortune Global 500 list of 'World's Largest Corporations' and ranks 117th amongst the world's Top 200 companies in terms of profits. The company operates world-class manufacturing facilities across the country at Allahabad, Barabanki, Dahej, Hazira, Hoshiarpur, Jamnagar, Nagothane, Nagpur, Naroda, Patalganga, Silvassa and Vadodara.
In the near term, the company believes its refining capacity will inch up by 3.5-4%. The work on wells at D1/D3 in the Krishna-Godavari basin is likely to arrest the production decline in FY14, while the booster compressor to be deployed in FY15 will slightly augment production. Management expects D1-D3 to last another 3-4 years. The retail business has turned EBITDA positive for RIL in FY13
Current Price: Rs 831, Target Price: Rs 1,100, Potential Growth: 32.3%
The Leela Palaces, Hotels and Resorts is an Indian luxury hospitality group founded in 1986 by Captain CP Krishnan Nair. Currently The Leela, as it is commonly referred to, is a group of seven luxury palaces and hotels located in Mumbai, Goa, Bangalore, Kovalam, Gurgaon, Udaipur and New Delhi. The company has marketing alliances with US-based Preferred Hotels and Resorts and is a member of the Global Hotel Alliance, based in Geneva. As the operating environment continues to remain challenging due to low demand, it will be tough for the company to operate with high levels of debt. Although most of the negatives have been factored in its market price, we still see some further downside going forward due to the erosion of net worth.
Current Price: Rs 15, Target Price: Rs 14, Potential Growth: -6%
Larsen & Toubro Ltd (L&T) is a technology, engineering, construction and manufacturing behemoth. The company is one of the largest and most respected companies in India's private sector. The company operates in three segments engineering and construction, electrical and electronics, and machinery and industrial products. The infrastructure spending by government and corporate expansion plans will continue to drive L&T’s business. Operating margins are expected to remain steady in spite of the competition due to L&T’s ability to execute complex projects and increased operational efficiency. Investment in subsidiary and associate companies expected to continue going forward.
Current Price: Rs 986, Target Price: Rs 1,150, Potential Growth: 11.6%
Idea Cellular is an Aditya Birla Group company. Idea is a pan-India integrated GSM operator offering 2G and 3G services, and has its own NLD and ILD operations, and ISP license. With revenues in excess of $4 billion; revenue market share of nearly 15% and subscriber base of over 121 million in FY13, Idea is India’s 3rd largest mobile operator. Idea ranks among the Top 10 country operators in the world with a traffic of over 1.5 billion minutes a day.
Idea has gained market share in terms of revenue in its top 5 circles in last 3 years as compared to its competitors who have slipped. This trend is expected to continue. We expect sustained improvement in the Indian wireless industry’s fundamentals as economies of scale kick in, and the intensity of competitive pressure reduces. We expect quasi-consolidation (challengers curbing their footprint) theme to continue, aiding sustained market share gains for the GSM incumbents. We see Idea very well-positioned to benefit from this theme and expect sustained market share gains for the company over the next few years. We also believe that incremental regulatory developments should be in favor of the industry as spectrum pricing and allocation start falling in sync with the economic realities of the business – increasing (even if forced) industry discipline should drive this change.
Current Price: Rs 144, Target Price: Rs 210, Potential Growth: 46.3%
Info Edge, largely known for its recruitment portal Naukri.com, is the first listed internet player on Indian bourses, and until recently the only one. Info Edge owns a diversified portfolio of portals like Naukri.com, 99acres.com, Jeevansathi.com and Shiksha.com which have come a long way in establishing strong market and mind share. Its brands are marketleaders. Naukri has a more that 60% market share and 99 acres has 30% in the real estate classifieds space. Its matrimony portal Jeevansathi though not the largest in its space is growing rapidly. Its investment in companies like Zomato, PolicyBazaar and Meritnation have also been successful, although it’s still early days . Info Edge has benefitted immensely from the key structural changes in the Indian marketplace. Internet penetration has increased exponentially, and access to internet is much cheaper and faster now with the mobile revolution. India’s demographics bode well for internet-based businesses in general and Info Edge in particular. In last five years though, Info Edge’s growth has been impacted due to the effects of global financial crisis (over FY09-10) and more recently in FY13 which was on the back of general slowdown of both global and domestic economy.
Current Price: Rs 495, Target Price: Rs 580, Potential Growth: 17.3%
The Power of Niche
Glenmark is a second tier pharmaceutical company which has tries to differentiate itself with superior research. It is also one of the leading Indian generic companies in US. Glenmark also has a presence in various emerging and regulated and semi-regulated markets. It has 13 manufacturing facilities spread in four countries. Glenn Saldanha, MD and CEO of Glenmark for the last decade has been at the front end of establishing a strong R&D focused business model with focus on key segments such as dermatology (30%), respiratory (16%), cardiac (22%) and anti infectives (16%). Glenmark's businesses can be grouped into three key segments: Generics (45%), specialty or branded generics (53%) and research (2%).
Glenmark has adopted a differentiated generic strategy for US business which focuses on niche segments like cardiac, dermatology, respiratory which have limited competition and higher profitability. It is the most successful Indian company in novel drug discovery research and has earned US$205m in milestone payments so far. Glenmark has delivered robust business growth with topline CAGR of 32% over FY11-13 backed by strong growth in both generic and specialty drugs business.
Current Price: Rs 559, Target Price: Rs 660, Potential Growth: 18%
IndusInd Bank (IIB) is one of the new generation private sector banks which commenced its operations in 1994. In 2004, the bank merged with Ashok Leyland Finance, a commercial-vehicle-finance focused NBFC. Niche positioning in commercial Vehicles financing, branch expansion, increased focus on small and mid corporate clients, and strong relationships with large corporate clients should enable IIB to sustain higher than industry loan growth. Over a long-term perspective, given its well-capitalised position, sound asset quality position, scalable business model, and well-incentivized management, we believe that IndusInd Bank is set to capitalise on the upturn in the economy. Additionally, IndusInd has the potential to deliver high growth (>20%) while maintaining quality. We expect its CASA to expand to about 32% by FY15 from 28% now. NIMs to expand to about 4% by FY15 from 3.4%, will likely translate into higher RoAs > 1.5%.
Current Price: Rs 384, Target Price: Rs 525, Potential Growth: 36.8%
The End Is Nigh?
Suzlon Energy Limited (SEL) manufactures wind turbine generators, wind power systems and related components. Its product portfolio includes drive systems, annular generators and grid connection systems. Apart from this, the company offers project management services including land sourcing, wind resource assessment, installation, commission and maintenance services. SEL primarily operates in India, Europe, USA, China and Australia and has a wind power generation equipment capacity of 22,500 MW (largest player in India and fifth largest in the world).
EBITDA margins for SEL worsened to -3.81% from -3.49% Y/Y on the back of fall in revenues at REpower, its European subsidiary it acquired a few years ago. Also as part of organization redesign, $22.68million has been incurred as onetime cost towards lay offs. This along with the forex loss of $25.83million increased the loss at the net level to $176.418 million.The company has been witnessing weakened demand since the days of Lehman crisis. This weakness continues to persist in its key markets i.e. US and Europe. The company had undertaken two back-to-back acquisitions in Europe in 2008 to the tune of Rs 10,000 crore. These acquisitions were supported by leverage. The company has been reporting losses consequently in the past three quarters and doesn’t have the funds to meet its debt obligations. Suzlon has lately defaulted on redemption of foreign currency convertible bonds (FCCB) worth $220 million.
Current Price: Rs 11, Target Price: Rs 1, Potential Growth: -90.7%
Indian Hotels Company (IHCL) and its subsidiaries are collectively known as Taj Hotels Resorts and Palaces. The group has an inventory of 13,629 rooms and 115 hotels across the world. Taj has a presence in different segments such as luxury, upper upscale, upper scale and budget with various brands such as Taj, Vivanta, Gateway and Ginger Hotels. The hospitality industry is highly capital intensive in nature. IHCL to fund its growth has relied heavily on debt. Caution is warranted on the stock because of its leverage and balance sheet weakness. Additionally earnings growth will be below par till there is some sign of recovery in its international operations. Higher depreciation and loss from related businesses have bloated IHCL's losses. Q1FY13 margins indicate that there is no significant improvement in the US business which continues to be a drag on IHCL’s performance. The muted performance is likely to continue in the midterm due to stagnant domestic demand with oversupply and sluggish foreign tourist arrival (FTA) in the wake of macroeconomic factors.
Current Price: Rs 58, Target Price: Rs 47, Potential Growth: -18.9%
Housing Development and Infrastructure (HDIL) is one of the premier real estate development companies in India and is actively pursuing the development of real estate and slum rehabilitation projects in the Mumbai Metropolitan region. HDIL has also diversified into energy, hospitality and the development of SEZs. The company has a debt around of Rs 4000 crore with interest liability of over Rs 500 crore. HDIL’s incremental cash generation has remained weak, given limited movement on its airport project. Policy clarity on eligibility norms for the airport project are still awaited. Further launch activity for the company hasn’t picked up materially as yet despite an approval recovery cycle seen in the city. Execution had been adversely impacted due to approval issues in Mumbai last year, thereby resulting in 9-12 months delay in delivery timelines for ongoing projects. Payments from pre-sales are often delayed too, which means the company is booking sales, but money isn’t coming into its books.
Current Price: Rs 42, Target Price: Rs 30, Potential Growth: -29%
Port of Call
Adani Ports and SEZ (APS), began commercial operations in October 2001 to build, operate and maintain the Mundra port for a period of 30 years till 2031, extendable by another 20 years. The port provides cargo handling services for bulk, crude and container cargo. The company has also received approval to develop the adjacent port land as a multi-product SEZ. Adani is in the process of acquiring about 16,000 acres of land for the venture. While the company is also bidding for other domestic and international port projects, it has also invested in value added services such as logistics support, providing container rail services and inland container depots to diversify from its core port business. APS, under the aegis of the parent company Adani Enterprises, has been instrumental in developing a deep draft gateway port and SEZ strategically on the west coast of India with state–of-the-art infrastructure and capability to handle diversified cargo. Since inception, APS has posted 35% CAGR and handled roughly 64 MT cargo in FY12, higher than most other major Indian ports. Also, it has hedged cargo uncertainty risk by getting into long-term service contracts (45% of total cargo to be handled in FY14). This third generation port acting as one-stop-shop for export-import logistics is one of its kinds in India.
Current Price: Rs 147, Target Price: Rs 180, Potential Growth: 22.5%