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8/2/2019 5 Stocks to Buy for 10 Years Cas
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CAS Research Desk
11th August, 2011 2|P a g e
Edelweiss Research
Executive Summary
This Independence day you have one additional reason to celebrate! Edelweiss is pleased to release
its report ‘Financial Freedom this Independence Day’. This report does away with all the short term
distractions that you read everyday, 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.
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;
we’ll in this report tell you your exact action points, 5 stocks you should buy for the next 10 years.
India has come a long way since the economic reforms in 1991, moving from the Hindu growth rates
of 5% into the orbit of 7-9% growth rates.
This growth has been structurally driven by economic reforms, private entrepreneurship and
linkages to the global economic boom.
Fundamental factors like young population (median age of 26), growing middle class, rising income
levels with stable and growing household savings make India’s medium to long- term growth secure.
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 4.5 Trn) by 2020. In nominal terms we expect growth over the next decade at
13% (Long term inflation projection of 4%).
These significant changes will manifest in three key investment themes for the next decade -
savings, consumption and infrastructure. Certain sectors (SUPER SECTORS) will grow well beyond
the 13% nominal GDP growth.
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, literally forget!
SUPER THEMES SUPER STOCKS WHY
Resources Coal India World’s largest coal reserve holder, Coal India is the
primary beneficiary of the structural deficit of
coal in India.
Financial Services Axis Bank Banking revenue set to grow 5.3x to ` 10.6
Trn, AXIS a front-runner to capture this
opportunity.
Organized Retail Pantaloon Retail Organized retail to grow 6.3x to ` 6.3 Trn, FDI
in retail to bring in the global biggies, Pantaloon
Retail - biggest beneficiary.
Automobiles Mahindra & Mahindra Automobile market forecast to grow ~5x to ~
` 4.3 Trn.
Domestic
Consumption ITC Ltd Cigarettes business to remain robust, FMCG the trump
card, classic domestic consumption bet.
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CAS Research Desk
11th August, 2011 3|P a g e
Edelweiss Research
Coal India Limited (COAIND)
Fundamental – BUY
CMP -` 386Sector Mkt Cap (` Cr.) 52W High 52W Low
Energy ` 241,000 ` 422 289
Coal India (COAIND) is the world’s largest coal reserve holder and producer and also controls ~80%
of the Indian coal market. It is going to be the primary beneficiary of the structural deficit of coal inIndia. Moreover, it is one of the least cost producers of coal in the world.
COAIND, a Maharatna company, is one of the largest public sector companies in India in terms of
turnover. Its product portfolio consists largely of thermal coal (90%) with the balance being coking
coal. 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, as prices
already remain at ~50% discount to internal benchmark prices.
It currently operates ~471 mines in India and is also scouting for international mines to increase
global presence and assure its resources. It sells ~10% of its production based on the e-auction route
and ~3.5% beneficiated coal (2x realizations of raw coal). Beneficiated coal volumes are expected to
rise significantly to ~150 mtpa by FY17 (25% of total volumes).
COAIND produced 43.13 crore tons in FY10 and their reserve position (extractable reserves) stands
at 2175 crores tons as of April, 2010. This translates into 51 years of production capacity going by
current production rates. Going by the reserve position, we believe that CIL is a great opportunity to
own a critical resource. On the demand side, India being a power deficit country, there is significant
power capacity being added with fuel resource being coal. 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. We believe there is enough demand for coal
and further scale up of production by CIL would find more than enough takers.
The big trigger for COAIND comes due to the pricing differential between raw coal that CIL sells andwashed coal that is imported from mines abroad. The average realization for CIL is 50% lower than
import parity price of coal. The margin for CIL per ton is currently close to ` 400/ton. 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. This would require capex of `350/ton but would improve
realization and margins manifold. By FY17, COAIND would have a 25% share of washed coal.
At the CMP of ` 386, the stock trades at a PE of 13.66x FY12E earnings and 12.64x FY13 earnings.
We believe that Coal India Ltd is an excellent investment and would prove to be a multi-bagger in
the long term.
Income Statement (` Mn) Valuations
Year to March FY11 FY12E FY13E
Revenues 502,336 609,725 674,330
EBITDA 134,791 217,001 242,144
PBT 165,234 267,640 289,626
Net profit 108,674 179,319 194,049
EPS 17.3 28.4 30.7
Year to March FY11 FY12E FY13E
Diluted PE (x) 22.4 13.7 12.6
EV/Sales (x) 4.2 3.1 2.6
EV/EBITDA (x) 15.7 8.8 7.3
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CAS Research Desk
11th August, 2011 4|P a g e
Edelweiss Research
Axis Bank Ltd (AXIBAN)
Fundamental – BUY
CMP - ` 1211Sector Mkt Cap (` Cr.) 52W High 52W Low
Banks ` 51,508 ` 1,609 ` 1,150.0
We believe that the current stage of economic growth in India, where savings and capital formation
are at ~34% of GDP, offers serious opportunities in financial intermediation. Core to our hypothesisis our belief that, over the next ten years nominal GDP (excluding agriculture) is expected to grow at
~13%, and revenues from the financial services sector (which would lead this growth) are expected
to grow at 22% to ` 266.4 trillion by FY20E .
Axis Bank is the third-largest private sector bank in India in terms of asset size, with a balance sheet
of ` 1.5 tn. It has a network of over 1000 branches and extension counters across the country. The
bank earns substantial fee income from transaction and merchant banking activities.
Axis Bank has registered buoyant loan growth on a balanced portfolio skewed towards corporate
advances than retail (as compared with its private peers). Retail advances contributed 20% to the
total loan portfolio. Thus, it has better scope for aggressively expanding across segments where it
has a low presence. It is also spreading across geographies and targeting presence in more than 75%
of India’s districts in the next five years. The bank’s loan book is expected to grow at a brisk pace of
25% plus in FY09-11E with SME, agri, housing, and personal loan segments likely to be the key
growth engines.
Rapidly growing franchise and new product offerings (viz., credit cards) will further drive growth in
retail fee income. The bank is also intensifying efforts to penetrate the remittance business by
aggressively spreading its international operations. Other key contributors to fee income will be
project advisory, debt syndication, and third party distribution of insurance.
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. The bank’s strategy of moderating pace of loan growthwill enable it to build a more formidable retail franchise and achieve consistently higher RoA. We
believe, it can sustain higher RoA of 1.5-1.6% against 1.0-1.2% a few years ago, allowing RoE to
move closer to 20% in a capital efficient manner. As Axis Bank delivers consistent earnings we
expect the current valuation discount of 40% with HDFC Bank to come off to ~25%.
Income Statement (` mn) Balance Sheet (` mn)
Year to March FY11 FY12E FY13E
Net Revenues 111,951 140,182 171,780
Operating Exp 47,794 63,251 74,325
Preprovision Profit 64,157 76,931 97,454
Net profit 33,880 42,237 52,431
EPS 82.5 102.9 127.7
Book Value 462.8 546.9 655.9
Year to March FY11 FY12E FY13E
Shareholders’ funds 141,003 156,170 176,284
Borrowed funds 75,857 70,516 57,562
Sources of Funds 216,860 226,686 233,846
Total fixed assets 177,225 175,057 180,531
Net current assets 26,522 31,945 33,631
Uses of Funds 216,860 226,686 233,846
Growth Metrics % FY11 FY12E FY13E
NII Growth 31.1 22.9 21.9
Fees Growth 29.3 30.8 26.2
Net profit 34.8 24.7 38.8
EPS 33.0 27.7 24.6
Valuations FY11 FY12E FY13E
Diluted PE (x) 15.0 12.0 10.0
Price/BV (x) 2.7 2.3 1.9
ROAE (%) 19.3 20.4 21.2
ROA (%) 1.6 1.6 1.6
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CAS Research Desk
11th August, 2011 5|P a g e
Edelweiss Research
Pantaloon Retail Ltd (PANRET)
Fundamental – BUY
CMP - ` 311Sector Mkt Cap (` Cr.) 52W High 52W Low
Retail 7,000 ` 528 ` 228
Pantaloon Retail Ltd is a leading Indian retail company with presence across most sectors of
organized retail. The company, entered modern retail in 1997 with the opening of its departmentstore format Pantaloons. In 2001, PRIL launched Big Bazaar, a hypermarket chain, followed by Food
Bazaar, a supermarket chain. A five format company, two years back, it now operates over 20
formats which include Central (seamless malls located in city centers), Collection I (home
improvement products), Depot (books, music, gifts and stationeries), aLL (fashion apparel for
plus‐size individuals), Shoe Factory (footwear), and Blue Sky (fashion accessories). It has recently
launched its e‐tailing venture, futurebazaar.com.
The Indian retail landscape is evolving with interplay of several demographic and economic factors.
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. 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.
Media reports suggest that the Cabinet could clear the proposal to allow FDI in multi-brand retail in
the near term, setting the stage for the entry of large chains by the FY12 end. Nod to the proposal
seems likely post the backing of the Prime Minister Manmohan Singh and Finance Minister Pranab
Mukherjee. By opening the retail sector for FDI, organized retail penetration can swell significantly,
benefitting retail firms. We believe this will be a positive for Indian retail sector especially for larger
players like Pantaloon Retail.
At the CMP of ` 311, the stock trades at a PE of 32.6 FY12E and 24.0x FY13E earnings, (represented
by the core retail business). We rate Pantaloon as a ‘Buy’ for the long term.
Income Statement (` Mn) Valuations
Year to March FY11 FY12E FY13E
Revenues 109,107 134,188 164,875
EBITDA 9,383 11,607 14,344
PBT 2,967 3,647 4,980
Net profit 1,988 2,443 3,336
EPS 9.6 11.9 16.2
Year to March FY11 FY12E FY13E
Diluted PE (x) 32.8 32.6 24.0
EV/Sales (x) 1.0 0.9 0.7
EV/EBITDA (x) 11.6 9.9 8.4
* Nos represent core retail business (PRIL+ FVRL)
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CAS Research Desk
11th August, 2011 6|P a g e
Edelweiss Research
Mahindra & Mahindra Ltd (MAHMAH)
Fundamental – BUY
CMP - ` 729Sector Mkt Cap (` Cr.) 52W High 52W Low
Automobiles ` 44,845 ` 827 ` 585
Mahindra & Mahindra (MAHMAH) operates in nine segments—automotive, farm equipment,
financial services, infrastructure, hospitality, IT services, Systech, which consists of automotivecomponents and other related products and services, and others, which consists of logistics, after-
market, two wheelers and investment.
Mahindra & Mahindra dominates the domestic tractors market, commanding 41% market share.
Three key structural factors—higher farm product prices, firmer labour wages (notably NREGA), 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. These factors are
likely to drive long-term tractor demand, which Mahindra & Mahindra (M&M) is well-positioned to
capitalize on.
MAHMAH is the leader in the UV segment and has managed to keep its market share above 55%
currently. MAHMAH, as the leader in the utility vehicle (UV) segment, is well entrenched with strong
brands. Further, incremental volumes could come from the LCV/ minivan segment, where we expect
the company to regain lost market share with the launch of its sub tonne Maxximo and Gio.
We believe, Ssangyong Motors acquisition is a strategic fit with MAHMAH ’s ambitions of being a
global SUV player. Ssangyong’s current financial performance seems to suggest a turnaround. Apart
from the M&HCV space (JV with Navistar), other new businesses (two wheelers, defense or logistics)
require minimal investments. The returns over a three year period though could be substantial,
particularly considering MAHMAH’s impressive track record in unlocking value of subsidiaries.
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. At the same time, with a dominant marketshare and low competition in the segment, the company enjoys pricing power.
Income Statement (` mn) Balance Sheet (` mn)
Year to March FY11 FY12E FY13E
Revenues 234,043 273,627 315,211
EBITDA 33,926 40,101 47,411
PBT 33,555 38,492 45,039
Net profit 26,621 28,869 33,779
EPS 40.9 47.0 55.0
Book Value 168 201 242
Year to March FY11 FY12E FY13E
Shareholders’ funds 103,134 123,530 148,837
Borrowed funds 24,053 34,796 34,796
Sources of Funds 130,730 161,870 187,177
Net Block 33,860 43,975 53,041
Investments 93,252 100,752 119,422
Net current assets (6,241) 7,284 4,855
Uses of Funds 130,730 161,870 187,177
Growth Ratios (%) Valuations
Year to March FY11 FY12E FY13E
Revenues 26.3 16.9 15.2
EBITDA 13.3 18.2 18.2
PBT 20.1 14.7 17.0
Net profit 22.0 14.9 17.0
EPS 18.7 14.9 17.0
Year to March FY11 FY12E FY13E
Diluted PE (x) 18.0 15.6 13.3
Price/BV (x) 4.4 3.6 3.0
EV/Sales (x) 1.5 1.3 1.1
EV/EBITDA (x) 10.8 9.0 7.1
ROE (%) 27.7 25.5 24.8
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CAS Research Desk
11th August, 2011 7|P a g e
Edelweiss Research
ITC Ltd (ITCLTD)
Fundamental – BUY
CMP - ` 199Sector Mkt Cap (` Cr.) 52W High 52W Low
FMCG ` 1,52,778 ` 211 ` 149
Favourable macroeconomic drivers such as GDP and population growth, coupled with rising income
levels and lifestyle changes to drive the FMCG market growth in India. Low penetration and low percapita daily consumption offers room for further growth. Increasing rural penetration to urban
penetration levels presents another growth opportunity; multiple usage of products offer further
upside. IMF expects the Indian economy to be ~USD 2.0 tn by FY15. Assuming FMCG spend/GDP
trend to continue, we expect the FMCG market to cross the ` 2 tn mark by 2015, from ~` 1 tn
currently
ITC is one of the largest FMCG companies in India with businesses spanning cigarettes, hotels, paper
and packaging, and agri-commodities. Recently, it has set up a branded foods division with products
such as staples, confectionery, and biscuits. Though the cigarettes division is still the major source of
revenue, other businesses have grown over the years, contributing ~49% to net sales and ~34% to
gross sales in FY10.
ITC's pricing power is strong due to relatively inelastic demand profile of cigarettes and the
company's ~80% market share. This translates into increasing margins for ITC as compared to any
other FMCG company. Cigarettes volume growth of 8% in Q1FY12 surprised positively against our
expectation of 6%. We expect cigarettes volume growth to be 6-7% with upward bias for FY12.
The e-Choupal network established by ITC gives it a phenomenal sourcing edge, which can help it
transform into a retailing giant. The demand-supply conditions are in favor of the paper businesses,
as the new supply will just be sufficient to meet the additional demand. With the Indian economy
slated to grow at about 8% for FY11E, we expect cigarettes volumes to continue to witness growth
momentum. The FMCG division is expected to scale up and turn profitable in FY13, contributing
positively to the bottom line, going forward.
Income Statement (` mn) Balance Sheet (` mn)
Year to March FY11 FY12E FY13E
Net Revenues 2,22,737 2,60,776 3,03,837
EBITDA 74,077 88,092 1,04,839
PBT 74,349 90,638 1,07,030
Net profit 50,179 61,261 72,349
EPS 6.6 8.0 9.4
Book Value 21.7 23.2 26.0
Year to March FY11 FY12E FY13E
Shareholders’ funds 1,64,621 1,79,591 2,01,477
Borrowed funds 1,246 1,046 846
Sources of Funds 1,75,255 1,90,678 2,13,123
Net Block 91,495 98,828 1,05,382
Investments 48,678 48,678 48,678
Net current assets 21,458 29,547 45,439
Uses of Funds 1,75,255 1,90,678 2,13,123
Growth Ratios (%) Valuations
Year to March FY11 FY12E FY13E
Revenues 16.4 17.1 16.5
EBITDA 17.1 18.9 19.0
PBT 19.0 21.9 18.1
Net profit 20.4 21.9 18.1
EPS 20.4 20.5 18.1
Year to March FY11 FY12E FY13E
Diluted PE (x) 29.8 24.6 20.9
Price/BV (x) 9.2 8.6 7.7
EV/Sales (x) 7.0 6.1 5.2
EV/EBITDA (x) 21.0 18.0 14.0
ROAE (%) 33.0 36.0 39.0
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11th August, 2011 8|P a g e
Edelweiss Research
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