IIFL_India_PSUs_2014

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India - PSUs

Prabodh Agrawal | [email protected]

+91 22 4646 4697| |

DD MMM YYYY

Modi Inc All the Kings Jewels

09 June 2014

Printed reportsummary

Institutional Equities

Our 288 page printed report on Indian PSUstitled Mo d i I n c A l l t h e K i n g s Je w e l s willshortly reach your desks. PSU reforms arelikely to be among the first tasks for thenewly installed Modi Government, given thenew Premiers stellar track record in hishome state of Gujarat. The knock-on effect

on the economy can be significant, sincemany PSUs operate in segments of vitalnational importance. Our top six picks, CoalIndia, SBI, REC, Power Grid, BEL, and

ONGC, are expected to deliver 70-100%+ returns in our bullcase scenario, over the next three years.

A lost decade: Indian PSUs lost their sheen in the past decade,

buffeted by unfavourable government policies, slow decision-makingand a cyclical downturn. PSUs share of market cap in BSE100 hasshrunk from 32% in March 2005 to 20% currently. PSUs in Gujarat,on the other hand, have a different story to tell, with several of themoutperforming even well-managed private companies.

Analysing 16 PSUs: We analyse 16 PSUs covered in this report onfive criteria: 1) Disruptive competition from private companies, 2)Beneficiary of higher economic growth in India, 3) Beneficiary of PSUreforms and conducive policies, 4) Strong balance sheets to leveragegrowth opportunities, and 5) Attractiveness of valuations.

Key expectations on reforms: Faster environment clearances,easier land acquisition laws, increased availability of coal and gas,speedier power distribution reforms, augmenting of railway logisticsfor mines, and reducing fuel subsidies these are the mostcommon reform expectations of the 16 PSUs.

Figure1: PSUsversusSensexSignificantunderperformance

Source:IIFL

Research,

Bloomberg

Figure2: ShareofPSUsandnonPSUsinBSE100smarketcapitalisation

Source:IIFLResearch,Bloomberg

0

50

100

150

200

250

300

350

400

450

Jan04

Jul04

Jan05

Jul05

Jan06

Jul06

Jan07

Jul07

Jan08

Jul08

Jan09

Jul09

Jan10

Jul10

Jan11

Jul11

Jan12

Jul12

Jan13

Jul13

Jan14

PSUs SensexRebasedto100

10

20

30

40

50

60

70

80

90

Mar05 May06 Jul07 Aug08 Oc t09 De c1 0 Jan12 Mar13 May14

PSU NonPSU(%ShareinBSE100)


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Company Industry Shareof

domestic

production(%)

Competitors

BPCLOil

Marketing

(share

ofconsumption)25 Nosignificantprivateplayer

ONGC Upstreamoil 68 Cairn(16%),RIL(3%),OIL(10%)

Bharat

ElectronicsDefenceElectronics 57

Foreignvendors(~40%),private

playerssuchasL&T,TataPower

SED(


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Figure8: ShorttenureofCMDsatleadingPSUsCurrentCMD Term

began

Termends NoofCMDsin

thelast10yrs

1 BharatElectronicsSunilKumarSharma Jan2014 NA 5

2 BHEL BPrasadaRao Oct2009 Dec2015 3

3 BPCL SVaradarajan Oct2013 Sep2016 3

4 CoalIndia Vacant 5

5 GAIL BCTripathi Aug2009 Jul2019 2

6

HPCL

Nishi

Vasudeva

Mar

2014 Mar

2016 37 IOC RSButola Jun2014 May2017 5

8 NHPC GSaiPrasad(Addlcharge) Jul2012 Jul2014 6

9 NMDC NarendraKothari Apr2014 Apr2019 4

10NTPC Dr.ArupRoyChoudhury Sep2010 Sep2015 4

11ONGC DKSarraf Mar2014 Sep2017 3

12PFC

M.K.

Goel

Sep

2013 Sep

2016 3

13PowerGrid RNNayak Sep2011 Jun2015 3

14REC RajeevSharma Nov2011 Oct2016 6

15SAIL CSVerma Jun2010 Jun2015 3

16SBI ArundhatiBhattacharya Oct2013 Sep2015 4

Average 3.9

Source:IIFL

Research

4.Strong balance sheet to leverage growthopportunities

Strong balance sheets would allow these companies to leveragegrowth opportunities. If GoI moves towards making PSU

managements more independent, these PSUs would be in theforefront for such reforms, since they can very well charter their own

course and fend for themselves. Strong balance sheets reflect thefinancial prudence and avoidance of unnecessary risk taking bythese companies. The past few years have been replete with

examples of companies hurting themselves by over-leveraging ortaking out-sized bets in the foreign exchange market.

Figure9: BalancesheetstrengthandprofitabilityratiosCompany FY14

Net

Debt/Equity

(x)

Freecash

flow/shareholders'

funds(%)

ROE

(%)

ROCE/ROA

(%)

1

BharatElectronics

(0.6) (6.9) 13.9

17.1

2 BHEL (0.2) 7.1 10.2 14.5

3 BPCL 1.5 18.1 21.1 15.3

4 CoalIndia (1.4) 54.4 34.8 47.4

5 GAIL 0.4 10.7 15.7 14.9

6 HPCL 3.3 5.1 7.9 5.9

7

IOC

1.3 (0.8) 8.1

8.6

8 NHPC 0.5 (0.6) 6.5 7.4

9 NMDC (0.6) 3.1 22.3 33.8

10 NTPC 0.6 (6.0) 12.4 10.7

11 ONGC 0.2 (11.0) 16.3 17.0

12 PFC NA NA 21.1 3.0

13 PowerGrid 2.2 (36.8) 12.7 8.6

14 REC NA NA 24.6 3.3

15 SAIL 0.5 (6.6) 4.4 4.8

16 SBI NA NA 10.4 0.6

Source:IIFLResearch,Prowess,Bloomberg


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5.Attractiveness of valuationsFigure10: ValuationmatrixoftopSixPSUs

Companyname CMP

(Rs)

MktCap

(US$m)

EPSCagr(%)

(FY1416ii)

P/E(x)

(FY16ii)

P/B(x)

(FY16ii)

ROE(%)

(FY14)

NetD/E(x)

(FY14)

BasecaseTP(Rs)

1yr

BullcaseTP(Rs)

1yr 3yr

1 ONGC 378 54,742 15.5 9.2 1.5 16.3 0.2 480 520 649

2 CoalIndia 371 39,640 11.3 11.7 4.0 34.8 (1.4) 405 473 816

3 SBI 2,542 32,115 20.0 9.3 1.1 10.4 NA 3,050 3,687 5,486

4 PowerGrid 122 10,800 16.5 10.7 1.5 12.7 2.1 150 182 249

5 REC 320 5,342 23.8 4.4 1.0 24.6 NA 408 461 812

6 BharatElectronics 1,608 2,176 5.9 12.0 1.5 13.9 (0.6) 1,927 2,042 3,219

Source:IIFLResearch,Bloomberg;pricesasatcloseofbusiness30May2014

Potential for earnings upgrade and valuation re-ratingOur current earnings estimate and valuation multiple targets assumesome recovery in earnings growth trajectory and higher valuationmultiple for PSU stocks over the next two years. We also present a

bull case scenario detailing areas of potential earnings upgrade, incase demand recovery is faster and stronger. This is likely to resultin valuation re-rating too for most stocks, underpinned by greatervisibility of economic reforms and their impact on the projectedearnings of PSUs. Based on this bull case scenario, we present one-year and three-year price targets for our top six PSU picks. The one-year and three-year bull case targets for all 16 PSUs can be found inthe printed report.


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IIFL_India_PSUs_2014