Jan 2016 - Kotak Securities · Investment Strategist January 2016 ... Domestic markets remained range-bound in December 2015, on weak global cues and lack of domestic triggers

15Investment Strategist January 2016

BUY

)nm sR( paC tkM)sR( L/H keeW 25)sR( ecirP tekraM tnerruC08483731 / 262371

Source: Bloomberg

Source: Bloomberg

FINANCIALS (RS MN) FY15 FY16E FY17E525,51selaS 18,618 21,909

%81%02%12)%( htworG915,2ADTIBE 3,165 3,834

EBITDA margin (%) 16.2% 17.0% 17.5%897,1TBP 2,276 2,863805,1tiforp teN 1,935 2,4338.6)sR( SPE 8.7 10.9

%62%82%521)%( htworG8.8)sR( SPEC 10.7 13.2

Book value (Rs/share) 17.4 24.6 34.0Dividend per share (Rs) 1.2 1.2 1.2 Source: Company, Kotak Securities - Private Client Research

4.44)%( EOR 41.4 37.37.62)%( ECOR 29.4 30.7848,4tbed teN 4,426 3,940

Net Working Capital (Days) 140.1 147.0 147.0

VALUATION PARAMETERS FY15 FY16E FY17E6.52)x( E/P 19.9 15.89.9)x( VB/P 7.0 5.18.2)x( selaS/VE 2.3 1.90.71)x( ADTIBE/VE 13.4 10.9

PRICE PERFORMANCE (%) 1M 3M 6M(8.8) 1.6 (12.7)

Source: Bloomberg, Company, Kotak Securities - Private Client Research Source: Company

Last report at Rs.180 on 5 November 2015CENTURY PLYBOARDS (INDIA) LTD

Target Price (Rs)230

Revenues (Rs mn)

Potential Upside (%)32.8%

1 Year Performance

Share Holding Pattern (%)

Revenue mix (%)

Promoter73.3%

FII10.7%

DII3.4%

Others12.5%

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Century Plyboards (India) Ltd Nifty

INVESTMENT ARGUMENT Demand environment likely to revive in medium term - We expect the

demand to recover at 10-12% every year going forward in medium to longterm.

GST implementation to be a game changer for the sector - With GST implementation, organized players would be able to tap the low costsegment captured by unorganized segment as it would bring both thesegments on a level playing field

Strong distribution network and branding to help in improving marketshare - Company has a strong dealer network of nearly 1500 dealers, 35branch offices, 6 regional distribution centres and 7 manufacturinglocations

Volume expansion and strong margin to drive PAT growth goingahead- We expect revenues and net profits to grow at a CAGR of 19% and27% respectively between FY15-FY17

Attractive valuations - We expect the stock to trade at higher multiplesgoing forward also as the company is ideally positioned to capture theupcoming demand as well as increased consumption with its leadershipposition and strong branding.

RISKS & CONCERNS Demand slowdown Forex volatility Delay in GST implementation Higher raw material prices

COMPANY BACKGROUND Century Plyboards is the largest plywood manufacturer with more than

30% share in the India's organized plywood sector with an annual capacity of 209420 CBM in plywood and 4.8 mn sheets in laminates.

SECTOR BACKGROUND Indian panel products and laminate industry is estimated at nearly Rs 285

bn - of which plywood accounts for Rs 180 bn, laminates account for Rs 66bn while rest is constituted by MDF.

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FY14 FY15 FY16E FY17E

Others CFS Laminate Plywood

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ROE (%) ROCE (%)


BUY


Source: Bloomberg

Source: Bloomberg

FINANCIALS (RS MN) FY15 FY16E FY17E488,741selaS 150,478 157,6065.8)%( htworG 1.8 4.7691,47ADTIBE 68,717 72,1572.05)%( nigram ADTIBE 45.7 45.8107,59TBP 90,509 95,953087,18tiforp teN 76,933 80,6014.91)sR( SPE 18.2 19.14.81)%( htworG (5.9) 4.89.02)sR( SPEC 19.9 21.1


9.81)%( EOR 16.8 15.89.81)%( ECOR 16.9 15.9158,703)tbed( hsac teN 345,149 389,392

Net Working Capital (Days) 84.0 71.0 54.2


PRICE PERFORMANCE (%) 1M 3M 6M(1.6) (2.3) (10.4)

Source: Bloomberg, Company, Kotak Securities - Private Client Research Source: Company, Kotak Securities - Private Client Research

Last report at Rs.159 on 21 October 2015HINDUSTAN ZINC


Sales to grow at 9% CAGR


1 Year Performance


EBITDA Margin to decline but still remain healthy (%)

Promoter64.9%

FII1.9%

DII31.2%

Others1.9%

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Hindustan Zinc Nifty

INVESTMENT ARGUMENT We believe on the back of the closure of mines in Australia, Poland and Peru in 2015,

zinc supply deficit to widen in 2015 and 2016. As per ILZSG zinc market will remain indeficit to the tune of 151,000 tonnes of metal in 2015. Zinc prices have strengthen owing to the supply constraint in 2014, which led to decline in LME inventory from itspeak of 1.2MT in December 2012.

Captive mining and captive power plants for its smelting operations have enabled, HZto operate in the lowest cost quartile on a sustainable basis and maintain healthyEBITDA margin compared to its global peers.

We expect HZL to generate free cash flows of Rs64.3bn and Rs70.2bn in FY16E andFY17E respectively.

At CMP, the stock trades at 7.6x/7.3x FY16E/FY17E earnings. Its EV trades at 3.5x/2.8x FY16e/FY17e EBITDA. The closure of several zinc mines across the worldbodes well for zinc prices in the medium term and widens opportunities for strongplayers in the business. We initiate coverage with BUY rating and a target price ofRs195.

RISKS & CONCERNS Global slowdown could restrict upside in zinc prices Rupee Appreciation and lower than expected volumes

COMPANY BACKGROUND Hindustan Zinc is the one of the largest integrated producers of zinc-lead with a capacity of1.0 MT and a leading producer of silver. The Company is also one of the lowest costproducer of zinc globally, backed by its captive mining operations (Rampura Agucha,Sindesar Khurd, Rajpura Dariba, Zawar and Kayad Mines) and 474MW power plants. HZReserves and Resources at the end of FY15 stands at 375.1MT, containing 35.3MT ofzinc-lead metal and 970Moz of silver, having mine life of over 25 years.

SECTOR BACKGROUNDGlobal demand for refined zinc metal is expected to increase by 3.7% to 14.14MT in 2015.China is expected to register 4.8% increase in demand, followed by 2.4% increase indemand for Europe and 6% from the United States. Demand is also expected to remainstrong in Canada, India, Indonesia, Mexico and Turkey. Refined zinc metal production isexpected to rise by 5.2% YoY to 13.99MT. Global zinc mine supply is likely to register3.7% YoY growth in 2015 to 13.84MT. It is anticipated global zinc market will remain indeficit to the tune of 151,000 tonnes of metal in 2015.

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BUY


Source: Bloomberg

Source: Bloomberg

FINANCIALS (RS MN) FY15 FY16E FY17E194emocni tseretnI 540 6105.003esnepxe tseretnI 324.4 363.4

Net interest income 190 215 246%4.41%0.31%6.51)%( htworG

221emocni rehtO 129 146791tiforp ssorG 216 2488.111tiforp teN 123.4 143.5

%3.61%4.01%9.31)%( htworG9.3)%( APN ssorG 3.8 3.26.1)%( APN teN 1.6 1.1

Net interest margin (%) 3.4 3.4 3.4 Source: Company, Kotak Securities - Private Client Research0.71)%( RAC 17.3 16.95.41)%( EoR 14.6 15.28.1)%( AAoR 1.8 1.9

Dividend per share (Rs) 5.0 5.5 6.03.91)sR( SPE 21.3 24.7

Adjusted BVPS (Rs) 127.9 141.4 161.6

VALUATION PARAMETERS FY15 FY16E FY17E0.31)x( E/P 11.7 10.10.2)x( VB/P 1.8 1.5

PRICE PERFORMANCE (%) 1M 3M 6M(4.3) (11.5) (20.6)


Last report at Rs.277 on 2 November 2015

ICICI BANK LTD


Trend in Asset Quality


1 Year Performance


Trend in earnings (Rs bn)

Promoter0.0%

FII53.9%

DII33.5%

Others12.7%

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ICICI Bank Ltd Nifty

INVESTMENT ARGUMENT We like the quality of liability franchise - CASA mix at 45.1% (Q2FY16),

one of the best in the industry. NIM has been strong on back of strong accretion to low cost deposits as

well as better ALM. Lower risk on SME portfolio (~5% of total portfolio). While retail piece has

witnessed insignificant net slippage, corporate segment continues toperform well.

RoA is likely to remain stronger at 1.8% (FY16/17), driving up the RoE to15%+ (FY17). Management focus on stable growth with improving structural profitability reinforces our existing positive outlook on the stock.

Incremental stress build-up is front-loaded and likely to be lower in FY16as compared to the same seen during FY15.

We have used SOTP method to value the stock, where standalone business comes to Rs.323 (2.0x FY17E ABV) and subsidiaries are valued at Rs.77 (holding co discount: 20%).

RISKS & CONCERNS Retail book stands at ~44% of total book, highly vulnerable to system-

wide deterioration in retail asset quality. Deregulation of interest rates on saving deposits (~32% of deposits)

might increase the funding costs and in turn impacting its NIM.

COMPANY BACKGROUND Largest private sector banks (4054 branches in Q2FY16) with 4.2%

market share in domestic loans. After conscious strategy of de-growing their B/S post Lehman collapse,

bank has started focusing on profitable growth

SECTOR BACKGROUND Easing bond yield is positive for wholesale funded entities and is likely to

result into higher trading gains for banks. Retail segment continues to drive loan growth. Prefer private sector

banks and remain cautious on PSU banks.

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Gross NPA (Rs bn - LHS)Gross NPA (% - RHS)


ACCUMULATE


Source: Bloomberg

Source: Bloomberg

FINANCIALS (RS MN) FY15 FY16E FY17E091,335selaS 613,658 684,6814.6% htworG 15.1 11.6023,831ADTIBE 153,341 174,869

EBITDA margin % 25.9 25.0 25.5095,271TBP 186,101 214,119092,321tiforp teN 132,105 153,0959.35)sR( SPE 57.2 65.74.31% htworG 6.1 14.83.36SPEC 67.9 77.4

Book Value (Rs / Share) 239.6 261.7 286.9Dividend per Share (Rs) 85.0 40.0 45.0 Source: Company, Kotak Securities - Private Client Research

1.42% EOR 22.9 24.17.33% ECOR 32.3 33.6

Net cash (debt) 303,715 334,561 377,813Net working capital (Days) 66.5 64.5 63.4


PRICE PERFORMANCE (%) 1M 3M 6M1.9 (7.4) 8.8


Last report at Rs.1125 on 13 October 2015INFOSYS TECHNOLOGIES LTD


Geographical Revenue Break up (%)


1 Year Performance


Number of Employees (Nos)

Promoter15.7%

FII47.9%

DII20.6%

Others15.7%

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Infosys Technologies Nifty

INVESTMENT ARGUMENT 2QFY16 results were encouraging. The 5.9% CC growth and

$983mn TCV from large deals were the positive takeaways.

We believe that, the new strategy should allow Infosys to improvegrowth rates over the long term with sustained margins.

The long-term strategic plan reflects Infosys' focus on next-generation services and delivery models. Infosys has already madesignificant progress towards next-generation services and deliverymechanisms.

RISKS & CONCERNS A slower-than-expected recovery in major user economies may

impact our projections. A sharp appreciation of rupee beyond our assumed levels may

impact our earnings estimates for the company.

COMPANY BACKGROUND Infosys was incorporated in 1981 by 7 engineers, led by Mr.

Narayana Murthy. Infosys had been the proxy for the Indian ITsector since its inception.

The company has been an outstanding corporate citizen in terms ofcorporate governance in India. Infosys services clients in over 30countries.

SECTOR BACKGROUND IT services exports are expected to amount to nearly $110bn in

FY16. Indian companies provide services to several Fortune 500

companies. Banking & Financial services sector accounts for the largest

revenues and USA is the largest geography for the industry

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BUY


Source: Bloomberg

Source: Bloomberg

FINANCIALS (RS MN) FY15 FY16E FY17E016,51selaS 18,724 23,3683.63)%( htworG 19.9 24.8661,2ADTIBE 2,405 2,971

EBITDA margin (%) 13.9 12.8 12.7874,1TBP 1,825 2,293400,1tiforp teN 1,223 1,5376.91)sR( SPE 23.8 29.99.94)%( htworG 21.8 25.73.43)sR( SPEC 33.0 41.0


9.41)%( EOR 12.3 11.52.43)%( ECOR eroC 28.1 28.0

Net cash (debt) (3,029) (22) (275)Net Working Capital (Days) 95 105 106


PRICE PERFORMANCE (%) 1M 3M 6M(0.4) 3.5 31.0

Source: Bloomberg, Company, Kotak Securities - Private Client Research Source: Industry

NHAI road projects awarding


1 Year Performance


Order Book & Order Inflows trend (Rs bn)

Last report at Rs.523 on 9 November 2015PNC INFRATECH LTD (PNC)


Promoter56.1%

FII6.4%

DII13.8%

Others23.7%

INVESTMENT ARGUMENT PNC has long history in the roads sector with over 15 years of experience in

executing NHAI projects. PNC has track record of timely and before schedulecompletion of projects and received early completion bonus.

PNC has an order book of Rs 43.9 bn including L1 order of Rs 8.1 bn. Further, Ithas bid pipeline of Rs 120 bn of projects and is targeting to add Rs 25-30 bn of new orders per annum in the next two years, which gives high revenue growth visibility.

PNC has already infused Rs 4.9 bn of its equity in BOT projects and does nothave any further equity commitment. It has negligible debt at standalone leveland maintains high core RoCE of 25% plus.

RISKS & CONCERNS Slowdown in road sector Aggressive bidding of projects Inflows of large size BOT projects

COMPANY BACKGROUND PNC Infratech Ltd (PNC) is a north India based construction company with

track record of more than 15 years in developing road projects, whichcontribute 99% of its current order book. PNC is currently executing 21projects on an EPC contract basis and is developing/operating 7 BOT projectsand 1 OMT project. It reported decent CAGR of 16% in its sales and 17% inPAT in FY10-15, despite highly competitive and challenging businessenvironment.

SECTOR BACKGROUND Awarding activity in road sector has picked up pace in the past one year and is

expected to remain firm in the next 2-3 years. Ministry of Road Transport &Highways (MORTH) targets to award 273 road projects of total 12900 kmlength and tentative cost worth Rs 1.27 trillion (including NHAI) during FY16.This trend is expected to continue in the next three years.

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PNC Infratech Ltd Nifty


BUY


Source: Bloomberg

Source: Bloomberg

FINANCIALS (RS MN) FY15 FY16E FY17E811,01selaS 10,141 12,1366.2)%( htworG 0.2 19.7348ADTIBE 865 1,262

EBITDA margin (%) 8.3 8.5 10.4547TBP 716 1,112366TAP 541 8457.3)sR( SPE 3.0 4.82.71)%( htworG (18.4) 56.29.5SPEC 5.0 6.89.53)erahs/sR( VB 36.6 37.8

Dividend / share (Rs) 1.6 2.0 3.0 Source: Company, Kotak Securities - Private Client Research4.01)%( EOR 8.3 12.73.01)%( ECOR 8.3 12.6804,2)tbed( hsac teN 2,531 3,012

NW Capital (Days) 45.6 48.2 47.0


PRICE PERFORMANCE (%) 1M 3M 6M14.1 13.2 (1.8)


Last report at Rs.81 on 10 December 2015

PRAJ INDUSTRIES LTD


Order Intake (Rs mn)


1 Year Performance


Order backlog (Rs mn)

Promoter33.9%

FII8.2%DII

19.0%

Others38.9%

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Praj Industries Ltd Nifty

INVESTMENT ARGUMENT Praj continues to enjoy leading position in the ethanol business

with 600 references across globe. The company gets 25% ofbusiness from repeat customers.

Order backlog is up 57% y-o-y at end of Q2FY16. It is also a potential beneficiary from the “Clean Ganga” initiative. The company is debt free and has Rs 2.21 bn in cash in balance

sheet

RISKS & CONCERNS Regulatory risk - Any rollback of ethanol blending mandate Technology risk - Inability to keep up with latest technology

developments in ethanol plant industry.

COMPANY BACKGROUND Praj is in the business of process design, engineering, fabrication,

and commissioning of bio-fuels plants, brewery plants, wastewater treatment plants, bio-consumables and process equipmentand systems.

SECTOR BACKGROUND The company is part of the capital goods industry which is seen

emerging from multi-year period of downturn. Issues such asdelay in land acquisition and environment clearance and coupledwith high interest rates had impacted order inflow for the sector. With improving business sentiment and promise of fasterclearances by the new government, the capital goods sector isexpected to recover.


BUY


Source: Bloomberg

Source: Bloomberg

FINANCIALS (RS MN) FY15 FY16E FY17E369,726,2selaS 2,616,720 3,091,0629.21)%( htworG -0.4 18.1783,293ADTIBE 340,640 435,722

EBITDA margin (%) 14.9 13.0 14.1620,712TBP 112,635 201,614368,931tiforp teN 80,245 148,4730.44)sR( SPE 31.3 43.7

)0.0()%( htworG (45.6) 85.01.58)sR( SPEC 71.7 102.48.471)erahs/sR( VB 209.0 250.4

-)sR(SPD 2.0 2.0 Source: Company, Kotak Securities - Private Client Research0.32)%( EOR 12.6 19.05.52)%( ECOR 15.3 21.4

Net cash (debt) (273,984) (281,155) (265,660))0.32()syaD( CWN (27.4) (29.9)


PRICE PERFORMANCE (%) 1M 3M 6M(8.5) 9.6 (15.1)


JLR Sales Volumes (Units)


1 Year Performance


Sales Volumes (Units)

Last report at Rs.380 on 17 December 2015TATA MOTORS LTD


Promoter41.0%

FII21.8%

DII26.8%

Others10.4%

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Tata Motors Ltd Nifty

INVESTMENT ARGUMENT Various reasons impacted sharp drop in China wholesale volumes for

JLR, though the company has taken some steps to rectify the same. Inthe near term, the general demand sentiment for luxury cars in China isexpected to stay subdued.

On the positive side, other key markets (ex - China) have grown for JLR,thereby largely offsetting the sharp decline in China sales. In FY16, JLRis targeting multiple new launches that will serve as a base for strongvolume growth in FY17 and beyond.

JLR's EBITDA margin in FY16 is expected to stay weak on weakgeography mix (falling share of China sales), weaker product mix andlaunch of various new models.

Standalone business volumes has started to recover for the company.We expect the standalone business to continue reporting losses forsome more quarters, though the losses are expected to gradually comedown.

RISKS & CONCERNS Lower than expected volume growth at JLR Delay in recovery in domestic demand Unfavorable currency movement

COMPANY BACKGROUND Tata Motors Limited (TAMO), part of Tata Group, is India's largest

automobile company. Established in 1945, TAMO has presence in thecommercial vehicle and passenger vehicle segments. In the domesticmarket, the company is the market leader in both the LCV and M&HCV segment.

SECTOR BACKGROUND Commercial vehicle industry fortunes depend on the overall

economic development happening in the economy. In the passenger car segment, the growth opportunities are high, givenlower car penetration levels in India.



Source: Bloomberg

Source: Bloomberg

FINANCIALS (RS MN) FY15 FY16E FY17E481,32selaS 25,986 30,07281)%( htworG 12 16525,2ADTIBE 2,780 4,764

EBITDA margin (%) 11 11 16061,2TBP 2,321 4,661955,1tiforp teN 2,087 3,739

2.22.19.0)sR( SPE83)%( htworG 33 792)sR( SPEC 1 2

Book value (Rs/share) 20 21 24Dividend per share (Rs) - - - Source: Company, Kotak Securities - Private Client Research

5)%( EOR 6 107)%( ECOR 6 10

Net cash (debt) (3,058) (1,732) 1,554Net Working Capital (Days) 101 103 97


PRICE PERFORMANCE (%) 1M 3M 6M25.5 38.6 14.4


Contribution to EBITDA


1 Year Performance


BARC Ratings Data (Rat, mn)

Last report at Rs.48 on 29 December 2015TV18 BROADCAST LTD

Target Price (Rs)67

Promoter60.4%FII

8.9%

DII4.9%

Others25.8%

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TV18 Broadcast Ltd Nifty

INVESTMENT ARGUMENT Owns one of the most attractive bouquets in the Indian TV Broadcasting

industry (news operations, 50% ownership in entertainment/ infotainmentoperations via JVs), and valuation (mkt. cap ~Rs 80Bn) versus peers(Zee Entertainment ~Rs 410 Bn, Sun TV ~Rs 160 Bn) indicatessignificant scope for appreciation.

Strong performance in entertainment channels’ ratings points to strongearnings ahead: Colors, the flagship channel of Viacom18, has emergedas the #1 paid Hindi GEC (BARC, Week 50); regional channels toobringing in strong performance. We expect strong earnings growth withEBITDA CAGR of 50% between FY16E-FY18E. We expect the companyto report historically high EBITDA in 2HFY16.

Earlier, when Colors has had a chance of convergence with the leader(in terms of ratings), and when TV18 has reported EBITDA ~25% of Zee,the valuation of TV18 has risen to 23% of Zee Entertainment. We expectsomething similar, as TV18 EBITDA moves to about 30% of ZeeEntertainment in 2HFY16. Our price target implies PER of 30X FY17E.

RISKS & CONCERNS Ratings performance of key channels is the key risk.

COMPANY BACKGROUND TV18 Broadcast is amongst the largest TV broadcasting companies in

India, with presence in news as well as entertainment. The company has a 50:50 JV with Viacom ("Viacom18) which operates,

among others, Hindi GEC Colors. TV18 has bought a 50% stake in ETVentertainment channels (other than Telugu) and 100% stake in ETVNews channels.

SECTOR BACKGROUND Indian TV Broadcasting is a Rs 540 Bn industry, with Rs 175 Bn in

advertising revenues. The sector is positively exposed to digitaladdressability, which should bring benefits to broadcasters/ platformproviders.

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- o/w Standalone Operations

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- o/w Viacom 18 (50%)

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5%

BUY

Documents

Jan 2016 - Kotak Securities · Investment Strategist January 2016 ... Domestic markets remained range-bound in December 2015, on weak global cues and lack of domestic triggers