ENAM  Securities Direct

New Year Picks 2011

Wish you all a

Happy & Prosperous
New Year 2011
Strictly Confidential ¾ENAM Securities Direct ¾12010
December 31,
 Top Picks for New Year - 2011
● The recommended stocks are expected to be major beneficiaries of the infra/energy 
theme  &  consumption  boom  in  India.  They  are  backed  by  strong  managements, 
have  healthy  balance  sheets  and  some  of  them  have  corrected  from their  all  time 
highs  rendering  them  cheap.  All  the  recommended  companies  are  in a  position  to 
report growth in topline and bottomline going forward.

New Year Picks 2011 Upside
Company CMP (Rs) Target (Rs) %
Coal India  308 385 25%
Powergrid  97 125 29%
Elgi equipments 92 127 38%
Prism Cement 52 66 27%
Whirlpool 282 355 26%
Hitachi Home 217 279 28%
Redington  81 99 22%
Pantaloon Retail 364 485 33%
Sterlite Tech 74 115 55%

ENAM Securities Direct 2

 Coal India (CMP: Rs 308)

Adj. EPS (Rs) ROE(%) Target 

M‐Cap CMP  Upside 
Company Price 
(Rs cr) (Rs) FY10 FY11E FY12E FY10 FY11E FY12E (%)
(Rs)

Coal India 194,576  308 15 17 19 41 34 31 385 25

Excellent resource play, spotlight on washed coal
● CIL  is  undergoing  a  metamorphosis  from  a  mere  production  driven  company  to  a  production  plus 
profitability focused mining behemoth. It is setting up 111 mn tonnes of new washing  capacity for  its 
existing production and ~90% of incremental production will have dedicated washeries.

● Since  washed  coal  realization  is  ~2.3x  that  of  raw  coal,  we  expect  huge  EBITDA  margin  expansion 
(45%  in  FY17  vs.  27%  in  FY10)  going  forward.  Led  by  better  realizations  and  a  volume  CAGR  of  6%, 
we expect EBITDA and PAT to grow at a CAGR of 23% and 22% respectively by FY17. 

● A strong balance sheet with net cash of USD 8.2 bn (FY10) and conservative accounting practices, the 
overburden  reserves  of  USD  2.7  bn  can  increase  book  value  by  USD  1.8  bn  (post  tax)  under  the 
proposed IFRS regime.

● Our one year target price (based on DCF) stands at Rs 385. In the long term, CIL has potential to deliver 
23%  CAGR  return  over  next  5  years  in‐line  with  earnings  growth.  With  a  target  P/E  of  15x  and  our 
EPS forecast of Rs 62 for FY17, CIL can trade at Rs 929 – five years hence.

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 Power Grid (CMP: Rs 97)

Adj. EPS (Rs) ROE(%) Target 

M‐Cap CMP Upside 
Company Price 
(Rs cr) (Rs) FY10 FY11E FY12E FY10 FY11E FY12E (%)
(Rs)

Power Grid 44,723 97 5 6 7 14 14 15 125 29

RoE expansion through merchant power sales
● PGCIL  captures  the  merchant  power  opportunity through  sale  of  its  spare  capacity  on  a  short‐term 
open access (ST) basis. It charges on an average ~Rs 0.16/kWh and retains 25% of the revenue and there 
are  NO  RoE  caps.  With  an  expected  increase  in  merchant  power  sales,  this  would  aid  PGCIL’s  ROE 
expansion. In FY10 ST contributed ~100bps to core RoE.

● Recently, even in case of a delay in generation‐linked transmission project, CERC has allowed PGCIL to 
bill transmission charges retrospectively to its customer from the original date of commercial operation. 
This was highly positive for PGCIL as it faced a major risk of stranded assets due to delay in generation 
linked projects.

● We  have  valued  PGCIL  at  Rs  125/sh  based  on  P/B  of  2x  FY12E  core  invested  equity  in  transmission 
assets 17% core RoE and 7% LT growth).

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 Elgi Equipments (CMP: Rs 92)

Adj. EPS (Rs) ROE(%) Target 

M‐Cap CMP  Upside 
Company Price 
(Rs cr) (Rs)  FY10 FY11E FY12E FY10 FY11E FY12E (%)
(Rs)

Elgi equipments 1,460 92 4.2 6.4 8.0 25 33 29 127 38

A proxy to Industrial capex 
● Elgi is a leading manufacturer of compressors catering to industries like mining, power, transport and 
textiles. It is also engaged in manufacturing of automobile service station equipments. The compressor 
industry  is  an  oligopoly  industry  with  only  four  players‐Elgi,  Kirloskar  Pneumatic,  Atlas  Copco  and 
Ingersoll‐Rand. The industry has huge entry barriers in the form of technology. 
● Elgi manufactures a wide range of compressors catering to large number of industries thus insulating it 
from downturn in a single industry. The company is focusing on increasing exports (exports account for 
15% of the Elgi standalone business currently). Elgi is also increasing its international presence and has 
acquired SA Belair which has given it a strong footing in Europe. It has a strong balance sheet with cash 
of  Rs.  122  cr.  Elgi  has  been  able  to  reduce  working  capital  to  sales  from  22%  in  FY06  to  7.5%  in  FY10 
(on standalone basis). 
● The  company  is  virtually  debt‐free  and  has  ROE  of  ~25%  in  FY10.  Compressors  contribute  86%  to 
revenue and 92% to EBIT of the company. The company has averaged ~50% growth in net sales over the 
last  three  quarters  on  a  standalone  basis.  We  expect  revenue  to  grow  at  a  CAGR  of  ~31%  over 
FY10‐12E(on a standalone basis). We have valued Elgi at Rs. 127/share giving an upside of 38%.

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 Prism Cement (CMP: Rs 52)

Adj. EPS (Rs) ROE(%) Target 

M‐Cap CMP  Upside 
Company Price 
(Rs cr) (Rs)  FY11E FY12E FY13E FY11E FY12E FY13E (%)
(Rs)

Prism Cement 2,607 52 1.9 5.1 8.9 8 18 27 66 27

Going up the value chain
● India’s  leading  integrated  building  material  player  with  a  robust  business  model  generating  FCF  and 
sustainable  competitive  advantage.  Presence  in  Central  &  Eastern Region  where  cement  demand  has 
grown  by  19%  &  17.5%  respectively  vs.  Industry  growth  of  10.6%  in  FY  2010.  Robust  demand 
& superior realization to benefit from the next cement up‐cycle by leveraging on its recently concluded 
capex taking its capacity to 6.6 mn tonnes.
● Significant  ease  in  input  cost  (FY  13  onwards):  Captive  coal  mine  +  reduced  power  tariff  rates 
(power  surplus  due  to  est.~  17,000  MW),  to  cause  quantum  leap  in profitability  in  a  scenario  of 
increasing input cost. We have not captured the benefits arising from coal mine in our valuations. 
● Synergies  across  divisions  ‐ Acquisition  of  RMC  +  TBK  business  with  ROCE’s  of  over  15%  would 
provide a strategic route to market for cement business whose extensive network can be used to further 
nurture RMC & TBK businesses.
● Prism is available merely at 4x EV/EBITDA & 6x its FY13E earnings. Capturing the value chain of all the 
business segments through our SOTP valuation, we have arrived at a price target of Rs. 66 per share.

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 Whirlpool (CMP: Rs 282)

Adj. EPS (Rs) ROE(%) Target 

M‐Cap CMP  Upside 
Company Price 
(Rs cr) (Rs)  FY11E FY12E FY13E FY11E FY12E FY13E (%)
(Rs)

Whirlpool 3,577 282 13 16 20 39 33 31 355 26

Direct play on Indian consumption 
● Whirlpool  is  a  direct  play  on  Indian  consumption  industry.  The  company  has  been  able  to  straddle 
across segments from refrigerators and washing machines to air‐ conditioners, microwaves and water 
purifiers. Focusing on both the mass and the premium segments gives it an edge over the other players. 
● We  believe  there  is  a  great  potential  for  Whirlpool  to  grow  considering  the  lower  refrigerator 
penetration level in Indian market. Currently, the size of refrigerator industry is only 5.5 mn units with 
penetration of around 17%. The refrigerator market can grow to 25 mn  by 2020 (growing at a CAGR of 
16%).  The  industry  size  of  AC’s  in  FY10  is  only  2.5  mn  units  (penetration  level  of  only  3%)which  is 
poised to grow to 18 mn by 2020 (CAGR of 22%). Uninterrupted power supply will also give a fillip to 
this market.
● Whirlpool has a strong demand pull and the company is fast expanding its presence in tier 2,3,4 towns 
where  the  growth  rates  are  higher  coupled  with  its  strong  product  portfolio  and    large  distribution 
network.. We believe Whirlpool can register a sales growth CAGR of 22.8% from FY10‐13E. We have a 
target price of Rs. 355 (based on 18x FY13E EPS of Rs. 19.7) giving potential upside of 26%.

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 Hitachi Home (CMP: Rs 217)

Adj. EPS (Rs) ROE(%) Target 

M‐Cap CMP  Upside 
Company Price 
(Rs cr) (Rs)  FY10 FY11E FY12E FY10 FY11E FY12E (%)
(Rs)

Hitachi Home 498 217 20 15 20 37 21 22 279 28

Direct play on Indian consumption 
● Hitachi Home (India) is a prominent player in the premium air conditioning segment. The company has 
two plants in Jammu and Kadi with a total capacity of 4 lakh units. 

● We believe the market size can grow to 18 mn by 2020 from 2.5 mn currently (growing at a CAGR of 
22%)  increasing  the  penetration  to  25%(which  is  still  lower  considering  China’s  penetration  of 
51% today). 

● We believe because of the strong brand name and definitive road map laid by the management, Hitachi 
will post better growth and increase market share to double digits from the current 6‐7%.

● Looking at the growth prospects of the Hitachi along with its robust fundamentals, we believe the stock 
looks attractive at the current levels. We arrive at a target price of Rs. 279 based on 14x its FY12E EPS of 
Rs.19.9, giving an upside of 28%.

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 Redington (CMP: Rs 81)

Adj. EPS (Rs) ROE(%) Target 

M‐Cap CMP  Upside 
Company Price 
(Rs cr) (Rs)  FY10 FY11E FY12E FY10 FY11E FY12E (%)
(Rs)

Redington 3,207 81 5 6 7 14 17 18 99 22

Smart growth driven by BLACKBERRY

● In  India,  demand  continues  to  remain  strong  driven  by  corporate  capex  3G  investments by  telecom 
companies  from  H2FY11  onwards would  add  to  the  momentum.  Smart  phones  sales  continue  to  be 
strong.

● The NBFC has shown strong growth with no delinquencies. In International markets, improvement in 
economic outlook & increasing share of value/non‐IT biz would lead growth in the long‐term.

● Given low PC penetration in Redingtonʹs overseas markets ‐ Middle East, Africa & Turkey, long term 
demand  outlook  seems  encouraging.  Addition  of  value  based  products  in  the  recently  acquired 
Turkish entity (Arena) will add to the earnings visibility over next few years.

● We expect YoY topline growth of ~23% & 24% in FY11E & FY12E respectively with PAT YoY growth of 
~27% & 19% in FY11E & FY12E respectively (including Arena). Maintain BUY rating with a target price 
of Rs 99.

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 Pantaloon Retail (CMP: Rs 364)

Adj. EPS (Rs) ROE(%) Target 

M‐Cap CMP  Upside 
Company Price 
(Rs cr) (Rs)  FY10 FY11E FY12E FY10 FY11E FY12E (%)
(Rs)

Pantaloon Retail 7,808 364 9 12 16 6 6 8 485 33

Aggressive roll out plans /Financial Restructuring
● Aggressive  rollout  plans,  ~  2  mn  sq  ft  p.a. (currently  12  mn  sq  ft)  over  next  3  years,  along  with 
Same‐ store‐sales growth will drive revenue’s by ~22% p.a. over the next 2 years. Moreover operating 
cash flows are sufficient to fund this expansion.

● Increased  efficiency  from  better  inventory  management  (reduce  inventory/sq  ft  by~15%)  will  improve 
the  working  capital  cycle.  Reduced  debt through  QIP  proceeds,  will  ease  interest  burden and  drive 
earning’s by ~55% CAGR over the next 2 years. Financial restructuring (divesting Insurance arm) will 
unlock value.

● Key triggers to watch out for would be: turnaround in the electronic biz, divestment of financial vertical 
and improvement in capital efficiency. We maintain a Buy rating on the stock with a SOTP‐based Target 
Price of Rs 485/‐

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 Sterlite Tech (CMP: Rs 74)

Adj. EPS (Rs) ROE(%) Target 

M‐Cap CMP  Upside 
Company Price 
(Rs cr) (Rs)  FY10 FY11E FY12E FY10 FY11E FY12E (%)
(Rs)

Sterlite Tech 2,644 74 6 7 9 32 26 27 115 55

Long Term Intact
● Sterlite  Technologies  Ltd  (STL)  is  a  play  on  the  high‐growth  Telecom  and  Power  sectors  in  emerging 
markets.  Parentage  of  Sterlite  Group  lends  strength  to  STL.  The  Group,  among  the  lowest  cost  metal 
producers  globally,  has  an  enviable  track  record  in  executing  large  projects  continuously,  in  a  timely 
manner.

● STL is  only  one  of  6‐7  players  globally,  having  technology  to  produce  Optic  Fiber  from  silica,  and  is 
one  of  the  lowest  cost  producers  in  the  world.  Volume  growth  in  Optic  Fiber  and  Optic  Fiber  Cable 
(OFC) will drive margin expansion. We expect EBITDA from Telecom vertical rising to ~60% in FY12E.

● Given burgeoning capex in power sector and Value‐add potential through BOT in transmission lines we 
expect EBITDA from Power vertical to move to ~40% in FY12E. Capacity expansion will propel it to be 
among  the  top  3  players  globally  in  both  segments.  Given  the  long‐term  growth  prospects  we  have 
Buy rating with a target price of Rs 115 based on 13x PE FY12E.

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Thank You !!!

ENAM Securities Direct 12

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ENAM Securities Direct 13