model portfolio series iv 10th august 2012

BMA Wealth Creators Equity Research

India's economic fundamentals have deteriorated in the near term leaving the country with weaker growth. The country is grappling with problems of rising inflation and booming fiscal and current account deficits. Global macro-economic environment seems equally gloomy. European debt crisis has been escalating with more and more countries finding it difficult to re-finance their government debt without the assistance of third parties. China's growth has also moderated along with other Asian countries. Against the backdrop of weak global growth and high global commodity prices, the Indian economy has taken a severe beating due to weak domestic political climate. Indian government has failed to reduce the fiscal deficit and to device structural reforms to open supply-side bottlenecks. Rising subsidy bills, slow decision making on behalf of the government due to scandals and back-tracking on reforms due to influence of regional political parties have curtailed the growth potential. Any significant economic reform or any serious effort to curtail the fiscal deficit seems unlikely in the face of general elections due in May 2014. The weakness in the Indian economy is reflected in the Indian equity market as well. Over the last two years, the equity market has given a negative return of nearly 4% while in the last year, it gave a negative return of nearly 8%. Thus, investment in the equity market has been quite difficult. We expect the market to consolidate in a broad range in the remaining part of the year, giving us the opportunity to accumulate stocks at reasonable prices. Thus, we have attempted to create a model portfolio to generate superior returns over the market. Given the weak domestic and global economic environment, we prefer to keep more than 70% of out portfolio in liquid funds. The funds would be deployed as and when the time will be ripe.

[email protected] 033 40110153

EQUITY RESEARCH

Model Portfolio (Series IV)

10th August 2012

Backdrop

Model Portfolio Update


Idea

Current Positions

We, have thus come up with a long term portfolio. The portfolio aims to guide the investors to gain moderate return through investments in capital markets. This is not a fund management exercise, so investors can customize this Model Portfolio according to their choice. The investor can expect the risk of significant price fluctuation. Recommendation Approach: For fundamental recommendation, we follow bottom up approach of stock selection. We conduct detailed fundamental analysis of individual companies before giving recommendations. Sometimes we may recommend stocks based on technical analysis for short term trading. We also wish to recommend short positions depending on market condition. Positon on futures and options strategies may also be included.

Position of the Portfolio as on 10-August 2012

Entry Date Company Entry Price Wt %

10-Aug-2012 ING Vysya Bank Limited 384.95 5.0%

10-Aug-2012 Colgate-Palmolive (India) Limited 1178.35 5.0%

10-Aug-2012 IL&FS Transportation Networks Ltd. 164.70 5.0%

10-Aug-2012 Larsen & Toubro Limited 1423.95 2.5%

10-Aug-2012 Ingersoll-Rand (India) Limited 455.50 5.0%

Portfolio Highlights Current market value of the portfolio is Rs 2,25,000 Total cash in the portfolio is Rs 775,000.

Sector Allocation

Company Allocation



KEY MARKET DATA

Sector Banking

BSE Code 531807

NSE Code INGVYSYA

CMP (as on 10.08.12) 384.95

52 Wk. High/Low 399.90/275.00

Sensex/Nifty 17557.70/5320.40

Shares outstanding (Cr.) 150.82

Face Value 10

Market cap (Rs. Cr.) 5660.27

Daily avg. Volume 18510600

Free Float (%) 59.99%

Promoters 43.73%

FIIs 26.91%

DIIs 13.91%

Public 15.45%

As on 30th June,2012

SHAREHOLDING PATTERN

FY11 FY12 Y-o-Y %

Interest Earned 2693.93 3856.93 43.17%

Total Income 3348.65 4526.46 35.17%

Expenditure 3030.24 4070.10 34.32%

Net Profit 318.41 456.36 43.32%

P/B 1.92 12.97 -

EPS 26.45 31.85 20.42%

ING Vysya Bank Limited Target - Rs. 450/-

Target - 55 Investment Rationale Healthy CASA ratio: Despite turbulent movement in interest rates, ING Vysya Bank has been able to maintain its CASA over last year. Its CASA – as a proportion to aggregate deposit – has increased by over 720 bps to 34.2% over last 7 years. The CASA per branch has increased to INR 229 bn in FY12 from INR 149 bn in FY08. Diversified Asset book as well as liability structure – Advances book is well diversified across segments viz. Corporate (43%), SME (32%), Retail (20%) as well as across sectors reducing the concentration risk. Asset mix is also much better than peer banks in the corporate banking as well as business banking segments. Corporate banking book is well diversified with NBFCs accounting for 26.3% while telecom accounts for 14.8%. All the other sectors account for less than 10% exposures which translate into below 4% of the total book. Improving Asset Quality with Low Slippage, Higher Provisioning for Bad Assets: To improve the asset mix, the bank majorly lent to services related business in the sectors related to consumption in the economy. It lent mainly towards working capital requirement which ensured timely repayments keeping the asset quality intact. This has reduced the slippage ratio to 0.7% in FY12 from 2.3% in FY10. In addition to this, ING Vysya Bank has been consistently provisioning higher for their bad assets which has reduced the Net NPA to 0.18% hiking the provision coverage ratio to 90.7%. Improvement in Profitability and Efficiency: The management took significant steps to boost the profitability after it took over in 2006 which has resulted in volume growth, improving the efficiency. Business per branch has risen from INR 751 mn in FY08 to INR 1,135 mn in FY12 while profit per branch has risen from INR 4 mn to INR 8.8 mn in the corresponding period. Employee efficiency has also improved with business per employee growing from INR 55.8 mn in FY08 to INR 81.3 mn in FY12 while profit per employee rising from INR 0.29 mn to INR 0.63 mn during the corresponding period. Improving Trend in NIMs: Bank has been able to improve NIMs on the back of improving CASA and better balance sheet management.

Financial Snapshot

ING Vysya Bank vs. Nifty



Gems & Jewellery 8.4

Rental Discounting 7.2

food Processing 6.8

Auto 6

Contractor 5.9

Textiles 5.3

Iron & Steel 4.6

Service Enterprises 3.1

Pharma 2

Other Manufacturing 9.2

Trader 32.7

Others 8.8

Company Background ING Vysya Bank Limited is an entity formed with the culmination of the erstwhile Vysya Bank Limited, a premier bank in the Indian Private sector and a global financial powerhouse, ING of Dutch origin during October 2002. It was previously known as the Vysya Bank Limited and it was in 2002 that the name was changed. The Bank operates in four segments: Treasury, Retail Banking, Wholesale Banking and Other Banking Operations. The Treasury segment includes the net interest earnings on investments of the bank in sovereign bonds, corporate debt, and mutual funds; income from trading; income from derivative, and foreign exchange operations and the central funding unit. The Retail banking segment includes the business with individuals and small businesses through the branch network and other delivery channels, such as automated teller machine (ATM) and Internet banking. The wholesale banking segment provides loans and transaction services to corporate, emerging corporate and institutional customers. The bank has continued to introduce new personalized services in order to make banking easier for its customers. On the wholesale banking front, ING Vysya launched ‘ING Coverage’, integrated banking solutions and on the retail banking front, the bank has launched ‘ING Zwipe’ a new savings account targeted at the young mobile customers.

Industry Overview The Rs 64 trillion (US$ 1.22 trillion) Indian banking industry has made exceptional progress in last few years, even during the times when the rest of the world was struggling with financial meltdown. Recently, the RBI took a few important steps to make the Indian Banking industry more robust and healthy. This includes de-regulation of savings rate, guidelines for new banking licenses and implementation of Basel Norm III. Since March 2002, Bank index (Index tracking the performance of leading banking sector stocks) has grown at a compounded annual rate of about 31%. After a very successful decade, a new era seems to have started for the Indian Banking Industry. According to a Mckinsey report, the Indian banking sector is heading towards being a high-performing sector. If we look at 5 years historical performance of different types of players in the banking industry, as far as net interest income is concerned, private banks are ahead in the race by reporting 24.2% growth, followed by pubic banks (21.4%) and then by foreign banks (14.8%). We can say that the current position of ROA, Net NPA and CAR of different kinds of players in the industry indicates that going ahead; private banks will face relatively lesser problems as compared to public banks.

ING Vysya Bank Limited

Diversified Loan Book

Break-down of Consumer Banking

Break-down of Corporate Segment (%)



FY09 FY10 FY11 FY12 FY13E

Net Interest Income (NII) 649.62 829.84 1,006.52 1,208.35 1549.30

NII Growth 25% 28% 21% 20% 28%

EBITDA 424.81 641.95 635.47 767.9 1011.32

EBITDA Margins 84.15% 79.47% 80.60% 85.63% 82.46%

Profit Before Tax 294.65 371.51 483.87 654.17 862.80

Profit After Tax 188.78 242.22 318.65 456.3 598.10

Earnings Per Share 18.06 19.76 25.85 29.67 39.54


Equity 1702.89 2330.92 2624.29 3979.79 4477.42

Debt 3185.32 3671.39 4146.91 5696.49 6493.68

Cash/Deposit Ratio 8.94 8.12 8.05 6.37 7.68

Number of shares 10.26 11.997 12.099 15.012 15.025


NIM 2.84 3.21 3.25 3.30 3.41

Book Value 155.94 187.04 201 255 286

Int Expended/Int Earned 71 62.84 65.64 68.67 65.27

Price to Earnings Ratio 21.32 19.48 14.89 12.97 9.74

Price to Book Value Ratio 2.47 2.06 1.92 1.51 1.35

Investment Concerns Growth and Asset Quality levered to Economic Conditions: Development of the banking industry is correlated to the economic growth of the country. A slowdown in economic activity could impact loan growth and, hence, is likely to pose a risk to our estimates. Changes in Regulatory Norms could affect Business Dynamics: A change in regulations governing private banks is likely to impact business dynamics and, hence, could impact our estimates. High Interest Rate Scenario: Increasing NPA concerns due to high interest rate and deteriorating asset quality across the sector on the back of economic scenario may cause reduction in upgrades and recoveries and may hurt the asset quality of bank in the near-term.

ING Vysya Bank Limited

Company Performance

Valuation At the current market price of Rs 384.95, the stock is trading at 9.74x FY2013E earnings estimate. We expect ING Vysya to outperform due to its healthy CASA ratio, stable NIMs, .and one of the best asset qualities in domestic banking space. We recommend a Buy on the stock with a price target of Rs 450. At our price target the stock will be valued at 11.38x FY2013E earnings.



KEY MARKET DATA

Sector FMCG

BSE Code 500830

NSE Code COLPAL

CMP (as on 10.08.12) 1178.35

52 Wk. High/Low 1252.00/889.75

Sensex/Nifty 17557.70/5320.40


Face Value 1



Free Float (%) 50.00%

Promoters 51.00%

FIIs 21.16%

DIIs 5.98%

Public 21.86%

As on 30th june,2012


FY11 FY12 Y-o-Y %

Net Sales 2220.56 2623.85 18.16%

Total Expenditure 1801.41 2158.05 19.80%

Interest 1.61 1.51 -6.21%

Profit After Tax 402.58 446.47 10.90%

P/Ex 39.81 35.89 -

EPS 29.60 32.83 10.91%

Colgate-Palmolive (India) Limited Target - Rs. 1350/-

Target - 55

Investment Rationale Market leader with excellent financial matrix: Colgate is one of the few FMCG companies with real pricing power with dominant and increasing market share across oral hygiene products. The company has continued to achieve excellent business results year after year despite difficult economic conditions coupled with fierce competition, and high inflationary market conditions resulting in higher input cost. The company achieved a healthy double-digit sales growth during the year 2011-12. Cash generation has therefore been excellent, and has also been aided by its move to tax free location of Baddi (Himachal Pradesh). Apart from the strong growth in profits, the balance sheet metrics with fixed asset turns of over 4x, ROCE of over 100% is remarkable as well. Innovation to drive growth: The Company's growth is sparked by the innovative products that it brings to the market. During 2011-12, innovative products like Colgate Sensitive Pro-Relief (the only product that provides instant relief from hypersensitivity), variants of Plax Mouth Wash with sensorial and functional benefits, were successfully launched further enhancing the broad range of oral care benefits that Colgate provides to the consumers. During 1Q FY13, the company launched Colgate 360 battery toothbrush with dual action brush head and Colgate Max fresh toothbrush with multi height bristles. New Projects for sustainable development: To support the growth momentum and to cater to the increasing requirement of the products, the company acquired a plot of land from Gujarat Industrial Development Corporation on long-term lease for setting up a new Toothpaste manufacturing facility. In April 2012, the company acquired land in Andhra Pradesh on a long term lease for setting up a toothbrush manufacturing facility. Both the manufacturing facility is expected to be operational in the year 2013. P&G entry in toothpaste likely to be delayed: P&G has indicated that it will not enter new categories in emerging markets, but continue to focus on existing products. This delayed entry in toothpaste category is a significant positive for Colgate. The fear of margin contraction due to increased aggression in the category is also likely to be wiped off.

Financial Snapshot

Colgate Palmolive vs. Nifty



Oral Care

Toothpastes

Toothbrushes

Toothpowder

Whitening Products

Mouthwash

Personal Care

Bodywash

Liquid Hand Wash

Shave Preps

Skin Care

Hair Care

Household Care

Surface Care

From the Dentist

Gingivitis Treatment

Sensitivity Treatment

Tooth Whitening

Fluoride Therapy

Mouth Ulcer Treatment

Speciality Cleaning

Company Background CPIL was incorporated in 1937 as a wholly owned subsidiary of its US parent. Currently the parent company holds 40.06% stake in the company. The products of the group include soaps, shampoos, cosmetics and toilet preparations, toothpaste, tooth powder, toothbrushes, shaving brushes, fatty acids, glycerin and calcium phosphate. The company launched ‘Colgate Dental Cream’ in the same year as it was incorporated in 1937. This was followed in 1948 by the launch of Colgate toothbrushes and toothpowder. In the early 1950s the company launched three more brands, ‘Palmolive’ shaving cream, ‘Halo’ shampoo and ‘Charmis’ cold cream. The company offered 60% of its shareholding to the public through an IPO in 1978. Colgate is one of the few FMCG companies with real pricing power with dominant and increasing market share across oral hygiene products (51% in the toothpaste segment, 48% in the tooth-powder market and 30% in the toothbrush market) and 4.6 mn outlets providing it the widest distribution reach among peers. Several market surveys have rated Colgate as India’s most trusted brand and it is backed by a strong parent, which is the largest oral care player globally.

Industry Overview The Indian Fast Moving Consumer Goods (FMCG) sector is booming from last several years and given steady returns to its investors despite slowdown in the economy. The India Brand Equity Foundation (IBEF) estimates a total market size in excess of US$13.1 billion for FMCG industry in 2012. There is stiff competition among domestic companies, unorganized segment and MNC companies to increase their sales year-on-year, due to which they operate on low operational cost and margins. Key drivers for growth in FMCG sector include rapid increase in the rate of urbanization, rise in disposable incomes enabling the companies to focus on premium product brands, constant innovation in existing products, penetration to rural markets with strong distribution channels, rise in rural non-agricultural income and benefits from government welfare programs which contributes to top-line growth for FMCG companies. According to Nielsen’s research report entitled “Consumer 360”, the Indian FMCG market is estimated to grow to USD 100 billion by 2025 from USD 13 billion in 2012. According to report, the key areas driving this growth would be increase sales and acceptance of branded products, regular consumption of FMCG goods, etc.

Colgate-Palmolive (India) Limited

Products




Sales Revenue 1,694.81 1,962.46 2,220.56 2623.85 3023.40

Sales Revenue Growth 15% 16% 13% 18% 18%

EBITDA 369.36 523.87 555.81 629.21 670.07

EBITDA Margins 22% 27% 25% 24% 23.98%


Profit After Tax 290.22 423.26 402.58 446.47 365.75



Equity 216.30 326.11 384.05 435.39 593.06

Debt 4.69 4.59 0.05 0 0

Debt-Equity ratio 0.02 0.02 0.01 0.00 0.00

Number of shares 13.6 13.6 13.6 13.6 13.6


Current Ratio(x) 0.91 1.05 1.12 1.12 1.12

Book Value 15.90 23.98 28.24 32.01 45

Interest Coverage Ratio 314.92 324.20 323.94 390.66 -



Investment Concerns Competition from New entrants: P&G's entry in the oral care market with its Crest/Oral B brand and heightened competitive intensity from HUL and Dabur could hit the company hard. Increase in raw material price: Higher packaging cost due to rise in crude prices along with flavours like mint and menthol may push raw material cost further. Further risks arise from down trading by consumers in response to recent price hikes, which could hurt the company’s top line. Deficient Rainfall: Colgate’s substantial turnover is derived from the rural market. Deficient rainfall could impact agricultural activity which in turn could hit rural demand.

Colgate-Palmolive (India) Limited

Company Performance

Valuation At the current market price of Rs 1178.35, the stock is trading at 30.21x FY2013E earnings estimate. We expect Colgate Palmolive to outperform due to its market leadership in the oral care category and its focus on innovation to drive growth. We recommend a Buy on the stock with a price target of Rs 1350. At our price target the stock will be valued at 34.62x FY2013E earnings.



Sector Infrastructure

BSE Code 533177

NSE Code IL&FSTRANS

CMP (as on 10.08.12) 164.70

52 Wk. High/Low 231.00/142.55

Sensex/Nifty 17557.70/5320.40


Face Value 10



Free Float (%) 30%

Promoters 72.46%

FII 3.28%

DII 3.61%

Others 20.65%



FY11 FY12 Y-o-Y %

Net Sales 4048.23 5605.62 38.47%


Interest 498.06 728.21 46.21%

Profit After Tax 449.74 538.88 19.82%

P/Ex 7.11 5.94 --

EPS 23.15 27.74 38.47%

IL&FS Transportation Networks Ltd. Target - Rs. 250/-

Target - 55 Investment Rationale Largest Private sector BOT Road Asset Portfolio: ITNL is the largest player in road BOT segment in India and has 23 projects worth 11,860 lane kms under its portfolio. At present, ITNL has 4 annuity projects worth 1,024 lane kms and 6 toll based projects worth 3,326 kms, totaling 4,350 lane kms under operational phase. All the remaining projects are in different phases of execution, and are scheduled to be operational between years 2012 - 2014

Diversified surface transport player with pan India presence: ITNL has 23 road projects spread across the length and breadth of the country. The company has bagged projects in difficult areas like J&K, Meghalaya and Jharkhand which indicates company’s ability to execute these projects. Besides that company is also diversified across other segments like railways (metro), airports, and bus terminals

Cash flow profile: ITNL has a good mix of annuity and toll projects, which positions it well to benefit from any upside in toll collection. At the same time, the company is able to enjoy stable cash flows from annuity projects. Its annuity portfolio is amongst the largest in the country, both in terms of project size and lane km, lending stability to cash flows

Acquisition is EPS accretive: ITNL, through its subsidiary, ITNL International Pvt Ltd (Singapore based) has acquired a 49% equity stake in the Chongqing Yuhe Expressway Co (Chongqing Yuhe), China. The stretch spans across 58kms, of which 27.1kms is tolled at five locations (towards various exits). For the remaining 31.6kms, the company would receive an assured subsidy of around $22 million from the Chongqing Municipality with a minimum 5% increment in annuity every year. Also the company would get indemnified for any reduction in assured subsidies and any increase in tax rate from 15% in the next ten years. Thus this project offers significant revenue and growth visibility in the coming years

Significant order book provides growth visibility: IL&FS Transportation order backlog stands at Rs 12000 crores which provides significant revenue visibility and growth prospects for the company in FY13E & FY14E. The company has seen substantial growth in its order book mainly due to the increase in project awarded by the NHAI and is expected to witness similar project awards in the coming years

Financial Snapshot

IL&FS Transportation vs. Nifty



Company Background IL&FS Transportation Networks Ltd is one of the largest BOT road operators in India. The company undertakes complete project management from bid evaluation to designing to O&M post construction. The company has, over the years, acquired a position of leadership in the roads sector and has expanded its scope of activities to Ports, Railways and Urban Transport Sectors. It generates its revenue from annuity receipts, toll collections, operations & maintenance activities and advisory & project management fees. ITNL is a pioneer in the road BOT space and has been involved in the development and operation of roads and highways for the past two decades. The company has an established track record of having successfully bid, developed and operated road BOT projects on a commercial basis. The company’s portfolio has witnessed a solid growth in last 10 years where in its portfolio has grown from 190 lane kms in 2001 to 11860 lane kms in 2012.

Industry Overview The infrastructure deficit in the Indian economy presents a substantial need for infrastructure creation. The Government has well understood that the lack of infrastructure is a stumbling block for an unhindered double-digit growth and has instituted several measures conducive for the growth of this sector. The XIIth five Year plan (2012-2017) reinforces the Government’s focus on infrastructure creation and upgradation. It envisages a total investment of Rs. 41 trillion in the infrastructure segment in order to attain a 10% economic growth. The Indian road network comprises expressways, national highways, state highways, major district roads and rural and other roads. National Highways are the key constituents of India's road network since they carry 40% of the total road traffic although they constitute only 2% of the total road network. Activity in the road space is picking up as a result of increased project award by the National Highway Authority of India (NHAI). The authority has awarded projects spread over more than 6,491 km in FY12. This follows from 5,000 kms of project awards in FY11. The overall target for FY13 is even higher at 8,800 km. In the recently held meeting on infrastructure sector chaired by the Prime Minister, the target for road sector award was set at 9,500 km in FY13. Over the years, the size of projects awarded by the authority has increased, both in terms of length and project cost. Project award is expected to remain robust over the next few years, given the number of projects in the pipeline. We expect momentum in project award to continue, given the government’s ambitious target.

IL&FS Transportation Networks Ltd.

21%

4%

29%6%2%

11%

5%

3%

2%11%

6%

Himachal Pradesh HaryanaJ&K JharkhandKerala MaharashtraMadhya Pradesh MeghalayaRajasthan Uttar PradeshAndhra Pradesh

State wise distribution of its capital projects

PHASE 1:

Golden Quadrilateral, NS – EW corridor, port connectivity and others Length : 7398 kms

PHASE II:

NS – EW corridor and other national highways Length : 6647 kms

PHASE III:

Upgrading and four – laning of national highways Length : 12109 kms

PHASE IV:

Improvement of national highways Length : 14799 kms

PHASE V:

Six laning of existing four lane highways Length: 6500 kms

PHASE VI:

Expressways Length : 1000 kms

PHASE VII:

Ring Roads, bypasses, flyovers Length: 700 kms

Phases of NHDP




Sales Revenue 1,225 2,408 4,048 5,606 7,657


EBITDA 287 879 1,233 1,589 1,907

EBITDA Margins 23% 36% 30% 28% 25%

Profit Before Tax 78 524 674 785 887

Profit After Tax 29 338 450 539 603



Equity 921 1,704 2,274 2,684 3,107

Debt 1,854 3,322 5,467 10,269 12,812


Number of shares 17.14 19.43 19.43 19.43 19.43


Current Ratio(x) 1.96 2.93 2.39 2.45 2.41

Book Value 53.74 87.69 117.06 138.18 159.93

Interest Coverage Ratio 1.44 2.69 2.33 2.08 2.01



Investment Concerns High debt burden: ITNL’s debt-equity stood at 3.8x in FY12. The increase in debt at consolidated level is mainly on account of drawdown happening from sanctioned debt in accordance with construction progression. ITNL’s business model is vulnerable to interest rate fluctuations and any hike in interest rates could increase the company’s interest costs Execution risk: Delay in completion of construction of road may result in cost overrun or may raise requirement of additional finance. Extended construction period will also cause loss of toll revenues for this extended period, as construction period is part of total concession period.

IL&FS Transportation Networks Ltd.

Valuation A well-balanced mix of toll and annuity road projects, rich experience of its parent company and a strong order-book that provides future visibility gives a positive outlook for the company. In the current competitive environment, IL&FS Transportation is much better placed than other road development players with better project evaluation methods and IL&FS group background. We place IL&FS Transport in our preferred picks and assign a Buy rating on ITNL with a target price of Rs. 250 based on 8x FY13E earnings.

Rising Debt Levels



Sector Infrastructure Cons.

BSE Code 500510

NSE Code LT

CMP (as on 10.08.12) 1423.95

52 Wk. High/Low 1723.00/969.15

Sensex/Nifty 17557.70/5320.40


Face Value 2



Free Float (%) 90%

Promoters --

FII 14.07%

DII 38.41%

Others 47.52%



FY11 FY12 Y-o-Y %

Net Sales 52043.78 64313.11 23.58%


Interest 1931.42 2894.41 49.86%

Profit After Tax 4447.66 4682.29 5.28%

P/Ex 19.49 18.62 --

EPS 73.05 76.46 4.67%

Larsen & Toubro Limited Target - Rs. 1665 /-

Target - 55

Investment Rationale Increased outlay for infrastructure in 12th Five year Plan: The Indian Planning Commission, has envisaged a total investment of ~$1 trillion in infrastructure in its 12th Five Year plan (almost double the investment in 11th Five Year Plan). L&T is the largest E&C company in India and one of the largest in the world. Infrastructure contributes nearly 40% of the order book of the company. Given the prospects of increased infrastructure investment in India in the medium-term, we expect L&T to capitalize on the same Order inflow robust at Rs19,594 crore: The order inflow of the company is robust at Rs19,594 crore. The management believes that the company's performance is on track to achieve its guidance of a 15-20% growth in both inflows and revenues in FY13. The current order book stands at Rs.1,53,095 crore. The majority of the orders are received from the private players from the transportation, building and factory segments. Going forward, the company expects good traction from the new markets like West Asia and South-East Asia Value Unlocking Going Forward: The L&T board has approved the restructuring of the company and implementation of the plan is underway. As per the plan, the engineering and infrastructure giant will be divided into nine virtual companies, each of which will have full fledged management team of its own and will also manage its own profit and loss account. Some of the companies formed out of L&T will be listed on the bourses before 2015. Each of them is worth a billion dollars in revenues or has the potential to reach there soon. Tight rates hit industrial, construction expenditure; reversal to aid investments: Sustained rate tightening by the regulator had impacted industrial capex over the last 6-8 quarters. With a more than 350bps increase in rates, project investments across manufacturing, mining, power and construction space have experienced a substantial decline. All three major sectors like manufacturing, mining and construction saw growth dipping below the 10-year average growth rate. With the rate hike cycle expected to reverse in the next 12-15 months, industrial and construction capex is set to see an uptick, leading to a favorable ordering cycle for L&T which gets substantial business from rate sensitive clients.

Financial Snapshot

Larsen & Toubro vs. Nifty



Company Background Larsen & Toubro (L&T) is the country’s largest engineering and construction Company, with a dominant presence in India's infrastructure, power, hydrocarbon, machinery and railway related projects. The company along with its group companies provides integrated design, engineering, procurement, construction and project management services to various sectors. Considered as the bellwether of the Indian engineering sector, L&T is renowned for its strong execution capabilities and professional management. The company’s proven track record of nearly six decades in executing complex and diverse projects has helped to establish a very strong brand image. With a customer base spanning across 30 countries, the company has significantly increased its global footprint, along with a notable presence in the Middle East. The company is present in multiple operating segments such as Engineering & Construction (E&C), Electrical & Electronics (E&E), Machinery & Industrial Products (MIP) and others. The E&C division of L&T undertakes engineering design and construction of buildings, factories, infrastructure, industrial and power transmission & distribution, while the E&E segment is engaged in manufacturing of electrical standard products, systems and equipment. The MIP division of L&T is focused on manufacturing industrial valves, construction and hydraulic equipment, machinery for mining, paper and rubber processing industry. Through its subsidiaries like L&T Finance, L&T Infrastructure Finance and L&T Infotech, L&T has also diversified into financial services and the IT/ITeS sector.

Industry Overview Engineering and Construction industry forms the backbone of any economy as it is intensely linked with many other core sectors. The Indian engineering sector, is the largest segment of the Indian industry and also the largest foreign exchange earner for the country. The various core sectors of the country, in particular, Power, Transportation Infrastructure, Hydrocarbon, Fertiliser, Defence, etc, faced multiple challenges in FY12 due to policy delays. Consequently the commitments on capital expenditure and fresh investments were deferred, impacting the growth in the order inflow of the industry during 2011-2012. Despite the prevailing economic uncertainties, the year 2012-2013 holds prospects of gradual build-up in the growth momentum of the Indian economy. Infrastructure development assumes prominence in the Government's budget proposals for the year 2012-2013. Thus the near term prospects look bright for the sector with a revival in the Indian Economy.

Larsen & Toubro Limited

Order Book Breakup

Revenue & PAT Trend




Sales Revenue 40,377 43,833 52,044 64,313 73,960


EBITDA 6,440 9,152 8,922 9,656 10,621

EBITDA Margins 15.95% 20.88% 17.14% 15.01% 14.75%

Profit Before Tax 5,184 7,481 6,800 6,974 7,630

Profit After Tax 3,758 5,442 4,448 4,682 5,097



Equity 13,988 20,991 25,051 29,387 33,546

Debt 20,370 24,607 24,841 36,156 37,602


Number of shares 58.57 60.22 60.885 61.24 61.24


Current Ratio(x) 1.18 1.21 1.12 1.07 1.12

Book Value 238.82 348.58 411.44 479.86 547.78




Investment Concerns Policy inaction: Many projects in sectors like ports, airports, defence and fertilizers are at various stages of regulatory approval, which would be followed by financial closure. A significant delay in granting necessary approvals would postpone the order pipeline. Also, a sizeable portion of revenues of the company is derived from power sector, which is facing fuel crisis, SEBs issues, environmental issues, etc. This might defer new projects and execution of the existing ones. Further deterioration in macro environment may lead to a subdued order book: A suppressed macro environment, both domestically and globally, may lead to a slowdown in order awards, which, in turn, would hammer the revenue visibility going forward

Larsen & Toubro Limited

Valuation L&T has continuously evolved to effectively benefit from emerging trends and opportunities. The company has acquired higher adaptability, enabling it to seize macro opportunities and wither volatility better than its peers. With the global downturn in the recent past, the company has taken several measures to accelerate its growth momentum. The stock currently trades at 18.62 times its FY12 earnings. We expect the company to deliver a superior performance and assign a price target of Rs. 1665 based on 20x FY13E earnings.



KEY MARKET DATA

Sector Non Electric Equip.

BSE Code 500210

NSE Code INGERRAND

CMP(as on 10.08.12) 455.50

52 Wk. High/Low 548.8/354.05

Sensex/Nifty 17557.70/5320.40


Face Value 10


Daily avg. Volume 7753.7

Free Float (%) 29.94

Ingersoll-Rand (India) Limited Target - Rs. 575/-

Target - 55

Investment Rationale

Capacity Expansion: The Air Solutions provider, IRL has planned to invest $100 million (over Rs 450 crore) in the next three years to set up a new plant, increase its existing capacities and expand its reach in India. The company is setting up a new plant in Chennai in south India at an approximate cost of around Rs 100 crore. It has also forayed into the Cold Chain Consultancy segment in August 2011. This Cold market size is estimated to be around Rs 800 crore and is growing at the rate of 20-22%. Further, it would invest around Rs 50 crore in the next two to three years at its existing Narola plant in Ahmedabad. This additional capex in Narola plant will be for newer and higher range of compressors. The company is also planning to set up new manufacturing unit in Chennai with the CAPEX of $22 million and it is expected to become operational by Q1-FY14. This would be INGR’s third manufacturing unit after Naroda (Gujarat) and Sahibabad (Uttar Pradesh). Other than this, it is running two technology centers in Bangalore and Chennai. Thus, with the support of technology of the parent company, IRL (India) will be ready to manufacture and supply every range and capacity of compressors.

Boosting Quarter: In Q1FY13, the company has posted an EPS of Rs 7.18. This has been a big jump from the previous quarter EPS of 6.57, as the new factory production has started. Next year, with 100% capacity coming into operation, IRL is expected to clock a topline of Rs 690-700 crore and a bottom-line of Rs 92-99 crore.

Zero Debt & Strong Cash-flow: IRL’s debt book stands clear with zero debt. Further, the company had cash and bank balance of Rs 450.61 crore as on June 2012. This translates into cash per share of Rs 143. The company is expected to utilize this cash by way of acquisition and/or distribution to the shareholders in the form of dividend/buyback. Further, it will also act as additional benefit and would support the company in times of hardening interest rates.

Regular Dividend Model: IRL has a continuous track-record of regular dividend since last 21 years. Moreover since last nine years, the company has maintained a rate of 60% dividend on face value of Rs10. Thus, along with the capital appreciation and growth benefit, the investor stands to gain the regular dividend benefit. This makes the company, a further safe bet for investment.

Financial Snapshot

Ingersoll Rand vs. Nifty

FY11 FY12 Y-o-Y %

Net Sales 492.74 592.02 20.15%


Interest 0.54 0.47 -12.96%

Profit After Tax 68.62 82.76 20.61%

P/Ex 21.95 20.41 -

EPS 20.75 22.32 7.57%

Promoters 74.00%

FIIs 2.87%

DIIs 4.34%

Public 18.79%

As on 30th June, 2012




Company Background

Ingersoll-Rand (India) Limited engages in the manufacture and sale of compressors in India and internationally. It offers reciprocating compressors, centrifugal compressors, system components, and air conditioner bus packages. The company’s products are primarily used in the automotive, metals, cement, textiles, and pharmaceutical sectors. It also offers contract manufacturing services to its associate companies. Ingersoll-Rand (India), a 74% subsidiary of Ingersoll Rand Company, U.S., has its presence in India since 1921. The company established its first manufacturing plant in India in 1965 and became a public limited company in 1977. Its manufacturing facilities in Ahmedabad are ISO 9001:2008 certified and those Sahibabad ISO 9001:2000, ISO 14001:2004 & OHSAS 18001:2007 certified. Ingersoll Rand’s products are known in the market for their quality and reliability. With strong sales presence in over 15 locations across the country and with an all wide national distributor network, the company is a dominant player in its business of providing solutions for infrastructure development, industry and climate control. Worldwide, Ingersoll Rand Corporation is moving from a product-centric approach towards a solutions-centric approach. It is no longer an engineering company offering world-class products but one that provides customers with solutions based on these products. In India, Ingersoll Rand is working in three key areas of productivity by leveraging its local manufacturing operations in Ahmedabad and Sahibabad, innovating through its engineering R&D centers in Bangalore and Chennai, and growing through the expanded footprint in the country. Besides compressors, Ingersoll Rand offers the widest range and technologies for air treatment and filtration solutions, storage solutions and energy savings controls solutions as well as energy saving compressed air modular piping and distribution solutions for increasing the overall efficiency of the entire system, besides reducing maintenance costs and downtime. These products growth is fuelled by the increased demand in domestic consumption as well as exports. Ingersoll Rand is well positioned to leverage the opportunities.

Ingersoll-Rand (India) Limited

Business Segment

Ingersoll-Rand's Main focus area is

Air Solution Segment

Industry Performance

Company Performance

Main Products of the company are Air Compressors and Stationary Generators




Sales Revenue 373.90 356.55 492.74 592.02 693.20

Sales Revenue Growth -23% 5% 38% 20% 17%

EBITDA 107.06 79.15 106.43 128.75 69.90

EBITDA Margins 28.63% 22.20% 21.61% 21.75% 10.08%


Profit After Tax 67.2 47.7 68.62 82.76 95.50



Equity 747.39 772.67 819.24 813.95 900.45

Debt 0 0 0 0 0

Debt-Equity ratio - - - - -

Number of shares 3.157 3.157 3.157 3.157 3.157


Current Ratio(x) 6.63 6.87 6.72 6.81 6.80

Book Value 236.74 244.75 259.5 257.82 267.42




Investment Concerns Lack of Diversification: IRL’s excessive concentration in the Air solutions providing segment, results in lack of diversification. This makes the company’s growth highly dependent on a single product. High Degree of Competition: Market for Air solution products continues to be highly competitive. Rising Material Cost: Escalation in raw material cost and other inputs can lead to reduced profitability.

Ingersoll-Rand (India) Limited

Valuation At the current market price of Rs 455.50, the stock is trading at a P/E of 15.03x FY13E earnings estimate. With economies of scale, new product launches and technological innovations, the top-line’s growth is expected to be translated into bottom-line's growth, going forward. Currently, the company does not have any debt on its books and we expect it to use internal accruals to fund its ongoing expansion. We recommend a Buy on the stock with a price target of Rs 575 based on 19x FY13E earnings.

Stabilization & Growth



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