The company has changed itself from a pure plain-vanilla Active Pharmaceuticals Ingredients (APIs) supplier to a niche formulations player. This transformation is still on and that has improved the EBITDA margin of the company, recently. Henceforth, the next big growth will be huge capacity optimization and monetization of the huge US Abbreviated New Drug (ANDA) pipeline. Recent deals with MNCs have given the company a new identity. Aurobindo on account of its proven capabilities and huge capacities is well equipped to cater to their incremental requirements.
Axis Bank`s performance is characterised by the consistent profitability growth of above 30% YoY for the past 24 quarters, one of the best records industry wide. Healthy CASA ratio of 42% provides a respite to cost of funds, thus comforting NIM. RoA of above 1.4%, RoE of above 17% and healthy asset quality (NNPA ratio at 0.3%) warrant a higher multiple at 3x FY12E ABV. Moreover, the recent price correction offers comfort to valuation. Currently, it is available at 2.6x FY12E ABV, thus making the stock attractive.
The higher availability of sugarcane would increase the sugar sales the company by 40% in SY11. With domestic sugar prices crossing Rs 30 per kg and sugarcane cost at Rs 22 per kg, the margins for the company would improve considerably. Simultaneously, an increase in ethanol prices to Rs 27 per litre would also add to the margins. We believe the stock is trading at the lower end of the replacement cost band and looks attractively valued.
Escorts, the third largest player in the tractor segment, is expected to gain market share as tractor sales will move northwards due to newer product launches in the popular Powertrac and Farmtrac variants. We expect the growth momentum of agri-GDP led by increasing demand to inject further steam towards farm mechanisation as labour migration towards urban areas continue. The construction has also turned EPS accretive and is expected to gain further traction due to improvement in infrastructure offtake in FY12. On the financial perspective, the company has de-leveraged its balance sheet significantly having brought down its debt/equity to a comfortable 0.2x from 1.0x in the last couple of years. We expect the net sales and PAT to grow at a CAGR of 18.7% and 31.9%, respectively, for FY10-12E.
GAIL is India`s flagship natural gas company, operating in various business segments including exploration and production, LPG production, petrochemicals, transmission, distribution and marketing of natural gas. GAIL double its gas transmission and petrochemicals capacity in the next few years. The stock is trading at a P/E of 17.9x TTM EPS of Rs 28.2. With the current capital expenditure plans in place, GAIL offers a lot of safety and visibility of earnings growth to investors over the next few years.
TCS, the largest IT company both in revenue (FY11E ~| 37 billion) and employees (174417) terms, is expected to report broad based volume growth leading to US dollar revenue growth of 23% CAGR in FY10-FY12E. Further, we expect 17% CAGR earnings growth during the same period. After almost five quarters of relative out-performance compared to Infosys, we believe the P/E discount rationale would subside.
HCL Technologies is a leading IT services company with revenues of Rs 15 billion (FY11E) and 46,540 professionals. HCL Technologies is well positioned to participate in incremental demand with low utilisation, superior lateral gross hires coupled with operating levers, which could help sustain operating margins. We expect revenue and earnings to grow at 17% and 29% CAGR during FY10-FY12E period.
Hindustan Zinc is engaged in production of Zinc and lead ingots. It is the world largest integrated player and one of the lowest cost producers of zinc and lead. It is a debt free company having huge cash and cash equivalent of Rs 130 billion. Going forward any improvement in the zinc prices will lead to margin expansion for the company. We continue to maintain our positive outlook on stock, at is trading at EV/EBITDA of 8.1x FY11E and 5.4x FY12E.
Larsen & Toubro:
L&T has witnessed a strong order inflow in the past few years. At present, its order backlog is at a historical high. We expect this momentum to continue in the next few years as capex activity in L&T`s core end-markets returns on a strong note and as the company diversifies into power ( equipment and ) and defence (that are characterised by large, high-value add orders). The management has guided for 25% growth in order inflows for FY11E. Going ahead, we believe value unlocking by divesting a stake in its core subsidiaries like L&T Finance Holdings, L&T InfoTech and L&T IDPL will lead to huge value creation for L&T`s shareholders. On the valuation front, the stock is trading at 28x and 21x its FY11E and FY12E standalone earnings. This is accompanied by huge hidden value in the companyâ€™s subsidiaries. L&T is expected to deliver a 19% CAGR in earnings over FY10-FY12E.
With sustained growth for the last many quarters, a strong foothold in developed markets through a combination of branded and , a foray into niche segments such as (OCs) in the US, good growth in domestic branded formulations and a strong balance sheet with ever reducing working capital cycle, we believe the company has achieved the critical mass to warrant a higher multiple.
With around three Para IV filings (including two FTFs), the company is taking a calculated risk in order to penetrate the US generic space. Although most of them are risky ventures, the company has cautiously tied up with leading marketing players to mitigate litigation risk. One successful product launch will change the prospects drastically. Being a niche player in the oncology segment, Natco should fare well in domestic formulations.
Oil India is engaged in exploration, development, production and transportation of crude oil and natural gas. Going ahead, we believe Oil India`s large reserve base and new discoveries would create value for investors. Oil India is trading at 10.7x FY11E and 9.9x FY12E EPS of Rs 129.7 and Rs 140.6, respectively.
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