[T.S.R:18311] Ambit-Top Picks

"*The buzz is back*" said the bellboy in the New York City hotel that I was
staying in last week. His words were echoed by other taxi drivers and hotel
staff that I met whilst travelling across the US to meet clients last week
– most of these Americans had seen business and tourist traffic rising over
the past four months and were feeling chirpy about life. Alongside
newsstands shouting about the Facebook IPO and the Glencore-Xstrata
mega-merger and juxtaposed against news of the US jobless rate falling to a
three-year low of 8.3%, it feels and smells like the worst is now past for
the biggest economy in the world.

Furthermore, with investors now falling in line with our January 4th view –
that the ECB intervention on 22nd December is a big deal as it de-risks
European banks' Balance Sheets and cashflow position – we now face the
tantalizing prospect of heavy QE from the ECB (which in December 2011
promised another round of ultra cheap long term loans for European banks in
February 2012) alongside an economic recovery in the US.

*So, in the context of the Indian market, what can investors do?*
a) Buy high beta broken Balance Sheet cylicals?
b) Buy high quality cyclicals?
c) Buy structural plays?
d) Not buy anything at all but sit on cash?

We continue to advocate doing a mixture of (b) and (c) and we continue to
steer our clients clear of (a). Whilst in a year where Obama, Merkel and
Sarkozy are up for elections, it is hard to see the Fed Rev and ECB letting
their respective economies slide, it is equally hard to see the:

- *Busted European sovereigns* – Greece, Portugal and Spain in
particular – going through the next 12 months without further financial
problems. Their fiscal maths is impossible with even the interest burden on
their outstanding sovereign debt growing faster than their economies.
- *Coming fiscal cuts in the US* not impeding the ongoing economic
recovery. On November 21, 2011 the US Congressional 'Super committee'
failed to agree on a plan to cut the US deficit by US$1.4 trillion. This
failure will automatically mean that around US$210bn (1.4% of US GDP) of
fiscal spending will be taken off the table by the US Government in CY12
v/s CY11.
- *Indian Economy* showing an acceleration in economic growth until
3QFY13 even if the RBI cuts rates in late mid-March and even if the UPA
administration is able to get its act together on big ticket investment
projects.

Whilst the caution we expressed in our 4th January note has turned out to
be more misplaced than our view that the Sensex will head towards 18,000 in
CY12, we are *not* convinced that the year to date rally is the beginning
of a secular bull run. Although CY12 looks likely to be a year where the
ECB and Fed Rev will work hard to put a backstop on their economies and on
their markets, it is unlikely that these Central banks alone can fuel a
long bull run.

Therefore we recommend that investors focus on high quality cyclicals (such
as the 10 listed below: *BoB, Manappuram, Tata Power, Torrent Power, EIL,
Cummins India, Tata Motors, Eicher Motors, Exide and Sobha Developers*) and
attractive structurals (such as the five listed below: *GSK Consumer, VST,
HCL Tech, Petronet LNG and TTK Prestige)*.
*
___________________________________________________________________________­___________________________________________________
**
10 high quality cyclicals *

*Tata Motors:** (TTMT IN, mcap US$14.8bn, BUY)
**Analyst: Ashvin Shetty,
ashvinshe...@ambitcapital.com<https://mail.google.com/mail/h/r880hlbkmwff/?&v=b&cs=wh&t­o=ashvinshe...@ambitcapital.com>,
Tel: +91 22 3043 3285*

*With emerging markets, particularly China, continuing to fuel luxury car
demand and with Range Rover Evoque encountering strong demand, we upgrade
our volumes, revenue, margin and net earnings estimates. We expect both of
these drivers to help sustain volumes going forward into FY13. Tata Motors
is on Ambit's "Good & Clean 3.0: Battleships" list.*

*Emerging Markets fueling luxury car demand:* While economic uncertainties
persist in the developed markets and continue to present key risks to the
luxury car market, Emerging Markets, particularly China, continue to
perform strongly and help the overall luxury car sales. Aggregate volumes
of the big European luxury car makers (BMW, Audi and Mercedes) saw an
uptick in December 2011 (YoY growth of 16%) compared with October 2011 (YoY
growth of 11%) and November 2011 (YoY growth of 12%) largely due to
continuing strong demand in China (YoY growth of 35% in December 2011).

*JLR to benefit specifically from emerging market demand and Evoque
launch:*The JLR business is now much healthier vs. 2008/09 with net
debt of just
GBP75 mn and higher volumes from emerging markets (40% share in total
volumes in 2QFY12 vs. 25% in 2QFY09). JLR Volume growth posted by JLR in
December 2011 (YoY growth of 45%), continuing strong demand from China and
positive response to the newly launched Range Rover Evoque, provide
indications that our FY2012 JLR volume projections (290,000 units) may well
be exceeded. Further, we believe that strong demand from China and Range
Rover Evoque (full year sales of Range Rover Evoque in FY2013 v/s 6-7
months in FY2012) will help sustain volumes in FY2013 and provide positive
upward bias to our existing FY2013 volume estimates of 310,000 units (our
current volume estimates imply a YoY growth of only 7% for FY2013). While
the exchange rate continues to present risks to JLR's margin, the product
mix, (higher share of Land Rover) and the regional mix (higher share of
China) continues to be favourable.

*Passenger car segment revival may help the domestic business: *With the
domestic passenger vehicle segment witnessing a sort of revival in the last
two months (domestic passenger vehicle volumes grew at the rate of 76% and
47% for November 2011 and December 2011 respectively compared with the
April to October 2011 YoY decline of 11%), the standalone business margin
may surprise our and consensus' estimates for 3QFY12 positively (2QFY12
standalone EBITDA margin at 6.8% of net sales was the lowest recorded by
the company in the last eleven quarters).

*Valuation:* We have put our current target price under review. At the
current market price, the stock is trading at 12.3x FY13 net earnings
(after adjusting the net earnings for normalised product development charge
to the income statement).* *Continuing strong monthly volumes at JLR and
margin sustenance at the current level are the key positive catalysts.

*Bank of Baroda:** (BOB IN, mcap US$6.1bn, BUY)
**Krishnan ASV,
vkrish...@ambitcapital.com<https://mail.google.com/mail/h/r880hlbkmwff/?&v=b&cs=wh&t­o=vkrish...@ambitcapital.com>,
Tel: +91 22 3043 3205
Pankaj Agarwal, CFA,
pankajagar...@ambitcapital.com<https://mail.google.com/mail/h/r880hlbkmwff/?&v=b&cs=wh&t­o=pankajagar...@ambitcapital.com>,
Tel: +91 22 3043 3206
Aadesh Mehta, aadeshme...@ambitcapital.com<https://mail.google.com/mail/h/r880hlbkmwff/?&v=b&cs=wh&t­o=aadeshme...@ambitcapital.com>,
Tel: +91 22 3043 3239*

*Measured pace of asset book growth*: Bank of Baroda (BoB), with a loan
book of ~US$7bn, has consistently exhibited loan book growth a few
percentage points ahead of the system and has gradually pipped the larger
and older banks (with a longer history) to emerge as the third largest
state-owned bank in the system, behind State Bank of India (SBI) and Punjab
National Bank (PNB). BoB has benefited from a large overseas book (~1/4ths
the total portfolio) that offers a perfect complement to the bank's
domestic lending operations (diversified avenues for deployment often help
balance the bank's blended profitability in terms of fund-based as well as
fee-based income).

*Disciplined underwriting drives best-in-class asset quality*: BoB has
demonstrated a disciplined approach towards underwriting that reflects in
system-lowest incremental delinquencies (sub-1% annualized as of September
2011) despite an economic environment that is not particularly conducive to
sustaining such superior asset quality. Over the last 3 years, BOB has
gradually re-positioned itself as the most defensive play among state-owned
banks from an asset quality perspective.

*Sustainable cross-cycle RoAs at ~1.3% and RoEs in excess of 20%*: Widely
considered as a sensible judge of its own risk appetite, BoB boasts a
consistent record of high profitability, superior efficiency ratios (one of
the lowest cost-to-income ratios in the system) and high return ratios
(with RoAs consistently clocking in the range of ~1.3%).

*At Rs763, BoB is trading at 1.3x our FY12E ABVPS of Rs601 and is the best
positioned among state-owned banks to hold its asset quality and return
ratios in this environment. Our target price is Rs1,000, implying 31%
upside.*

*Exide Industries:** (EXID IN, mcap US$2.4 bn, BUY)
**Analyst: Ashvin Shetty,
ashvinshe...@ambitcapital.com<https://mail.google.com/mail/h/r880hlbkmwff/?&v=b&cs=wh&t­o=ashvinshe...@ambitcapital.com>,
Tel: +91 22 3043 3285*

After two consecutive quarters of below par performance, Exide's 3QFY12
results came in as a relief particularly on the margin front. Whilst we
expected margin to improve sequentially on account of softening in the Lead
prices (expected to help the company for part of the quarter) and uptick in
higher margin inverter batteries, the extent of improvement has been
encouraging. Going forward, we expect margin to improve further in 4QFY12
(16% EBITDA margin) as benefits of Lead price correction (around 20%) is
available for whole of the quarter. Over the longer term, we expect strong
OEM sales in FY2010 and FY2011 to help the replacement volume growth in the
next two years. As a result, we expect improvement in replacement-OEM mix
in FY2013 and FY2014 which should help the company on the margin front too.
We expect company's performance to witness marked improvement in FY2013
and record net earnings growth of > 40% YoY. The company currently trades
at 15x FY2013 net earnings (excluding value for stakes in ING Vysya Life
Insurance and captive smelters) which is nearly 15% discount to the average
multiple commanded by the company in the last four years.

*Cummins India:** (KKC IN, mcap US$2.4bn, BUY)
**Bhargav Buddhadev,
bhargavbuddha...@ambitcapital.com<https://mail.google.com/mail/h/r880hlbkmwff/?&v=b&cs=wh&t­o=bhargavbuddha...@ambitcapital.com>,
+91 22 3043 3252
Puneet Bambha, puneetbam...@ambitcapital.com<https://mail.google.com/mail/h/r880hlbkmwff/?&v=b&cs=wh&t­o=puneetbam...@ambitcapital.com>,
+91 22 3043 3259*

Cummins India is the strongest player in the engine segment given its
superior presence (70% of its sales) in the large engine segment. This is
backed by superior technology (only domestic player allowed to sell gensets
above 550 KVA), strong brand recall in gensets (given that 65% is sold as
back ups i.e. critical application) and engines (preferred supplier for
MNCs given its MNC pedigree) and a strong dealer network (~70% of its
genset sales are through its genset OEM partners and 40 exclusive dealers).
Besides, Cummins' number one position appears defensible in spite of the
presence in India of strong global players like Volvo, GE, Mitsubishi,
Perkins, Caterpillar and Honda. In our competitive analysis Cummins emerges
as the best-in-class franchise given high operating cash flows coupled with
some of the best return ratios in the industry.

At CMP, the stock trades at FY12 P/E of 24x (last 5-year average forward
P/E is 18x). Given that FY12 and FY13 are likely to be years of earnings
pressure for Cummins and electrical Capital Goods peers, it is best to
compare such firms on FY14 multiples as we expect a recovery in corporate
capex by then. On an FY14 basis Cummins' trades at a premium of 20% to
electrical capital goods peers. We find such a premium to be justified
given that Cummins' FY14 RoE of 34% and 17% EPS growth in FY14 compare
favourably with 20% RoE and 8% EPS growth for electrical capital goods
peers.

*Torrent Power:** (TPW IN, mcap US$2.1bn, BUY)
**Bhargav Buddhadev,
bhargavbuddha...@ambitcapital.com<https://mail.google.com/mail/h/r880hlbkmwff/?&v=b&cs=wh&t­o=bhargavbuddha...@ambitcapital.com>,
+91 22 3043 3252
Puneet Bambha, puneetbam...@ambitcapital.com<https://mail.google.com/mail/h/r880hlbkmwff/?&v=b&cs=wh&t­o=puneetbam...@ambitcapital.com>,
+91 22 3043 3259*

Operationally Torrent Power has the best efficiency in the sector (average
PLF and average T&D losses in FY10 was 88% and 7.6% compared to India's
average PLF of 78% and T&D losses of 25% respectively) and stellar cash
flow generation (FY11 CFO/PAT stood at 1.5x v/s peers 1.1x). It also has
one of the strongest balance sheets (FY11 net debt:equity was 0.6x),
minimal exposure to merchant power (~20%) and zero exposure to Chinese
equipment. This compares very favourably with its private sector peers
(Adani Power, Lanco Infratech, KSK Energy, JSW Energy) for whom the net
debt:equity is at 2.6x, exposure to merchant power is in the range of 20%
to 72% and have majority of their equipment purchased from Chinese vendors.

The stock is trading at FY12P/BV of 1.4x, which is at a discount of ~20%
v/s peers (we have only considered NTPC and Adani power given that the
stock prices of other companies have been severely beaten down given
concerns around fuel availability, offtake, land acquisition and leveraged
balance sheets). We believe the discount to peers is not justified given
Torrent's superior cash flows (FY12 FCF yield of ~16% and a dividend yield
of 3%), higher RoE (24% v/s 13% for peers) and improving visibility on
pipeline. Note that in our DCF based SOTP (which values the company at
Rs322, 48% upside) we have modeled excess cash to earn a pre tax return of
6%. In the event Torrent makes an acquisition (given that there are many
projects up for sale on distressed valuations), it will act as a big
positive for the stock given that equity IRRs on a minimum are likely to be
3x of our assumed pre tax return on excess cash (Note: Torrent generated
operating cash flow of Rs19bn in FY11, which is equivalent to doubling its
installed capacity, assuming a debt:equity of 70:30).

*Manappuram:** (MGFL IN, mcap US$1.0bn, BUY)*

*Pankaj Agarwal, CFA,
pankajagar...@ambitcapital.com<https://mail.google.com/mail/h/r880hlbkmwff/?&v=b&cs=wh&t­o=pankajagar...@ambitcapital.com>,
Tel: +91 22 3043 3206
Krishnan ASV, vkrish...@ambitcapital.com<https://mail.google.com/mail/h/r880hlbkmwff/?&v=b&cs=wh&t­o=vkrish...@ambitcapital.com>,
Tel: +91 22 3043 3205
Aadesh Mehta, aadeshme...@ambitcapital.com<https://mail.google.com/mail/h/r880hlbkmwff/?&v=b&cs=wh&t­o=aadeshme...@ambitcapital.com>,
Tel: +91 22 3043 3239*

*Whilst the decline in gold prices can impact both the credit quality and
growth of gold loan companies, our analysis suggests that the impact is not
as linear as the ongoing fall in stock prices are factoring in. This is
because:*

- The average loan-to-value (LTV) of the Manappuram loan portfolio is
70%. Hence the chances of willful default are relatively low as the
borrower is incentivised to pay up and reclaim his jewellery.
- Manappuram calculates LTV without including the value of the precious
stones embedded in the jewelry. Including the value of stones and taking
account of making charges makes it even less likely that borrowers will
willfully default on a loan.
- Manappuram offers loan against jewellery, which households have used
for some time and to which the borrower usually has an emotional
attachment. This further reduces the chances of willful default.
- The average tenure of the loan is ~4 months, so the gold prices have
to decline very rapidly for the borrower to be out of the money and
willfully default on the loan.

Therefore, we expect credit quality trends for Manappuram to remain stable
unless there is a sharp correction (of more than 20% in the gold prices in
rupee terms over the next three months). However, gold prices have never
fallen more than 20% within three months in rupee terms in the past due to
the inverse correlation between international gold prices and the INR/USD
exchange rate. Our sensitivity analysis based on the LTV breakup and
repayment pattern of Manappuram's portfolio shows that if we assume a worst
case scenario of a 40% fall in the gold prices within three months (this
sort of correction has never occurred in rupee terms and has taken place
only once in dollar terms), and we assume all the gold loan borrowers to be
opportunistic borrowers who would default if they are out of the money
(which is not the case looking at ticket size per customer), the total
write-offs after recoveries could be ~4.0% of the portfolio, which could be
absorbed by a year's earnings as the company's RoA is ~4.5%.

We continue to highlight Manappuram as the best play in the NBFC space
given it is least impacted by: (i) proposed regulatory changes on
securitisation, priority sector status, higher capital requirement and
tougher NPA recognition norms; (ii) slowing macro demand and rising cost of
funds, as it demonstrates sustained growth momentum in an asset class which
is rate agnostic at sustained margins and RoAs. We maintain our BUY stance
and target price of Rs72 (22% upside, implied valuation of 2x FY13 BVPS and
9.2x FY13 EPS).

*Eicher Motors:** (EML IN, mcap US$1bn, NOT RATED)
**Analyst: Ashvin Shetty,
ashvinshe...@ambitcapital.com<https://mail.google.com/mail/h/r880hlbkmwff/?&v=b&cs=wh&t­o=ashvinshe...@ambitcapital.com>,
Tel: +91 22 3043 3285*

Eicher Motors continues to be on a strong growth trajectory both in volumes
as well as in margins. The company is benefitting from two favourable
trends relative to peers: a) the 7.5 tonne to 12 tonne category, in which
Eicher has a dominant market share, continues to outperform the >12 tonne
category (for YTD FY12, volume growth in the domestic 7.5 to 12 tonne goods
carrier category at 26% outpaced the >12 tonne category's growth rate of
9%); and b) Eicher is gaining market share in the heavy tonnage segments
(>12 tonne) with YoY market share gain of 82bps for 1HFY12. Moreover, it
continues to witness strong growth for its two-wheeler Royal Enfield with
volume growth of 44% in YTD FY12. Further, on the margin front, the recent
quarters have shown significant YoY improvement in margins helped by an
increasing share of higher tonnage vehicles, strong volume growth and the
discount gap closing with market leaders. Going forward too, these trends
should help the margins. The company trades at 5.4x CY2011 consensus EBITDA
(given nearly 35% of current market cap accounted by cash on the books, P/E
multiple is not the appropriate measure) which is in line with Ashok
Leyland's FY2012 EV/EBITDA despite higher EBITDA growth expectation of 23%
for CY2012 v/s Ashok Leyland's 15%.

*Voltas:** (VOLT IN, mcap US$630mm, BUY)
**Nitin Bhasin,
nitinbha...@ambitcapital.com<https://mail.google.com/mail/h/r880hlbkmwff/?&v=b&cs=wh&t­o=nitinbha...@ambitcapital.com>,
Tel: +91 22 3043 3241
Chhavi Agarwal,
chhaviagar...@ambitcapital.com<https://mail.google.com/mail/h/r880hlbkmwff/?&v=b&cs=wh&t­o=chhaviagar...@ambitcapital.com>,
Tel: +91 22 3043 3203

*We find Voltas a better proxy to participate in the Indian investment
cyclical recovery than the pure construction companies on account of: (a)
low/ nil leverage providing balance sheet capacity to fund working capital
for growth from infra segments; (b) nil requirement of investments in asset
development; (c) free cash flow generation history; and (d) superior
management quality. Whilst the acquisition of Rohini Electricals (and
moving up the value chain for an integrated MEP offering) and recent demand
decline in the highly competitive Room AC market (Voltas is the 2nd largest
player) have impacted the recent fiscal financial performance, we highlight
Voltas as the top pick in the E&C sector based on:

*Superior strengths in the EMP project management segment:* Our primary
data across the MEP industry highlight that Voltas' project management
capabilities are superior to that of peers in terms of execution,
experience in large infra projects and most importantly, team stability. As
investments in buildings remain low, Voltas, over the last two years, has
used its international experience and talent pool to bid for, win and
execute large infrastructure HVAC or MEP jobs (airports, metros). Whilst
infrastructure jobs have higher execution and capital requirements, we
believe Voltas' balance sheet gives it the strength to build market share
in this segment which has higher potential for integrated MEP jobs.

*Comfort of Unitary cooling products:* Voltas' profitable market share
increase (to 19% from 16%) in Room ACs over FY08-FY11 (a 24% revenue CAGR
and 40% EBITDA CAGR resulting in doubling of RoCE to 64%) via its focus on
the high-demand but cost conscious mass market is a notable success. Its
super brand status, its expanding reach and its outsourced production model
leave it well placed to compete and capture the secular growth opportunity
in a relatively under penetrated segment. Whilst we expect some market
share loss and profitability decline in this segment for Voltas due to
rising competitive intensity, we believe its wide retailing/brand/logistics
reach provide it with pockets of opportunity wherein it can witch from
tier-I and tier-II cities to new centres of demand.

Near-term pressure on earnings, lower working capital turnover and lower
RoCE can impact valuations. However, we expect the core business valuations
to recover with the improvement in business environment and with a gradual
recognition of Voltas' superior balance sheet strength versus the
limitations of its fragmented competitors. On our revised FY13 EPS
estimates, Voltas is trading at a P/E of 13x. We expect Voltas' core
business valuations to recover faster than that of peers with improvement
in the business environment. Our core business valuation for Voltas is
Rs111.

*Sobha Developers:** (SOBHA IN, mcap US$550mn, NOT RATED)
**Analyst: Rakshit Ranjan,
rakshitran...@ambitcapital.com<https://mail.google.com/mail/h/r880hlbkmwff/?&v=b&cs=wh&t­o=rakshitran...@ambitcapital.com>,
Tel: +91 22 3043 3201*

Sobha is one of the best placed real estate developers in India with the
combination of a consistently high run-rate of sales and cash flows with a
strong balance sheet, which does not need restructuring to fund debt
refinancing and construction of projects. Sobha's balance sheet holds Rs2bn
of advances from customers (over 10% of net worth), which is yet to go
through the P&L once thresholds on revenue recognition are crossed on
projects in 3QFY12 including Sobha Forest View, Sobha Ivory Pune and Sobha
City Commercial. With 49% of Sobha's customers over the past 15 months self
financing their purchase, buyer sentiment on the group's customer base is
likely to be relatively less exposed to the current interest rate
environment. As collections are made on units already sold, we expect cash
flows to remain strong in the coming quarters. Also, sales momentum has
remained strong in 3QFY12 with sales value down only 8% QoQ due to a
combination of around 15% reduction in area sold and a 6% increase in
realisation rates. In 2QFY12, the group reported a sales volume growth rate
of 41% QoQ and 26% YoY and a sales value growth rate of 61% QoQ and 77%
YoY. Consequently, Sobha is well on track to achieve its targets for: (a)
sales of 3msf worth Rs1.5bn in FY12 (2.4msf already sold in nine months to
December 2011); and (b) reducing the amount of debt on the balance sheet to
around Rs10bn (Rs13bn as on December 2011), thereby bringing down the
group's debt/equity ratio to 0.5 by March 31, 2012 (from the current levels
of 0.7). The stock is currently trading at 1.1x FY12E P/B multiple.

*VA Tech Wabag:** (VATW IN, mcap US$220mn, BUY)
**Nitin Bhasin,
nitinbha...@ambitcapital.com<https://mail.google.com/mail/h/r880hlbkmwff/?&v=b&cs=wh&t­o=nitinbha...@ambitcapital.com>,
Tel: +91 22 3043 3241
Chhavi Agarwal,
chhaviagar...@ambitcapital.com<https://mail.google.com/mail/h/r880hlbkmwff/?&v=b&cs=wh&t­o=chhaviagar...@ambitcapital.com>,
Tel: +91 22 3043 3203*

VA Tech Wabag is one of the leading water treatment companies in India with
an unmatched experience of water and sewage treatment and desalination
projects across municipal and industrial uses. Unlike its civil
construction peers/competitors (who seek international technology
alliances), VA Tech Wabag has in-house design and technical strengths
keeping it ahead of the former. The real technical strength of VA Tech is
blending its understanding of evolving and fragmented water treatment
technologies with project management skills. A high-quality reference list
and a cash rich balance sheet provide real substance to its strategy of
cultivating newer geographies in populous and water-scarce Asia and Africa.

Inevitability of the pick-up in the pent-up investments in the Indian water
sector across municipal and industrial segments can be gauged by the
Government of India's recent comments in the National Water Policy
document, which highlights importance for: (a) recycle and reuse of water,
(b) after treatment to specified standards, (c) establishment of a tariff
system, and (d) heavy fines for returning polluted waters. Given limited
possibility of fresh water creation/ generation, investments will be more
skewed towards treatment, implying a strong visibility for VA Tech.

VA Tech is currently trading at 12.4x FY13 estimated EPS of Rs33, which
appears to be at a premium to mid-sized construction/engineering companies.
But digging deeper it appears more than justified in the light of certainty
of competitive and balance sheet strengths. We expect VA Tech's valuations
to re-rate as the higher revenue growth and marginal EBITDA margin
improvements drive not only EPS, but more importantly, RoICs to levels
north of 18% (adjusted for 50% cash holding).

*
___________________________________________________________________________­___________________________________________________
**
5 attractive structurals** *

*HCL Tech **(HCLT IN, mcap US$6.4bn, BUY)*
*Ankur Rudra, CFA,
ankurru...@ambitcapital.com<https://mail.google.com/mail/h/r880hlbkmwff/?&v=b&cs=wh&t­o=ankurru...@ambitcapital.com>,
Tel: +91 22 3043 3211*
*Hardik Shah, hardiks...@ambitcapital.com<https://mail.google.com/mail/h/r880hlbkmwff/?&v=b&cs=wh&t­o=hardiks...@ambitcapital.com>,
Tel: +91 22 3043 3291*

We continue to find HCL Tech the best positioned vendor on a structural
basis due to its stronger positioning in Remote Infrastructure Management
(RIM) services and Enterprise Application Services- the two structurally
fastest growing service lines. HCLT is also likely to benefit from strong
deal flow momentum over the course of the October-November-December quarter
as CFOs and CIOs sign several RIM deals to optimise their cost of
operations before budgets for CY12 are decided. Although our view on
spending levels in CY12 remains cautious, we see HCL Tech benefit from RIM
deals signed in CY11 and stronger presence in new markets (non-US and
Europe)- particularly Asia Pacific. HCL Tech shares have underperformed its
Tier 1 peers over the past three months driven by both fear of slowing
growth, billing rate discounts and technical factors such as exiting the
MSCI index. This makes it the most attractively priced Tier 1 IT firm with
stronger than peer growth prospects and valuation comfort.

Our free cash flow model values HCLT at Rs 534. HCLT now trades at a 20%
discount to its larger peers on a P/E and EV/NOPAT basis and 27% on an
EV/EBITDA basis. This makes it a good company and a great investment. We
reiterate our strong BUY recommendation on HCLT.

*Petronet LNG **(PLNG IN, mcap US$2.6bn, BUY)*
*Dayanand Mittal,
dayanandmit...@ambitcapital.com<https://mail.google.com/mail/h/r880hlbkmwff/?&v=b&cs=wh&t­o=dayanandmit...@ambitcapital.com>,
Tel: +91 22 3043 3202*

PLNG is a straightforward gas utilities with secure financial positions and
good Balance Sheets are worth looking at. Rising domestic gas demand, muted
growth in domestic gas production and waning gas pipeline infrastructure
bottlenecks places PLNG in a sweet spot to capture the huge domestic gas
deficit. Further PLNG would benefit from early mover advantage, as its
expanded regas capacity will come up over FY13-FY14, 2 years ahead of
competition. The doubling of capex for a greenfield LNG regasification
terminal as compared to capex for PLNG Dahej terminal, would mean either:
(1) PLNG will be able to generate far higher RoCEs (+25%) versus the new
entrants whilst charging the same prices, or (2) as is more likely, cut its
prices (and hence take a reduction in its RoEs) to make operations tough
for the entrants.

The company has high earning visibility amid global uncertainty given the
fact that it does not bear any pricing, volume or margin risk for 80%-85%
of its regas volumes due to long term (+20 years) and back to back contract
with LNG suppliers and gas offtakers. We don't foresee risk to LNG demand
from the industrial segment, as even at high 14.5% linkage to USUS$100/bbl
of crude price, LNG prices are 11%-25% lower than the prices of alternative
liquid fuels (naphtha, fuel oil and diesel). The key trigger for the share
price is the signing of 3-4mmtpa of long term LNG contracts. With surplus
LNG liquefaction capacity being set up to export LNG from Australia, Qatar,
Africa etc. and with US planning to set up LNG export terminals to export
its surplus shale gas, it will result in availability of more LNG for
supply deficient economies such as India at competitive prices. Thus,
despite PLNG share price outperforming the Nifty by 55% over the past year,
we find shares still reasonably valued at 11.9xFY13 EPS.

Using a DCF-based model we value PLNG at Rs190, which implies an FY13 P/E
of 13.7x, FY13 EV/EBITDA of 9.4x. We expect 20% earnings CAGR over
FY11-FY14 on the back of rising volumes and higher re-gas charges. The key
catalyst for the stock would be the signing of a long-term LNG contract and
further delay in ramp-up of KG-D6 gas production.

*GSK Consumer **(SKB IN, mcap US$2.3bn, BUY)**
Analyst: Anand Mour,
anandm...@ambitcapital.com<https://mail.google.com/mail/h/r880hlbkmwff/?&v=b&cs=wh&t­o=anandm...@ambitcapital.com>,
Tel: +91 22 3043 3169*
*Analyst: Shariq Merchant,
shariqmerch...@ambitcapital.com<https://mail.google.com/mail/h/r880hlbkmwff/?&v=b&cs=wh&t­o=shariqmerch...@ambitcapital.com>,
Tel: +91 22 3043 3246*

*Core business to drive 17% revenue CAGR*: We expect the core malted foods
portfolio to grow volumes at 9.5% CAGR over CY10-CY13E, marginally lower
than the 10% CAGR seen over CY04-CY09. The company generates almost 50% of
Horlicks' sales from SEC (socio economic classification) C, D and E
consumers. Given that the overall penetration of health drinks in India
remains a low 20%, the untapped growth opportunity is considerable. The
recent launch of variants such as Mothers Horlicks, Women Horlicks, etc.
seems to be successful in expanding the target audience for Horlicks.

*Don't write off Noodles: *Foodles*, *after achieving a 3% market share in
its first year, could not sustain its position due to ITC's aggressive
entry into the category. However, the company was able to clock 4.5% market
share in the organized trade channel, which contributes 13% to the noodles
market (Rs20bn category). Now, we expect GSK to launch an improved product
in the category and focus on the organized trade channel. Success in the
biscuit category strengthens our belief that GSK's brand extension strategy
can be successful if it focuses on a niche segment with health positioning.
In the Rs130bn biscuit category, GSK Consumer competes in the niche segment
of milk biscuits (Rs6.5bn market size). The company grew volumes by 34% in
CY10, improving its segment share from 17% to 22%.

*New product initiatives to contribute additional 2% growth*: Entry into
niche segments like breakfast cereals (Rs.2bn category growing at 25%
p.a.), its focus on nutrition biscuits and new launches in the health and
nutrition space should allow the GSK's foods segment to contribute 9% to
overall sales in CY13 (from 6% in CY10). It is worth keeping a close eye on
launches in the
child nutrition space, which has a strong association with the brand,
Horlicks.

*Valuation. *With the core business growing at a steady pace and with new
business contributing additional growth, we expect the company to report
21% earnings CAGR over CY10-CY13E. Assuming a cost of equity of 12.9%, cost
of debt not being applicable and perpetuity growth from CY20 of 5%, our DCF
model yields a value of Rs2,994 (implied CY13 P/E of 24x, 56%
above its five year median of 15.1x).

*TTK Prestige:** (TTKPT IN, mcap US$524mn, BUY)*
*Analyst: Rakshit Ranjan, CFA,
rakshitran...@ambitcapital.com<https://mail.google.com/mail/h/r880hlbkmwff/?&v=b&cs=wh&t­o=rakshitran...@ambitcapital.com>,
Tel: +91 22 3043 3201*
*Analyst: Shariq Merchant,
shariqmerch...@ambitcapital.com<https://mail.google.com/mail/h/r880hlbkmwff/?&v=b&cs=wh&t­o=shariqmerch...@ambitcapital.com>,
Tel: +91 22 3043 3247*

Over the past eight years, the company has grown its sales at 27% CAGR and
earnings at 70% CAGR. Having spoken with more than 15 leading brown goods
dealers across India, we expect the momentum in TTK's sales growth to
continue based on 3 key sustainable competitive advantages:

*Wide range of products*: The group has consistently introduced over 50 new
product variants and 1-2 new product categories each year over the past
eight years. This has helped raise the profile of its brand in Northern
India whilst enabling it to maintain strong sales momentum in Southern
India (wherein it has already achieved high penetration levels in a few
product categories).

*Differentiated distribution*: Franchisee shops, called Prestige Smart
Kitchens (PSK), help distribute the entire product range, increase
competition with traditional dealers, and help TTK penetrate into cities
where brand awareness remains low. PSKs control nearly 20% of TTK
Prestige's total sales for FY2011 and the group intends to double the
number of PSKs across India by FY2013.

*Superior supply chain management*: With 23 warehouses all over India and
an efficient hub and spoke distribution network in place, dealers across
India acknowledge that in stark contrast to most of its competitors,
availability of stock on demand is seldom a concern with TTK Prestige's
products.

*Strong free cash flows despite capacity expansion plans*: With FY06-FY11
cumulative pre-tax CFO/EBITDA ratio being 100%, cash conversion remains
high. Prestige intends to more than double its production capacity over
CY11 and CY12 through a capex plan of Rs2.25bn, funded from internal cash
resources and Rs600m of short-term debt, which should be repaid within one
year using internal cash flows. Consequently, TTK Prestige has a
significant competitive advantage over its capacity constrained peers. We
expect CAGR to grow at 35% for CFO and at 54% for FCFF over FY11-FY15.
*Valuation: *Our DCF model uses a WACC of 14.3% and generates a fair value
of Rs3,397 per share (Rs3,331 for kitchenware plus Rs66 for the real estate
business assuming realization rates similar to those prevailing in
Whitefields, Bangalore). The stock is trading at 18.8x FY13E earnings.

*VST Industries **(VST IN, mcap US$400mn, BUY)**
Analyst: Anand Mour,
anandm...@ambitcapital.com<https://mail.google.com/mail/h/r880hlbkmwff/?&v=b&cs=wh&t­o=anandm...@ambitcapital.com>,
Tel: +91 22 3043 3169*
*Analyst: Shariq Merchant,
shariqmerch...@ambitcapital.com<https://mail.google.com/mail/h/r880hlbkmwff/?&v=b&cs=wh&t­o=shariqmerch...@ambitcapital.com>,
Tel: +91 22 3043 3246*

In 3QFY12,* *VST Industries reported 21% growth in gross sales, driven by a
stellar 18% YoY volume growth in domestic cigarettes, while for 9MFY12, the
volume growth was 13% YoY. The company's leadership at the entry level
price point continues to drive volume growth for the company. Exports for
the quarter also grew at 20%, while for 9MFY12, exports revenues have
declined by 10%. With 3% average realisation increase, gross margins
expanded by 158bps to 54.8%. Further, operating leverage benefitted EBITDA
margin expansion by 266bps to 32.6%, higher than our expectation of 31% as
other overheads expenditure was lower at 13.6% against our expectation of
15.3%.

While the volume growth has improved substantially from 11% in 1HFY12 to
18% in 3QFY12, we believe this is supported by some inventory build-up and
4QFY12 should see volume growth of just 3%, thereby averaging annual volume
growth of 10.5%. With a dividend payout of 85% and RoCE of ~50%, we find
VST Industries attractively priced at 12xFY13 earnings. We remain *BUY*ers
on the stock with a valuation of Rs1,576, indicating a 25% upside and 6%
dividend yield. Though excise hike concerns may continue to play on the
stock till Union Budget, we believe VST Industries is well-placed to pass
on a 15% excise hike to its customers

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