Funds Tsunami

2012 has turned out to be a year to remember for various reasons. It has been even more important from the market perspective for the sudden and positive turn in the sentiment that happened over a really short period of time. Economies and economics keep on evolving. This constant evolution reached newer heights in 2012. There came a time when everything seemed to fall apart with nations going bankrupt and governments struggling to keep themselves afloat. The Euro zone crisis kept on gnawing time and again (in fact it still hasn't disappeared completely) and the US too faced a whole lot of headwinds so to say. All this has obviously had an impact on the overall economic scenario of India as well. On the domestic front, we have been faced with our own set of problems, having grappled with a good number of issues largely extraneous to the markets, but which have had an adverse impact nonetheless.

But self inflicted worries are never permanent. And most of them at least in the Indian economic context were largely of that nature. Higher inflation, which kept interest rates on the higher side and thereby led to lower growth, were like a vicious cycle taking a toll on the markets. It was for the government to act in a direction that would keep the Indian economic growth ticking at a steady pace. What was required for this was a concerted attempt from policy makers to fast track reforms.  After a lot of dilly dallying, reforms finally took off. Domestic factors have been looking up since the past three months, particularly after P Chidambaram once again took over the reins of the Finance Ministry. This changed the overall economic sentiment and more so the market trend.

Regular followers of Dalal Street Investment Journal would concur with us that we were the first to call the bottom of the market. It helped our readers to take a timely position and ride the uptrend in a more meaningful manner. The markets have not looked back and continue to look positive going forward too. There are solid reasons that back our conviction. The two main factors that held the market back over most part of 2012 are now making way for a more positive environment.

All this is pointing towards one fact – there is a whole lot of money waiting to come into India from outside. Well it does not stop at that. The measures initiated by the government here, will see huge amounts of money flowing into the system. Nothing less than a Fund Tsunami seems to be heading India’s way. Here are the where’s and wherefores of this impending fund flow and what you should be doing to take advantage of it.
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Foreign Fund Flows

The US Impact

The US has been facing its own set of economic problems. Worries of tipping over the ‘Fiscal Cliff ’ have been looming large over it for quite some time now. Will tax rates go up? Will large scale austerity mar growth in worlds’ growth engine going forward? Will the US go into a recession kind of a situation? If the US tips over the so called ‘Fiscal Cliff ’, fears are, it will probably slip into a recession. This means, the markets out there would underperform leaving huge scope for money to be diverted into alternate markets.

The obvious question that arises here is, where will money come from? Well, the Fed has announced the extension of its bond buying programme. In fact it has enhanced it from the erstwhile USD 40 billion a month to USD 85 billion a month now. This means a total churn of almost more than a trillion dollars over the next one year. A large part of this money will eventually find its way to emerging markets in search of Alpha.

Within the emerging market pack, India offers a hugely diversified basket of investible areas and will hence attract a large amount of this money. How much will that be? Last year without such a scenario, India attracted huge sums of FII investments. A view very strongly supported by Sunil Singhania, Head-Equities, Reliance Mutual Fund. “In 2012, India has seen disproportionate allocation of global money. We have already got USD 23 billion. The other two countries that have seen such a flow of money are Japan and South Korea. It gives you a perspective of how foreign fund flow has been disproportionately in favour of India. So it is clear that with all the inherent problems in India, it has been on the radar of foreigners” says Singhania.

Singhania isn’t alone in holding this view. In fact, Motilal Oswal, CMD, Motilal Oswal Financial Services too is pretty convinced about the capacity of India in attracting foreign funds. According to him, India has actually seen huge amount of money coming in this year itself. “Investors, especially in the US are looking to divert their funds. I think emerging markets including India will keep on getting a lot of money”, says Oswal. In fact, there is a larger probability of more funds flowing into India this year. The flow of funds has been quite huge in an otherwise dull year that 2012 was. “One has to remember that this amount of money has come in a time when India has faced some drawbacks as far as growth numbers are concerned. With the situation improving I feel that India will keep on receiving good amount of money”, opines Oswal.

All in all there seems to be a clear consensus about the huge funds that are likely to come into from the US whether it tips over the ‘Fiscal Cliff ’ or not. In fact, Bharat Shah, Executive Director, ASK Group has an interesting perspective on this whole issue. According to Shah, “Fiscal Cliff and  Western world difficulties are nice conversational topics. These are not points where you will decide to buy or sell”.

The Abe Effect

Another significant factor that will bring in loads of money India’s way is the recent developments in Japan. With the election of a pro-growth and a proponent of easy money policy, Shinzo Abe as the Prime Minister, there is every possibility that funds will once again find flowing out of Japan in search of a favourable arbitrage. Japan’s central banker has increased the size of the Asset purchase fund from 66 trillion yen to 76 trillion yen. This means a huge increase of a net USD 120 billion. A large part of this money too will find its way to India. It has happened in the past and will most probably repeat now too. Only fear is, it has a tendency to flow out as quickly as it flows in. However, the flow of funds from that region is sure to happen.

Putting it in the correct perspective, Singhania says, “Japan’s currency is looking to weaken, there is a clear indication by the Prime Minister that they are going to focus on growth and in all this, I think Japan’s interest in India will only get highlighted. With Japan’s friction with China, they have started looking at India as a major destination, which along with a weak currency and growth oriented scenario bodes very well for capital hungry countries like India. I think we are again positive on increasing fund flows coming from Japan”. A thought held up by Oswal who says, “the Japanese are very slow, but I am hoping that a lot of money will come to India”. 
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Government Action

Another front that will open up flood gates of money is the recent government action. A lot of policy initiatives of the government which are a part of the reforms process will ensure a huge surge in liquidity. The most important among this is the opening up of FDI in select sectors. FDI is a largely preferred and wanted source of inflow.

FDI

The Story So Far

FDI Flows into India for the first seven months of FY13 (April-October 2012) has shown a decline of 31 per cent in rupees terms but the fall is sharper in USD terms (42%) as the rupee has depreciated by a good seven per cent in the same period. (See Table: FDI Performance).

It is not only India that has witnessed such a decline; the trend is visible worldwide albeit at a lower level. The reason for such a fall may be attributed to the volatility in the recovery of global economies, especially the US and Europe.

A Turnaround Is Underway

On the surface, this dismal performance on the FDI front masks the improvement that is happening beneath. An analysis of the month wise flow of FDI, suggests that the drag in the performance is mainly due to the bad performance in the first five months where it declined by 42 per cent on a yearly basis in rupees term. However, the latter two months; September and October have witnessed a turnaround and FDI is up by 1.5 times in rupees terms on a yearly basis.

One of the reasons that may be attributed for such a performance may be the change in guard in Finance Ministry and unleashing of reforms. Policy paralysis that had hampered the flow of foreign money in India is coming back with a vengeance as bold reforms see the light of the day. FDI is therefore expected to go up going forward. This will help India to cover lost ground, as a report by the research firm AT Kearney shows India ranked second only to China in terms of FDI confidence index worldwide for CY12. Though the FDI numbers for the month of November and December are not out, they will definitely be better than those during the same period last year.

So what will be the scenario on the FDI front?
Will it be able to beat China its biggest competitor in this arena?

“With a country with USD 1 trillion as GDP an FDI of USD 20 to 25 billion is a very small an amount. China gets around four times the money that we get. This money is important as this is sticky money and helps in creating income. So that is the crux, we have to get the investment ratio to that level of GDP”, says Shah. Will it then happen? “China also is trying to attract more and more investments. Specifically for the first time they are seeing some pressure on their growth. 

But our view, especially on the FDI front, is that, a lot of money has already gone into China. So for China to get disproportionate FDI money looks a bit difficult from here on. Yes they may see some FII money, but for India more FDI coming in rather than FII is a good thing. That is more stable and stronger money”, says Singhania. This view is ably supported by Oswal. According to him, “in the next couple of years we are going to see a lot of money coming in Retail FDI. If we are able to create the right kind of environment then FDI will be much bigger than the FII money. It is on the way we market ourselves to the foreigners or the big investors”.

FDI, according to Shah, will certainly help. Our savings ratio used to be at 13 per cent, but now it is at a high at 33 per cent. This is helped by foreign flow of money and remittances by NRIs. Both combined is around USD 100 billion. It is around 9 to 10 per cent of the fresh capital that is available for investment. Savings, NRI remittances and FDI and FII combined come to around 48 per cent that is ready to be invested.

Just attracting FDI will not be sufficient. There is a need for adequate steps to channelise the money properly and this will need a whole lot of political will. One right step in this direction is the formation of the Cabinet Committee on Investments headed by the Prime Minister himself.
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So, Where Should You Invest?

Over the past two years, money has flown into diverse asset classes. Gold has been high on the radar for investors. Those who invested in gold have reaped the benefits as well. Another asset class which has seen a lot of interest is Real Estate. According to Singhania, investors have invested nothing in equities in the last five years. Whereas investments in real estate, gold and silver put together stand at close to USD 15 trillion. Allocation to equities has been very less. “When we ask people whether you own shares of blue chip stocks, they say no. So the retail investments in Indian stocks are almost negligible”, he says.

These are the two primary asset classes from where money should be coming out. “I think a lot of money is invested in real estate. So, unless you want to invest in real estate for use be it for office or personal, investment in real estate, especially in frothy cities is definitely avoidable. Even in gold you need to be measured. Though we Indians will continue to vouch for gold, one should not go in an overbought zone”, says Singhania. Can commodities emerge as a new asset class in demand next year? “It is very difficult. Commodities are a global asset class. The avenues of investment in commodities are limited. You can speculate in commodities, but how do you invest? There are no commodity-based funds. So I think it is still premature”, feels Singhania.

These views have been seconded by Shah, who feels that equity and Real Estate are the only two real asset classes available to investors. Obviously since the allocation of equities has been less over the past couple of years, money should now flow into equities. Will equities provide the right kind of returns? “One year is too short a time for equity markets to be really forecasted. Short term is harder to forecast and long term is relatively easier to predict. But the irony is that, investors run for the short term benefits. There is an illusion in the equity markets that it is the place to make quick riches. It can never be possible. You can only make money in the long term” says Shah

With the obvious choice being equities, we keep up our tradition of building for you a portfolio stocks which will yield the best returns for you over the next one year. Invest and enjoy the benefits. Have a blast this New Year’s eve and leave the worries of finding the best investment ideas to us. After all, we know the markets for over 27 years now. Once again, here’s wishing all our readers a very Happy New Year!
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Your Equity Portfolio for 2013

It is said that an acre of performance is worth a whole world of promises. If we look back at the year 2012, we at DSIJ have surely delivered well by predicting the bull run when the market was directionless and mired in despair. The icing on the cake was the astounding returns yielded by our recommended equity portfolio for 2012 amid all the volatility in the Indian equity markets. After a stunner of a performance, we present an equity portfolio handpicked for you for the year 2013.

2012 was a perfect example of how sentiments can change suddenly in the equity markets. The beginning of 2012 was fraught with despair, with little hope of improvement. That was a time when most experts and market commentators were actually scaling down the Indian equity story and advising caution for the year ahead. The global economy too seemed heading nowhere, and in fact, was staring at a long depression as more negative factors were seen on the horizon. No wonder equity indices across the globe crashed and liquidity dried up, especially in the equity markets, as investors were looking for safer havens like precious metals. Now, at the dawn of a new year, comes a stark change in the scenario. Hope seems to have rebounded, and there is an improvement in sentiment across the globe. Slowly but surely, the global economy seems to be making its way out of trouble and the equity markets are showing signs of a revival. This is evident from the fact that the leading equity indices are trading in the green as against last year, when they were strongly in the red. 2012 has turned out to be a good year for equities, with the Sensex providing returns as high as 25 per cent on a year-till-date basis.

Though the equity indices have witnessed a strong bounceback, the path to recovery has not been that easy. High amount of volatility kept investors on their toes as the market remained directionless and kept most of the investors on the fence for most part of the year. We, at Dalal Street Investment Journal, have been quick and spot on in seizing this opportunity and have been advising our readers on the impending bull run for quite some time now.

So, where do you go from here? What should be your course of action in equities for ensuing year? Here are the answers. As we have pointed out in our lead story, there is a lot of liquidity waiting in the wings and this will propel the markets into a new orbit in the year. Be prepared and build a portfolio that will provide superlative returns. Here are some pointers you can follow to build a model portfolio for the next year.

Your Wealth Tomorrow – Target Price
Company Name	CMP(Rs) as on 24-Dec-2012	Target Price (Rs)
Dabur India	129	155
Greenply Industries	324	425
J&K Bank	1299	1625
MRF	12597	15750
Pidilite Industries	213	275
Prestige Estates Projects	179	225
Voltas	104	130

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Volatility All Over

On the global front, issues like the Euro zone debt worries and slower-than-expected growth in the US economy kept investors at bay from the equity markets. On the domestic front too, we were contending with the slowdown in GDP growth, higher inflation that lead to higher interest rates and last, but not the least, a complete policy paralysis in the early days of 2012. A combination of all these factors kept the markets directionless and resulted in a high amount of volatility.

While in the first two months of 2012, the equity indices moved slightly upwards on account of anticipations of a better budget, the whole scenario suddenly flipped into the negative as the UPA government announced the GAAR (General Anti Avoidance Rule) in a bid to shore up tax revenues, and that too with retrospective effect. GAAR empowers the revenue authorities to deny taxation sops of transactions or arrangements which do not have any commercial substance or consideration other than achieving tax benefits. This factor directly impacted foreign institutional investors (FIIs) in India, who turned net sellers for the month of April, May and June 2012. Along with this, there were other factors that made matters worse like contracting GDP growth (below six per cent expected for FY13), the declining financial performance of India Inc. and consistently higher inflation. These factors were enough to take the steam out of the Indian equity markets. The equity indices also witnessed a decline during these three months. Even the surprising 50 basis point repo rate cut by the RBI could not bring any cheer to the markets.It was only in the second half, when the government woke up and fast –tracked the reforms process, that the vibes changed for the better. The proposal for FDI in multi-brand retail was cleared, and the Banking Laws (Amendment) Bill, 2011 and the Companies Bill, 2011 too were passed.

All these developments infused a fresh burst of life into the equity markets. FIIs poured in more money, so much so that 2012 will be remembered as a year that saw the second highest amount of FII activity to the tune of Rs 122725 crore in Indian equities. With liquidity flowing in, the indices recovered sharply, ending the year with strong gains.
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DSIJ - Creating Value For Investors

At Dalal Street Investment Journal, we always try to uncover value propositions for our readers. Over the past 26 years, we have done that very conscientiously. Be it helping investors find their way in a directionless market, or predicting a bull run ahead of everyone, we have hit the bull’s eye each time.

This time round, we have added yet another feather to our cap. Our recommended portfolio ‘Where To Invest In 2012’ has provided returns of 30 per cent in the past one year. In the similar period, the Sensex gained only 14 per cent. Note here that we have not considered the dividend paid by the companies while calculating these returns.

Investors may recollect that when we had recommended this portfolio in December 2011, there was an overall mood of pessimism in the markets, with even experts predicting a difficult year for equities. In such a scenario too, we led from the front and recommended a portfolio of seven counters. As the scenario was slightly stormy, we had taken extra effort to pick out a portfolio with a balance of aggression and stability. Also noteworthy is the fact that we had picked companies that were not in the limelight but were hidden gems waiting to be discovered. This ensured that the scrips were available at good valuations.

We had asked investors to book profits in three scrips, viz. Gruh Finance, MARG and Munjal Auto Industries through our ‘Book Profit’ SMS service on February 6, 2012. The annualised returns from the same would thus be much higher. Other calls that were kept open have also provided strong returns, with Divi’s Laboratories, HDFC Bank and Marico each providing more than 40 per cent returns. By providing almost double the returns than those of the Sensex, we have amply proved our mettle once again.

Company Name	Reco. Price (Rs)	Quantity	Value (Rs)	CMP (Rs)	Value (Rs)	% Return
	(7-Dec- 2011)		(7-Dec-2011)	(24-Dec- 12)	(24-Dec- 12)
Marico	147	1225	180443	220	269500	49.4
HDFC Bank	463	395	182885	675	266625	45.8
Divi's Labs	754	185	139416	1066	197210	41.5
Munjal Auto Ind.	189	525	99225	235	123375	24.3
Gruh Finance	558	250	139500	648	162000	16.1
MARG	82	975	79804	94.5	92137.5	15.5
TCS	1178	150	176700	1240	186000	5.3
Cash	–	–	2028	–	2028	–
DSIJ	–	–	1000001	–	1298875.5	29.89
Sensex	16878	–	–	–	19255	14.08
* Book Profit SMS Sent on 6th Feb **Split on 29th Dec 2011 1:5 and Book Profit SMS Sent on 6th Feb

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So, How Do You Play The Next Year?

Like every year, this time too, we have provided our readers with a Rs 1 crore portfolio recommendation. We have looked at the industry scenario and have closely studied the valuations of each company before adding them to our portfolio. As part of our process, we have selected only those companies that have performed well in H1FY13 and are available at reasonable valuations.

While this gives us a short-term perspective on the companies, our long-term view is based on the financial performance of companies over the past five years. To help investors build a portfolio, we have also assigned specific weightage to individual scrips (See table –Rs 1 Crore Portfolio For 2013).

As stated in the performance review of last year’s portfolio, we have managed to create an alfa for readers who invested based on our recommendation. We are quite confident of repeating this stellar performance next year too. Rather, we have gone a step ahead and have provided targets for our recommendations, so that investors can get the exact exit levels. 

To conclude, here’s wishing all our readers a very happy and prosperous new year!
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Dabur India - A Healthy Choice

BSE Code: 500096
Face Value: Re 1
CMP: Rs 129

Here Is Why 

• Dabur has a majority market share in most of the categories that it operates in.
• Its increasing rural presence and higher disposable incomes would create more demand.
• The company’s robust financial performance in the past through the organic as well as the inorganic route, and the stock’s availability at a fair valuation makes it a good investment bet.

The importance of having defensive stocks in your portfolio can hardly be overstated. Therefore, we have picked up Dabur India from the FMCG space as part of a winning portfolio for investors in 2013. This scrip surely looks to be a very good bet for the next one year. The company has a majority market share in most of the categories it serves, and with inflation expected to soften, we believe that its margins would expand.

Dabur has a presence across various categories in the FMCG sector like hair care, oral care, fruit juices, honey, digestives and ayurvedic tonics, among others. It has strong brands in these categories including names like Dabur Chyawanprash, Hajmola, Dabur Honey, Odonil, Real Fruit Juices, Dabur Amla Hair Oil, and Babool. The company is a leader in most of these categories, enjoying a majority market share, which gives it an edge over its peers. Around 68 per cent of its total revenue comes from the domestic business, while the remaining 32 per cent comes from its international business.

The company’s rural distribution initiative is well on track and is expected to be completed in H2FY13. Currently, rural India accounts for about 45-50 per cent of the company’s domestic sales. Going ahead, the demand for its products from the rural space is expected to be higher due to its increasing presence in these areas and higher disposable incomes, and this will add to the fundamental strength of the company.

On the financial front, its past performance has been pretty strong. As at the end of FY12, the company’s net sales increased at a six-year CAGR of 21 per cent to Rs 5283 crore. Its net profit witnessed a CAGR of 20 per cent to touch Rs 645 crore. Despite volatile raw material prices, Dabur has maintained its EBITDA margin above 18 per cent during the same period. For the September quarter of FY13, its net sales increased by 20.6 per cent (with volume growth of 10.5 per cent) to Rs 1522 crore, while the net profit grew by 16.39 per cent to Rs 202 crore on a YoY basis.

Input cost pressures look to be softening over some time now. The raw material cost-to-sales ratio has decreased by 98 basis points to 49.23 per cent on a YoY basis in the September 2012 quarter. However, the softening of raw material prices has not helped the company’s EBITDA to expand. This is majorly on account of higher ad spends. The advertisement cost-to-sales ratio increased by 178 basis points to 11.84 per cent on a YoY basis. Of course, higher advertisement spends would create brand awareness for the company, which will be good for growth in the long run. Its overall EBITDA margins for the quarter decreased by 67 basis points to 19.11 per cent.

The company is establishing a greenfield manufacturing unit in Sri Lanka, which would be operational in H2FY13. This capacity expansion will enable it to set its feet firmly in a growing market like Sri Lanka. On the valuations front, Dabur is trading at a trailing P/E multiple of 32x, which we believe is fair as compared to that of its peers like Marico (38x), Godrej Consumer Products (38x) and HUL (32x). Its upward move seems assured considering that the FMCG sector has good prospects going forward. The stock is an ideal candidate for a portfolio that seeks safer growth.

Dabur India
FINANCIAL HIGHLIGHTS (TTM)
Market Cap (Rs / Cr)	22474.97
Sales (Rs / Cr)	5834.91
Net Profit (Rs / Cr)	695.11
EPS (Rs)	3.98
Dividend Yield (%)	1
PE (x)	32.34
EBITDA Margins (%)	17.44
Equity Capital (Rs / Cr)	174.29

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Greenply Industries - Board Gains

BSE Code: 526797
Face Value: Rs 5
CMP: Rs 324

Here Is Why

• Rapid urbanisation and improved standard of living is expected to be beneficial for the sector.
• Its leadership in the sector and capacity addition by GPIL would drive future growth.
• An expected improvement in its margins would boost the bottomline.

The state of the environment is a matter of great concern today. Stringent environment protection norms have become a strong entry barrier in a few industries. Plywood manufacturing is one such industry where environmental norms play a big role. Being wood-based, the plywood industry has been facing the restriction of new licenses by the government. This restriction, however, has helped existing players make the most out of the Indian furniture market, which was worth Rs 71000 crore as of March 2012. While this remains the situation at the macro level, there are a host of other reasons why we are recommending Greenply Industries (GPIL) as part of our portfolio for 2013.

Increasing urbanisation and growth in the hospitality industry are two main demand drivers for this industry. Besides, with the interest rates expected to come down in the March 2012 quarter, the real estate market will pick up, further increasing the demand for furniture. All of this bodes well for GPIL.

Operating in three business verticals, GPIL has seven manufacturing units located in Eastern and Northern India. Its three business verticals, viz. Plywood, Laminates and Medium Density Fibreboards (MDF) contribute to around 50 per cent, 35 per cent and 15 per cent of its topline respectively.

Further, four of the company’s plants located in Nagaland, Himachal Pradesh and Uttarakhand, which represent a total of 46 per cent of its manufacturing capacity, enjoy tax exemptions. These plants also enjoy an added advantage of proximity to the raw material.

The organised sector represents only 15 per cent of the huge furniture market in the country, and hence,there is a huge scope for growth in this sector going ahead. Currently, GPIL holds a leadership position in each of its business verticals. That apart, the company also expects to grow faster than the industry growth rate, which will further increase its share in the market. Its strong network of distributors, dealers and retailers adds further strength. Innovation-wise too, GPIL has been doing well by bringing new products into the market. The company started MDF as a new vertical in 2010, and in just two years, this is already adding 15 per cent to its topline.

On the financial front, the company has registered a five year CAGR of 33 per cent in its topline and 19 per cent in its bottomline. Its EBITDA margins have recovered from 9.57 per cent to 11.16 per cent in FY12. For the first half of the current fiscal too, its topline grew by 24 per cent to Rs 948 crore. Thanks to a decline in the operating expenses, its EBITDA margins increased by 292 basis points to 12.72 per cent. The net profit saw a growth of 152 per cent to touch Rs 67 crore.

On the valuations front, the stock is trading at a PE multiple of 9.8x its TTM EPS of Rs 35.22. The company has lowered its debt in the September 2012 quarter, which will further add to its EPS. With the new capacity addition and improving margins, we see the growth momentum continuing in the future too. We advise our readers to enter the counter with a target price of Rs 425 over the next one year.

Greenply Industries
FINANCIAL HIGHLIGHTS (TTM)
Market Cap (Rs / Cr)	789.5
Sales (Rs / Cr)	1826.0
Net Profit (Rs / Cr)	80.2
EPS (Rs)	33.2
Dividend Yield (%)	0.0
PE (x)	9.8
EBITDA Margins (%)	11.6
Equity Capital (Rs / Cr)	12.1

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Jammu & Kashmir Bank - Money Spinner

BSE Code: 532209
Face Value: Rs 10
CMP: Rs 1299

Here Is Why

• The bank has a good asset quality reflected in its net NPA levels, which are among the lowest in the industry.
• Its NIM has improved by eight basis points to 3.94 per cent in the first half of FY13, and with the interest rates expected to soften, the margins are set to expand further.
• A healthy dividend yield of 2.51 per cent coupled with fair valuations makes the stock a good bet.

The banking space has clearly outperformed the broader indices. In CY2012, the BSE Bankex appreciated by around 57 per cent, while the Sensex was up 26 per cent. Within that, private sector banking players seem to be well placed compared to their public sector counterparts. We have selected one such private sector banking company, Jammu & Kashmir Bank (J&K Bank), as part of our portfolio recommendations for 2013. This bank has good asset quality, improving margins and decent business growth. We believe that J&K Bank is one stock which would give handsome returns in the next one year.

As at the end of FY12, its deposits have registered a four-year CAGR of 17 per cent to touch Rs 53341 crore. The advances, on the other hand, saw a CAGR of 15 per cent to Rs 33077 crore. According to the management’s expectations, the bank’s business will touch Rs 100000 crore in FY13. This has already touched Rs 89198 crore as of September 30, 2012, and we believe that it would easily achieve its business target in the second half of this fiscal.

Currently, most of the banking players are facing serious headwinds with regard to their asset quality. J&K Bank, however, stands apart in fact that it has maintained its asset quality at the same level, where its net NPAs have increased by a negligible amount of one basis point to 0.16 per cent in the first half of FY13. The bank’s NPA levels are also among the lowest in the industry, which is a good sign.

Further, it maintains a higher provision coverage ratio (PCR), which stands at 93.30 per cent and is way above the RBI’s expectations of 70 per cent. This obviously means that the bank would not face much pressure on the asset quality front going ahead too.

Its Net Interest Margin (NIM) has improved by eight basis points to 3.94 per cent in the first half of FY13, which is commendable. Going ahead, with the interest rates expected to soften, the bank’s margin are all set to expand further. As on September 30, 2012, its Capital Adequacy Ratio (CAR) stood at 13.73 per cent, with the Tier 1 CAR at 11.59 per cent. We believe that this bank would not be in an urgent need of funds, unlike other banks which are currently raising funds to meet the Basel III norms.

During the first half of FY13, J&K Bank’s Net Interest Income (NII) increased by 25 per cent to Rs 1088 crore and the net profit grew at a robust rate of 35 per cent to Rs 515 crore. The management has said that the bank would achieve a net profit of Rs 1000 crore in FY13, which we believe is possible, as it has already crossed the halfway mark in the first six months itself.

In FY2012, it had declared a dividend of Rs 33.50 per share, resulting in a healthy current dividend yield of 2.51 per cent. On the valuations front, the stock is currently available at a trailing PE multiple of 6.87x. As far as the price to book value goes, it is available at 1.41x, which is fair as compared to its peers like IndusInd Bank available at 4x, Federal Bank (1.45x) and YES Bank (3.12x). Overall, J&K Bank looks to be in good shape and we believe that it would see a good performance going ahead too.

Jammu & Kashmir Bank
KEY FINANCIAL INDICATOR
Market Cap (Rs / Cr)	6402.46
Return on Assets (%)	1.79
Net Interest Margin (%)	3.94
Capital Adequacy Ratio (%)	13.73
Net NPA (%)	0.16
TTM EPS (Rs)	193.58
Book Value (Rs)	939
Equity Capital (Rs / Cr)	48.49

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MRF - On The Right Track

BSE Code: 500290
Face Value: Rs 10
CMP: Rs 12597

Here Is Why

• It is a market leader with a diversified presence across segments.
• Stabilisation of rubber prices will lead to an improvement in the company’s margins.
• The replacement market, increasing radialisation and a huge export market are primary growth drivers.

The automobile industry has been seeing a rather bleak year. So far in FY13, the overall automobile sales have grown by a mere 4.8 per cent on a yearly basis. The sales of Medium and Heavy Commercial Vehicles (M&HCVs) have dropped by 16.34 per cent so far. Considering the fact that M&HCV tyres constitute 65 per cent of the tyre industry, the revenues of tyre companies would naturally be expected to slow down. However, the truth is quite different.

70 per cent of the tyre industry’s revenues come from the replacement market. This provides for stability even during times when the industry is facing major headwinds. The replacement market is particularly advantageous as it provides for higher margins than sales to Original Equipment Manufacturers (OEMs).

Also, despite the slowdown in segments like M&HCVs, passenger cars and motorcycles, the overall industry has been supported by a tremendous growth seen in utility vehicles, Light Commercial Vehicles (LCVs) and scooters. This has offset the negative effect for players such as MRF, which cater to all the industry segments.

Another factor that provides this business an ample opportunity for growth is the shift to radials. Radialisation is in its nascent stage in India, especially in the M&HCVs segment. While 98 per cent of passenger car tyres are radial, the figure stands at a mere 18 per cent and 15 per cent for LCVs and M&HCVs respectively. This provides immense potential for tyre companies to capitalise on.

On the back of these factors, MRF has been a market leader with more than 30 per cent of the market share and has seen a YoY revenue growth of 22.36 per cent in the last four quarters. We expect this strength to continue in the financials of MRF going forward.

Over the last two years, the margins of tyre companies were extremely pressured due to increasing raw material prices. Soaring prices of oil and rubber combined with the inability to pass on the costs to end consumers fully (due to tough competition and price sensitivity) had severely hampered the profitability of the companies. However, rubber prices have come down by an average of 11.93 per cent in November 2012 as compared to the previous year.

MRF has remained extremely robust on the financial front, with an average revenue growth of 24.61 per cent. Though the company’s margins were pressured, the stabilisation of prices provides a positive outlook. Moreover, December has seen a declining trend in rubber prices, with the current prices 6.21 per cent lower than those in the month of November, and this further strengthens the outlook.

Moreover, MRF has been a consistent dividend payer. The scrip is available at a PE of 9.17x, and this seems attractive when the industry average and growth prospects are taken into account.

Overall, considering the outlook on the tyre industry, improvement in margins, the increasing trend towards radialisation and the strong past performance of the company, we feel that MRF is a must-add to your portfolio for 2013.

MRF
FINANCIAL HIGHLIGHTS (TTM)
Market Cap (Rs / Cr)	5310.76
Sales (Rs / Cr)	11959.6
Net Profit (Rs / Cr)	579.4
EPS (Rs)	1366.19
Dividend Yield (%)	0.2
PE (x)	9.17
EBITDA Margins (%)	10.64
Equity Capital (Rs / Cr)	4.24

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Pidilite Industries - Stick To It

BSE Code: 500331
Face Value: Re 1
CMP: Rs 213

Here Is Why

• A strong brand recall, leadership in the adhesives market, ability to introduce a range of innovative products and pricing power are strong points for the company.
• It has an ability to overcome difficult economic cycles unscathed.
• Expected improvement in the exports markets and rapid urbanisation in domestic markets to be major demand drivers.

Consistency is always highly regarded in the stock markets. No wonder then that scrips of companies providing consistent financial performance always enjoy a premium over their peers on the bourses. Pidilite Industries is one such company. Pidilite is a pioneer in industrial and specialty chemicals, with many strong brands like Fevicol, M-Seal, Dr Fixit, Fevi Stick and Hobby Ideas under its belt. In fact, Fevicol is a brand that is almost synonymous with adhesives. The best part has been the company’s ability to come up with innovative products to keep its leadership position intact. It has also been able to enjoy good pricing power.

With these characteristics, Pidilite is one of the few companies that have been able to overcome different economic cycles in a fairly smooth manner. It was able to restrict its downside on the bourses in the 2008 mayhem and was quick to bounce back, which clearly indicates the inherent strength of the company to withstand a slowdown. While this has been the past, there are also various demand drivers in place for its future growth.

As regards its business, Pidilite has two major segments; Consumer & Bazaar Products (CBP, which contributes to 80 per cent of its revenues) and Specialty Industrial Chemicals (SIC, which brings in the remaining 20 per cent of its revenues). CBP consists of products like adhesives & sealants, construction & paint chemicals and art material. The SIC segment is majorly into exports, with products like industrial resins & adhesives as well as organic pigments.

As regards the growth drivers for the CBP business, a very important factor is the rapid urbanisation and improved living standards. This will result in a higher demand for realty. With Pidilite’s products being widely used by carpenters, painters, plumbers, mechanics and even households, the demand is set to increase. Pidilite is a market leader and is expected to be a largest beneficiary of this demand hike. The company has posted strong double-digit growth in this segment in FY12. Its growth in the recentlyconcluded September 2012 quarter too has been very good. New and innovative product launches have been the reason behind this. In the SIC segment, growth has been quite slow on account of a weak global economic situation. This factor has also impacted the financial performance of its various subsidiaries. However, with a slow and steady improvement on the global front, the performance of the company is slated to get better. The performance of its subsidiaries, which were a drag in H1FY12, is expected to improve in H2FY13.

The EBITDA margins are expected to pick up as crude prices have stabilised. Pidilite has been a consistent dividend paying entity for the last 22 years, and this is an added advantage of entering the stock. Pidilite has seen a consistent rise in sales, with a CAGR of 17.60 per cent and profit with a CAGR of 22.70 per cent in the past five years, and it has continued this growth momentum in FY13. On a consolidated basis for H1FY13, it has posted a topline of Rs 1907 crore and a bottomline of Rs 223.68 crore as against Rs 1635 crore and Rs 181.79 crore respectively. The scrip is placed well on the valuations front too, with its CMP discounting its annualised FY13 earnings by 24x. We feel that there is scope for an up-move, and thus, recommend a ‘buy’ on the counter with a one year horizon.

Pidilite Industries
FINANCIAL HIGHLIGHTS (TTM)
Market Cap (Rs / Cr)	10782.32
Sales (Rs / Cr)	3401.96
Net Profit (Rs / Cr)	366.28
EPS (Rs)	7.20
Dividend Yield (%)	0.90
PE (x)	29.44
EBITDA Margins (%)	18
Equity Capital (Rs / Cr)	50.86

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Prestige Estates Projects - Towering Heights

BSE Code: 533274
Face Value: Rs 10
CMP: Rs 179

Here Is Why

• Improving macro-economic factors to boost the demand for real estate projects.
• Strong annuity like portfolio provides stability to the revenues.
• The company is expected to increase its own sales guidance by 20 per cent in FY13.

Prestige Estates Projects (PEPL) is a leading developer in south India, predominantly in Bengaluru. The stock of this company has not only outperformed the Sensex, but has also beaten the BSE Realty index by a huge margin. Against the up-move of 24 per cent and 50 per cent registered by the Sensex and the BSE Realty index respectively on a year-till-date basis, PEPL is up by a stupendous 144 per cent. Despite such a huge outperformance, we believe that one can still buy this stock at its current levels to build a strong portfolio. This conviction comes for the improving macro-economic fundamentals conducive for real estate companies in general, as well as the improving financial performance of the company. In fact, PEPL is expected to beat its own sales growth estimates by as much as 20 per cent in FY13.

One major factor that will go in favour of PEPL (and in fact the entire real estate sector) is the moderation of interest rates as early as the next quarter. According to estimates, every one per cent decline in interest rates increases the affordability for buyers by 12 per cent. This development will surely provide a good fillip to the pentup demand in real estate. In addition to this, the government and the central bank have taken steps such as opening up the external commercial borrowings (ECBs) window for real estate companies for low cost housing, which will help real estate companies consolidate their position further.

It is not only the improving macros that are going to help PEPL, but its business model too is a strong factor that will usher in growth going forward. The company is present in all segments of real estate, with its project portfolio comprising residential, hospitality, commercial and retail projects. While it sells its residential developments outright, the company exercises discretion in selling or leasing its commercial office and retail space developments. This has helped it to build an annuity type of portfolio that hedges its earnings during a downturn.

In H1FY13 alone, PEPL earned around Rs 100 crore from its rental income against the Rs 165 crore it had earned during the whole of last year (FY12). It has 1.65 msf (million square foot) of non-yielding pre-leased area, which will start contributing significantly to its financials in the next two years. This will help in increasing the contribution of its rental income.

Besides this, the company follows an asset light business model for most of its projects. This reduces its capital requirement in comparison to traditional land bank-based business models. It will also help the company maintain a healthy return ratio, as it does not have to pay upfront for the land. Land owners are paid once the project is completed, and this reduces a lot of stress on the financials of the company. PEPL has an ongoing and forthcoming project portfolio of around 83 millon sq. ft. of developable area in which it has an average of 73 per cent economic interest. Almost 90 per cent of these projects are situated in Bengaluru.

On the financial front, against the full year sales guidance of Rs 2500 crore given by the management earlier, PEPL has already achieved sales of Rs 2250 crore in the first eight months of FY13. If the company maintains the same run rate, it can easily exceed its guidance by almost 20 per cent in the fiscal. According to various estimates, in terms of its valuations against the CMP of Rs 178, the net asset value (NAV) of the company’s projects comes to be around Rs 200-210. This will increase further as the interest rate decreases.

Prestige Estates Projects
FINANCIAL HIGHLIGHTS (TTM)
Market Cap (Rs / Cr)	5884.0
Sales (Rs / Cr)	829.0
Net Profit (Rs / Cr)	161.3
EPS (Rs)	4.9
Dividend Yield (%)	1.0
PE (x)	36.6
EBITDA Margins (%)	35.0
Equity Capital (Rs / Cr)	328.1

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Voltas - Cool Pick

BSE Code: 500575
Face Value: Re 1
CMP: Rs 104

Here Is Why:

• It has a highly diversified presence in various segments.
• Strong performance in domestic markets and particularly the UCP business.
• The company’s order book is indicative of revenue visibility.

Common perception has Voltas being largely associated with consumer cooling and refrigeration products. However, the unitary cooling products (UCP) division contributed to only 30 per cent of the revenues of Voltas in FY12. In fact, the company earned 61 per cent of its revenues from electro-mechanical projects and services (MEP) and eight per cent from Engineering Products and Services (EPS).

Voltas has been facing pressures in the MEP segment due to the delayed execution of major international projects resulting out of liquidity issues faced by its clients. This has resulted in a declined international order book. Stretched project schedules, lapsed time and labour sourcing, among other problems, have resulted in increased costs and heavily impacted margins. However, a major international project, the Sidra Medical & Research Centre, which has been under execution since 2008, is now nearing completion. Q2FY13 results indicated a movement on the Sidra project front. The project is 85 per cent complete and the delivery timeline has been extended to June 2013. With only 15 per cent of the project remaining to be completed, we do not expect any unpleasant surprises. This, combined with a strong domestic inflow of orders, promises a bright future for Voltas.

At the end of Q2FY13, the consolidated order backlog for MEP stood at approximately Rs 4200 crore. Although the international order book reduced to Rs 1930 crore, the domestic order book increased by 16 per cent (as compared to Q4FY12) to Rs 2270 crore. Its FY12, the MEP sales stood at Rs 3183 crore, thus providing ample revenue visibility over the next 12 months.

In the EPS business, where Voltas  provides machinery to the textiles, mining and construction sectors, the Q2FY13 revenues declined by 5.23 per cent on a yearly basis on the back of the current issues in the mining sector. It performed well in the textile machinery segment despite facing stiff competition from international players setting up shop in India. Moreover, in Q2FY13, it also improved the profitability in the segment by 380 basis points on a YoY basis to 18.59 per cent, thus adding to the positives.

In its UCP segment though, Voltas has been posting a strong performance. This has been driven by healthy volumes growth, a gain in market share, price increases and the benefits of operating leverage. In Q2FY13, the company’s revenues from UCP grew by a healthy 22 per cent on a YoY basis. Its performance was impressive on the volumes front, where it saw a growth of 13 per cent in H1FY13 versus an industry decline of eight per cent. With a market share of a tad above 20 per cent, the company continues to enjoy the market leader position. This segment is expected to do well on the back of the festive season sales in Q3FY13.

Voltas’ presence in various industry segments and businesses has helped it maintain stability in its financial performance, reduce risk and thus, steer through troubled waters with little negative impact. Voltas has managed to report an average revenue growth of 6.33 per cent in the last three years. It is currently trading at a PE of 31x, which seems alright since it is a market leader. On a cumulative basis, its performance lag from international orders and the mining engineering products is being reversed by the robust performance in the domestic markets in the UCP and textile machinery segments. Aided by a favourable future outlook, we consider Voltas a good buy.

Voltas
FINANCIAL HIGHLIGHTS (TTM)
Market Cap (Rs / Cr)	3431.27
Sales (Rs / Cr)	5520.38
Net Profit (Rs / Cr)	110.68
EPS (Rs)	3.34
Dividend Yield (%)	1.54
PE (x)	31.00
EBITDA Margins (%)	8.13
Equity Capital (Rs / Cr)	33.07