MARICO - Maintaining Good Health
 
•    Good volume growth expected from domestic as well as international markets.
•    Strong financial performance for H1FY12 despite margin pressures.
•    Main raw material copra prices are softening.

The FMCG sector is considered to be one of the best defensive plays in the stock market. Rather, in times of uncertainty the FMCG sector is considered to be a safe place to park funds. Hence we are recommending Marico which is one of the leading Indian companies offering consumer products and services in the global beauty and wellness space. We are of the opinion that the scrip not only offers a cushion to the downside but also provides room for growth.
 
When we talk about FMCG players, increase in volume and price are the two factors that lead to growth for companies. Increasing volume is considered to be very good as the rising prices may result in losing customers which are hard to woo back again. Currently, most of the FMCG companies are facing rising input pricing pressures and are passing on this cost to some extent to their customers. However, Marico has managed to sail through these uncertain times thanks to good volume growth which helped it in deferring from passing on much of its costs to the customers.

The H1FY12 performance of the company clearly indicates this aspect where despite the margin pressures it has managed to post strong bottomline growth. This has also helped the company to maintain its leadership position in all the products except hair oil. Further, the company is also expected to gain on account of the increasing health cautiousness in the domestic markets. Marico offers products like Saffola brand oil and oats which have less elasticity in demand. Going ahead, the company is betting on this volume play. Therefore, considering the strong management bandwidth, expected growth on the volume front, improvement in the margins on account of the marginal increase in prices (1 per cent) along with the declining raw material prices, we recommend a ‘buy’ on the counter.

With a presence in the domestic as well as the international markets, Marico has a strong product portfolio. It has brands like Parachute, Saffola, Nihar, Medikar, Kaya, Derma Rx, etc which have a good market share in India and abroad. (See Table: Market Share). It has three key business segments. Its consumer products business in India (CPI) contributes around 68 per cent of the total revenue, while its international business group (IBG) contributes about 25 per cent. The remaining 7 per cent comes from Kaya skin Clinic.

As mentioned earlier, the company is focusing on volume growth from the rural markets. In Q2FY12 the rural markets contributed approximately 30 per cent (up from 27 per cent in FY11). With better monsoons and social welfare schemes, this rural demand has been the prime source of growth for the company. Though there are certain fears about the fading of growth in rural areas, the company’s spokesperson has clearly stated that there will be no impact in the near to medium term. As such, the management expects to achieve volume growth of 6 to 8 per cent in coconut oil, 15 to 17 per cent in hair oils and 15 per cent in Saffola.

In the international segment the company will focus on gaining more market share, introduce other products and expects to grow in healthy double digits. Its new product offerings like Saffola Masala Oats and Parachute Advance Body Lotion are also performing well. According to the spokesperson, another new product launch will happen after these two capture a healthy market share. Along with the expected volume growth it has recently gone ahead with a 1 per cent hike in price across all the categories. This factor along with the expected decline in the copra prices (reduction of 11 per cent since Q1FY12), which accounts for almost 40 per cent of the overall raw material prices, is expected to result in margin improvement.

Market Shares For Key Brands
Brand And Territory	Market Share (%)	Rank
Coconut Oil - India	53	1st
Saffola Oils - India - Premium ROCP	55	1st
Hair Oils - India	23	2nd
Kaya Skincare Solutions	35+	1st
Parachute Coconut Oil - Bangladesh	69	1st
Hair Code Hair Dye - Bangladesh	29	1st
X -Men Men's Shampoo - Vietnam	41	1st
Hair Code and Fiancee - Egypt	57	1st

Another factor is that despite not passing on the cost increase to the customers, its financial performance has been very good. On a consolidated basis in H1FY12 the company reported a growth of 29 per cent in net sales to Rs 2,023 crore. Its net profit witnessed a decent growth of 12 per cent to Rs 163 crore. The raw material expenses accounted for almost 44.60 per cent of the net sales which is 330 basis points higher when compared to a similar period last year. On a half yearly basis, Marico reported an EPS of Rs 2.66 per share. The stock is currently available at a trailing P/E multiple of 29.77x. Growing market share, good consumption demand and decreasing raw material prices will further improve the performance of Marico in the coming quarters.[PAGE BREAK]

GRUH FINANCE - Sheltering Good Profits

•    Ability to steer through difficult economic cycles.
•    Growth drivers in place from the focus on semi-urban and rural markets.
•    Consistent dividend payment history.

Investors might be surprised to see a housing finance company being recommended as a part of the portfolio to hold in 2012. Looking at the current scenario of rising interest rates and tepid real estate markets the concerns are true to some extent. However there are compelling factors that make Gruh Finance a good long-term buy. One important factor to be considered before investing is to know how a particular company has been able to endure difficult market conditions in the past. Gruh has consistently delivered superior profitability and growth across all the economic cycles.

Even during the turbulent phases of FY08-09 its net interest margins remained firm and the profitability improved significantly. This ability to steer the business through volatile times makes it a safe haven for investors. However, this is not the only factor and there are other compelling factors such as its strong management bandwidth (it enjoys the backing of the HDFC Group), consistent dividend payment history, access to strong distribution network in the rural and semi-urban areas which are providing growth, strong brand identity and one of the best asset quality (net NPAs at zero since the last five years) that make it a strong contender to be a part of our list. Even the peaking out interest rate cycle is expected to be beneficial for this company.

On the valuation front, its CMP of Rs 553 discounts the trailing four-quarter earnings by 19.50x and the price to book stands at 6x. This may seem to be on the higher side. However we are of the opinion that better management quality and consistent performance always command a premium over others.

Gruh Finance is a part of the HDFC Group (60.37 per cent holding) and targets the semi-urban and rural areas through a strong network of 121 branches. On the NIM front also the company managed to sustain it above 3.50 per cent. Going ahead too we expect the rural focus to drive growth for the company. While realty deals have declined in metros and Tier I cities, it has hardly had any impact on the semi-urban areas. With around 75 per cent business coming from places with a population of less than 2 lakhs, the company has posted growth in disbursement of 22 per cent in H1FY12 despite such a difficult macro-economic situation. This is much above the industry average of 18 per cent.

Another important factor to take note of is that its asset quality has consistently remained superior to that of its peers. Rather, this has been one of the best amongst the housing finance companies and its net NPAs have remained at a ‘nil’ level in the last five years. As regards the gross NPAs, despite the stringent norms as of September 2011, these stood at 1.11 per cent of the loan book as against 1.37 per cent in Q2FY11. It is a consistent dividend paying company and if it maintains the dividend at the same level as last year its yield will work out at 2 per cent.  

The financial performance of the company has been strong and it has managed to carry on the momentum in H1FY12 too. Along with 22 per cent growth in disbursement its net profit stood at Rs 41.47 core (up 28 per cent on a YoY basis). Despite the rising cost of funds it sustained its NIM at 4.50 per cent. We believe that it will be able to maintain the current NIM going forward as around 95 per cent of its loan book is based on a variable rate. The company has been adequately capitalised with a CAR of 13.50 per cent. So considering the expected growth from rural areas, sustained margins and peaking out interest rate cycles, we recommend a ‘buy’ on the counter. [PAGE BREAK]

MUNJAL AUTO INDUSTRIES - Full Throttle Ahead

•    Strong volume growth expected from the largest customer Hero Moto Corp.
•    Consistent and strong dividend payment history and strong management bandwidth.
•    Margins expected to improve as the commodity prices witness a decline.

While talking about the creme de la creme of the year 2012 the list would not be complete without the fantastic scrip of Munjal Auto Industries (MAIL) being included in the portfolio. A manufacturer of exhaust systems and wheel rims for two-wheelers as well as four-wheelers, MAIL seems to be placed in a sweet spot to drive its future growth at a rapid pace. With a major portion of its revenues coming from India’s largest two-wheeler manufacturer, Hero Moto Corp, MAIL has managed to post a CAGR of more than 25 per cent in topline and 34 per cent in bottomline for the past three years. And this growth looks sustainable going forward considering the fact that Hero Moto Corp is expanding its capacity from 6 million units to 7 million units.

After a stunning performance in H1FY12 (20 per cent growth in volume), it is expected to put in better volume growth in the second half too. However, this is not the only reason for recommending MAIL. The other compelling factors include a consistent dividend payment history, strong promoter background of the Hero Group and an expected improvement in the margins as the commodity prices have declined significantly. Further, the company has Rs 31.77 crore in investments, resulting in a value of Rs 31.50 per share. On the valuation front its CMP of Rs 190 discounts its trailing four-quarter earnings by 7.63x. Even its EV/EBITDA seems to be placed comfortably at 3.86x. The company’s debt-equity is in a comfortable zone at 0.66x. MIAL has recently announced a stock split of 10:2 (five shares of FV Rs 2 from one share of Rs 10). The record date for this is December 30, 2011.
 
MAIL manufactures exhaust systems, wheel rims, fuel tank assembly and seat structure systems. Currently the company has three plants, one each at Waghodia, Bawal and Haridwar. A majority of its revenues (around 88 per cent) come from exhaust systems, followed by 7 per cent from wheel rims, 3 per cent from scooter wheels and the rest from other components. Around 80 per cent of its revenues come from Hero Moto Corp which is growing above the industry rate of 18 per cent. For H1FY12 Hero Moto Corp has already sold more than 3 million units and is expected to target more than 6 million units for the whole of FY12. We feel that this is going to be a major volume driver for MAIL. Secondly, Hero Moto Corp, after its separation from Honda, has lined up a capex of Rs 800-900 crore for FY 2012, which would largely be utilised towards the setting up of a new plant and the launch of new variants.

Besides this, it also plans to expand its capacity from 6.15 million to 6.5 million vehicles by the end of FY12 through de-bottlenecking. This provides a good opportunity for growth and MAIL is fully equipped to cater to the increased demand. Another advantage is that the commodity prices have declined significantly in the last quarter. The raw material cost accounts for almost 73 per cent of its revenues and the fall in commodity prices is expected to be beneficial to the company. With CR and SS strips, nickel and metal components forming a majority of the raw materials consumed by the company, the operating margins are expected to improve. These benefits might be passed on to the customers as well. But some positive impact will nevertheless be seen.

It has a strong history of dividend payment since the past nine years and it has paid incremental dividend in the past three years (Rs 7.50 in FY11 and Rs 5 in FY10 and Rs 2.50 in FY09). Even if the company sustains a dividend payout ratio equivalent to that of last year (which looks likely considering its financial performance for H1FY12) the yield will be on the higher side. The financial performance of the company has been very strong and in FY11 it posted topline of Rs 519.83 crore and bottomline of Rs 25.23 crore as compared to Rs 290.71 crore and Rs 15.96 crore respectively for FY10. It carried along the momentum in H1FY12 and posted topline of Rs 322.82 crore and bottomline of Rs 19.87 crore as compared to Rs 223.86 crore and Rs 9.01 crore respectively in H1FY11. Going ahead also we feel that the growth is expected to be sustained and hence we recommend investors to buy the scrip with a target price of Rs 240.[PAGE BREAK]
 
DIVI’S LABORATORIES - In Fine Form

•    Debt-free status beneficial in the current rising interest rate scenario.
•    Posted strong financial performance in H1FY12 despite paying higher taxes.
•    Growth drivers in place with 18 patents in India and 12 patents in the USA.

During turbulent times companies in the pharmaceutical sector make for good defensive play. Considering the same we are recommending Divi’s Laboratories as a part of our New Year portfolio. DLL is a manufacturer of active pharma ingredients and also manufactures intermediates of innovator drug companies and specialty chemicals like peptides and nutraceuticals.

In this high interest rate scenario, DLL is one company which has very low debt on its balance-sheet and its promoters have also not pledged a single share from their shareholding. While these reasons make it a safe investment, there are other reasons why we believe that this company will do well on the operational front as well. After launching new products in the last two years, DLL’s dependence on its top five products has come down from 61 per cent to 52 per cent and we expect it to further drop from these levels. When pharmaceuticals markets in the world are moving towards generic drugs as well as towards outsourcing of the whole manufacturing process, the new launches of eight generic and 13 custom syntheses products cite good growth opportunity for the company.

The generics and custom synthesis products launched in FY11 have increased by 4 and 2.5 times more over those launched in FY10 respectively. In fact for a company like DLL, which earns 92 per cent of its revenues from exports, it looks to be an excellent opportunity. This apart, many of its customers who started de-stocking for the last two years are now buying heavily which will boost its topline in FY12. DLL has four manufacturing units located in Andhra Pradesh with a total capacity of 4,500 MT. The company enjoys 50 per cent tax exemption for its two manufacturing capacities located at Chippada, District Visakhapatnam. Interestingly, DLL has recently (June 2011) commenced the manufacturing of carotenoids from its DSN SEZ unit which also enjoys 100 per cent tax benefit.

Exports are the backbone of its business with the company having operations in all the continents. The European and American countries contribute to about 75 per cent of its topline. There is a huge potential for generics in these countries due to the government policies and the company has seen a 57 and 27 per cent surge in its sales in the European and American markets respectively in FY11. Besides, its current portfolio consists of 41 DMFs, 12 certificates of suitability for the European markets and a total of 30 patents in India and the USA, which assure sustainable growth even in the future. After the company commissioned its new DSN SEZ unit, its EBITDA margins have expanded by more than 300 basis points in the September quarter, indicating further scope of improvement in the second half of this fiscal too.

Its financial performance has been strong for the year FY11 during which its sales increased by 38 per cent to Rs 1,343 crore while its net profit increased by 23 per cent to Rs 472 crore. Even in its half yearly results, the company reported a good 40 per cent growth in its topline to Rs 730 crore. Despite paying higher taxes on account of reduced tax benefits, its bottomline also saw a growth of 31 per cent to Rs 208 crore on a YoY basis. On the valuation front, at the current market price of Rs 739.85 the company is trading at a PE multiple of 22x (TTM) to its FY11 EPS. We advise our readers to enter the counter with 18-20 per cent expected returns from the scrip.[PAGE BREAK]

HDFC BANK - Several Leagues Ahead

•    Better operational performance with sustained higher NIM despite steep rise in cost of funds.
•    Despite strong business growth the asset quality has been the best amongst the industry.
•    Strong management bandwidth and the ability to sustain growth across all economic cycles.

In the current uncertain macro economic environment, HDFC Bank seems strongly positioned to be a part of our portfolio for 2012. The compelling factors include a better loan profile, strong and consistent business growth, superior net interest margins (NIM) along with the ability to sustain the same in different economic cycles, best asset quality in the industry and a strong management bandwidth. The steadiness is also seen from the fact that while other leaders like ICICI Bank and SBI are in the negative territory on a YTD basis, HDFC Bank is still in the positive zone.

HDFC Bank has been a consistent performer and this is visible from the fact that it has been delivering an earnings growth of around 30 per cent consecutively for the last 38 quarters. This is really commendable and that is the reason it always enjoys a premium valuation as against its peers. At its current levels also the CMP of Rs 460 discounts the trailing four-quarter earnings by 27x and even the price to book stands at 4.22x. Consistency is always highly rewarded on the bourses and HDFC Bank is one such example.

Another factor in favour of the stock is its growth in advances which has been above the industry average. Over the past few years its loan book has grown 4-5 per cent faster than the system or the average industry growth. The gross advances grew by 25.6 per cent on a YoY basis to Rs 1,89,920 crore at the end of Q2FY12. This was much higher than the system growth of around 20 per cent. Here the advantage is that its loan portfolio is managed properly with very low exposure to segments like airlines, power and textiles. Further, despite the strong growth in advances the asset quality of the bank has been very good. As of September 30, 2011 the gross NPAs stood at 1 per cent (1.16 per cent in Q2FY11) and the net NPAs stood at just 0.20 per cent (0.30 per cent in Q2FY11).

While its advances grew strongly, the bank deliberately kept its deposits growth at 18.10 per cent as part of a conscious strategy. Apart from this, it has also been able to consistently sustain its NIM. Rather, HDFC Bank has always delivered the highest NIM in the industry. Basically its resilient NIM has been aided by a higher CASA ratio of 47.30 per cent. Despite the rising interest cost, it has managed to maintain the NIM at 4.1 per cent for Q2FY12. The management has guided that going forward its NIM is likely to remain in the range of 3.9-4.2 per cent. With the interest rate cycle peaking out, the scenario may get favourable for this consistent performer.

The company’s financial performance has always been strong with a consistent 30 per cent growth in earnings. It has carried this growth momentum forward in H1FY12 also with an earnings growth of 32.50 per cent to Rs 22,843 crore on a YoY basis. Higher capitalisation (CAR 16.50 per cent) indicates that the bank is well capitalised for growth. Considering factors like strong business growth, capability to sustain margins, weather the different economic cycles and the consistent financial performance, we recommend a ‘buy’ on the scrip. [PAGE BREAK]

TATA CONSULTANCY SERVICES - Retaining An Info Edge

•    No signs of demand sluggishness as early indicators for CY12 IT budgets are positive.
•    Strong large deal wins in H1FY12 and a robust deal pipeline.
•    NASSCOM has maintained an 18 per cent growth projection for the IT sector. This is creditable in the current turbulent economic scenario.

TCS was part of our portfolio ‘Where To Invest In 2011’ and investors might be surprised to see the same scrip in our portfolio of ‘Where To Invest In 2012’ as well. However, there are reasons why we are recommending TCS to our investors once again. The financial performance of the company has been strong. In addition to factors like strong deal wins in H1FY12 and a robust deal pipeline, no signs of demand sluggishness and a strong hiring momentum indicate towards a better performance in H2FY12 also. This robustness can also be seen from the fact that the scrip has remained rock steady in these turbulent times. On a year-to-date basis the scrip has provided positive returns while the broader indices witnessed deep cuts. Therefore, considering factors like its ability of winning large deals and significant cost advantage over its peers we recommend our readers to buy the scrip at its current levels.

TCS posted good financial performance in Q2FY12 with topline growth of 7.70 per cent and earnings growth of around 2.30 per cent on a sequential basis. The figures were in line with the street estimates. The one factor that lends credibility to the enthusiasm about this stock is the visibility of a better growth environment going ahead. In a recent conference call the management has maintained that the demand environment is stable and macro uncertainty in the US and Europe is yet to impact its sales’ cycle. It is important to note that to refrain from repeating the mistake of 2008 in reading the business environment wrong, the company is engaging with its clients to pick up early signs of a slowdown.

TCS’ CEO, N Chandrasekaran, recently met about 35 CEOs in client organisations to get an indication of their business outlook and decision-making on IT spending. After this interaction with their clients, the company is of the opinion that the outlook is still positive as CY12 IT budgets are expected to be announced on time. Secondly, IT budgets will either be hiked or maintained at par. So budget cuts have not yet surfaced.
 
During H2FY12, TCS witnessed decent growth across industries (except telecom) led by energy and utilities, retail, manufacturing, hi‐tech, healthcare and BFSI. The company also delivered strong growth in the US, UK, MEA, Asia Pacific and Continental Europe regions. It won ten deals of USD 100 million or more in Q2FY12 spread across various geographies and verticals. Despite the telecom vertical being a laggard, TCS won two strategic deals there indicating scope for growth revival going ahead. The current deal pipeline also looks healthy as TCS is chasing about ten large deals. Going forward, with a strong deal pipeline and a stable pricing environment, TCS expects FY12 to be a good year with strong revenue growth and sustained margins.

It has plans to continue its investment in people capability to prepare itself for prospective contracts. The total employee base increased to 2,14,770 in Q2FY12 which is a net addition of 12,580. Further, for FY13 the company till date has made 35,000 campus offers. The utilisation rate has also been good at 83.10 per cent and this has been the sixth consecutive quarter wherein the utilisation rate has been more than 82 per cent.

On the financial front, FY11 was a strong year with topline growth of 24.30 per cent and PAT growth of 26.70 per cent. For FY12 the company is expected to register topline growth of more than 25 per cent and the street estimates for its earnings’ growth stand at 18-20 per cent. Considering the same, the EPS stands at Rs 53, thus resulting in a P/E of 22x. This provides a scope for upward movement and hence we recommend a ‘buy’ on the counter.[PAGE BREAK]

MARG - Strong Foundations

•    Expansion in Karaikal Port capacity to drive growth going forward
•    Strong order book of Rs 3200 crore in the EPC segment provides earnings visibility
•    Company’s real estate segment is witnessing a strong momentum

Investors will be surprised to see an infrastructure company as a recommendation in our portfolio. In a difficult macro-economic scenario of rising interest rates and delayed infrastructure projects not many are bullish about the infrastructure sector. However there are a few factors about Marg which we feel make the stock an ideal recommendation for the next year.
Marg, operates in three segments viz infrastructure, EPC and real estate. Though on the face of it these segments have been lying pretty low for quite some time now, there are some triggers which makes this stock look attractive. Going ahead, we feel Marg’s business strategy to transcend from being an asset light model to heavy assets along with good earnings visibility is expected to pay off in the next two years.

The Karaikal Port (SPV with Marg having 71 per cent stake on fully diluted basis after the conversion of PE investors) is expanding capacity to 21 mtpa from the current levels of 5.2 mtpa and the revenues from the same will start pouring in FY13. While the port has already handled 3 million tonnes of traffic in H1FY12, it is expected to touch 7 million tonnes for FY12. The segment has already clocked Rs 106 crore in topline and if the expected target is achieved it may put up a topline of Rs 270 crore (Rs 170 crore in FY11). This segment generates an EBITDA of around 50 per cent and one can expect a bottomline of more than Rs 50 crore. The overall valuation of the segment comes at Rs 1330 crore.

It has an SEZ under the Swarnabhoomi brand with around 613 acres of land. This is an emerging satellite township spanning 22.04 million sq ft. of which approximately 14.66 mn sq ft of space would be dedicated towards development of residential units and the balance would constitute light engineering and multi services sectors like Research, innovation, science Park, Education and IT. In the Swarnabhoomi residential project, it has already sold 2 million sq ft till date and opened up the sale of 4300 apartments’ recently. It has been witnessing a good booking since its launch.

In addition to the above in the realty segment under the brand Marg Properties it has already launched 4mn sq ft and sold 1.7 mn sq ft and is planning to offer another 1.7 million sq ft soon. In the commercial segment under the Brand Marg Junction it is developing 1.82 million Sq ft (1.31 mn sq ft in retail, 0.51 sq ft in hotels). The hotel with 261 rooms will be operational soon. In the retail space 35 per cent is signed by leading anchor tenants. Another 20 per cent is signed or in advance stages of negotiations.

The EPC division has been on a Strong footing with a CAGR of around 75 per cent over the past four years. The order book of Rs 3200 crore (3x of FY11 revenues) with Rs 910 crore of external orders provide a good revenue visibility. The 12-14 per cent EBITDA margin is an added advantage here.

There are concerns about higher debt of around Rs 2500 crore on a consolidated basis and may increase after Marg carries out the next phase of expansion at Karaikal port. But this will come down going ahead following the cash flows from the EPC segment.

After posting a strong growth in FY11 on a consolidated basis, the company has been able to carry forward the growth momentum in H1FY12 too. Here, it posted a topline of Rs 625.87 crore and a bottomline of Rs 77.13 crore as against Rs 406.23 crore and Rs 24.75 crore in H1FY11. The CMP of Rs 81 discounts the trailing four quarter earnings by 19x. However, factors like expected growth in all the segments, already paid for land bank, good growth momentum in the realty business are positives that help build a strong conviction in this stock. The sum-of parts provides a value of Rs 105, providing for a good up-move from the current levels. We recommend investors to buy the scrip on every decline.