Midcap Investment Ideas June 25, 2014

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2 Midcap Investment Ideas June 25, 2014 Indian markets have witnessed a strong rally so far this year, supported by strong FII inflows and stable currency. As a result, the key benchmark indices, Sensex and Nifty, posted decent gains and rose ~20% till date. Though India s macro fundamentals are weak but turning around, especially when compared with regional and Emerging Markets. Going ahead, we believe that the domestic economy will perform better and this uptrend is likely to continue. The next major trigger for the market is the Union Budget for The Finance Minister, Arun Jaitley, will present the Union Budget on July 10 th, Based on the expectations of upcoming Union Budget, market may see the stock/sector specific movement in the near term. The progress of monsoon and rising crude oil prices (due to militant violence in Iraq) will remain the key macroeconomic worries for our domestic economy. However, we believe that quality midcap stocks with strong growth story and robust financial performance can still deliver better returns. Company Name CMP (`)* Target (`) Upside Potential Apollo Tyres Ltd % PTC India Ltd % Rallis India Ltd % Tata Global % *CMP as on June 24, 2014 Disclaimer: 2

3 Apollo Tyres Ltd. CMP : ` Target : ` 235 BSE Code: NSE Code: : APOLLOTYRE Apollo Tyres registered strong performance for the fourth quarter and year ended March Though the company's topline managed a moderate growth of around 5-6%, bottomline registered a strong growth for both the quarter and the year. On a consolidated basis, first time its profit crossed Rs 1000 crore mark in FY14. Natural rubber which constitutes more than 40% of the cost of a tyre witnessed substantial decline in its price. The management expects the domestic prices to correct further post monsoon and global prices to stay at current levels. Its 77% of sales came from replacement market and the balance from Original Equipment (OE). Given the weak demand from the OE's in domestic market, the company expects replacement demand to continue to drive volumes for the company. Recently, the company approved Greenfield Project in Eastern Europe, at a project cost of approx. Euro 500 million over the next four years. The planned capacity is expected to be Passenger Car Tyres (PCR) per day and 3000 Truck Bus Radial Tyres (TBR) per day. A healthy replacement market and export demand is helping the company to drive volumes. The benefit of capacity expansion in the European operations will accrue in FY2015. For larger expansion, the company has also finalized a Greenfield project in Eastern Europe. We expect that rubber prices will remain moderate during H1FY15 which will further improve its profitability. Market Cap (`Cr) Equity Cap (`Cr.) Face Value 1.00 Book Value EPS (`) Dividend Yield (%) 0.25 Price / BV (x) 2.19 P/E (x) 9.55 Avg. Weekly Volume Week High-Low /54.80 Disclaimer: 3

4 PTC India Ltd. CMP : ` 92.9 Target : ` 120 BSE Code: NSE Code: PTC PTC India has over 40% share in the power trading market. The company undertakes long-term trading of power, generated from large power projects as well as short-term trading of power capitalizing on opportunities arising as a result of short-term supply and demand mismatches. PTC will continue to focus on growing the long-term Power Purchase Agreements (PPAs) which would aid margins and improve volume visibility. The company has tied-up about 11 GW (gigawatts) generation capacity on long-term basis by FY16, and is actively converting these into power-sale agreements. PTC India has also commenced supply of about 250 MW power to Bangladesh from Dec'13 onwards. Thus Bangladesh is yet another country that is added to list of cross border power transfer apart from Bhutan and Nepal. Despite challenges arising from fall in State Electricity Board (SEB) volume and high cost of power, PTC India continued to improve its trading volume every year. With further new long-term capacity getting commissioned, the share of long-term trading will increase to more than 50% by FY2016 from around 15% currently. This provides strong visibility on volume growth. This shift in sales mix to long-term contracts will not only lead to better clarity and visibility of earning, but also higher margins ahead. Market Cap (`Cr) 2749 Equity Cap (`Cr.) Face Value Book Value EPS (`) 8.39 Dividend Yield (%) 1.80 Price / BV (x) 1.05 P/E (x) Avg. Weekly Volume Week High-Low /33.15 Disclaimer: 4

5 Rallis India Ltd. CMP : ` Target : ` 260 BSE Code : NSE Code : RALLIS The market size of Indian agro- chemicals industry is expected to more than double to $5 billion by 2017 on rising agri production and increasing awareness among farmers. Due to low consumption, huge demand is there in Indian market and the company is increasing its efforts to train farmers about the right use of agrochemicals in terms of quantity to be used. Herbicides are the fastest growing crop protection category in the domestic market. Tata Vaar and Honcho along with new herbicides, have a good opportunity to cater to farmers needs in weed management segment. The company is looking for bigger opportunities in contract manufacturing. Its facility at Dahej (Gujarat), with annual capacity of 5,000 tonnes, is mainly dedicated for this purpose, from where contract manufacturing activities for large global companies are being undertaken. The company is aiming for Rs crore of sales turnover from this facility, almost half of Rallis' current turnover, in the coming years. The company believes that there is a big opportunity existing in Indian agrochemical industry as the usage of pesticides in India is one of the lowest in the world with 0.48 kg/ha whereas average world consumption is around 3 kg to 5 kg/ha and only 35-40% of the farmland is under crop protection. The company is now strengthening its organic portfolio and focusing on Agro-chemicals which accounts for about 85% of its business. It plans to increase its presence in the seeds business and focus on exports. Market Cap (`Cr) 4244 Equity Cap (`Cr.) Face Value 1.00 Book Value EPS (`) 7.10 Dividend Yield (%) 1.17 Price / BV (x) 5.60 P/E (x) Avg. Weekly Volume Week High-Low /125 Disclaimer: 5

6 Tata Global Beverages Ltd. CMP : ` Target : ` 210 BSE Code: NSE Code: TATAGLOBAL Tata Global Beverages Ltd. (TGBL) has a well-defined portfolio of brands in Tea, Coffee and Water extended across 40 countries. TGBL is focusing on expanding the range and strengthening the presence of its flagship brands: Tetley, Tata Tea and Eight O clock coffee. The Joint Ventures with PepsiCo, Starbucks and Activate will provide significant sources in developing and marketing its products globally. This delivers a huge market potential worldwide. Recently, TGBL s overseas subsidiary based in UK has acquired a 100% stake in Earth Rules, Australia; engaged in coffee business under the MAP brand. It will help the company to expand its portfolio to include high growth contemporary single serve business. TGBL has also entered the water business and launched three brands: Himalayan, Tata Gluco Plus and Tata Water plus in selected cities in India. A substantial improvement is being observed in water business; revenues continue to grow with increase in key accounts. With strong brand presence and new joint ventures; the company is well positioned to enhance its reach worldwide. Various cost effective measures taken by the management leads to a turnaround and healthy performance in France and Czech Republic. Water vertical in India has significantly improved its performance. TGBL s continuous focus on volume growth will significantly increase the future performance of the company. Market Cap (`Cr) Equity Cap (`Cr.) Face Value 1.00 Book Value EPS (`) 7.77 Dividend Yield (%) 1.28 Price / BV (x) 1.79 P/E (x) Avg. Weekly Volume Week High-Low /128 Disclaimer: 6