Keynote capitals stock ideas

K E Y N O T E

Keynote Capitals Research

Keynote Capitals Institutional Research –awarded “India’s Best IPO Analyst 2009” by MCX‐ Zee Business

Keynote Capitals Research – September 20, 2011

Stock Ideas

Stocks Covered Page No.

Bharti Airtel Ltd. 1

DB Corp Ltd. 3

Dr Reddy’s Ltd. 5

Hero Moto Corp Ltd. 7

Marico Ltd. 9

1

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K E Y N O T E

Keynote Capitals Research 2

The company has fast growing customer base. It has crossed the significant milestone of 200 million customers for all territories during the quarter ended December, 2010. As on Q1FY12, the company had an aggregate of 230.8 million customers consisting of 221.2 million Mobile, 3.3 million tele-media and 6.3 million DTH customers. Its total customer base as on Q1FY12 increased by 25.9% compared to the customer base as on Q1FY11.

Total customer base (in mn)

The acquisition of Zain’s African business has given geographical diversification to the

company. It is targeting 100 million subscribers by the end of FY13 from this continent. Currently, Airtel Africa has over 46 million customers, added 2.1 million new customers across 16 countries of Africa after the acquisition. It plans to increase its revenues to $5bn and EBITDA to $2bn by the end of the next financial year.

Valuation and Outlook

We have a positive outlook on Bharti Airtel and believe that the company with its strong customer base growth and 3G spectrum in key circles is best placed to benefit in the Telecom sector in the long-term. The company indicated that mobile tariffs may go up further. This could be positive move from the company and will help sustain margins going forward. Peers comparison (FY11)

(` Cr) Company Sales PAT EPS (`) ROCE (%) RONW (%)

Bharti Airtel 59433.00 5899.20 15.53 13.28 13.07 Idea Cellular 12397.88 953.94 2.89 8.32 7.43 Rel. Comm. 24908.98 1505.82 7.21 2.92 2.77

(Source - Keynote Capitals ltd.) Bharti Airtel has a market capitalization of `146944Cr and is trading at a share price of `386.95 per share. The consolidated TTM EPS is `15, translating into a TTM PE of 30x. The stock is an attractive buy considering the growth prospects of the industry as well as the company.

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K E Y N O T E

3 Keynote Capitals Research

DB Corp Ltd.

Key Stock Data Sector Print Media CMP `219.20 52wk High/Low `307/216.4 Market Cap `4017Cr ($8.51bn) 6m Avg. daily vol 92,337 BSE Sensex 16,745.35

Stock Codes Reco. ‘Buy’ Reuters Code DBCL.BO BSE Code 533151 NSE Code DBCORP Face Value `10

Shareholding pattern (30th June, 2011)

Price Performance (%)

1 Mth 3 Mths 6 Mths 1 Yr

-6.5% -5.9% -13.6% -16.6%

DB Corp Ltd. (DBCL) is a leading print media company in India. Its newspapers and magazines, published in four languages, have a strong readership base of around 18.1mn. DBCL currently has a presence in 13 state and many of these states enjoy good economic growth prospects, because of which the company is a play on regional growth in the Indian print sector. In terms of average readership per day, DBCL’s Hindi newspaper, Dainik Bhaskar, is a market leader in the states of Madhya Pradesh, Chandigarh, Chhattisgarh and Haryana. The company is also the leader in the urban areas of Gujarat, Rajasthan and Punjab.

DBCL also has a presence in the radio business, under the brand name, MY-FM. Currently, it runs 17 FM radio stations at locations where its publications have an established presence, which helps it in cross-sell advertising space to local companies.

DBCL also operates Internet and Short Messaging Service (SMS) portals through its subsidiary, I Media Corp. Ltd. (IMCL). A division of DB Corp, DB Activation, is engaged in organizing events such as road shows, mall activities, live entertainment shows, trade shows, conferences, trade meetings, exhibitions and shopping festivals.

DBCL entered the state of Jharkhand with the launch of the Dhanbad edition in April 2011. Subsequently, it launched its second Marathi edition from Nashik in July 2011 and it plans to launch in other cities of Maharashtra including Jalgaon over 2011-12. The company is expected to complete its Bihar foray by FY13. The company is looking to ramp up its internet business rapidly. Its page views have also gone up from 8 million to over 100 million in the last 15 months.

DBCL had last hiked advertising rates by about 14% in April 2010, for all editions (excluding Divya Bhaskar) across states. The ratio of colour and black & white advertisements in DBCL’s publications stood at 70:30 in FY11. As the rates for colour advertisements are twice that of black & white advertisements, the company is expected to earn higher realisations and yields, going forward.

Key Financials (`Cr)

FY07 FY08 FY09 FY10 FY11Net Sales 663.32 839.01 920.57 1013.77 1247.33YoY Growth (%) 25.7% 26.5% 9.7% 10.1% 23.0%Total Expenditure 574.46 647.48 770.63 680.06 853.12EBITDA 88.86 191.53 149.94 333.71 394.21YoY Growth (%) 20.4% 115.5% -21.7% 122.6% 18.1%Margin 13.4% 22.8% 16.3% 32.9% 31.6%Interest 20.16 24.27 46.45 32.34 15.28Depreciation 10.88 14.69 17.8 26.64 42.77PBT 67.3 164.15 111.32 304.75 366.97Tax 5.41 62.75 42.84 105.71 99.65PAT 61.89 101.4 68.48 199.04 267.32YoY Growth (%) 77.3% 63.8% -32.5% 190.7% 34.3%Margin (%) 9.3% 12.1% 7.4% 19.6% 21.4%EPS (`) 289.21 6.01 4.06 10.97 14.59

(Source - Keynote Capitals ltd.)

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K E Y N O T E


Dr. Reddy’s Laboratories Ltd.

Key Stock Data Sector Pharma CMP `1512.15 52wk High/Low `1855/1387 Market Cap `256.15bn

($5390.36mn) 6m Avg. daily vol 33251 BSE Sensex 16,745.35 Reco ‘Buy’ BSE Code 500124 NSE Code DRREDDY Face Value `5


Price Performance (%)

1 Mth 3 Mths 6 Mths 1 Yr

-0.53% -5.06% -4.53% 0.66%


Dr.Reddy's Laboratories Ltd. (DRL) is an integrated global pharmaceutical company having strong generic opportunities in the US, favourable positioning in Russia and expanding bio-similars portfolio are healthy indicators of the stock in the long run. DRL's acquisition of GSK's penicillin facility in the US opens up newer avenues for growth as it has allowed the company an entry into the US penicillin-based anti-bacterial market segment (through brands such as Augmentin and Amoxil).

DRL’s settlement with Pfizer is for resolving litigation related to Lipitor tablets of strengths 10 milligram (mg), 20 mg, 40 mg, and 80 mg, known generically as Atorvastatin calcium tablets.

Steady growth in its baseline revenue and upsides from periodically successful Para

IV ‘first-to-file' launches in the US (either with 180-days exclusivity or as an authorised generic supplier to the innovator) buoy up the growth prospects for the company. DRL filed 21 abbreviated new drug applications (ANDAs) in 2010-11, taking the cumulative total to 179 ANDAs (including partnered ANDAs). The company has 76 pending approvals, of which 36 are Para IV filings and 11 are in the ‘first to file' category. The company also filed 56 drug master files (DMFs) in 2010-11, taking its overall count to 486.

Dr. Reddy’s entered into an agreement with JB Chemicals & Pharmaceuticals to

acquire the latter’s prescription portfolio of 20 brands in the Russia and other CIS regions for $34.85mn. The key ones are Metrogyl and Jocet. Prior to this, JB Pharmaceuticals had sold its OTC business in Russia and CIS countries to Cilag GmbH International, a wholly-owned subsidiary of Johnson & Johnson, for `938Cr.

It recently received a final nod from the US FDA to launch the fondaparinux sodium

injection — a bioequivalent generic version of GSK's Arixtra that would also support growth in the US. The approval opens up significant earnings potential for the company, considering that the Arixtra brand had US sales of approximately $340mn for the 12-months ended May 2011.

Key Financials (`Cr) Particulars FY07 FY08 FY09 FY10 FY11Net Revenues 6513.88 4991.68 6900.63 7027.65 7469.28EBITDA 1771.63 1042.66 -61.50 616.81 1677.53Net Profit (Adj) 965.54 438.13 284.77 106.76 1104.00Earnings Per Share 32.42 26.07 - 6.33 65.28Price Earnings 12.79 23.26 - 67.38 28.64EBIDTA Margin (%) 27.29% 21.14% -0.74% 15.31% 21.91%PAT Margin (%) 14.82% 8.78% 4.13% 1.52% 14.78%RONW (%) 23.96% 9.99% 15.09% 20.72% 20.84%ROCE (%) 31.83% 10.30% 6.56% 15.61% 25.58%

Sources: Keynote Capitals Ltd.

FIIs 45%

DIIs 15%

Promoters 26%

Public & othr 14%

8090

100110120130140

Dr.Reddy's LabBSE_SENSEX

K E Y N O T E


Revenue Break Up (`Cr)

For the quarter ended June 2011, DRL's global generics business grew by over 21% driven primarily by strong growth in North America (up by 47%), which was led by launches of last year and market share increase across key products lansoprazole, tacrolimus and omeprazole OTC, to name a few. With several new launches Allegra D24 and Olanzapine are expected this year, the US is likely to remain the revenue driver. Russia & CIS which contributed 15% grew by 18% on back of significant volume growth in key brands.

(`Cr)

DRL’s consolidated net profit rose 25% to `262.34Cr on 18% increase in net sales to `1978.32Cr in Q1 June 2011 over Q1 June 2010. Revenues from Global generic business increased by 21% to `1442.40Cr for the quarter ended June 2011, contributing 70% to the total sales. Strong generic opportunities in the US, supported by its pipeline of product releases and favorable positioning in Russia, the management expect DRL to show robust growth going forward on the back of strong performance in the US, India and Russia business.

Particulars Q1FY11 Q4FY11 Q1FY12 YOY (%) QOQ (%)

Global Generics 1192 1417 1442 21.0 1.8North America 390 592 576 47.7 -2.7Europe 194 201 192 -1.0 -4.4India 278 275 296 5.7 7.0Russia & Other CIS 255 268 302 18.3 12.6Others 75 82 80 5.7 -2.6PSAI 450 555 483 7.4 -13.0North America 84 75 84 0.6 12.4Europe 156 208 169 8.9 -18.8India 63 71 66 4.6 -6.9RoW 147 201 165 10.9 -18.5Proprietary Products 42 45 53 27.2 16.6Total 1683 2017 1978 17.5 -1.9

Particulars Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12Net Sales 1836.81 1729.64 1642.25 1683.13 1870.37 1898.51 2017.27 1978.32Other Income 14.01 17.35 20.93 18.64 22.2 19.79 50.48 18.7Total Income 1850.82 1746.99 1663.18 1701.77 1892.57 1918.3 2067.75 1997.02Total Expenditure 1496.19 1377.27 2215.02 1341.62 1464.82 1518.41 1578.48 1594.71PBIDT 354.63 369.72 -551.84 360.15 427.75 399.89 489.27 402.31Less: Interest -20.85 5.03 2.53 17.74 3.49 4.98 -7.44 4.65PBDT 375.48 364.69 -554.37 342.41 424.26 394.91 496.71 397.66Less: Depreciation 98.7 964.08 -760.15 97.6 104.79 106.58 105.8 123.38Tax 59.51 -77.69 44.06 35.73 32.65 15.19 56.74 11.94Profit After Tax 217.27 -521.7 161.72 209.08 286.82 273.14 334.17 262.34EPS (`) 12.88 - 9.86 12.41 16.95 16.14 19.76 15.52PBIDTM (%) 19.31 21.38 -33.6 21.4 22.87 21.06 24.25 20.34PBDTM (%) 20.44 21.08 -33.76 20.34 22.68 20.8 24.62 20.1PATM (%) 11.83 -30.16 9.85 12.42 15.33 14.39 16.57 13.26

K E Y N O T E


Hero Moto Corp Ltd.

Key Stock Data Sector Auto CMP `2210.00 52wk High/Low `2232/1378 Market Cap `441.34bn

($9594.3mn) 6m Avg. daily vol 68161 BSE Sensex 16745.35

Reco ‘Buy’ BSE Code 500182 NSE Code HEROMOTOCO Face Value `2


Price Performance %

1 Mth 3 Mths 6 Mths 1 Yr 16.8% 26.7% 45.1% 26.8%


Hero Moto Corp Ltd. (Formerly Hero Honda Motors Ltd.), the world's largest manufacturer of two – wheelers, has 3 manufacturing units at Gurgaon, Dharuhera and Haridwar with total capacity of 6.15mn. The company is pioneer in fuel efficient technology with introduction of 4-stroke motorcycles and became first to launch the fuel injection technology in Indian motorcycles with the launch of Glamour FI in June 2006. The company has more than 5000 outlets comprising a mix of authorized dealerships, service & spare parts outlets, and dealer-appointed outlets across the country. Hero Moto Corp recently unveiled a new brand after the two-wheeler major ended its long standing partnership with Japan's Honda Motor.

The company is targeting 6mn units in terms of volume and has already sold 2.46mn units in 5 month which around 41% of the target and is in-line with company’s estimates.

The company expects the margins to improve in Q2 & Q3 due to marginal softening of the commodity prices and benefit of price hike taken in June 2011 despite incurring the re-branding cost in Q2 and Q3 FY12. The company had hiked the vehicle prices by `500-750 per vehicle in June 24th, 2011. It would incur re-branding cost of roughly `100Cr over and above advertising cost for the same. The tax rate would continue at 17% for the remaining quarters of FY12 as witnessed in Q1FY12.

The company is expanding capacity from 6.15 million vehicles as on 31st March 2011

to 6.4 - 6.5 million vehicles by end of FY12 through various measures at existing plants such as de bottlenecking, out sourcing parts, etc. The urban demand is driven by premium motorcycles and scooters. The company is witnessing capacity constraint for their premium bikes which would improve post capacity expansion.

The growth in rural market is faster than in urban market. Rural sales constitute 45%

of its sales volume now compared to 38% in 2008-09. Due to good monsoon, it is expected to be strong.

Key Financials (`Cr) Particulars FY07 FY08 FY09 FY10 FY11Net Revenues 9894.52 10335.24 12319.12 15758.18 19245.03Growth (%) - 4.45% 19.20% 27.92% 22.13%EBITDA 1387.49 1572.6 1964.65 3025.3 2822.94Growth (%) - 13.34% 24.93% 53.99% -6.69%Net Profit 777.11 879.19 1180.63 2081.8 1842.11Growth (%) - 13.14% 34.29% 76.33% -11.51%EPS (`) 40.07 45.24 60.79 93.18 79.51Price Earnings (x) 17.1 15.26 17.6 20.85 19.95EBIDTA Margin (%) 14.02% 15.22% 15.95% 19.20% 14.67%PAT Margin (%) 7.85% 8.51% 9.58% 13.21% 9.57%RONW (%) 38.30% 35.48% 37.77% 61.43% 60.05%ROCE (%) 51.66% 40.09% 50.99% 76.48% 60.68%

Promoters 52.21%

FIIs 33.67%

DIIs 4.57% Public

9.56%

70%

90%

110%

130%Hero Moto Nifty

K E Y N O T E


EBIDTA Margins to rise in coming quarters Due to the significant rise in commodity price, margins were squeezed from 15% to 8.4% which has now begun to rise due to softening of commodity price from last 2 quarter and is expected to further come down in near future thereby improving company’s margins. Consistently paying dividends Since 1991, company is paying dividend which has increase from 20% to 5500%. Last year company paid dividend of `105 per share. As company has enough cash which would be utilize for capacity expansion. Therefore, the company is in position of giving dividend in coming years.

Higher ROE & ROCE as compared to its peers The company has ROE of 60%, which indicates amount earned by the investor and ROCE of 61%, which indicates the efficiency of the company in using its resources. Both have increased to current levels from 38% and 52% levels in FY07, respectively.

(` Cr)

Valuations: The management expects margins to improve considerably giving an opportunity for further upside. At current market price, Hero Honda is trading at PE multiple of 19.8x of Q1FY12 annualized earnings.

Year End FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11Dividend Paid (` Cr) 339 359 399 399 399 339 379 399 2197 2097Dividend (%) 850 900 1000 1000 1000 850 950 1000 5500 5250Div. Yield (%) 5.09 9.55 4.08 3.65 2.25 2.48 2.75 1.87 5.66 6.62

Particulars Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12Net Sales 4040.1 3814.42 4092.61 4264.61 4511.29 5118.19 5350.94 5637.64Other Income 68.71 54.95 69.49 53.42 78.35 62.03 74.34 88.41Other Operating Income 29.5 25.01 29.71 32 40.66 43.47 39.99 45.69Total Income 4138.31 3894.38 4191.81 4350.03 4630.3 5223.69 5465.27 5771.74Total Expenditure 3325.43 3178.51 3410.58 3694.07 3944.01 4664.92 4561 4865.57PBIDT 812.88 715.87 781.23 655.96 686.29 558.77 904.27 906.17Less: Interest -6.1 -4.59 -4.47 -2.66 -2.07 -5.22 8.1 -3.19PBDT 818.98 720.46 785.7 658.62 688.36 563.99 896.17 909.36Less: Depreciation 50.34 46.89 48.66 48.28 60.75 55.96 237.39 239.79Tax 171.5 137.8 138.23 118.65 122.01 79.03 157.17 111.68Profit After Tax 597.14 535.77 598.81 491.69 505.6 429.00 501.61 557.89EPS (`) 29.9 26.83 29.99 24.62 25.32 21.48 25.12 27.94EPS TTM (`) 90.12 101.91 111.76 111.34 106.76 101.41 96.54 99.86PBIDTM (%) 20.12 18.77 19.09 15.38 15.21 10.92 16.9 16.07PBDTM (%) 20.27 18.89 19.2 15.44 15.26 11.02 16.75 16.13PATM (%) 14.78 14.05 14.63 11.53 11.21 8.38 9.37 9.9

K E Y N O T E


Marico Ltd.

Key Stock Data Sector FMCG CMP `140.70 52wk High/Low `173 / 112 Market Cap `86.50bn

($1922.22mn) 6m Avg. daily vol 83,506 BSE Sensex 16745.35 Reco ‘Buy’ BSE Code 531642 NSE Code MARICO Face Value `1


Price Performance % 1 Mth 3 Mths 6 Mths 1 Yr 5.5% 17.5% 25.8% 30.9%


80%90%

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Marico Sensex

Marico is one of the leading Indian FMCG players in the beauty and wellness space offering products and services in hair care, health care and skin care segments to consumers in domestic and international markets. The company was incorporated in 1988, under the name Marico Foods Ltd.

Marico has a wide distribution network of over 3.3mn outlets in India and overseas. The company is primarily based in India while international presence is flourishing. The company’s international markets include Middle East, SAARC countries, Egypt and South Africa.

Investment Rationale

Marico’s edible oil segment branded under Saffola caters to a niche of health conscious people. It is a pricing and market leader in this segment. Fast growing Indian economy has seen a major transition in the lifestyle of people. Consciousness towards hygiene and health is rising and a reason for spurt in the health and wellness markets. The company’s Saffola brand volume registered a CAGR of 15% while its revenues reported a CAGR of 18% during FY05-10, which is likely to continue, going forward. The brand is expected to report a CAGR of 15-17% in terms of volume growth during FY11-14.

Marico’s Parachute brand has become a generic name in coconut oil segment in India. The company holds both pricing as well as volume leadership in this segment. Presence of the unorganized market in villages was a major concern in this segment, which Marico is resolving through selling economy packs at affordable prices leading to an increase in volume growth. The company also caters fast growing value added light hair oil segment in the hair oil category.

Marico’s international business contributes ~23% to total revenue and grew at a CAGR of 36% over past 4 years. Going forward, the segment is expected to grow at a CAGR of 20% during FY11-14.

There are few triggers for the company’s stock price, going forward. These include, • Robust topline growth driven by strong business momentum across categories • Further, Marico's thrust on increasing traction in rural market by expanding its

distribution network through direct coverage of retail outlets, • Launch of budget SKUs, • Competitive/penetrative pricing and • New product initiatives such as coconut based cooling oil • Further, the company’s profitability is likely to improve, going forward as raw

material prices seem to have peaked and are expected to soften due to flush season, the impact of which will be visible during second and third quarter.

• Kaya domestic business has also shown signs of revival however it is yet to achieve breakeven. Hence, we believe Kaya is likely to remain an overhang in the near term.

Valuation and View

As per the consensus estimates, Marico’s EPS will show a CAGR of 19.5% higher than its competitor Dabur India. The company’s 2 year forward PEG ratio 0.91x is much lower than it’s peer Dabur’s 1.21x, indicates a scope for share price appreciation.

Promoters63% FII

26%

DII4%

Others

7%

K E Y N O T E


Key Financials (`Cr)

Particulars FY07 FY08 FY09 FY10 FY11Net Revenues 1556.92 1905.04 2388.42 2660.76 3128.31Growth (%) - 22.36% 25.37% 11.40% 17.57%EBITDA 198.56 246.22 288.96 365.36 379.31Growth (%) - 24.00% 17.36% 26.44% 3.82%Net Profit 98.61 160.28 199.8 240.15 253.25Growth (%) - 62.54% 24.66% 20.20% 5.45%EPS (`) 1.62 2.63 3.28 3.94 4.12P/E (x) 42.4 21.1 31.4 30.5 39.1EBIDTA Margin (%) 12.8% 12.9% 12.1% 13.7% 12.1%PAT Margin (%) 6.3% 8.4% 8.4% 9.0% 8.1%RONW (%) 51.3% 50.9% 44.1% 36.7% 27.7%ROCE (%) 39.2% 35.0% 32.1% 29.1% 24.3%

Quarterly Financials (`Cr)

Particulars Q1FY12 Q1FY11 Change Q4FY11 Q4FY10 Change Net Sales 807.59 585.00 38.0% 621.07 458.40 35.5%Total Expenditure 700.39 499.00 40.4% 524.96 383.75 36.8%EBITDA 107.2 86.00 24.7% 96.11 74.65 28.7%Other Income 4.31 2.83 52.3% 98.45 7.36 1237.6%Interest 6.60 4.70 40.4% 15.64 3.58 336.9%PBDT 104.91 84.13 24.7% 178.92 78.43 128.1%Depreciation 7.13 5.18 37.6% 8.22 7.54 9.0%Tax 16.16 11.38 42.0% 38.89 10.48 271.1%Reported PAT 81.62 67.57 20.8% 131.81 60.41 118.2%Extra-ordinary Items 0.00 0.00 0.0% 71.09 0.00 0.0%Adjusted PAT 81.62 67.57 20.8% 60.72 60.41 0.5%EBITDA margin 13.3% 14.7% -1.4% 15.5% 16.3% -0.8%EPS (`) 1.33 1.11 19.8% 0.99 0.99 -0.3%Paid up Equity Cap 61.46 60.94 0.9% 61.44 60.93 0.8

K E Y N O T E


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