Executive Summary

CAS Research Desk

Edelweiss Research

This Independence day you have one additional reason to celebrate! Edelweiss is pleased to release its report Financial Freedom this Independence Day. This report does away with all the short term distractions that you read everyday, everywhere from Europe crisis to US downgrades and focuses entirely on the long term big picture India growth story and how you can make the best of it. Weve identified in this report the key sectors that are set to benefit from the long term growth India is set to witness and well not just leave you in terms of broad economic numbers and jargons; well in this report tell you your exact action points, 5 stocks you should buy for the next 10 years. India has come a long way since the economic reforms in 1991, moving from the Hindu growth rates of 5% into the orbit of 7-9% growth rates. This growth has been structurally driven by economic reforms, private entrepreneurship and linkages to the global economic boom. Fundamental factors like young population (median age of 26), growing middle class, rising income levels with stable and growing household savings make Indias medium to long- term growth secure. We believe Indias real GDP will grow at a CAGR of 9% over the next decade translating to a nominal GDP of ` 205 Trn (USD 4.5 Trn) by 2020. In nominal terms we expect growth over the next decade at 13% (Long term inflation projection of 4%). These significant changes will manifest in three key investment themes for the next decade savings, consumption and infrastructure. Certain sectors (SUPER SECTORS) will grow well beyond the 13% nominal GDP growth. Certain stocks (SUPER STOCKS) are all set to reap the benefits from their stronghold in their SUPER SECTORS and these are the stocks that you should just buy and forget, literally forget! SUPER STOCKS Coal India WHY Worlds largest coal reserve holder, Coal India is the primary beneficiary of the structural deficit of coal in India. Banking revenue set to grow 5.3x to ` 10.6 Trn, AXIS a front-runner to capture this opportunity. Organized retail to grow 6.3x to ` 6.3 Trn, FDI in retail to bring in the global biggies, Pantaloon Retail - biggest beneficiary.

SUPER THEMES Resources

Financial Services

Axis Bank

Organized Retail

Pantaloon Retail

Automobiles

Mahindra & Mahindra Automobile market forecast to grow ~5x to ~ ` 4.3 Trn.

Domestic Consumption

ITC Ltd

Cigarettes business to remain robust, FMCG the trump card, classic domestic consumption bet. 2|P a g e

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Coal India Limited (COAIND) Fundamental CAS Research Desk BUY CMP -` 386

Sector

Edelweiss Research
Mkt Cap (` Cr.) ` 241,000 52W High ` 422 52W Low 289

Energy

Coal India (COAIND) is the worlds largest coal reserve holder and producer and also controls ~80% of the Indian coal market. It is going to be the primary beneficiary of the structural deficit of coal in India. Moreover, it is one of the least cost producers of coal in the world. COAIND, a Maharatna company, is one of the largest public sector companies in India in terms of turnover. Its product portfolio consists largely of thermal coal (90%) with the balance being coking coal. The company enjoys a near-monopoly position in the lucrative coal market and is more of a utility player due to assured volume off-take and minimal chance of a product price cut, as prices already remain at ~50% discount to internal benchmark prices. It currently operates ~471 mines in India and is also scouting for international mines to increase global presence and assure its resources. It sells ~10% of its production based on the e-auction route and ~3.5% beneficiated coal (2x realizations of raw coal). Beneficiated coal volumes are expected to rise significantly to ~150 mtpa by FY17 (25% of total volumes). COAIND produced 43.13 crore tons in FY10 and their reserve position (extractable reserves) stands at 2175 crores tons as of April, 2010. This translates into 51 years of production capacity going by current production rates. Going by the reserve position, we believe that CIL is a great opportunity to own a critical resource. On the demand side, India being a power deficit country, there is significant power capacity being added with fuel resource being coal. Currently most private companies building power capacities have been signing up long term Fuel Supply Agreements (FSAs) with foreign players due to shortage of coal domestically. We believe there is enough demand for coal and further scale up of production by CIL would find more than enough takers. The big trigger for COAIND comes due to the pricing differential between raw coal that CIL sells and washed coal that is imported from mines abroad. The average realization for CIL is 50% lower than import parity price of coal. The margin for CIL per ton is currently close to ` 400/ton. The management of CIL has indicated that it is putting in place a system for producing more of washed coal to match the quality of imported coal. This would require capex of `350/ton but would improve realization and margins manifold. By FY17, COAIND would have a 25% share of washed coal. At the CMP of ` 386, the stock trades at a PE of 13.66x FY12E earnings and 12.64x FY13 earnings. We believe that Coal India Ltd is an excellent investment and would prove to be a multi-bagger in the long term.
Income Statement (` Mn) Year to March Revenues EBITDA PBT Net profit EPS FY11 502,336 134,791 165,234 108,674 17.3 FY12E 609,725 217,001 267,640 179,319 28.4 FY13E 674,330 242,144 289,626 194,049 30.7 Valuations Year to March Diluted PE (x) EV/Sales (x) EV/EBITDA (x) FY11 22.4 4.2 15.7 FY12E 13.7 3.1 8.8 FY13E 12.6 2.6 7.3

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Axis Bank Ltd (AXIBAN) Fundamental CAS Research Desk BUY CMP - ` 1211
Sector

Edelweiss Research
Mkt Cap (` Cr.) ` 51,508 52W High ` 1,609 52W Low ` 1,150.0

Banks

We believe that the current stage of economic growth in India, where savings and capital formation are at ~34% of GDP, offers serious opportunities in financial intermediation. Core to our hypothesis is our belief that, over the next ten years nominal GDP (excluding agriculture) is expected to grow at ~13%, and revenues from the financial services sector (which would lead this growth) are expected to grow at 22% to ` 266.4 trillion by FY20E . Axis Bank is the third-largest private sector bank in India in terms of asset size, with a balance sheet of ` 1.5 tn. It has a network of over 1000 branches and extension counters across the country. The bank earns substantial fee income from transaction and merchant banking activities. Axis Bank has registered buoyant loan growth on a balanced portfolio skewed towards corporate advances than retail (as compared with its private peers). Retail advances contributed 20% to the total loan portfolio. Thus, it has better scope for aggressively expanding across segments where it has a low presence. It is also spreading across geographies and targeting presence in more than 75% of Indias districts in the next five years. The banks loan book is expected to grow at a brisk pace of 25% plus in FY09-11E with SME, agri, housing, and personal loan segments likely to be the key growth engines. Rapidly growing franchise and new product offerings (viz., credit cards) will further drive growth in retail fee income. The bank is also intensifying efforts to penetrate the remittance business by aggressively spreading its international operations. Other key contributors to fee income will be project advisory, debt syndication, and third party distribution of insurance. Led by stable to improving margin coupled with benign asset quality we expect Axis Bank to deliver a healthy 25% earnings CAGR over FY11-13E. The banks strategy of moderating pace of loan growth will enable it to build a more formidable retail franchise and achieve consistently higher RoA. We believe, it can sustain higher RoA of 1.5-1.6% against 1.0-1.2% a few years ago, allowing RoE to move closer to 20% in a capital efficient manner. As Axis Bank delivers consistent earnings we expect the current valuation discount of 40% with HDFC Bank to come off to ~25%.
Income Statement (` mn) Year to March Net Revenues Operating Exp Preprovision Profit Net profit EPS Book Value Growth Metrics % NII Growth Fees Growth Net profit EPS FY11
111,951 47,794 64,157 33,880

FY12E
140,182 63,251

FY13E
171,780 74,325

82.5 462.8 FY11 31.1 29.3 34.8 33.0

76,931 42,237 102.9 546.9 FY12E 22.9 30.8 24.7 27.7

97,454 52,431 127.7 655.9 FY13E 21.9 26.2 38.8 24.6

Balance Sheet (` mn) Year to March Shareholders funds Borrowed funds Sources of Funds Total fixed assets Net current assets Uses of Funds Valuations Diluted PE (x) Price/BV (x) ROAE (%) ROA (%)

FY11 141,003 75,857 216,860 177,225 26,522 216,860 FY11 15.0 2.7 19.3 1.6

FY12E 156,170 70,516 226,686 175,057 31,945 226,686 FY12E 12.0 2.3 20.4 1.6

FY13E 176,284 57,562 233,846 180,531 33,631 233,846 FY13E 10.0 1.9 21.2 1.6

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Pantaloon Retail Ltd (PANRET) Fundamental CAS Research Desk BUY CMP - ` 311

Sector

Edelweiss Research
Mkt Cap (` Cr.) 7,000 52W High ` 528 52W Low ` 228

Retail

Pantaloon Retail Ltd is a leading Indian retail company with presence across most sectors of organized retail. The company, entered modern retail in 1997 with the opening of its department store format Pantaloons. In 2001, PRIL launched Big Bazaar, a hypermarket chain, followed by Food Bazaar, a supermarket chain. A five format company, two years back, it now operates over 20 formats which include Central (seamless malls located in city centers), Collection I (home improvement products), Depot (books, music, gifts and stationeries), aLL (fashion apparel for plussize individuals), Shoe Factory (footwear), and Blue Sky (fashion accessories). It has recently launched its etailing venture, futurebazaar.com. The Indian retail landscape is evolving with interplay of several demographic and economic factors. The long term prospects backed by changing consumer behavior in favor of larger discretionary spend has set the stage for a healthy growth in the retail space over the next few years. The big opportunity lies in the growing share of organized retail with the growing trend among consumers to allocate a larger share of income to consumption and gradual improvement in lifestyle. Media reports suggest that the Cabinet could clear the proposal to allow FDI in multi-brand retail in the near term, setting the stage for the entry of large chains by the FY12 end. Nod to the proposal seems likely post the backing of the Prime Minister Manmohan Singh and Finance Minister Pranab Mukherjee. By opening the retail sector for FDI, organized retail penetration can swell significantly, benefitting retail firms. We believe this will be a positive for Indian retail sector especially for larger players like Pantaloon Retail. At the CMP of ` 311, the stock trades at a PE of 32.6 FY12E and 24.0x FY13E earnings, (represented by the core retail business). We rate Pantaloon as a Buy for the long term.
Income Statement (` Mn) Year to March Revenues EBITDA PBT Net profit EPS FY11 109,107 9,383 2,967 1,988 9.6 FY12E 134,188 11,607 3,647 2,443 11.9 FY13E 164,875 14,344 4,980 3,336 16.2 Valuations Year to March Diluted PE (x) EV/Sales (x) EV/EBITDA (x) FY11 32.8 1.0 11.6 FY12E 32.6 0.9 9.9 FY13E 24.0 0.7 8.4

* Nos represent core retail business (PRIL+ FVRL)

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Mahindra & Mahindra Ltd (MAHMAH) Fundamental CAS Research Desk BUY CMP - ` 729

Sector

Edelweiss Research
Mkt Cap (` Cr.) ` 44,845 52W High ` 827 52W Low ` 585

Automobiles

Mahindra & Mahindra (MAHMAH) operates in nine segmentsautomotive, farm equipment, financial services, infrastructure, hospitality, IT services, Systech, which consists of automotive components and other related products and services, and others, which consists of logistics, aftermarket, two wheelers and investment. Mahindra & Mahindra dominates the domestic tractors market, commanding 41% market share. Three key structural factorshigher farm product prices, firmer labour wages (notably NREGA), and greater commercial usage of tractorshave significantly increased rural incomes and brought smaller farmers (owning <4 hectares of land) into the tractor purchasing ambit. These factors are likely to drive long-term tractor demand, which Mahindra & Mahindra (M&M) is well-positioned to capitalize on. MAHMAH is the leader in the UV segment and has managed to keep its market share above 55% currently. MAHMAH, as the leader in the utility vehicle (UV) segment, is well entrenched with strong brands. Further, incremental volumes could come from the LCV/ minivan segment, where we expect the company to regain lost market share with the launch of its sub tonne Maxximo and Gio. We believe, Ssangyong Motors acquisition is a strategic fit with MAHMAHs ambitions of being a global SUV player. Ssangyongs current financial performance seems to suggest a turnaround. Apart from the M&HCV space (JV with Navistar), other new businesses (two wheelers, defense or logistics) require minimal investments. The returns over a three year period though could be substantial, particularly considering MAHMAHs impressive track record in unlocking value of subsidiaries. MAHMAH is in a sweet spot as demand for tractors and utility vehicles are benefitting from rising rural incomes and governments increased rural thrust. At the same time, with a dominant market share and low competition in the segment, the company enjoys pricing power.
Income Statement (` mn) Year to March Revenues EBITDA PBT Net profit EPS Book Value Growth Ratios (%) Year to March Revenues EBITDA PBT Net profit EPS FY11 234,043 33,926 33,555 26,621 40.9 168 FY12E 273,627 40,101 38,492 28,869 47.0 201 FY13E 315,211 47,411 45,039 33,779 55.0 242 Balance Sheet (` mn) Year to March Shareholders funds Borrowed funds Sources of Funds Net Block Investments Net current assets Uses of Funds Valuations Year to March Diluted PE (x) Price/BV (x) EV/Sales (x) EV/EBITDA (x) ROE (%) FY11 103,134 24,053 130,730 33,860 93,252 (6,241) 130,730 FY12E 123,530 34,796 161,870 43,975 100,752 7,284 161,870 FY13E 148,837 34,796 187,177 53,041 119,422 4,855 187,177

FY11 26.3 13.3 20.1 22.0 18.7

FY12E 16.9 18.2 14.7 14.9 14.9

FY13E 15.2 18.2 17.0 17.0 17.0

FY11 18.0 4.4 1.5 10.8 27.7

FY12E 15.6 3.6 1.3 9.0 25.5

FY13E 13.3 3.0 1.1 7.1 24.8

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ITC Ltd (ITCLTD) Fundamental CAS Research Desk BUY CMP - ` 199

Sector

Edelweiss Research
Mkt Cap (` Cr.) ` 1,52,778 52W High ` 211 52W Low ` 149

FMCG

Favourable macroeconomic drivers such as GDP and population growth, coupled with rising income levels and lifestyle changes to drive the FMCG market growth in India. Low penetration and low per capita daily consumption offers room for further growth. Increasing rural penetration to urban penetration levels presents another growth opportunity; multiple usage of products offer further upside. IMF expects the Indian economy to be ~USD 2.0 tn by FY15. Assuming FMCG spend/GDP trend to continue, we expect the FMCG market to cross the ` 2 tn mark by 2015, from ~` 1 tn currently ITC is one of the largest FMCG companies in India with businesses spanning cigarettes, hotels, paper and packaging, and agri-commodities. Recently, it has set up a branded foods division with products such as staples, confectionery, and biscuits. Though the cigarettes division is still the major source of revenue, other businesses have grown over the years, contributing ~49% to net sales and ~34% to gross sales in FY10. ITC's pricing power is strong due to relatively inelastic demand profile of cigarettes and the company's ~80% market share. This translates into increasing margins for ITC as compared to any other FMCG company. Cigarettes volume growth of 8% in Q1FY12 surprised positively against our expectation of 6%. We expect cigarettes volume growth to be 6-7% with upward bias for FY12. The e-Choupal network established by ITC gives it a phenomenal sourcing edge, which can help it transform into a retailing giant. The demand-supply conditions are in favor of the paper businesses, as the new supply will just be sufficient to meet the additional demand. With the Indian economy slated to grow at about 8% for FY11E, we expect cigarettes volumes to continue to witness growth momentum. The FMCG division is expected to scale up and turn profitable in FY13, contributing positively to the bottom line, going forward.
Income Statement (` mn) Year to March Net Revenues EBITDA PBT Net profit EPS Book Value Growth Ratios (%) Year to March Revenues EBITDA PBT Net profit EPS FY11 74,077 74,349 50,179 6.6 21.7 FY12E 88,092 90,638 61,261 8.0 23.2 FY13E 3,03,837 1,04,839 1,07,030 72,349 9.4 26.0 2,22,737 2,60,776 Balance Sheet (` mn) Year to March Shareholders funds Borrowed funds Sources of Funds Net Block Investments Net current assets Uses of Funds Valuations Year to March Diluted PE (x) Price/BV (x) EV/Sales (x) EV/EBITDA (x) ROAE (%) FY11 FY12E FY13E 1,64,621 1,79,591 2,01,477 1,246 1,046 846 1,75,255 1,90,678 2,13,123 91,495 98,828 1,05,382 48,678 48,678 48,678 21,458 29,547 45,439 1,75,255 1,90,678 2,13,123

FY11 16.4 17.1 19.0 20.4 20.4

FY12E 17.1 18.9 21.9 21.9 20.5

FY13E 16.5 19.0 18.1 18.1 18.1

FY11 29.8 9.2 7.0 21.0 33.0

FY12E 24.6 8.6 6.1 18.0 36.0

FY13E 20.9 7.7 5.2 14.0 39.0

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CAS Research Desk

Edelweiss Research

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