TOP FORTPOLIO STOCKS FOR LONG TERM

1.FEDERAL BANK   CMP :450.00

Federal Bank is among the old private sector banks with a network of 743 branches and a dominant presence

in southern India. The bank is mainly focused on SME and retail segments which together constitute about 60%

of the loan book. Under the new management, the bank is working on a strategy to gain pan-Indian presence,

increase the efficiency, diversify loan book and improve the asset quality.

The asset quality of the bank showed a marked improvement in Q4FY11 as the gross and net NPAs dropped to

3.5% and 0.6% from 4.0% and 0.8% respectively in Q3FY11. Going forward, with the initiatives taken by the

management and the increased recoveries the NPAs are likely to decline further. Federal Bank’s loan growth has slowed over the past several quarters due to a rise in the slippages. However,

the loan growth re-bounded in FY11 showing a growth of 19% YoY driven by corporate lending as the bank

plans to diversify the loan book which is skewed towards the retail and SME segments.The bank’s return ratios have remained subdued ever since it raised capital, which is likely to go up led by an

increase in the profits. We expect an RoE of about 15.3% and RoA of around 1.3% by FY13 led by a 27% CAGR in

the earnings. Federal Bank is likely to clock earnings growth of 27% CAGR over FY11-13 (compared to a 17% CAGR over FY08-

011) led by a steady growth in the balance sheet and a decline in the credit costs. Given the strong presence

in south India, the expanding reach in the rest of India, an improving asset quality and a revival in its earnings

the bank should trade at a higher valuation. We maintain Buy with a price target of Rs500 (1.2x FY13 BV).

2.LUPIN  CMP : 448.00

Global dominance in certain products, focus on niche, less-commoditised products, a geographically diversified

presence in markets such as Japan and a presence in the US branded segment distinguish Lupin among the

mid-cap players in the generic space.In FY12, Lupin expects to launch 12 products with at least four in niche therapies, like oral contraceptives in

the USA. Along with a strong presence in the branded space through Suprax and Aerochamber, Antara has

enabled Lupin’s US business to grow at a staggering CAGR of 65% over FY06-10. With the expansion in the

branded portfolio through the anticipated launch of Allernaze we expect the US business to grow at a CAGR

of 19% over FY11-13. We expect the branded business to contribute about 30% of the total US sales over the

next two years. With the strong core business and aggressive abbreviated new drug application (ANDA) filings (cumulative 148

ANDA filings till date), a differentiated strategy augurs well for Lupin. Niche product launches like generic

Geodon, Fortamet ER, Cipro and OCs would drive upwards performance of the stock.Potential delays in the US Food and Drug Administration approval for oral contraceptives and its other niche

filings, and ramp-up delays in AllerNaze (expected launch in FY12) are the key challenges for Lupin.We expect Lupin to report an earnings CAGR of 18% over FY11-13 with strong margins at the operating level..

3.GAIL INDIA  CMP : 450.75

GAIL India, a leading gas transmission company, is aggressively expanding its pipeline network and plans to

invest more than Rs30,000 crore over FY10-14 in a phased manner to double its gas pipeline network to over

14,000km and its transmission capacity to around 300mmscmd. This provides strong revenue visibility in its core

gas utilities business.We also see value accretion from doubling of the petrochemical capacity by FY2014, and the exploration and

production (E&P) and city gas distribution (CGD) businesses going forward. A higher than expected fuel subsidy burden and regulatory risk in its core transmission business are the key

risks for the company. Despite the subsidy burden, the strong growth visibility in its core gas transmission business would drive its

earnings growth of 12% CAGR during FY10-13.At the current market price, the stock trades at a price/earnings ratio of 12.8x and EV/EBITDA of 8.4x based

on our FY13 estimates. We have a Buy recommendation on the stock with a price target of Rs567. 

4.HCL TECHNOLOGIES  CMP : 496.20

HCL Technologies Ltd (HCL Tech) is a global information technology (IT) services company providing softwareled

IT solutions, remote infrastructure management services and BPO services. The company has a leading

position in remote infrastructure management services which has helped it win large IT outsourcing contracts.

Through the Axon plc acquisition the company has gained strong SAP consulting footing. Over the last five quarters it has outperformed its peers in terms of volume growth, with an average volume

growth of 7.3% during the period. The growth has been broad based across industry verticals, geographies and

service lines.Going forward, we believe that HCL Tech would outperform its peers in terms of earnings growth with an

earnings CAGR of 31% over FY11-13E. On the other hand, further consistency in quarterly performance and

improvement in cash generation profile will help gain further investors’ confidence in the stock. We value HCL Tech at a 25% discount to Infosys at 15x FY13E earnings. At the current market price the stock

trades at 15.2x and 11.9x its FY12E and FY13E earnings respectively. We have a Buy recommendation on the

stock with price target of Rs622.

5. ILandFS Transportation Networks  CMP: 214.00

IL&FS Transportation Networks Ltd (ITNL) is India’s largest player in the BOT road segment with 10,269 lane km
in various stages of development, construction or operation. It has a pan-India presence and a diverse project
portfolio consisting of 23 road projects, bus transportation and a metro rail project. It is well equipped to capitalise on the huge and growing opportunity in the road infrastructure sector due to
its established track record in operating BOT road projects, its execution capabilities and the strong support
from IL&FS. It has a fair mix of annuity and toll projects in its portfolio which provides revenue comfort. Further, it is
present across the value chain except the civil construction services which it outsources to the local
contractors. This helps the company to handle a large number of projects at a time and diversify geographically,
reducing the risk of concentration. Thus, we expect the sales and the earnings to grow at a CAGR of 34.2% and 14.7% respectively over FY11-13E. At the current market price, the stock is trading at 8.8x and 7.3x its FY12 and FY13 estimated earnings
respectively. We maintain our Buy recommendation with a price target of Rs383.