Visit us at www.sharekhan.com June 02, 2014 Sharekhan Top Picks The Indian equity market shed all inhibitions and celebrated the an attractive opportunity for investors to accumulate these stocks thumping majority mandate for the Narendra Modi led National with a little longer time horizon. Democratic Alliance government in the last month. The benchmark To make space, we exit ITC (keeping in mind a possible hike in indices, Sensex and Nifty, appreciated by 10.2% and 10% the excise duty on cigarettes in the forthcoming budget) and respectively. Our Top Pick basket appreciated by 10.4%, which is take home some profits in Apollo Tyres (making space for the largely in line with the movement in the benchmark indices. The other stocks in the auto sector) and HCL Technologies. One action was more pronounced in the mid-cap space with the CNX addition more than the deletions this time is to make up for one Midcap Index appreciating by close to 17% in the same period. extra deletion made in the last month. In line with the key identified investment themes (policy push- To re-iterate our bullish stance, we believe that the equity market driven re-rating of construction, power and public sector is on the cusp of a multi-year rally with the potential to give undertakings, and early beneficiaries of an economic revival, like exponential returns to investors. Do not get bogged down by the auto and financial services), we are adding LIC Housing Finance, recent 20-25% run-up and take a longer-term view on the stock TVS Motor Company, Gabriel India and Gateway Distriparks to market (and play the multi-year rally for handsome gains). the Top Picks basket. We believe that a possible pull-back or correction in these stocks after the recent upsurge would offer
Consistent outperformance (absolute returns; not annualised) (%) 1 month 3 months 6 months 1 year 3 years 5 years Top Picks 10.4 21.7 27.1 34.9 52.6 112.2 Sensex 10.2 16.8 18.2 25.1 34.0 62.5 Nifty 10.0 16.9 18.4 23.0 33.7 60.9 CNX Mid-cap 17.5 27.8 34.2 32.5 26.3 83.6
Absolute outperformance Constantly beating Nifty and Sensex (cumulative returns) since April 2009
300% 272% 350%
250% 300%
200% 250% 150% 116% 200% 100% 35% 150% 50% 22% 12% 17% -20% 0% 100% CY2014 CY2013 CY2012 CY2011 CY2010 CY2009 Since -50% Inc eption Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Oct-09 Jan-10 Oct-10 Jan-11 Oct-11 Jan-12 Oct-12 Jan-13 Oct-13 Jan-14 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 (Jan Apr-09 Sharekhan (Top Picks) Sensex Nif ty Sharekhan Sensex Nif ty 2009)
Name CMP* PER (x) RoE (%) Price Upside (Rs) FY14 FY15E FY16E FY14 FY15E FY16E target (Rs)# (%) Crompton Greaves 189 48.5 22.0 16.8 6.7 13.4 15.6 225 19 Federal Bank 118 12.0 10.3 8.6 12.6 13.3 14.5 142 20 Gabriel India 44 12.9 10.6 8.3 14.6 17.7 19.1 ** - Gateway Distriparks 226 17.3 15.9 13.5 17.5 18.0 20.3 250 11 ICICI Bank 1,460 17.2 15.4 12.9 14.0 14.2 15.5 1,728 18 Larsen & Toubro 1,648 31.0 27.1 22.6 15.6 16.0 17.4 1,840 12 LIC Housing 329 12.6 10.5 8.8 18.8 19.4 19.9 373 13 Lupin 923 31.4 22.5 19.6 25.3 26.5 24.1 1,100 19 Reliance 1,093 15.7 14.5 13.1 11.3 11.0 11.0 ** - TVS Motors 130 23.6 17.1 13.7 19.9 23.4 24.2 142 10 Zee Entertainment 265 28.5 24.8 19.5 20.6 20.6 23.1 367 38 *CMP as on June 02, 2014 # Price target for next 6-12 months ** Under review For Private Circulation only Regd Add: Sharekhan Limited, 10th Floor, Beta Building, Lodha iThink Techno Campus, Off. JVLR, Opp. Kanjurmarg Railway Station, Kanjurmarg (East), Mumbai – 400042, Maharashtra. Tel: 022 - 61150000. Fax: 67481899; E-mail: [email protected]; Website: www.sharekhan.com; CIN: U99999MH1995PLC087498. Sharekhan Ltd.: SEBI Regn. Nos. BSE- INB/INF011073351 ; CD-INE011073351; NSE– INB/INF231073330 ; CD-INE231073330; MCX Stock Exchange- INB/INF261073333 ; CD-INE261073330; DP-NSDL-IN-DP-NSDL-233-2003 ; CDSL-IN-DP-CDSL-271-2004 ; PMS-INP000000662 ; Mutual Fund-ARN 20669 ; Commodity trading through Sharekhan Commodities Pvt. Ltd.: MCX-10080 ; (MCX/TCM/CORP/0425) ; NCDEX-00132 ; (NCDEX/TCM/CORP/0142) ; NCDEX SPOT-NCDEXSPOT/116/CO/11/20626; For any complaints email at [email protected] ; Disclaimer: Client should read the Risk Disclosure Document issued by SEBI & relevant exchanges and Do’s & Don’ts by MCX & NCDEX and the T & C on www.sharekhan.com before investing. sharekhan top picks
Name CMP PER (x) RoE (%) Price Upside (Rs) FY14 FY15E FY16E FY14 FY15E FY16E target (Rs) (%)
Crompton Greaves 189 48.5 22.0 16.8 6.7 13.4 15.6 225 19
Remarks: Crompton Greaves deals in industrial and power systems, which hold high potential, given the prospective turnaround in the investment cycle, with higher focus on the power transmission & distribution sector. It also has a strong presence in domestic consumer products which is expected to witness a high growth, thanks to brand leverage, deep presence and stable demand.
Though the power system business in the USA and the subsidiaries in Canada are still not out of the woods, the overall performance of the international subsidiaries would improve backed by a recovery in the European business, which was hit by a restructuring exercise. A reversal in the outlook for domestic demand would improve sentiment too. Consequently, we expect a sharp improvement in its margin, earnings and return ratios which would be the key driver of a re-rating. We remain positive on the stock.
Federal Bank 118 12.0 10.3 8.6 12.6 13.3 14.5 142 20
Remarks: Federal Bank undertook structural changes in the balance sheet, viz increasing the proportion of the better rated assets and improving the retail deposit base, and is thus better prepared to ride the recovery cycle. As the economy is gradually showing signs of a revival, the bank is much better capitalised (tier-1 capital adequacy ratio of 15%) compared with its peer banks to expand the balance sheet.
Asset quality has improved substantially over the past three to four quarters and is likely to improve further in the coming period. Higher provision coverage of 84% and a possibility of recovery from one large-ticket account (likely in the next two to three quarters) would further increase the comfort on asset quality.
The valuation of 1.2x FY2016 BV is attractive when compared with the regional banks and other old private banks. The expansion in the return on equity (RoE) led by a better than industry growth (FY2014-16) will lead to an expansion in the valuation multiple. We have a Buy rating on the stock with a price target of Rs142.
Gabriel India 44 12.9 10.6 8.3 14.6 17.7 19.1 ** -
Remarks: Gabriel India (Gabriel), a leading manufacturer of shock absorbers is perfectly set to reap the benefit of strong growth in two-wheeler segment and revival in the passenger and CV segments. The management is focusing on increasing the revenue share from the after-sales (high margin segment) and export segments.
Additionally, the revenue share with Honda’s two-wheeler business (the fastest growing two-wheeler company) is expected to increase as it starts to ramp-up production at its new Karnataka facility. No major capex, strong free cashflow generation would help to reduce debt burden going forward. Consequently, it would lead to higher margins and return ratios.
In recent time, the stock has generated healthy return of 40% and almost achieved our target price of Rs46. We continue to remain firm on company’s fundamental, given the fact of strong market share across business verticals, improving outlook of CV/PV segments and recent restructuring exercise to concentrate on each of the business verticals (two-wheeler, PV and CV) to improve the product-mix, after the sales service as well as to improve the exports, which would lead better financial performance. Currently, the stock is under review.
Sharekhan 2 June 2014 sharekhan top picks
Name CMP PER (x) RoE (%) Price Upside (Rs) FY14 FY15E FY16E FY14 FY15E FY16E target (Rs) (%)
Gateway Distriparks 226 17.3 15.9 13.5 17.5 18 20.3 250 11
Remarks: GDL continues to struggle due to a slowdown in demand and intense competition in its CFS business (especially at JNPT). However, the expected uptick in Kochi and the commissioning of the Faridabad inland container depot (ICD) facility would aid the recovery in the stand-alone operations.
The management also expects the improving trend in the rail freight and cold chain subsidiaries to sustain on account the recent efforts to control costs and improve the utilisation.
We continue to have faith in GDL’s long-term growth story based on the expansion of each of its three business segments, ie CFS, rail transportation and cold storage infrastructure segments. First, we believe the listing of SLL will unlock the inherent value and the potential of the cold chain operations. Second, the coming on stream of the Faridabad facility and the strong operational performance will further enhance the performance of the rail operations. Third, the expected turnaround in the global trade should have a positive impact on the CFS operations. We maintain our Buy rating with a price target of Rs250.
ICICI Bank 1,460 17.2 15.4 12.9 14.0 14.2 15.5 1,728 18
Remarks: With an improvement in the liability profile, ICICI Bank is better positioned to expand its market share especially in the retail segment. We expect its advances to grow at 18.5% compound annual growth rate (CAGR) over FY2014-16 leading to a CAGR of 16.9% in the net interest income.
ICICI Bank’s asset quality had shown some stress in recent results due to rise in restructured loans. However, the bank’s asset quality is significantly better than public sector banks (PSBs)’ and has improved in the past few years. We believe the strong operating profits should help the bank to absorb the stress which anyway is expected to recede due to an uptick in economy.
Led by a pick-up in the advance growth and a significant improvement in the margin, the RoE is likely to expand to ~16% by FY2016 while the return on assets (RoA) is likely to improve to 1.7%. This would be driven by a 15.2% growth (CAGR) in the profit over FY2014-16.
The stock trades at 1.7x FY2016E BV. Moreover, given the improvement in the profitability led by lower NPA provisions, a healthy growth in the core income and improved operating metrics, we recommend a Buy with a price target of Rs1,728.
Sharekhan 3 June 2014 sharekhan top picks
Name CMP PER (x) RoE (%) Price Upside (Rs) FY14 FY15E FY16E FY14 FY15E FY16E target (Rs) (%)
Larsen & Toubro 1,648 31.0 27.1 22.6 15.6 16.0 17.4 1,840 12
Remarks: Larsen & Toubro (L&T), the largest engineering and construction company in India, is a direct beneficiary of the strong domestic infrastructure development and industrial capital expenditure (capex) revival now.
L&T continues to impress us with its order inflow growth achievement and good execution skills even in a slowdown. Now it is looking at better days ahead with the domestic environment improving. We believe in such a situation, L&T would be a major beneficiary as it is placed much ahead of its peers with a strong balance sheet. Moreover, monetisation of various assets would help the company to improve the RoE.
A sound execution track record, a healthy order book and a strong performance of its subsidiaries reinforce our faith in L&T. We believe it is one of the best bets to play the cyclicals now.
LIC Housing Finance 329 12.6 10.5 8.8 18.8 19.4 19.9 373 13
Remarks: LIC Housing Finance being the second largest housing finance company (a loan book of over Rs90,000 crore) will benefit from the recovery in the housing market. The company has strong brand recall (due to the LIC parentage) and widespread distribution network which will aid expansion in the business.
The re-pricing of the fixed rate loans to floating rate loans over FY2015 and FY2016 coupled with a moderation in the interest rates will boost margins. The company’s gross and net NPAs are at 0.67% and 0.39% respectively, amongst the best in the system.
Currently, it trades at 1.6x FY2016E book value, which seems attractive considering the stable RoE of around 18- 20% and healthy asset quality. Going ahead, a revival in the economy and moderation in the borrowing rates could be the key triggers for the stock. We have a Buy rating on the stock with a price target of Rs373.
Lupin 923 31.4 22.5 19.6 25.3 26.5 24.1 1,100 19
Remarks: A vast geographical presence, focus on niche segments like oral contraceptives, ophthalmic products, para-IV filings and branded business in the USA are the key elements of growth for Lupin. The company has remarkably improved its brand equity in the domestic and international generic markets to occupy a significant position in the branded formulation business. Its inorganic growth strategy has seen a stupendous success in the past.
Lupin is expected to see stronger traction in the US business on the back of the key generic launches in recent months and a strong pipeline in the US generic business (over 91 abbreviated new drug approvals pending approval including 86 first-to-files) to ensure the future growth. The key products that are going to provide a lucrative generic opportunity for the company, include Nexium (market size $2.2 billion), Lunesta (market size $800 million) and Namenda (market size $1.75 billion) that will be going out of patent protection in FY2015.
While most of the geographies have recorded an impressive growth for the company, Japan (due to restructuring at the step-down subsidiary, Irom Pharma) and India (due to the impact of the new drug pricing policy) saw a weaker performance in FY2014. However, we expect the Indian business to bounce back, as the pricing related issues are gradually getting settled.
Sharekhan 4 June 2014 sharekhan top picks
Name CMP PER (x) RoE (%) Price Upside (Rs) FY14 FY15E FY16E FY14 FY15E FY16E target (Rs) (%)
Reliance Industries 1,093 15.7 14.5 13.1 11.3 11.0 11.0 ** -
Remarks: Reliance Industries Ltd (RIL) has a strong presence in the refining, petrochemical and upstream exploration businesses. The refining division of the company is the highest contributor to the company’s earnings and is operating efficiently with a better gross refining margin (GRM) compared with its peers in the domestic market due to the ability of its plant to refine more of heavier crude. However, the gas production from the Krishna- Godavari-D6 (KG-D6) field has fallen significantly in the last two years. With the government approval for additional capex in its allocated gas fields, we believe production will improve going ahead.
Though there is uncertainty prevailing on gas production and pricing of gas from the KG-D6, the traction in volume from shale gas assets is playing positively for the company. Moreover, the upcoming incremental capacities in the petrochemical and refinery businesses are going to drive the earnings growth in future as the downstream businesses are in the driving seat and contributing the lion’s share of the profitability. Hence, the uncertainty related to the domestic gas production and pricing is likely to limit the impact.
We remain positive on the stock considering earnings growth potential in next two to three years with incremental downstream capacity.
TVS Motors 130 23.6 17.1 13.7 19.9 23.4 24.2 142 10
Remarks: TVS Motors Limited (TVSL), fourth largest two-wheeler manufacturer in India, continues to impress with its robust volume growth on the back of new launches i.e. Jupiter in the scooter segment and Star City + in the motorcycle segment. A wide product range in motorcycles, scooter and mopeds, healthy market share in fast growing scooter segment (12.5% market share) along with new launches (upcoming launches of Wego in Q1FY2015 followed by a new Scooty Zest in Q2FY2015) is expected to drive volume and revenue growth.
Two Wheeler exports after a dismal performance in FY2013 and rebounded with a 16% growth in FY2014. Three- wheeler export continue to maintain momentum with a 103% growth in FY2014. Further, it has entered into a partnership with BMW Motorrad for development of a new range of motorcycles in the sub-500cc category. The partnership will leverage the technical strength of BMW Motorrad and the benefits of TVSL’s low-cost manufacturing. The first product from the tie-up is expected in H2FY2015.
During FY2010-13, it has been invested in its Indonesian subsidiary and other group companies. However, no major investments are expected outside the core business, which would help company to generate better cashflow to de-leverage balance sheet. With an improvement in the profitability coupled with debt reduction, we expect the company to report both RoCE and return on equity (RoE) in excess of 20% in FY2015-16. We recommend a BUY rating with a target price of Rs142.
Sharekhan 5 June 2014 sharekhan top picks
Name CMP PER (x) RoE (%) Price Upside (Rs) FY14 FY15E FY16E FY14 FY15E FY16E target (Rs) (%)
Zee Entertainment 265 28.5 24.8 19.5 20.6 20.6 23.1 367 38
Remarks: Among the key stakeholders of the domestic TV industry, we expect the broadcasters to be the prime beneficiary of the mandatory digitisation process initiated by the government. The broadcasters would benefit from higher subscription revenues at the least incremental capex as the subscriber declaration improves in the cable industry.
On completion of 20 years of operations, ZEEL has issued redeemable preference shares (RPS) aggregating Rs2,000 crore (6% preference dividend) for eight years. The RPS will be issued at a ratio of 21 RPSs for every equity share. The RPS will be redeemable from the fourth year till the eighth year.
ZEEL’s management acknowledged that the recent TRAI recommendation of capping the advertisement time at 12 minutes per hour would have an adverse impact on its advertisement volume. The company will take adequate hikes in the advertisement rates in order to negate the impact of reduced volumes. Thus, we expect a very minimal impact on the blended advertisement growth in FY2014 and FY2015.
ZEEL is well placed to benefit from the ongoing digitisation theme and the overall recovery in the macro economy. Additionally, phase-wise rate hikes in the channel rates would augur well for the subscription revenues. We have incorporated potential tax benefits from a merger of DMCL in FY2016. We maintain our Buy rating on the stock with a price target of Rs367.
Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.
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