Corrections of 5-8% are
common during any bull run...Good time to build portfolio of quality businesses
for SAMVAT 2071
Dear All,
Nifty has delivered returns of 23.4% year-to-date and is one of
the best performing global equity market in CY14. Off late, in the month of
Oct14, Indian equity markets are facing huge volatility due to economic
slowdown in developed world. Weak economic recovery in developed world has led
to slump in commodity prices, with correction to the tune of 15-25% in crude,
coal, metals, etc.
The ~22% YTD fall in crude oil price will put an end to diesel
under recoveries, easing pressure on twin deficit and hence will lead to
channelizing of resources towards productive assets in medium to long term.
Moreover, it will ease the inflationary pressure on the economy across the
length and breadth and will leave room for RBI to ease key policy rates. Green
shots of recovery in Indian economy are already visible with healthy GDP growth
of 5.7% in 1QFY15, revival in auto sales number, decent credit growth and
continuing healthy trend in exports. On forex front, RBI governor Raghuram
Rajan has done commendable job of stabilizing Indian rupee against dollar in
the range of 59-62 and has build enough forex reserves (@ $311 bn) to face any
global eventuality.
In medium
to long term, to bring economy back on track, government is likely to take the
following steps 1) change in cumbersome processes and overhaul of laws (labour,
land acquisitions etc) related to setting up and running business in India. The
effort is to make conducive environment to do business in India with ease and
thereby attract foreign companies to setup manufacturing base in India, 2)
announcement of gas price formula and clarity on various policies related to
oil and gas industry, so as to give long term visibility and clarity; 3)
deregulation of diesel prices and roadmap for reducing subsidy burden on LPG;
4) policy, roadmap and support for affordable housing for all by 2022; 5)
implementation of DTC in FY16; 6) implementation of GST in FY16/FY17 and many
more.
In nutshell, we believe that, best is yet to come for Indian
economy and India’s GDP is likely to grow at 5.5% and 6.2% in FY15E and FY16E
respectively (Source: Bloomberg). Corporate earnings will reflect
the same and Nifty’s earning is likely to grow at CAGR of 15% during FY14-FY17E
period. On valuation front, Nifty is trading at P/E of 16.2x, 13.6x and 11.7x
of FY15E, FY16E and FY17E earnings respectively. In short term, market will be
driven by global factors, however, in medium to long term, we believe, Indian
equity market is in midst of structural bull run and hence, the trajectory is
likely to remain upwards.
Nifty has corrected ~5% from its peak, whereas some quality
companies have corrected by 20-25%. Investors should use this auspicious
occasion of Diwali to encash on this opportunity and build portfolio for SAMVAT
2071.
We recommend a portfolio of 15 quality businesses/companies, which
are mix of cyclicals (like auto, banking etc), new emerging sectors (like
defense, media etc) and consumption with strong earnings growth momentum. We
expect these stocks to deliver returns in the range of
20-25% over next 6-12 months.
Happy
Diwali!! Happy Investing!!
Eicher Motors
Investment Arguments:
·
Royal
Enfield has a unique pan India appeal helping sustain a waiting period of 5-6
months despite of 60% growth in volume. It Is working on a new platform for
both domestic market and export market and increasing dealership which will
help sustain demand. Targeting 40% increased sales next year. CV business is
still weak though engines export is doing well and is expected to double by
next year. CV business will also be firing big time starting next year as multi
year growth in CV begins after going through one of the worst period over last
3 years. Expect 50% ++ EPS growth over CY13-16. Trades @ 21X CY16(E) earnings.
Across the segment play on 2W + CV + Adventure sports global player.
ZF Steering
Investment Arguments:
·
ZF,
a leading M&HCV steering supplier will be a key beneficiary of CV cycle
turnaround. It is a debt free company with capex/investment funded through
internal accrual. 26% ownership of ZF Lenksysteme GmbH has been taken over by
Bosch. Has entered into a 26:74 JV with Bosch for PV steering opening up yet
another growth story. ZF is currently trading @ ~11x expected FY16 earnings
with higher probability of top-line growth and earnings surprise. On the other
hand Bosch (Dec ending) is quoting @ 28X FY16(E). Potential re rating candidate
Balkrishna Industries Ltd. CMP ` 724
Investment Arguments:
·
BIL
is a focused on off-highway tyre (OHT) player and enjoys 4.5% market share in a
~$15 billion global market. The company sell its products at 30% discount to
market leader, however enjoys strong margins as its products are competitive
due to lower labour costs in
India.
Weak natural rubber prices (40% of the raw material), crude oil prices and
weakness in rupee is likely to aid further margin expansion. BIL‟s capacity
will get 2x by FY16E @ 300000 MT, which will aid volume growth during
FY16-FY17. At CMP, the stock is trading at reasonable valuations of 10.5x FY16E
earnings, which is likely to re-rate, once the volume start picking up from its
expanded capacity.
Gujarat Pipavav Port
Limited (GPPL) CMP ` 161
· GPPL„s volume growth have surprised
positively and the trend is likely to continue as new services have been added and
macroeconomic scenario is showing signs of uptick.
Realizations are likely to stabilize as a) container volumes is witnessing strong
growth b)currency has stabilized and is expected to be range bound and
c) full impact of tariff revision has already taken place. Operating
margin is likely to improve as volumes are picking up and high margin liquid
volumes will kick in in 2HCY14 onwards. The Company‟s profitability
is likely to improve as commodity mix changes and operating leverage starts trickling down to the bottom-line.
MBL Infra
Investment Arguments:
·
Company
has an order book of `24bn of which 63% is roads and highways construction, 15%
from roads O&M and the balance from Buildings and Housing and Railways
segment. With the new government taking charge, it has laid an ambitious target
of 25 km of roads a day which we believe will throw tremendous opportunity for
road players. Given the experience and balance sheet strength, MBL would be
able to capitalize on the upcoming opportunity. Historically, MBL has delivered
a superior RoE and RoCe of 18% and 17% respectively during FY14 and has a
consistent dividend paying track record (30%+). At CMP MBL is priced at 7x its
FY14 EPS of `43, which we believe is highly attractive.
AIA
Engg CMP ` 891
Investment Arguments:
·
AIA
has witnessed sustained market-share gains in grinding media business. We
expect the trend to continue as AIA focuses on mining industry and doubles its
capacity by April 2016 – emerging as the largest player globally. ` 6 bn capex
is funded through internal generation. D/E stands @ 0.2%. Export constitutes
75% of the TO. Price hikes and improved product mix will help drive margins to
22%+. Expected to see 15% earnings growth in FY16E. At 19x FY16E earnings,
valuations are attractive given the dominant position of the company, superior
return ratios (20%+) as also long term growth potential
Centum Electronics CMP ` 446
·
Centum
is a globally recognized electronics company with strong presence in the
Defence & Aerospace, Space, Industrial, Medical and Telecom industry
segments. CEL offers a wide spectrum of manufactured products and test
solutions which are driven by strong quality management processes and systems.
We believe Centum Electronics Limited(CEL) will be one of the few players which
is likely to benefit from the upcoming Defence investment opportunity given the
first mover advantage the company has. At the CMP stock trades at 12x its FY16
(E) earnings (Bloomberg estimates) which we believe is highly attractive given
the experience and capabilities the company possesses.
Tube Investment CMP `308
Investment Arguments:
·
Tube
Investments (TI) is the flagship company of the Murugappa group with operations
spanning across three divisions – cycles, engineering, and metal formed
products. In addition, the company owns 74% of Chola MS general insurance
business, has ~ 50 % stake in the listed Cholamandalam Finance &
Investments Ltd (CIFC) and 70% stake in Shanthi Gears. At CMP, the stock is
valuing just financial service business, implying that efficient core
engineering business with FY16E revenue of ` 45 bn is available for free. In
medium to long term, the stock has potential to deliver 20%+ CAGR returns.
IndusInd Bank
Investment Arguments:
·
Indusind
Bank has a well-diversified loan book of ` 599bn with corporate credit
constituting 57% (` 340bn) while retail credit comprises the balance 43%. Going
ahead, management aims to increase the share of retail credit (high yielding
book) which shall support the NIM of 3.6%. Similarly, on the liability side, it
relies heavily on bulk deposit and benefits if interest rates fall. Management
aims for credit growth of ~25% for FY14-17E, CASA ratio of 35% and other income
to grow faster than credit growth. Overall, the PAT growth trajectory of 25%+
is here to stay for next 2-3 years. Valuation is reasonable at 2.8x FY16E ABV
for the bank earning such strong return ratios of ~1.9% RoA and ~20% RoE.
Dewan Housing CMP `311
Investment Arguments:
Dewan Housing caters mainly to low and middle
income segment with a credit book of ` 468.6 bn as on Q1FY15. Management aims
to grow credit at 25%+ till FY17E which shall support the NII and profit growth
going ahead. Government‟s aim of “housing for all by 2022” and under-penetrated
Indian housing finance market shall support the strong credit growth. Besides,
the current NIM of ~2.8% shall be maintained as its cost of fund (CoF) is
contained. The bank borrowing (high cost nature) constitutes 63% of total
borrowing. With recent rating upgrades, we expect the share of NCD to increase
which shall contain the CoF. The valuation is attractive at 1x FY15E ABV.
PVR CMP ` 646
Investment Arguments:
PVR is the largest multiplex operator in India
with ~25% market share. It is well placed to take advantage of ongoing
consolidation in the industry, thereby increasing its bargaining power with
film producers on one hand and pricing power on cinema tickets, on other hand.
The company enjoys multiple sales and profitability growth drivers during
FY14-FY16E period, which are as follow: 70-80 screen additions per annum,
12-15% CAGR in ad revenue, 10% CAGR growth in footfalls, 3-4% CAGR growth in
ATPs and 7-8% CAGR on food spend. At CMP, the stock is trading at P/E of 33.6x
and 22.1x FY15E and FY16E earnings respectively. We expect PVR‟s PE multiple to
re-rate to ~25-28x - inline with other FMCG/Media players.
Pidilite CMP `389
Investment Arguments:
Monopoly player in adhesives (MS: ~60%), with
well established brands like Fevicol, m-seal, Dr Fixit etc. With recovery in
capex cycle, Pidilite‟s consumer as well as industrial segment is likely to see
healthy sales traction during 2HFY15. In addition, we expect Pidilite‟s margin
to expand during 2HFY15, led by fall in crude and hence VAM prices. Overall,
during FY14-FY16E, Sales and PAT are likely to grow at CAGR of 17-18% and 25%
respectively. The stock is trading at P/E of 35x and 29x FY15E and FY16E
earnings respectively. Although, valuations are stretched, we believe the
company to enjoy premium due to strong earnings growth trajectory and its
healthy return profile.
Britannia
Investment Arguments:
One of the largest organised biscuit player in
India (35% MS), with well known premium brands like Good Day, Tiger,
Nutrichoice, Britannia 50-50, Marie Gold, Treat etc. The company is scaling up
its presence in Dairy, Rusk and Snacks segment. Margins has expanded from 5% to
8% and has room to further expand based on cost optimisation program, efficient
supply chain management and premiumisation leading to favourable mix change. We
expect Britannia‟s PE multiple to re-rate going forward (~28x FY16E now) in tandem
with structural improvement in margin profile and revenue growth rates.
Alembic Pharma CMP `387
Investment Arguments:
Alembic Pharma has been showing significant
growth over past 2-3 years. Its strong ANDA filings for US and increasing
contribution from specialty portfolio in domestic formulations, enhanced
R&D efforts and a strong balance sheet expected to drive healthy revenue
and PAT growth over next 2-3 years. At CMP, the stocks is trading at a multiple
of 18.3x of FY16 earnings.
Arvind Ltd CMP ` 273
Investment Arguments:
Arvind offers one of the most inexpensive ways
to participate in the growth story of Indian branded apparel segment. The
company holds one of the best brand portfolio in India with 28 brands (Tommy
Hilfiger, Arrow, US Polo, Hanes, etc.) under its fold. We believe, Arvind is
likely to get re-rated over medium to long term, on the back of (1)
monetisation of surplus land leading to deleveraging of its balance sheet (2) a
successful turnaround of Megamart and (3 )likely demerger of its branded
portfolio. At CMP, the stock is trading at reasonable valuation of 13x FY16E
P/E ratio. Recent correction from peak of ` 330, provides good opportunity to
participate in quality integrated textile business.
Diwali Top Picks
|
No
|
Stock
|
Sector
|
CMP
|
|
|
|
|
|
|
1
|
Eicher Motors
|
Auto
|
11,334
|
|
|
|
|
|
|
2
|
ZF Steering
|
Auto
|
709
|
|
3
|
Balkrishna Industries Ltd.
|
Auto
|
724
|
|
|
|
|
|
|
4
|
GPPL
|
Infrastructure
|
161
|
|
5
|
MBL Infra
|
Infrastructure
|
303
|
|
|
|
|
|
|
6
|
AIA Engg
|
Cap Goods/Infrastructure/Engg
|
891
|
|
7
|
Centum Electronics
|
Defense
|
446
|
|
|
|
|
|
|
8
|
Tube Investment
|
Diversified
|
308
|
|
9
|
IndusInd Bank
|
Finance
|
661
|
|
|
|
|
|
|
10
|
Dewan Housing
|
Finance
|
311
|
|
11
|
PVR
|
FMCG/Media
|
646
|
|
|
|
|
|
|
12
|
Pidilite
|
FMCG/Media
|
389
|
|
13
|
Britannia
|
FMCG/Media
|
1,343
|
|
|
|
|
|
|
14
|
Alembic Pharma
|
Pharma
|
387
|
|
15
|
Arvind Mills
|
Textiles
|
273
|
|
|
|
|
|
WHAT EVER YOU EARN FROM MY CALLS PLEASE GIVE 10% PROFIT'S FOOD TO COWS AND DOGS HELP THM GOD WILL HELP YOU-!!!
