 "Key stocks to pick for your 2014 portfolio")
Two major events, the general elections and the impact of US tapering, will dictate the direction of the Indian markets. On the fundamental side, a stable rupee, improvement in the current account deficit, recovery in the economy and a possible cut in the interest rates next year should bode well for the markets particularly as many believe that the earnings cycle is bottoming out.
Current valuations, too, are supportive of this. The Sensex, at 20,888, is trading at 14.5 times its estimated earnings of Rs 1,475 a share in FY15, which is close to its 10-year historical average PE band of 14 times. But the results of elections will have a significant bearing on the outlook next year. If the outcome is favourable, there could be re-rating of the Indian markets considering the valuations are near their historical average. Though the probability is less, in the worst case scenario if the government is formed by a Third Front, with the support of Congress, the market may not like the same. “A Congress-led UPA government and a ‘third front’ government would likely be the intermediate and least-preferred choices of the equity market,” said Manishi Raychaudhuri, managing director and head of research, BNP Paribas Securities.
In this situation, experts advise that those who are on the conservative side should stick to defensive businesses and later on when clarity emerges, which is possible in the second half of the year after elections, choose from cyclicals. On the other hand, those who want to be a bit aggressive and take higher risk could look at cyclicals which could bounce back if the economy recovers and hence, lead to their valuations being re-rated.
Additionally, a large part of the market, including the mid and small-caps and old economy stocks, are trading at large discounts to their own historical and intrinsic value of the businesses. Here investors can combine recovery and attractive valuations in some of these pockets such as PSU banking, cyclicals like metals and engineering, which could boost returns. Here’s what experts have to say:
TIRTHANKAR PATNAIK
Director-Institutional Research, Religare Capital Markets
Infosys: Post Narayan Murthy’s return, Infosys has registered an improved performance on most operational metrics and is the biggest beneficiary of a potential tech demand recovery in the US. Moreover, the management’s conservative guidance of 10 per cent dollar growth for FY14 could provide room for positive surprise. Despite recent rally, the stock still trades at 14-15 per cent discount to TCS on FY16 earnings
Tech Mahindra: The deal-win momentum has been very healthy with the company announcing 13 deals in Q2. Win rates for deals have been improving and the deal pipeline remains healthy with five-six large deals. Moreover, the increased scale would help the company continue the deal-win momentum. Current valuation at 13 times FY15 P/E remains reasonable despite the stock’s recent upmove
Sun Pharma: It offers robust revenues and earnings visibility amid a weak macro environment. We expect a revenue CAGR of 21 per cent over FY13-16 led by sustenance of pricing power in Taro, niche product launches, re-introduction of URL portfolio and a scale-up in Dusa. While Sun trades at 15-20 per cent premium, it’s justifiable given high growth expectations, industry leading margins, improving RoIC (41 per cent in FY16E vs 38 per cent now) and net cash of $1 billion plus
Lupin: Its footprint in the US and Japan as well as India business continues to grow profitably. We expect 18-20 new generic launches annually in the US mostly in low-competition segments resulting in 25 per cent growth. Margins would likely inch up gradually led by high-margin US launches, improved Japan profitability and higher utilisation of Indore SEZ. Steady execution in US generics and resilient domestic business would drive earning upgrades
Maruti Suzuki: Amid the weak macro situation, MSIL has managed to grow ahead of the industry. The company’s aggressive plans to build its rural vertical (aided by good monsoons) will likely yield dividends. We expect a new SX4 and smaller SUV to generate incremental volumes or improved realisations. With an enhanced focus on localisation and cost reduction, margins will have a cushion
Managing Director–Institutional Equities, Motilal Oswal Securities
Lupin: A rich US generic pipeline, a strong domestic formulation franchise and presence in key markets differentiate Lupin’s profile from peers. Over FY13E-15E, we expect 19 per cent profit CAGR, driven by niche US launches and domestic growth. Lupin is set to launch several limited competition products in US. Lupin’s strong positioning in the chronic space is likely to continue driving growth in India over next few years
Tech Mahindra: It appears to be well placed to address demand trends shaping the future, with unique advantages compared to peers. Its traction in application development and maintenance segments in both telecom and enterprise too continues to be strong. It is expected to grow dollar revenues at a CAGR of 14.4 per cent over FY13-15 and EPS at a CAGR of 25 per cent during this period
SBI: Strong earnings growth is expected in FY15 as life expectancy related provision of Rs 2,400 crore and high MTM of Rs 2,000 crore is unlikely to be repeated. Stock trades at low 0.8 times FY14 consolidated book value of Rs 1,928. Lowest NSL, strong franchise, better capital adequacy of 9.2 per cent, management continuity and high recognition of stress loans upfront are the key positives
Oil India: Its strong operational foothold, steady production growth, high share of oil (55 per cent in proven reserves and 62 per cent in proven and probable reserves) in its reserves, and attractive valuations, (trades at 40 per cent discount to its global peers ) make us positive. The stock trades at seven times FY15E EPS of Rs 65.8 and has an implied dividend yield of four-five per cent. We value the company at Rs 639 a share
ICICI Bank: Despite the challenging macro-environment, the bank has been able to manage asset quality fairly well and within guidance. Stress loans (NNPAs +restructured loan portfolio) are contained at 2.34 per cent (1.7 per cent in FY11). Expect FY14/FY15 NII CAGR of 17 per cent, compared to loan CAGR of 18 per cent. Helped by healthy RoA of 1.6 per cent plus, core RoE should remain healthy at 15 per cent in FY15. Tier-I capital would remain strong at 10 per cent plus at end-FY15
Head Research (Individual Clients), Edelweiss Financial Services
Motherson Sumi Systems: New order wins in FY13 at SMP & SMR (6 billion euros) give sales visibility while margin expansion (SMR/SMP) over last three quarters gives comfort on company’s effort to expand margins going forward. Internal sourcing opportunities (Rs 5,000 crore), tapping customers within business segments and vertical integration will lead to sustained sales and margin visibility over a longer period
L&T: Management is confident of 15-17 per cent growth in standalone revenue in FY14 with stable margins. Order backlog of Rs 1.76 lakh crore (2.9x FY13 standalone revenue) and expectation of strong order inflows gives revenue growth visibility. Further divesting stake in several developmental projects will unlock equity, thus allowing company to fund more projects and unlock value. Improving RoE in the coming years to 20 per cent will augur well
IL&FS Transportation: With 10 projects likely to become operational by FY15 end, ITNL’s operating cash flow will improve. This, along with the recent fund-raising exercise, should help the company meet its equity commitment for road BOT projects. With NHAI now shifting focus from project award to putting clearances in place, we anticipate smoother execution of future projects. The company will be one of the major beneficiaries.
Repco Home Finance: Promoted by Repco Bank, it is a dedicated Tier-II and Tier-III cities-focussed housing finance company. Last five years, loan disbursements have grown at a CAGR of 40 per cent while PAT grew 40 per cent CAGR. It will be able to sustain growth in excess of 20 per cent and RoAE in excess of 20 per cent in coming years. The company is well capitalised (25.5 per cent capital adequacy ratio)
Jammu and Kashmir Bank: We believe JKB is an attractively priced bank compared to its peers at one time FY15E adjusted book and 4.8 time FY15E earnings, delivering sustainable RoE of around 22 per cent and RoA of 1.5 per cent. Capital Adequacy Ratio (CAR) of 13.2 per cent (Basel-II), gross NPA of 1.7 per cent and PCR at 92 per cent makes a strong case for the stock to trade at premium valuations compared to peer group valuations
DEVEN CHOKSEY
Managing Director, KR Choksey Shares and Securities
Jain Irrigation: It will benefit from better rabi crop outlook, higher exports, improving working capital and lower debt. Its sales and net profit are expected to grow by 14 per cent and 76 per cent CAGR over FY13-15 to Rs 6,513 crore and Rs 299 crore, respectively. Operating and net profit margin are expected to improve by 50 basis points and 270 basis points respectively in FY15
Maruti Suzuki: Company to ramp up its business activities. It is expected to showcase/launch five-six models as well as concepts. It is minimising cost and clearing inventory. Also it will start transporting its products by rail. The company is in talks with the Sri Lankan government to set up a manufacturing facility there. Maruti is planning to set up a plant in Gujarat which will strategically help in exports of the company’s products
IDFC: Integrated business model, strong management capabilities, healthy return ratios, well capitalised and strong domain knowledge and healthy asset quality are key value drivers for IDFC in our view. We expect IDFC to deliver 15 per cent CAGR in earnings over FY13-15 driven by core operation. At Rs 107, the stock is trading at 0.90 time FY15 book and 6.6 times FY14 earnings
Sterlite Technologies: Power Grid to award contracts of Rs 18,000-20,000 crore each year during 12th Plan. Sterlite Tech being a leading player in power conductors will benefit from the same. It has guided a strong execution in power conductor (130,000 mtpa) and in optical fibre guidance for current fiscal; which is achievable given strong order backlog of Rs 2,500 crore
Crompton Greaves : It has finished its restructuring of Belgium operations and has come out leaner and efficient; consequently the company has shown improvement in operating margins in H1FY14. We believe improvement in margins will continue as impact of restructuring sets in gradually and as facilities stabilise; resulting in operating margin improvement of 280 bps over
FY12-15 to 6.8 per cent and earnings growth of 73 per cent over FY12-15
Current valuations, too, are supportive of this. The Sensex, at 20,888, is trading at 14.5 times its estimated earnings of Rs 1,475 a share in FY15, which is close to its 10-year historical average PE band of 14 times. But the results of elections will have a significant bearing on the outlook next year. If the outcome is favourable, there could be re-rating of the Indian markets considering the valuations are near their historical average. Though the probability is less, in the worst case scenario if the government is formed by a Third Front, with the support of Congress, the market may not like the same. “A Congress-led UPA government and a ‘third front’ government would likely be the intermediate and least-preferred choices of the equity market,” said Manishi Raychaudhuri, managing director and head of research, BNP Paribas Securities.
In this situation, experts advise that those who are on the conservative side should stick to defensive businesses and later on when clarity emerges, which is possible in the second half of the year after elections, choose from cyclicals. On the other hand, those who want to be a bit aggressive and take higher risk could look at cyclicals which could bounce back if the economy recovers and hence, lead to their valuations being re-rated.
Additionally, a large part of the market, including the mid and small-caps and old economy stocks, are trading at large discounts to their own historical and intrinsic value of the businesses. Here investors can combine recovery and attractive valuations in some of these pockets such as PSU banking, cyclicals like metals and engineering, which could boost returns. Here’s what experts have to say:
TIRTHANKAR PATNAIK
Director-Institutional Research, Religare Capital Markets
Infosys: Post Narayan Murthy’s return, Infosys has registered an improved performance on most operational metrics and is the biggest beneficiary of a potential tech demand recovery in the US. Moreover, the management’s conservative guidance of 10 per cent dollar growth for FY14 could provide room for positive surprise. Despite recent rally, the stock still trades at 14-15 per cent discount to TCS on FY16 earnings
Tech Mahindra: The deal-win momentum has been very healthy with the company announcing 13 deals in Q2. Win rates for deals have been improving and the deal pipeline remains healthy with five-six large deals. Moreover, the increased scale would help the company continue the deal-win momentum. Current valuation at 13 times FY15 P/E remains reasonable despite the stock’s recent upmove
Sun Pharma: It offers robust revenues and earnings visibility amid a weak macro environment. We expect a revenue CAGR of 21 per cent over FY13-16 led by sustenance of pricing power in Taro, niche product launches, re-introduction of URL portfolio and a scale-up in Dusa. While Sun trades at 15-20 per cent premium, it’s justifiable given high growth expectations, industry leading margins, improving RoIC (41 per cent in FY16E vs 38 per cent now) and net cash of $1 billion plus
Lupin: Its footprint in the US and Japan as well as India business continues to grow profitably. We expect 18-20 new generic launches annually in the US mostly in low-competition segments resulting in 25 per cent growth. Margins would likely inch up gradually led by high-margin US launches, improved Japan profitability and higher utilisation of Indore SEZ. Steady execution in US generics and resilient domestic business would drive earning upgrades
Maruti Suzuki: Amid the weak macro situation, MSIL has managed to grow ahead of the industry. The company’s aggressive plans to build its rural vertical (aided by good monsoons) will likely yield dividends. We expect a new SX4 and smaller SUV to generate incremental volumes or improved realisations. With an enhanced focus on localisation and cost reduction, margins will have a cushion
Managing Director–Institutional Equities, Motilal Oswal Securities
Lupin: A rich US generic pipeline, a strong domestic formulation franchise and presence in key markets differentiate Lupin’s profile from peers. Over FY13E-15E, we expect 19 per cent profit CAGR, driven by niche US launches and domestic growth. Lupin is set to launch several limited competition products in US. Lupin’s strong positioning in the chronic space is likely to continue driving growth in India over next few years
Tech Mahindra: It appears to be well placed to address demand trends shaping the future, with unique advantages compared to peers. Its traction in application development and maintenance segments in both telecom and enterprise too continues to be strong. It is expected to grow dollar revenues at a CAGR of 14.4 per cent over FY13-15 and EPS at a CAGR of 25 per cent during this period
SBI: Strong earnings growth is expected in FY15 as life expectancy related provision of Rs 2,400 crore and high MTM of Rs 2,000 crore is unlikely to be repeated. Stock trades at low 0.8 times FY14 consolidated book value of Rs 1,928. Lowest NSL, strong franchise, better capital adequacy of 9.2 per cent, management continuity and high recognition of stress loans upfront are the key positives
Oil India: Its strong operational foothold, steady production growth, high share of oil (55 per cent in proven reserves and 62 per cent in proven and probable reserves) in its reserves, and attractive valuations, (trades at 40 per cent discount to its global peers ) make us positive. The stock trades at seven times FY15E EPS of Rs 65.8 and has an implied dividend yield of four-five per cent. We value the company at Rs 639 a share
ICICI Bank: Despite the challenging macro-environment, the bank has been able to manage asset quality fairly well and within guidance. Stress loans (NNPAs +restructured loan portfolio) are contained at 2.34 per cent (1.7 per cent in FY11). Expect FY14/FY15 NII CAGR of 17 per cent, compared to loan CAGR of 18 per cent. Helped by healthy RoA of 1.6 per cent plus, core RoE should remain healthy at 15 per cent in FY15. Tier-I capital would remain strong at 10 per cent plus at end-FY15
Head Research (Individual Clients), Edelweiss Financial Services
Motherson Sumi Systems: New order wins in FY13 at SMP & SMR (6 billion euros) give sales visibility while margin expansion (SMR/SMP) over last three quarters gives comfort on company’s effort to expand margins going forward. Internal sourcing opportunities (Rs 5,000 crore), tapping customers within business segments and vertical integration will lead to sustained sales and margin visibility over a longer period
L&T: Management is confident of 15-17 per cent growth in standalone revenue in FY14 with stable margins. Order backlog of Rs 1.76 lakh crore (2.9x FY13 standalone revenue) and expectation of strong order inflows gives revenue growth visibility. Further divesting stake in several developmental projects will unlock equity, thus allowing company to fund more projects and unlock value. Improving RoE in the coming years to 20 per cent will augur well
IL&FS Transportation: With 10 projects likely to become operational by FY15 end, ITNL’s operating cash flow will improve. This, along with the recent fund-raising exercise, should help the company meet its equity commitment for road BOT projects. With NHAI now shifting focus from project award to putting clearances in place, we anticipate smoother execution of future projects. The company will be one of the major beneficiaries.
Repco Home Finance: Promoted by Repco Bank, it is a dedicated Tier-II and Tier-III cities-focussed housing finance company. Last five years, loan disbursements have grown at a CAGR of 40 per cent while PAT grew 40 per cent CAGR. It will be able to sustain growth in excess of 20 per cent and RoAE in excess of 20 per cent in coming years. The company is well capitalised (25.5 per cent capital adequacy ratio)
Jammu and Kashmir Bank: We believe JKB is an attractively priced bank compared to its peers at one time FY15E adjusted book and 4.8 time FY15E earnings, delivering sustainable RoE of around 22 per cent and RoA of 1.5 per cent. Capital Adequacy Ratio (CAR) of 13.2 per cent (Basel-II), gross NPA of 1.7 per cent and PCR at 92 per cent makes a strong case for the stock to trade at premium valuations compared to peer group valuations
DEVEN CHOKSEY
Managing Director, KR Choksey Shares and Securities
Jain Irrigation: It will benefit from better rabi crop outlook, higher exports, improving working capital and lower debt. Its sales and net profit are expected to grow by 14 per cent and 76 per cent CAGR over FY13-15 to Rs 6,513 crore and Rs 299 crore, respectively. Operating and net profit margin are expected to improve by 50 basis points and 270 basis points respectively in FY15
Maruti Suzuki: Company to ramp up its business activities. It is expected to showcase/launch five-six models as well as concepts. It is minimising cost and clearing inventory. Also it will start transporting its products by rail. The company is in talks with the Sri Lankan government to set up a manufacturing facility there. Maruti is planning to set up a plant in Gujarat which will strategically help in exports of the company’s products
IDFC: Integrated business model, strong management capabilities, healthy return ratios, well capitalised and strong domain knowledge and healthy asset quality are key value drivers for IDFC in our view. We expect IDFC to deliver 15 per cent CAGR in earnings over FY13-15 driven by core operation. At Rs 107, the stock is trading at 0.90 time FY15 book and 6.6 times FY14 earnings
Sterlite Technologies: Power Grid to award contracts of Rs 18,000-20,000 crore each year during 12th Plan. Sterlite Tech being a leading player in power conductors will benefit from the same. It has guided a strong execution in power conductor (130,000 mtpa) and in optical fibre guidance for current fiscal; which is achievable given strong order backlog of Rs 2,500 crore
Crompton Greaves : It has finished its restructuring of Belgium operations and has come out leaner and efficient; consequently the company has shown improvement in operating margins in H1FY14. We believe improvement in margins will continue as impact of restructuring sets in gradually and as facilities stabilise; resulting in operating margin improvement of 280 bps over
FY12-15 to 6.8 per cent and earnings growth of 73 per cent over FY12-15