Continued inflow in domestic funds, benign interest rate environment, stable currency coupled with favorable global cues is driving markets higher. Anxiety in global markets over North Korea has tapered off. Meanwhile India has received Rs 20,000 crore of inflow in domestic mutual funds in Aug’17 – an all-time high.
We believe while valuations are not euphoric, they are rich vs. long period averages and therefore support from earnings pick up is critical to sustain these valuations, going forward. We prefer large-caps to mid-caps owing to valuation gaps. Earnings visibility and valuation comfort are key determinants for our preferred ideas.
ICICI Bank has steadily improved its retail portfolio with 1) high double digit retail loan growth since FY14 leading to a granular loan book (58% retail and SME), 2) sub 1% retail NNPA over the last 5 years, 3) best in class liability franchise (average CASA ratio of ~47%) and 4) healthy retail fee income profile. Visible improvement in asset quality with consistent decline in total net stressed loans should widen the gap between core PPoP and credit costs. Healthy capital position (Tier 1 ratio of 14.8%) provides further comfort. We reiterate BUY with sum-of-the-parts (SOTP) based target price of Rs 366.
Hindalco’s business is robust and de-risked. Novelis and copper segments operate on conversion model, with LME being a pass-through. These two businesses account for more than 66% of EBITDA, and provide steady cash flows. Aluminum smelting is a high margin; volatility is correlated to metal cycle. Aluminum prices are supported by supply discipline in China – largest producer in the world. We remain bullish on the stock due to (a) strong business fundamentals, (b) free cash flow generation, and (c) the managements’ focus on deleveraging, high IRR projects, and attractively-valued inorganic opportunities. We re-iterate BUY, with a target price of Rs 310/share.
JLR’s product pipeline is entering into its strongest phase, with 8 product actions in next 2 years (v/s 5 in last 2 years), driving JLR’s volumes CAGR of 19% (FY17-19). We estimate recovery in JLRs’ margins over FY17-19, driven by improving hedge rate and operating leverage. While CV business faces uncertain times in FY18, India PV business can potentially break even driven by favorable product pipeline. This implies 6-7% accretion to our FY19E SOTP. We estimate 74% consolidated EPS CAGR over FY17-19 (after declining ~46% CAGR over FY15-17). Maintain Buy with a target price of Rs 542.
Despite near-term challenges due to likely higher sales disruption following GST implementation (as it has high wholesale channel dependence v/s peers), we believe that HMN remains a credible long-term play due to (a) healthy growth led by rural recovery in the existing product categories, where it has dominant market share, (b) demonstrated ability to turnaround acquisitions leveraging on innovation and customer understanding, (c) best-of-breed R&D spend and ability to back up innovation with best in class marketing spend (d) efforts toward improving its direct distribution reach. Valuations of 34.5xFY19 are at a discount to peers with target price of Rs 1310
Petronet LNG continues to benefit from structurally low LNG prices and firm utilization contracts at its terminals. Increasing cross country pipeline infrastructure, completion of Kochi-Mangalore pipeline and focus of the government on greener fuels would continue to drive demand of LNG despite growth in domestic gas production. Lack of competition poses low threat in next 2-3 years. Recent renegotiation of the expensive Australian contract also gives support to consumption of LNG. We expect EPS growth of 23%/28% in FY18/19. Recommend Buy with a target of Rs 273.