In the past one year, though Nifty 50 has given a return of around 3 per cent, BSE Midcap and BSE Smallcap have plummeted 8 and 15 per cent, respectively. The positive returns of Nifty50 were largely driven by just 5 stocks i.e. Infosys, TCS, Reliance Industries, ICICI Bank and HDFC Bank. The carnage in mid and small cap stocks was caused mainly by mutual funds’ selling owing to new categorization of MF schemes, GSM/ASM circular of SEBI and change in equity taxation. In addition, liquidity crisis led by IL&FS default, was extended to other NBFCs, which were already reeling under increasing interest rate environment.
Nikhil Kamath, Co- Founder at Zerodha, says “The indices seem to have reached an inflection point where the current events may largely play a major role in impacting the direction for the next year. Even with the festivities around the corner, demand does not seem to be picking across sectors indicating a lackluster season this year. We maintain a neutral outlook for the next 12 months and see further room for correction with the benchmark indices still trading at valuations higher than the long-term mean post this correction.”
Aurobindo Pharma | Target Price: Rs 915
Over the last few years, the company has successfully managed high debt scenario and acquisitions by consistently generating free cash flows. The company has developed a knack of making the acquisitions profitable by leveraging on its vertically integrated model (Actavis acquisition in the EU). We expect the company to replicate a similar success in the recent Sandoz acquisition in the US, gradually. The company is also one of the better plays on currency tailwinds with ~60% net forex exposure. We expect sales, EBITDA and PAT to grow at a CAGR of 28%, 23% and 19%, respectively, in FY19E-21E.
Divis Lab | Target Price: Rs 1,700
Besides currency tailwinds, the strong Q2 performance was attributable to higher capacity utilisation in the wake of Chinese supply constraints. To overcome the capacity constraints and prepare for growing opportunities arising due to China factor, the company has earmarked an aggressive capex of nearly Rs 1,500 crore (including maintenance capex), over and above nearly Rs 1, 000 crore spent in the last three years. Margins are also likely to get support from currency tailwinds and operating leverage. We ascribe a target price of Rs 1,700 based on 26x FY20E EPS of Rs 65.3.
SBI | Target Price: Rs 340
SBI’s management has guided a strong recovery path led by moderation in slippages, resolution of stressed assets and strong growth in advances. Divestment of non-core assets and stake sale in subsidiaries is on the list. For FY20E, credit growth is pegged by SBI at 12% CAGR (our estimate 11% CAGR) and RoA at 0.9-1% (our estimate- 0.4-0.5%). Even if the bank is able to achieve reasonable growth maintaining credit cost at ~2-2.5% (incorporating Ind-As provisions), earning trajectory should remain healthy. Adequate provision in lieu of cases referred to NCLT provides comfort. Overall, long term structural value remains intact.
Axis Bank | Target Price: Rs 725
Advances as on Q1FY19 was at | 441074 crore. Due to its network & strong corporate relationships, loan book grew at 30% CAGR earlier, higher than 19 per cent CAGR in industry. It has largely been a corporate lender though the trend has been changing over the years. One of the biggest strengths of the bank is its strong liability franchise. CASA deposits
account for ~47% of deposits as on June 2018. CASA ratio has been at ~45% for almost a decade. This has been due to constant investment in branches & ATMs, strong brand recognition & quality services. This has enabled it to maintain healthy NIM of >3% since FY08.
Titan Company | Target Price: Rs 950
Despite headwinds like fewer wedding dates in H1FY19, surge in gold prices & tightening of regulatory policy, Titan continued to gain market share. The management remains upbeat on growth outlook with the aim to grow jewellery segment revenue at a CAGR of 20% till FY23E. High asset turnover with positive operating leverage are expected to translate
into 33% RoCE by FY20E from 29% in FY18. We believe Titan’s growth story will remain multi-pronged and drawn over a longer time frame.
Trent | Target Price: Rs 410
We believe the recently acquired value fashion business, Zudio, would add to incremental revenue growth. Trent sees value fashion as one of the growth drivers and intends to scale up the brand significantly in coming years. We expect consolidated revenues to grow at 25% CAGR in FY18- 20E with EBITDA margin expansion of 120 bps to 10.5% by FY20E. We value the stock on SOTP basis assigning 3.2x, 3.0x, 1.5x FY20E EV/sales to the standalone business, Inditex (Zara), Star Bazar, respectively.
EIH | Target Price: Rs 205
East India Hotels (EIH) is one of the premium hotel operators having a presence across leisure & business destination and a total room capacity of 4,834 rooms (of which EIH owns around 45% of rooms). The company is expected to be a key beneficiary of a revival in the economic environment. The stock is trading at attractive valuation of 19.8x FY20E EV/EBITDA against industry average of 28.0x. Hence, we have a BUY rating on the stock with a target price of Rs 205 (i.e. valuing at two years forward EV/EBITDA of 25.0x, EV/room of Rs 3.8 crore).
It is the frontrunner in upcoming Biosimilar opportunities globally. US generics business will see significant pricing pressure due to Channel consolidation, highest ever approval and reducing opportunity size. Hence those companies who are heavily depended on US chemical based generics should be avoided and biosimilar based companies should be added on portfolio.
Company’s PAT in the last 5 years have growth at a CAGR of 14%. We believe that the company would grow at a CAGR of 17% over the next 3 years. The category in which Dabur operates is expansion, like PATANJALI has been able to expand the market for Honey from Rs 4 billion to Rs 7billion, and Toothpaste market from Rs 60 billion to Rs 90 billion, which is beneficial for DABUR in the long run. We expect volume should improve from 3.5% on an average since 3QFY17 to 8% from 1QFY19 onwards.
HDFC Bank consistently witnessed healthy profit growth even in challenging environment. The Bank’s net interest income (NII) and net profit growth was 26% and 28% respectively over the last 48 quarters on the back of 28% growth over loans & advances. We have projected net revenue and net profit to grow at 20% and 26% respectively over FY18-20e on back of 25% growth in loans & advances. We believe the bank may divest stake in its subsidiaries in future to unlock value for the bank and strengthen its balance-sheet. At CMP, stock is trading at 3.2x FY20 ABV with a RoA and RoE of 2.1% and ~18%.
Havells recently acquired (Feb 2017) the consumer segment of Lloyd Electricals (which the company plans to continue) which would give it an access to Lloyds’ strong distribution network with 10k touch points along with leadership in room AC segment with around 12‐14% market share. GST will enable higher compliance and consolidation in the industry, which provides level playing field for players like Havells to compete with local unorganised players. Company has grown its PAT at 13% CAGR since last 5 years, next 3 years’ growth would be 22% CAGR. At CMP stock is trading at 34x of FY20E EPS.
Post Halol resolution, we expect base business will move from $80 mn per quarter to $120 mn per quarter from 2QFY19 onward. Innovative pipeline which include ODOMZO, SISCERA, TILTRA and ILLYA will drive incremental growth and expect $400 mn peak sales within next 5 years, which will compensate price erosion in base generics business. The company will have Rs 200 billion net cash at the end of FY19E, which can be utilised for earning accretive acquisition.
Voltas’s equipment services business provides spare/parts and services to various capital goods / construction equipment for global partners Company has grown its PAT at 24% CAGR since last 5 years, next 3 years’ growth would be 13% CAGR. At CMP stock is trading at 22x of FY20E EPS.
MOTILAL OSWAL FINANCIAL SERVICES
Maruti Suzuki | Target Price: Rs 8,484
We are positive on Maruti, considering its multi-year favorable product lifecycle, improvement in product mix (increasing share of premium products), aiding realizations and consequently margins, reducing JPY exposure, lower capex intensity, improvement in FCF conversion, and sharp improvement in RoIC. We believe Maruti would gain further market share, driven by 10% volume CAGR over FY18-21. We expect the earnings growth to remain strong for Maruti, driven by higher volumes and margins.
Hindalco Industries | Target Price: Rs 338
Hindalco’s India business is generating strong FCF, despite factoring in lower margins in the aluminum business led by lower LME and 3-4% higher cost of Production (CoP). Copper business is benefitting from strong by-product prices. Hindalco has a very strong balance sheet, with a net debt-to-EBITDA ratio of 2.9x. We expect EBITDA and EPS CAGR of 15% and 20%, respectively, over FY18-20, driven by growth at Novelis and the acquisition of Aleris. By FY20, RoE is expected to improve by another 70bp to 13.5%, while RoCE (pre-tax) is expected to increase by 110bp to 10.4%.
LIC Housing Finance (LICHF) | Target Price: Rs 550
The mortgage market has been in a hyper competitive mode leading to increased balance transfers and moderation in growth. Yet, with significant under-penetration and improving home affordability, this segment is expected to grow at 15% CAGR over the medium term. We believe the worst is over on the spread front and it should stay stable/improve going forward. This should result in NII and PAT growth being in line with balance sheet growth. We estimate an EPS growth of 28% over FY18-20 with RoEs expanding to 16% in FY20 from the current 13%.
PVR | Target Price: Rs 1,650
PVR is expected to report a strong 23% revenue CAGR over FY18-20 driven by acquisition of SPI Cinemas, 84/100 screen additions in FY19/20 in PVR portfolio, healthy content pipeline driving footfalls and stable average ticket price (ATP) and spending per head (SPH). We expect 30%/36% consolidated EBITDA/PAT CAGR over FY18-20. Besides, mid-double-digit growth in advertising revenue bodes well. Going forward, an upbeat earnings outlook and a fillip in return ratios augurs well for PVR.
Oberoi Realty | Target Price: Rs 574
Oberoi has one of the strongest balance sheets among real estate companies, with negligible net debt. As of FY18, the company had net debt to equity of 0.3x. With strong monetization visibility from its ongoing and upcoming projects, Oberoi is expected generate healthy free cash flow over FY18-20. We believe such financial strength offers the company with an opportunity for value-accretive land acquisitions to drive growth potential beyond the existing land bank. OBER plans to multiply its annuity portfolio from 1.6 million square feet (msf) to 4.2 msf resulting in leasing income increasing by 4 times over the next five years.
Infosys | Target Price: Rs 800
Infosys is building a base for improved revenue growth – in its three-year roadmap; while favorable currency provides a tool to effectively address attrition, among other headwinds to business. For 2QFY19, it’s consolidated revenue/EBITDA/PAT grew 17%/14%/10% YoY. 2QFY19 revenue was largely driven by digital which grew 33.5% YoY CC. The company signed $2 billion worth of deal wins in the quarter. Thus, visibility on revenue growth lent by 2Q execution and deal wins is likely to drive growth going ahead.
Indraprastha Gas | Target Price: Rs 373
We are positive on IGL due to IGL’s consistent operational outperformance, the government’s thrust on gas usage, and sustainable high-growth market. Led by the strong focus on curbing pollution in the NCR, CNG sales volume is likely to grow strongly. The expected restriction on the usage of dirty fuel would propel volume further for the company. We expect 12% volume growth in FY19/20 and EBITDA/scm at Rs 5.9 standard cubic meter (SCM). IGL has received permission from the Haryana government to lay a city gas distribution network in a part of the Gurugram district. We believe more such permissions in other areas of Gurugram can boost IGL’s prospects.
ICICI Bank | Target Price: Rs 400
ICICI Bank reported a better-than-expected set of numbers for Q2FY19. ICICI is in the midst of an improvement in the operating environment and is showing healthy signs of earnings normalization. With challenges related to management transition getting addressed, the bank is now focusing on growing its core operating profits.
Britannia Industries | Target Price: Rs 6,870
Rapidly expanding distribution, continuing investment in R&D, rapid pace of new launches and significant expansion of its own manufacturing indicate the immense confidence that management has on growth prospects. Opportunity beyond biscuits is also substantially high. Continuing premiumization, significant incremental cost savings and a favorable commodity cost outlook mean further EBITDA margin expansion prospects are bright as well.
Exide Industries | Target Price: Rs 314
Original equipment manufacturer (OEM) and replacement demand remains healthy in both automotive and industrial segments. Also, there is a gradual shift away from unorganized to organized players. We believe that the battery industry should benefit the most and grow at a CAGR of 10-12% over the medium-to-long term. We expect EXIDE to continue gaining market share, backed by new product launches for existing and new applications, and a sharp focus on customer service and marketing infrastructure.
The company has a strong clientele of +19,000 clients as of 31 Mar’18 (incremental 4,079 during the year) and an addition of 671 new clients in Q1FY19. In all, the total instruments rated in Q1FY19 were 1,806 vs 10,243 in FY18. CARE’s list of clients includes banks, NBFCs, public and private corporates, SMEs and microfinance companies among others. The company also provides issuer ratings and corporate governance ratings along with rating innovative debt instruments such as perpetual bonds. Over the years, the ratings business has proven to be high profit margin business with EBITDA margins remaining in excess of 60%. This has yielded high return ratios with RoE at 28.7% in FY18 (avg. 31% in the last 5 years). Given the strong clientele and improvement in credit growth, we are positive on the stock.
Central Depository Services (India) (CDSL)
CDSL is the leading securities depository with the highest share of incremental growth of Beneficial Owner (BO) accounts and second largest in terms of market share. The company has a wide network of 594 DPs, who act as points of service for the investors operating from 17,473 centres across India, as on 31 Mar’18, offering convenience for an investor to select a DP based on its cost structure and locational convenience to engage our services. The company has DPs across 29 states and 7 union territories including two overseas centres. Given the high economies of scale and focus on new DP relations, we are positive on the stock of CDSL which, at CMP, trades at 22.5x/19.0x its FY19E/20E EPS.
HDFC Standard Life Insurance Company
The company has a well-diversified distribution mix with Bancassurance channel accounting for 33% of its total new business premium (NBP) for FY18, 7% by Agency Channel, 10% by Direct Channel, 2% by Broker Channel and Group business contributing 48%. The company continued to widen its presence and distribution touch-points, through several new tie-ups and partnerships. HDFC Life has a total of 34 individual and 11 group products in its portfolio, along with 8 optional rider benefits. Over FY16-18, the company’s market share among private insurers, in terms of total new business premium has increased to 19.1% from 15.8% in FY16. This further increased to 21.2% in H1FY19, thus maintaining 1st rank.
The company’s flagship brand Dainik Jagran (65% of FY18 revenue) has strengthened its position and enjoys a total readership of 7 crore, ahead of other industry peers. The company is present in the fast growing Hindi print media markets of Bihar, Delhi, Haryana, Jharkhand, Punjab and enjoys leadership position in Uttar Pradesh (UP), the largest Hindi newspaper market. Over the years, Jagran has transformed itself from a print-focussed enterprise to a multimedia conglomerate. To achieve the next phase of growth, Jagran has gradually invested in high growth and under penetrated businesses like radio and digital. For Q1FY19, on a consolidated basis, revenue grew ~2% YoY to ₹603 crore. Radio revenue was up 8% to ₹76 crore with operating profit at ₹26 crore (up 17% YoY) while losses in digital business declined to Rs 0.7 crore (vs Rs 3.8 crore loss in Q1FY18). EBITDA grew 5% to ₹169 crore, with margins expanding by 75bps to 28%. Net profit grew 5% to Rs 91 crore.
The company has presence across various segments such as milk products & nutrition, beverages, prepared dishes and cooking aids, and chocolate and confectionery. At the end of H1CY18, the domestic business contributed 94% to the gross sales while exports accounted for 6%. The company’s core brands Nestle, Kit Kat and Maggi have continued growing at a strong pace. For Q3CY18, Nestle reported good set of numbers with the net operating income increasing 16.9% YoY to ₹2,922 crore on the back of strong growth across all the core brands. The EBITDA increased 25.3% to ₹730 crore with margin expanding 169bps to 25.0% vs. 23.3% in the corresponding quarter last year. This was mainly aided by the raw material cost as a % to operating income declining by 285bps to 40.5% vs. 43.4% in Q3CY17. Net profit grew at a robust pace of 30.0% to ₹446 crore aided by 55.7% increase in other income.
Page’s license agreement with JOCKEY International Inc. has been extended till 31 Dec’40. Jockey being a market leader in the innerwear category is looking at extending product categories to Athleisure and Sportswear for men, women and kids. The strong brand recall and positioning could help Page’s new product launches (Girls Innerwear & Outerwear, USA Originals Women’s Innerwear and Jockey ATHLEISURE). Better penetration across product segments could aid future volume growth. For Q1FY19, revenue grew ~17% YoY to ₹815 crore. Sales volume grew ~9% to 50.4 million pieces and realizations grew ~8% to ₹160/piece. EBITDA grew 39% to Rs 189 crore, with margins expanding by 361 bps to 23.2%. Net profit grew 46% to Rs 124 crore.
On the domestic front, PIL has 8 regional offices with 23 plants, 23 co-makers and 3 R&D centers. On the international front, PIL exports to over 80 countries (major exports to Middle East, Africa, US and Europe). Demand in the domestic market over the last year witnessed an impact of demonetization and GST, the same is said to be improving. PIL is now looking at emerging markets like Sri Lanka, Ethiopia and Bangladesh for future business prospects. It also anticipates better growth from the Middle East and Africa regions. For Q1FY19, on a consolidated basis, PIL’s revenue grew 20% YoY to Rs 1,834 crore (excluding the sales of cyclo division of Pidilite USA Inc which was sold in Jun’17, sales grew 23%). EBITDA grew ~19% to Rs 382 crore, with margins contracting by 18bps to 20.8%. Net profit grew 5% to Rs 239 crore. PIL has taken price hikes (blended increase 3-5% YoY) on select products to mitigate the high input cost (cost of vinyl acetate monomer – VAM, a key input material). The company could witness another round of price hikes on account of rising input cost and rupee depreciation. PIL targets EBITDA margins to be between 22-25%.
Despite robust growth in advances, RBL has been able to maintain a healthy asset quality. The gross NPAs, on QoQ basis, remained stable at 1.40% with net NPAs declining 1bp to 0.74%, as on 30 Sept’18. Post demonetization of high value currency, while there was some pressure on the asset quality with gross NPAs rising in Q3FY17 to 1.2% and increasing further to 1.56% by Q3FY18. Thereafter RBL has managed to improve recoveries along with declining slippages resulting in stable NPAs. The management has indicated that the portfolio impacted by demonetisation will be fully written off in FY19 bringing the gross NPA below 1%. Going forward, with recoveries expected to improve, we expect gross and net NPAs to reduce to 0.95% and 0.49% by FY20E.
With a pan India network of 1,000+ distributors & 30,000+ retailers, it offers a wide product range across residential air coolers, packaged air coolers and central air coolers. Symphony commands 50% value and 42% volume share in India’s organised air cooler market, but its overall volume share is ~14%. Symphony’s unique distribution framework, bolstered by strong branding/promotional investment, has largely led to strong market share over the years. Along with two acquisitions in Mexico and China, Symphony’s 95% acquisition of Climate Technologies (CT), Australia, has given access into the industrial and commercial segments, diversifying its geographical presence. CT acquisition diversified Symphony’s exposure to Australia and US and doubled the target market to more than $600 million. This is in line with its strategy (Symphony 3.0) of establishing a global foothold and exploring new growth opportunities.
Zee Entertainment Enterprises
The company plans to focus on original content creation for their digital platform which has a great untapped market with huge potential, in addition to acquisition of movie titles and launch of new channels. Further, there may be a near term trigger from a likely increase in advertising by political parties for the state assembly elections and the general elections (expected in Apr’19).
ANAND RATHI FINANCIAL SERVICES
Aarti Industries | Target Price: Rs 1,517
Aarti is one of the leading Indian manufacturers of benzene-based specialty chemicals (~78% of FY18 revenue), pharmaceuticals (~15%) and home & personal care segments (~7%). Being a net exporter (~26% of FY18 revenue), it is a beneficiary in the rupee depreciation scenario. Aarti’s play across integrated value-chain, long term orders, strong customer relationships and consistent return ratios justify our valuation multiple. We recommend BUY with target price of Rs 1,517, valuing at ~23x FY20E EPS.
MindTree | Target Price: Rs 1,081
Mindtree, India’s eighth largest IT services company, has strong digital capabilities. The stock has corrected almost 30% since Sep’18 and trades at attractive valuations vs. peers despite better revenue and EPS growth profile. Our belief is based on the company’s strong digital capabilities, which resonates well with clients, resulting in higher digital deal sizes.Mindtree trades at ~15% discount vs. peers, which is unjustified.
Mphasis | Target Price: Rs 1,328
The mid-sized IT company, which is a part of Blackstone group, is likely to post industry leading growth on the back of traction in Direct core and HP channel. We project overall revenue and PAT CAGR of 17% and 23% respectively with margins
improving by ~200bps over FY18-20E to 18.3%. We value Mphasis at 20x FY20E EPS and recommend Buy with target price of Rs 1,328.
Motherson Sumi Systems | Target Price: Rs 293
Motherson Sumi, the auto ancillary player, derives revenues from standalone wiring harness (14%), mirrors (SMR- 22%), polymers (SMP- 43%), global wiring harness (PKC- 16%) and others (5%). Company has successfully acquired / integrated 21 companies till date. Hence, it is set to achieve FY20E revenue target of $18bn ($10bn FY18) via combination of organic ($12-13bn revenues) and inorganic ($5-6bn) initiatives.
Petronet LNG | Target Price: Rs 256
We expect revenue and PAT CAGR of ~16% and ~19% over FY18-20E respectively. The stock trades at 10.8x FY20E EPS with discount valuation (~21%) to its 3-year average. We recommend Buy on the stock (13x FY20E EPS) with a target price of Rs 256.
Reliance Industries | Target Price: Rs 1,310
RIL’s largest petcoke gasification unit at Jamnagar is under commissioning, which is expected to bring full benefit of bottom-of-the-barrel conversion to its refining business. This is likely to improve GRM by up to $2/bbl gradually over FY19E-21E. JIO continues to surprise with robust subscriber additions and steady improvement in profitability. We estimate steady state Revenue Market Share (RMS) of ~43% for JIO.