Diwali Special Picks - 2014
Buy Axis Bank Ltd For Target Rs.501 CMP 379
Buy Banco Products Ltd For Target Rs.182 CMP 139
Buy Bank of India Ltd For Target Rs.310 CMP 239
Buy Crompton Greaves Ltd For Target Rs.235 CMP 203
Buy Goodyear India Ltd For Target Rs.756 CMP 644
Buy ICICI Bank For Target Rs.1,894 CMP 1,460
Buy India Cements Ltd For Target Rs.146 CMP 108
Buy Infosys Ltd For Target Rs.4,700 CMP 3,889
Buy Jagran Prakashan Ltd For Target Rs.154 CMP 122
Buy Mangalam Cement Ltd For Target Rs.337 CMP 244
Buy Punjab National Bank For Target Rs.1,109 CMP 900
Buy Siyaram Silk Mills Ltd For Target Rs.952 CMP 712
Axis Bank Ltd
Buy Axis Bank Ltd For Target Rs.501 CMP 379
* Axis Bank, the third largest private sector bank in India, has been focusing on retail business in the past few years. It has increased its branch network at a 24% CAGR from 1,035 in FY2010 to 2,421 branches as of 1QFY2015, which has aided the bank to maintain healthy growth in its low cost deposits (CASA ratio at 42% in 1QFY2015). Moreover, the contribution of the retail advances to total advances has increased from 20% in FY2010 to 34% in 1QFY2015 (excluding retail agriculture loans), out of which 88% of retail loans are secured. Focusing on secured retail products has also aided the bank to maintain its relatively better asset quality with a Net NPA ratio of 0.44% as of 1QFY2015, which is one of the lowest in the industry.
* Axis Bank is well capitalized with a capital adequacy ratio (CAR) of 16.09% and Tier I CAR of 12.64% as in 1QFY2015. Strong capital adequacy combined with branch expansion has positioned the bank to benefit from growth opportunities in the up-cycle and further improve its market share of advances and low cost deposits.
* We expect the bank to grow its earnings at a CAGR of 17.2% over FY2014-16E. On the valuation front, Axis Bank is trading at 1.8x FY2016 P/ABV, ie at a 47.0% discount to HDFC Bank, which is trading at FY2016 P/BV of 3.4x. We maintain our Buy recommendation with a target price of `501.
Banco Products Ltd
Buy Banco Products Ltd For Target Rs.182 CMP 139
* Banco is a manufacturer of radiators and gaskets that have applications in automobiles, oil engines, compressors and locomotives. The company is a leading exporter of aftermarket radiators to Europe, with a growing presence in the America, Middle East and African markets.
* The commercial vehicle (CV) industry contributed ~80.0% to the company's domestic standalone sales in FY2014. We expect Banco to perform well on the back of recovery in the global economy as well as revival in domestic CV demand.
* In order to focus on the core business, the company has divested its entire stake in Lake Cement for US$17.7mn at an approximate premium of 52%. It is expected that it will use the proceeds for acquisitions (in Europe) related to the core business. We believe this will strengthen its core business and fortify its presence in the global markets.
* We expect Banco to register a CAGR of 15.0% in revenue over FY2014-16E to `1,536cr with an operating margin of 13.7% in FY2016E. The profit is expected to grow at a CAGR of 20.4% over the same period to `130cr in FY2016E. At the CMP, the company is trading at a PE of 7.6x FY2016E earnings. We have a Buy rating on the stock with a target price of `182 based on FY2016E PE of 10x.
Bank of India Ltd
Buy Bank of India Ltd For Target Rs.310 CMP 239
* PSU Banks such as Bank of India (BOI) are expected to be among the beneficiaries of an improved economic and policy environment. Further with inflation consistently declining and gross domestic savings once again entering into financial savings such as deposits, we expect interest rates to decline going forward. This is expected to improve the operating performance of banks such as BOI on all fronts including credit growth, asset quality and treasury gains.
* Benchmark 10-year bond yield has fallen to 8.46% and is expected to fall further due to the softening trend in inflation, which is expected to contribute to substantial treasury gains for banks such as BOI.
* In the last ten years, BOI has traded at an average P/ABV multiple of 1.1x and in the range of 0.7x to 1.4x. Currently it is trading close to its bottom average trading range in the last 10 years and at an attractive valuation of 0.5x FY2016E P/ABV, which is at a 44.4% discount to its closest peer, Bank of Baroda. We expect the valuation gap to narrow with improving fundamentals. Hence we maintain our Buy view on the stock with a target price of `310.
Crompton Greaves Ltd
Buy Crompton Greaves Ltd For Target Rs.235 CMP 203
* Crompton Greaves (CG) is among the leading players in the power transmission & distribution, industrial equipment, and consumer products and solutions segments in India. The company derives more than 50% of its revenue from international operations (as of FY2014).
* The company has proposed to de-merge its consumer business into a separate listed entity. In the consumer business, CG is a market leader in the fans and pumps segments with 26% and 14% market shares, respectively. We believe the demerger would unlock value for share holders as the consumer business is expected to deliver strong growth in the near future with higher margins and better return ratios. Thus, CG's consumer business would command a higher valuation multiple, in line with its peers in the space.
* The overseas operations as in Belgium, Hungary, Canada and US have become profitable at the EBITDA level but are still showing losses at the net profit level owing to higher interest liabilities. CG's Management expects margins to improve as the new orders bagged are relatively higher margin orders.
* The stock trades at an attractive valuation of 0.9x FY2016E EV/sales; we maintain our positive stance on the company and assign an EV/sales multiple of 1x to arrive at a target price of `235, implying an upside of 16% in the stock price from the current levels.
Goodyear India Ltd
Buy Goodyear India Ltd For Target Rs.756 CMP 644
* Goodyear India (GIL) is a market leader in the tractor tyre industry, with a market share of ~22% in the front tyre segment and ~34% in the rear tyre segment.
* Raw Material cost accounts for ~71% of net sales of which, rubber constitutes ~62%. Natural Rubber (NR) prices have been declining in the recent past largely due to global surplus in NR. Domestic rubber prices have declined from average levels of `171/kg in CY2013 to `121/kg currently. Additionally, styrene butadiene rubber (SBR), which is also used for manufacturing tyres, is showing signs of weakness owing to weak demand from China.
* GIL is a debt free-cash rich company with a RoIC of 64.9%. We expect the company's RoIC to surge to ~148% in CY2015. The company's cash and equivalents are expected to be at `545cr by CY2015-end, which are ~36% of the current market cap.
* The stock is currently trading at a PE of 10.2x for CY2015E. We have a Buy recommendation on the stock with a target P/E of 12x for CY2015E, and arrive at a target price of `756.
ICICI Bank
Buy ICICI Bank For Target Rs.1,894 CMP 1,460
* In the last six years, ICICI Bank has delivered a strong performance in a tough environment. It has increased its branch network from 1,388 branches in 1QFY2009 to 3,763 in 1QFY2015. Its balance sheet also strengthened, with CASA ratio improving from 29% at the end of FY2009 to 43% in 1QFY2015, Gross NPA ratio decreasing to 2.69% in 1QFY2015 as against 5.1% in FY2010 and Net NPA ratio decreasing to 0.87% in 1QFY2015 as against 1.87% in FY2010.
* Branch expansion coupled with strong capital adequacy at 17.57% (Tier1 at 12.5%) will in our view enable the bank to grow its loans and low-cost deposits at a faster pace than the industry and increase its market share as the business environment turns conducive.
* The stock is trading at a valuation of 1.9x FY2016E P/ABV (adjusting for subsidiaries). We maintain our Buy recommendation on the stock with a target price of `1,894, valuing the core bank at 2.5x FY2016E P/ABV and assigning a value of `206 to its subsidiaries.
India Cements Ltd
Buy India Cements Ltd For Target Rs.146 CMP 108
* India Cements is the largest cement player in south India and the fifth largest player in India, with an installed capacity of 13.1 MTPA in south India and overall total capacity of 15.6 MTPA (pan India). The company derives 85-90% of its revenue from south India. Due to excess capacity in south India and political instability in Andhra Pradesh, the demand for cement in the south region had been weak in the past couple of years. Now, with the Telangana issue being resolved and demand picking up in the region, we expect overall utilization levels to improve going forward.
* The pricing environment in south India continues to remain stable despite a sharp increase in the previous quarter. As per the Management, prices are expected to increase further post monsoons, which should lead to an improvement in margins in future.
* At the current market price of `108 the stock is available at trailing EV/tonne of $63, which is at a large discount to its other midcap peers. Given the improving macroeconomic scenario, stable pricing and expected pickup in demand, we are positive on India Cements and value it at EV/tonne of $75 on FY2016E installed capacity. We arrive at a price target of `146, ie an upside of 35% from the current levels.
Infosys Ltd
Buy Infosys Ltd For Target Rs.4,700 CMP 3,889
* Infosys has reinforced its USD revenue growth guidance of 7-9%, earlier given in 1QFY2015. This should result in 2.3-3.5% qoq revenue growth for the rest of the quarters of FY2015. We believe that this is a conservative number by the company and expect the company to post ~10.4% USD revenue growth in FY2015. Over the long term, the new Management has given an outlook of a meaningful revival over the next 2-3 years and is targeting a long term revenue growth of 15-18% and EBIT margins of 26-28%, thus reverting back to being the industry leader in growth and profitability.
* Management commentary indicates that the deal pipeline seems to be better than what it was the same time last year. During the last few quarters, Infosys signed 4-5 large deals worth US$700mn+, indicating a better spending trend in key verticals like financial services, retail and manufacturing although telecom and hitech verticals continue to be challenging. We expect Infosys to post a 10.8% USD revenue CAGR over FY2014-16E.
* At the current market price, the stock is trading at 18.2x and 16.5x its FY2015E and FY2016E EPS, respectively, ie at a discount to its peers and thus provides a good investment opportunity for long term investors, as we believe that over the next 2-3 years the company will be back to its growth trajectory and breach the valuation gap. We maintain our Buy on the stock with a price target of `4,700.
Jagran Prakashan Ltd
Buy Jagran Prakashan Ltd For Target Rs.154 CMP 122
* We expect Jagran Prakashan (JPL) to register a healthy net sales CAGR of ~8% over FY2014-16E, supported by strong growth in circulation revenue and improvement in advertising revenue. Further, we expect the company to report CAGR of ~12% over FY2014-16E in circulation revenue owing to combination of increase in cover price and volume growth. Also, we expect revenue from advertisements to pick up due to improvement in GDP growth.
* We expect the company to report an operating profit CAGR of ~12% over FY2014-16E to `479cr on back of improvement in margin due to lower news print costs and effective cost management strategy. We expect a net profit CAGR of ~12% over FY2014-16E to `282cr on back of decent sales numbers and healthy operating profit.
* Considering Dainik Jagran's status as the most read Hindi newspaper and its strong presence in the rapidly growing Hindi markets of Bihar, Haryana, Jharkhand, Punjab, Madhya Pradesh and Uttar Pradesh, we expect JPL to benefit from an eventual recovery in the Indian economy. At the current market price of `122 the stock trades at a PE of 15.9x and 13.5x its FY2015E and FY2016E EPS of `7.7 and `9.1, respectively. Hence, we maintain our Buy rating on the stock with a target price of `154.
Mangalam Cement Ltd
Buy Mangalam Cement Ltd For Target Rs.337 CMP 244
* Mangalam Cement (MCL), a BK Birla group company having its plant in Rajasthan, has expanded its cement capacity by 1.25 MTPA (increase of 63%) to 3.25 MTPA (as of end-FY2014). We expect MCL to report a healthy 21.8% volume CAGR over FY2014-16E, on the back of improved outlook for cement demand.
* With MCL's grinding capacity now having increased to 1.4x of clinker capacity post expansion (vs 1.2x earlier), it expects to increase the fly ash component in cement production from the current 16% to 30-32% during FY2015E, closer to industry levels, which is expected to aid OPM expansion. Also, the new 1.25 MTPA capacity, which is expected to contribute significantly to overall production volume, is also expected to be more energy efficient. Thus there would be a further reduction in the cost of cement production for the company. The realizations are also expected to improve due to strong demand recovery in the cement sector. Overall, we expect EBITDA/tonne to improve from `310/tonne in FY2014 to `680/tonne in FY2016.
* At the current market price of `244, the stock is trading at trailing EV/tonne of $49 (on its 3.25 MTPA installed capacity), which is at a large discount to its midcap peers. We value MCL at EV/tonne of $60 and imply 6.5x FY2016 EV/EBITDA to arrive at target price of `337, thus providing an upside of 39% from the current levels.
Punjab National Bank
Buy Punjab National Bank For Target Rs.1,109 CMP 900
* Punjab National Bank (PNB)'s loan growth in the last 2 years has been conservative at 5.1% and 13.1% in FY2013 and FY2014 respectively. However, with the economic cycle expected to turnaround, growth rate should pick up in FY2016.
* With economic cycle improving, recoveries are likely to improve going forward. PNB has a large pool of bad loans with Gross NPA of `19,604cr (5.5% of advances and 52.6% of net worth), restructured book of `34,012cr (9.8% of advances and 91% of net worth) and written off accounts of `6,550cr (1.9% of advances and 17.6% of net worth). While this had depressed its book value and valuations so far, once the recovery cycle picks up steam, the bank is likely to be among the bigger beneficiaries.
* In last ten years, PNB has traded at an average P/ABV multiple of 1.3x and in the range of 0.9x to 1.5x. Currently PNB is trading at a valuation of 0.8x FY2016 P/ABV. We expect the P/ABV multiple to expand over the next few years due to higher growth, better asset quality and return metrics. We maintain our Buy recommendation with a target price of `1,109.
Siyaram Silk Mills Ltd
Buy Siyaram Silk Mills Ltd For Target Rs.952 CMP 712
* Siyaram Silk Mills (SSML) has strong brands, such as Siyaram's, Mistair, MSD, J. Hampstead and Oxemberg. With launch of two new premium cotton brands - Zenesis and Moretti, entry into linen fabrics, foray into ladies wear (SKD) under the brand Siya and increased focus on premium J. Hampstead brand, the company will be able to maintain its high growth trajectory.
* The revenue share of readymade garments, which is a high margin business, is expected to increase to 20% in FY2016E from 16.3% in FY2014. The asset turnover (gross block) is expected to improve from 2.4x in FY2014 to 3.1x in FY2016E as the company has already incurred the required capex. We believe there would be minimum capex requirement as it would outsource manufacturing, which would prove to be more profitable. In addition, with the cash flow coming in, the company will be able to reduce its debt to `201cr by FY2016E from `275cr in FY2014, thereby easing interest expenses and improving profitability.
* We believe that with market leadership in blended fabrics, strong brand building, wide distribution channel, strong presence in tier II and tier III cities and emphasis on latest designs and affordable pricing points, SSML will be able to post a revenue CAGR of 17.8% over FY2014-16E to `1,810cr with an EBITDA margin of 11.1%. We expect the profit to grow at a CAGR of 32.4% over FY2014-16E to `111cr. On account of the improved brand acceptance and strong profit growth, we reiterate our Buy rating on the stock with an upgraded target price of `952, valuing the stock at a revised target PE of 8x FY2016E earnings.
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