Sharekhan has come out with a report “Value Guide”. The research firm has stated their view on markets and stocks.
Volatility gets an extension:
It has been a sombre beginning for this equity market this year. The benchmark index registered a double-digit decline over the past one month even as the equities markets rallied globally. In the year to date India is the second worst performing market globally with Egypt being the worst. Our market dropped on macro-economic concerns of persistently high inflation, hardening of interest rates and an unexpected sharp slowdown in the industrial production. Even though corporate earnings for Q3FY2011 were largely in line with expectations, the market witnessed earnings downgrades in several companies across sectors on account of concerns related to margin pressure from the rising raw material cost and spiraling energy prices. The eruption of social unrest in Egypt and some other countries in the neighbouring region towards the end of the month added to the market’s woes. Given the global concerns and certain India-specific issues, the foreign institutional investor (FII) flows reversed with the foreign investors withdrawing close to one billion dollars in January 2011 alone.”
“After the sharp correction the valuations have turned reasonably attractive but investors remain anxious. The anxiety is justified since the macro-economic headwinds have started to blow again at home. Food inflation has surged to over 17% for the week ended January 22, 2011 vs 15.57% in the previous week. The Wholesale Price Index climbed to 8.43% in December 2010 from 7.48% in the previous month. To curb inflation and inflationary expectations the Reserve Bank of India is expected to aggressively hike the key policy rates. The northward bound interest rates will further slow down the economic growth. Industrial growth has already slowed down—the Index of Industrial Production (IIP)’s growth for November 2010 came in at 2.7%, much below the consensus estimate of 6.6%. The IIP growth was dismal mainly due to a moderate growth in the manufacturing (up 2.3%) and mining (up 6.0%) sectors and a drop in the consumer goods segment (down 3.1%).”
“The Q3FY2011 results of Indian companies were more or less in keeping with expectations but the cost pressures are beginning to pinch and will take their toll on the future performance of India Inc. We expect the consensus earnings growth estimate for FY2012 to slip to around 17-18% from over 20% a couple of months ago. However, most of these factors seem to have been already discounted by the market. The key hangover that still keeps the market dizzy is the possibility of a spill-over of the social unrest in some parts of the Middle East and North Africa to the neighboring oil producing countries. It could potentially stall the nascent recovery in the USA and some parts of Europe. But more importantly, the resultant big upsurge in the crude oil prices would derail the import-dependent Indian economy.”
“The key event this month is the Union Budget 2011-12. The finance minister has a tough task at hand. There is a need to invest in reducing supply-side bottleneck to avoid overheating of the economy and also kick-start infrastructure spending. At the same time, the focus would be on fiscal consolidation. In line with this objective, the government could withdraw some of the fiscal stimulus measures that were taken to boost industrial growth during the lean phase of 2008-09. However, some semblance of political stability and proactive policy action would go a long way in boosting sentiments among the investors. Keep your fingers crossed as increased volatility could be the norm in this month.”
“The markets tumbled down sharply in January 2010 on account of macro-economic concerns, political instability and the emergence of social tension in Egypt and the Middle East. Consequently, the benchmark indices, Sensex and Nifty, slipped by 8.5% each in the past one month. The mid-cap space continued to see selling pressure with the CNX MIDCAP Index losing 9.5% last month and almost 37% in the past three months. Our portfolio of Top Picks performed in line with the markets and lost around 9% during the month.”
“In this month, we are adding two stocks to the Top Picks basket: Indian Hotels Company and Polaris Software Lab. Polaris Software Lab has been our top pick in the mid-cap information technology space due to its attractive valuations and scope for inorganic initiatives given the huge cash on its books. Indian Hotels Company is likely to show a better financial performance going ahead on the back of improving occupancy rates (ICC Cricket World Cup 2011 in Q4FY2011 will be added advantage) and increasing room tariffs. Though the stock has fallen quite a bit and offers an attractive entry point for the long-term investors, we are removing Sun Pharmaceuticals from the Top Picks list as the uncertainty related to Taro Pharmaceutical Industries’ audited accounts and the possible write-off in Q4FY2011 would act as a drag on the earnings of the company and the stock’s performance in the near term.”
NIIT Technologies: With its strong domain expertise in a few niche verticals and competitive advantage in terms of significant contribution from its non-linear initiatives, NTL is well placed to benefit from the overall improvement in the demand environment. Consequently, we expect the company to show a steady growth of 19% CAGR in its net profit over FY2010-13. Moreover, the company has healthy cash on the books with minimal debt which leaves scope for further acceleration in growth through inorganic initiatives and act as another re-rating trigger for the stock. We initiate coverage on NTL with a Buy recommendation and 12-month price target of Rs 285 (8x FY2013 earnings of Rs 35.6 per share).”
ASHOK LEYLAND: We are positive on the stock after the management’s commentary on the business, although we are revising our EPS estimates downward for FY2011 and FY2012 by 9.6% and 8% respectively. We maintain our Buy recommendation on the stock with a revised target price of Rs 84 per share.
BAJAJ HOLDINGS & INVESTMENT: We arrive at a fair value of Rs 1042 for the stock (based on the company’s fully diluted equity), which is significantly above its current market price of Rs 749. We, therefore, maintain our Buy recommendation on the stock with a revised price target of Rs 1042.”
BANK OF BARODA: We maintain our Buy recommendation on the stock with a price target of Rs 998.
BHARAT HEAVY ELECTRICALS: We are downgrading our target multiple from 22x to 20x. We are rolling over our target multiple on an average of FY2012 and FY2013 estimates. We remain positive on the stock and revise our target price to Rs 2781. At the current market price, the stock trades at 16.3x and 14.3x its FY2012E and FY2013E earnings respectively, which looks attractive. Hence, we maintain our Buy recommendation on the stock.”
CADILA HEALTHCARE: At CMP of Rs 766, the stock trades at 22.8x FY2011E and 18.7x FY2012E earnings.
We maintain Buy with a price target of Rs 861.
CORPORATION BANK: We maintain our Buy recommendation on the stock with a revised price target of Rs 735.
EROS INTERNATIONAL MEDIA (EIML): We remain positive on EIML in view of the increasing traction in its TV syndication and new media revenues, and the strong market positioning in the movie box-office revenues. Going forward, we expect the strong momentum to continue with an impressive slate of movie releases in FY2012. On the other hand, the incremental revenue contribution from the high-margin business segment would further strengthen the company’s profitability. At the current market price of Rs 158, the stock is trading at 10x and 8x FY2012 and FY2013 earnings estimates. We maintain our Buy recommendation on EIML with a price target of Rs 247.”
GREAVES COTTON: We maintain our positive view on the stock. We have upgraded our FY2011 earnings for the company by 10% to Rs 6.7 a share as we expect the infrastructure equipment division to report a strong comeback and the engine division to continue to see a strong volume growth in the coming quarters. Consequently, we have also revised upwards our FY2012 earnings estimate marginally by 4% to Rs 7.5 a share after factoring in a moderate growth on the high base of FY2011. We maintain our Buy recommendation on the stock with a price target of Rs 106 (14x FY2012E earnings).”
HCL TECHNOLOGIES: We have tweaked our earnings estimates for FY2011 and FY2012 and have introduced FY2013 estimates. HCL Tech has continued its strong performance on the revenue front. However, margin performance still has to catch up. The management has indicated at a strong demand environment with a robust deal pipeline across verticals. We expect HCL Tech to show a superior CAGR in earnings of 34% over FY2010-2013E with broad based revenue growth and margin improvement. With improved business visibility and consistency in financial performance, we now value HCL Tech at a 25% discount to Infosys Technologies (from 30% discount earlier) which comes out to 15x FY2013E earnings. We have upgraded our target price to Rs 622 from Rs 519 earlier. We maintain our Buy rating on the stock.
HINDUSTAN UNILEVER (HUL): We expect HUL’s top line and bottom line to grow moderately at a CAGR of 12.0% and 8% respectively over FY2010-13. Hence, considering the poor earnings visibility amongst the FMCG space we maintain our Reduce rating on the stock with a revised price target of Rs 246 based on 20x its FY2013E EPS of Rs 12.3. At the current market price the stock trades at 25.3x its FY2012E EPS of Rs 10.7 and 22.0x its FY2013E EPS of Rs 12.3.”
HOUSING DEVELOPMENT FINANCE CORPORATION: We maintain our Hold rating on the stock with a price target of 708.
ICICI BANK: We maintain our Hold recommendation on the stock with a revised price target of Rs 1190.
INFOSYS TECHNOLOGIES: We remain positive on Infosys’ strong organic led growth model and its strong margin mechanism and superior corporate governance. We have revised upward our estimates for FY2012 and introduced our FY2013 estimates in this note; consequently, we have revised upward our 12-month price target for Infosys to Rs 3817 from Rs 3461 earlier. At our price target the stock would be valued at 20x FY2013 earnings estimates. We upgrade our rating on Infosys from Hold to Buy.
IPCA LABORATORIES: At the CMP of Rs 313, Ipca is attractively valued at 15.6x FY2011E and 13.1x FY2012E. Based on the earnings visibility from the expanded field force in the domestic market
and increasing contribution from Russia and the US in the export formulations segment, we maintain Buy with a price target of Rs 381.
IRB INFRASTRUCTURE DEVELOPERS (IRB): IRB has not been able to bag any new orders in the last 9 months, primarily due to a slowdown in NHAI’s awarding activity. However, the project awarding activity is again expected to pick up from March 2011 onwards and IRB being one of the largest BOT player in India will benefit from the same. We revise our target price to Rs 285 as compared to Rs 311 earlier. However, we maintain our Buy recommendation as the stock looks very attractive at the current levels given the steep price correction in the recent past and on an improved outlook of NHAI’s awarding activity going ahead.
ITC: We have revised our price target upward to Rs 207. In view of strong earning visibility in the FMCG space and a potential upside of 23% from the current levels, we maintain our Buy recommendation on the stock. At the current market price the stock trades at 22.1x its FY2012E EPS of Rs 7.7 and 17.8x its FY2013E EPS of Rs 9.0.
JB CHEMICALS & PHARMACEUTICALS: At the current market price of Rs 135, the stock trades at a price/earnings (P/E) of 8.8x FY2011E and 7.3x FY2012E earnings. Considering the double-digit growth in the revenue and earnings from its core business, the strong free cash flows and the healthy return ratio (18-20%), we maintain our Buy recommendation on the stock with a price target of Rs 174 (9.5x FY2012E earnings).
KEWAL KIRAN CLOTHING (KKCL): We believe that KKCL, with a strong collection of brands, is smartly positioned in one of the fastest growing fashion apparel segments and we believe that the company will emerge as one of the most successful apparel brand stories of India. In view of the pedigree of its brands and its disciplined management which has a consistent track record and financial acumen, we maintain our Buy rating on the stock with a price target of Rs615 (~14.5x FY2012E earnings-a 50% discount to large retailers like Titan).
LARSEN & TOUBRO (L&T): We have fine-tuned our estimates in view of the M9FY2011 results, margin pressure and muted order inflow growth. We expect L&T’s earnings to grow at a compounded annual growth rate (CAGR) of 19.9% over the next three years. We have also revised our sum-of-the-parts (SOTP) price target to Rs 1955, where we have downgraded the target multiple for L&T’s core business from 22x to 21x on the FY2012 estimates. We upgrade our recommendation on the stock from Hold to Buy.
MARICO: With a consistent steady growth in the focus portfolio, a strong growth in the international business and a revival in the Kaya business, we expect Marico’s top line to grow at a CAGR of 17% over FY2010-13. New product launches and an increase in the reach of the recent launches would further add-on to the top line. We expect Marico to maintain its OPM in the 12-13% band over FY2010-13. Hence, we expect Marico’s bottom line to grow at a CAGR of 16% over the same period.
ORIENT PAPER AND INDUSTRIES: In the light of the increased profitability of the cement division (qoq) and the revival of the paper plant, we are upgrading our recommendation on the stock from Hold to Buy and maintaining our price target at Rs 60. At the current market price, the stock trades at a PE ratio of 5.6x and an EV/ EBIDTA of 3x discounting its FY2012 earnings estimate.
POLARIS SOFTWARE LAB: Our underlined investment thesis of “Intellect” led growth is playing out well with it having a strong revenue trajectory. Going forward, faster growth of revenues from “Intellect” is expected to continue in the coming years. We maintain our Buy recommendation with a 12 month price target of Rs 234. At our target price, the stock is valued at 8x FY2013E earning.
PUNJAB NATIONAL BANK: We maintain our Buy recommendation on the stock with a revised price target of Rs 1460 (1.9x FY2012 book value).
RELIANCE INDUSTRIES: We have lowered our earnings per share (EPS) estimates for FY2011 and FY2012 to Rs 62.2 & Rs 70.1 respectively, to incorporate the reduction in the assumption of the gas production from the KG D-6 field. The business outlook for the refining and petrochem segments is turning positive with demand as well as the margin showing signs of recovery since last few quarters. We advise investors to accumulate the stock and maintain our Hold recommendation with a price target of Rs 1190.
STATE BANK OF INDIA: We maintain our Hold recommendation on the stock with a revised target price to Rs 2990.
TATA CONSULTANCY SERVICES (TCS): Management commentary on the future outlook continues to remain positive and strong hiring and higher laterals addition is a clear reflection of robust business visibility. On the other hand, we also draw comfort from TCS’ margin performance (180 basis points improvement in the last 6 quarters) and pricing uptick. We continue to remain positive on TCS and we maintain our price target of Rs 1260. At our target price the stock is valued at 20x FY2013E earnings. We maintain our Hold rating on the stock.
THERMAX: We are revising our price target to Rs 909, which is 20x the average of FY2012 and FY2013 earning per share (EPS) estimates. At the current market price, the stock trades at 15.8x and 13.6x its FY2012 and FY2013 earnings estimates respectively. Hence, we upgrade our rating on the stock from Hold to Buy.
TORRENT PHARMACEUTICALS: We maintain our Buy recommendation and estimates on the stock with a price target of Rs 685.
ULTRATECH CEMENT: Given the slow volume off take & poor pricing scenario, cost inflation in terms of rising coal prices and limited upside from the current levels, we maintain our Hold recommendation on the stock with a price target of Rs 1150. At the current market price the stock trades at a PE of 16x discounting its FY2012E earnings.
UNITED PHOSPHORUS: We have fine-tuned our FY2011 & FY2012 earnings estimates which now stand at Rs 14.7 & Rs 18.2 respectively. We have also lowered our target multiple to 12x FY2012E mainly due to the difficult macro economic conditions (especially on the currency front) and the pressure on the volume growth in Europe. Consequently, we have lowered our price target to Rs 218 but maintained our Buy recommendation on the stock. At the current market price, the stock trades at attractive valuations of 8.5x its FY2012E EPS and 5.5x its FY2012E enterprise value (EV)/EBITDA.
V-GUARD INDUSTRIES: We have lowered our target multiple to 10.5x from 12.5x in view of the macro headwinds (eg input cost pressure). We have also rolled forward our target multiple to the average of the FY2012 and FY2013 estimates. At the current level, the stock is trading at 9.3x and 6.3x on its FY2012 and FY2013 estimate which looks attractive given the company’s sound growth trajectory. We maintain our Buy recommendation on V-Guard with a revised price target of Rs 237.
YES BANK: We maintain our Buy recommendation with a target price of Rs 415 (2.7x FY2012E book value).
Upon furher analysis of the list of stocks mentioned above, the only ones worth evaluating for inclusion in your portfolio are as shown below:
This is by all means a quick and dirty method to shortlist from the 33 stock picks. Invest at your own risk !! .