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Dec 02, 2012, 12.02 PM IST | Source: Moneycontrol.com

Sharekhan's 11 top picks you should keep an eye on

Sharekhan has come out with its 11 top picks. Axis Bank, BHEL, Cadila Healthcare, Dishman Pharma, Federal Bank, GCPL, ICICI Bank, Larsen & Toubro, Mahindra & Mahindra (M&M), Relaxo Footwear and Reliance Industries are the stock included in the list.

Sharekhan has come out with its 11 top picks. Axis Bank, BHEL, Cadila Healthcare, Dishman Pharma, Federal Bank, GCPL, ICICI Bank, Larsen & Toubro, Mahindra & Mahindra (M&M), Relaxo Footwear and Reliance Industries are the stock included in the list.

The Top Picks basket has appreciated by 4.2% since our last update on October 26, 2012. The performance is largely in line with the appreciation of 3.8% each in the Sensex and the Nifty, and that of close to 4.4% in the CNX Mid-cap Index in the same period. On a year-till-date basis (for the eleven months of CY2012), the Top Picks basket has generated returns of 31.5%, which is ahead of the returns given by the Sensex (24.7%), the Nifty (27.4%) and the CNX Midcap Index (28.7%).

This month we are making only one change in the Top Picks basket. We are inducting Federal Bank in place of Persistent Software. This will enable us to increase the basket’s exposure to the banking sector. Federal Bank is among the better managed old private sector banks and its recent underperformance offers an attractive opportunity for investors to enter the stock. On the other hand, we are replacing Persistent Software due to our constructive view on the rupee in the near term.

Axis Bank : The stock is attractively valued as it trades at 1.7x FY2014 book value against a five-year mean valuation of 2.2x. We expect the bank to deliver return on equity (RoE) of ~19% and return on asset (RoA) of 1.5% by FY2014. We recommend a Buy on Axis Bank with a price target of Rs 1,370.

BHEL : The relatively lower order intake in recent years would reflect on its revenue growth and result in a marginal decline in the earnings over the next two years. However, a lot of negatives are reflected in the serious de-rating of the stock over the last two years. Therefore, we have included BHEL in our Top Picks basket.

Cadila Healthcare : We expect revenue compounded annual growth rate (CAGR) of 20% and profit CAGR of 25% over FY2012-14. The stock is currently trading at 14.2x FY2014E earning per share (EPS), which is a 17% discount to Lupin. We believe the valuation discount should narrow further. We value the stock at 17x FY2014E EPS to arrive at a price target of Rs1,000.

Dishman Pharma : The stock is currently trading at 6.7x FY2014E EPS, which is a 58% discount to its five-year average P/E multiple and close to a 65% discount to Divi’s Laboratories. We expect the valuation gap to narrow on a strong operating performance and an improved financial health. We recommend a Buy on the stock with a price target of Rs135 (8x FY2014E EPS).

Federal Bank : The bank’s return ratios are likely to go up led by an increase in the profits. We expect an RoE of ~15.5% and an RoA of around 1.2% by FY2014 led by a 16% CAGR in the earnings. Currently the stock is trading at an attractive valuation of 1.2x FY2014 book value. We recommend Buy with a price target of Rs550.

Godrej Consumer Products (GCPL): Due to the recent domestic and international acquisitions, the company’s business has transformed from a commodities soap business into the business of value-added personal care and home care products. Therefore, we expect its OPM to be in the range of 16-18% in the coming years. Overall, we expect GCPL’s bottom line to grow at a CAGR of above 30% over FY2012-14. We believe the increased competitive activity in the personal care and hair care segments and the impact of high food inflation on the demand for its products are the key risks to the company’s profitability. At the current market price, the stock trades at 31.7x its FY2013E EPS of Rs23.2 and  25.4x its FY2014E EPS of Rs29.0.

ICICI Bank : The stock trades at 1.8x FY2014E book value. We expect the stock to re-rate, given the improvement in the profitability led by lower NPA provisions, a healthy growth in the core income and improved operating metrics. We recommend Buy with a price target of Rs1,230.

Larsen & Toubro : Though the company reported overall decent results for the quarter, but the order inflow guidance would be highly subjective to an uptick in the infrastructure development activities in the country and in the Middle East region. Sound execution track record, bulging order book and strong performance of its subsidiaries reinforce our faith in L&T. With the company entering new verticals, namely solar and nuclear power, railways, and defence, there appears a huge scope for growth. At the current market price, the stock is trading at 18.9x its FY2014E stand-alone earnings and at an EV/EBIDTA of 11x.

Mahindra & Mahindra (M&M): The company’s pricing power is better compared with the other OEMs because of its strong brand equity. It took price hikes aggressively to maintain the margins in both the automotive and the farm equipment division. The company is expected to launch Reva electric NXR and sub-four meter Verito in H2FY2013. Our SOTP-based price target for M&M is Rs949 per share as we value the core business at Rs721 a share and the subsidiaries at Rs228 a share. We recommend Buy on the stock.

Relaxo Footwear : The company has displayed an impressive growth rate in its top line and bottom line in the last couple of years and is expected to maintain the performance going forward. With an established distribution set-up and aggressive plans of opening own retail outlets called “Relaxo Retail Shoppe”, the company should be able to gain market share in the coming years. The softening rubber prices should provide a boost to the company’s margins and profitability. We believe a rise in the raw material prices and a continuous slowdown in the discretionary spending remain the key risks to our volume and profitability estimates. At the current market price, the stock trades at 18.5x its FY2013E EPS of Rs43.2 and 13.7x its FY2014E EPS of Rs58.3.

Reliance Industries : In the petrochemical business, the company’s margins are close to bottoming out (with a sharp correction in Q1FY2013). In H2FY2013, we could see an improvement in the margin that will support the overall profitability of the company.  In case of the upstream exploration business, the company has recently got the nod for further investments in exploration at the Krishna-Godavari basin, which augurs well for the company and could address the issue of falling gas output. The key concern remains in terms of a lower than expected GRM, profitability of the petrochemical division and the company’s inability to address the issue of falling gas output in the near term. At the current market price the stock is  trading at PE of 12.2x its FY2014E EPS.

Non-Institutions holding more than 90% in Indian cos

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Axis Bank BHEL Cadila Health
Dishman Pharma Federal Bank Godrej Consumer
ICICI Bank Larsen M&M
Relaxo Footwear Reliance

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