Nov 07, 2012, 08.16 AM | Source: Moneycontrol.com
The Indian equity markets are witnessing renewed confidence on positive global and domestic policy actions.
, Angel Broking |
Renewed optimism gains ground in the markets- The Indian equity markets are witnessing renewed confidence on positive global and domestic policy actions. We attribute much of the optimism in the markets to factors such as a) greater policy certainty in advanced economies, b) increase in global liquidity flows, c) government initiated policy reform measures to boost business and investor confidence and d) improvement of growth prospects in FY2014 owing to reduction of tail-risk scenarios panning out in the Euro zone and US. While global liquidity has generally aided emerging market indices in clocking 11.7% gains since June 2012, domestic policy measures have helped Indian stock markets outperform to an extent, by clocking 16.6% gains during the period.
The increase in capital inflows in the economy owing to FII investments (US$18bn since January 2012 till date) has also contributed to the upbeat market sentiments. Owing to reasonable valuations, equities are likely to continue attracting buoyant capital inflows. In addition, with incremental positive action on the reform agenda, we expect markets to extend their gains further.
Macroeconomic indicators still awaiting improvements- Growth has likely bottomed out at 5.5% in 1QFY2013. However, a sustainable improvement in growth depends on positive catalysts like reversal in the investment cycle and capex activity, a pick-up in the weak global demand and corrective policy action by the government through fiscal consolidation measures, reforms in power, mining and land acquisition to stimulate economic growth. We believe that inflation and the twin deficits - current account deficit (CAD) and fiscal deficit are likely to remain an overhang in the near-term.
Outlook and valuations: Currently we are factoring in an improvement in the Sensex' EPS at a CAGR of 9.8% over FY2012-14E. We arrive at our 12 month Sensex target of 20,300, maintaining our target multiple at 15x FY2014E earnings implying an upside of 8.2%. Going into FY2014, there are possibilities for further upsides arising out of improvement in earnings growth outlook. We maintain a stock-specific and value-buying approach to yield better returns. For instance, we prefer private banks amongst rate-sensitives and also quality stocks in export-oriented sectors like IT and pharma. Private banks have much better capital adequacy than PSU banks and continue to expand their branch networks at a healthy rate, so we expect them to continue gaining market share in loans and low-cost deposits. Also, in the near-term, in spite of the macro environment, their asset quality remains quite healthy, unlike PSU banks. Export sectors are also bound to benefit from the rupee's sharp depreciation in the last one year and so even after the good performance of most stocks in these sectors, we selectively recommend stocks in IT and pharma that are still reasonably valued in our view.
We also recommend a few turnaround stories that are otherwise structurally strong businesses and available cheaply at this point, such as Crompton Greaves in the capital goods space. Other than that, we do believe that, with several Sensex companies already decently valued in most cases, the next leg of the rally is also expected to be much stronger in midcaps. Accordingly, we also recommend high quality companies in the midcap space with strong brands in sectors such as media, FMCG and apparel space, amongst others.
Axis Bank : Axis Bank is trading at 1.6x FY2014E ABV (~55% discount to HDFC Bank). We remain positive on the bank, owing to its attractive CASA franchise, multiple sources of sustainable fee income and reasonable growth outlook. We maintain our Buy recommendation on the stock with a target price of Rs1,476.
Crompton Greaves : Given the attractive valuations (stock trading at 0.6x FY2014E EV/Sales compared to its trading range of 0.7x to 1.6x and median of 1.2x) , we maintain our positive stance on the company. We have assigned an EV/Sales multiple of 0.7x to arrive at a target price of Rs145, implying an upside of 16% from the current levels.
ICICI Bank : The stock is trading at an attractive valuation of 1.7x FY2014E P/ABV. Hence, we maintain our Buy view on the stock with a target price of Rs1,270, valuing the core bank at 2.2x FY2014E P/ABV and assigning a value of Rs153 to its subsidiary.
Lupin : Management has given a revenue guidance of US$3bn by FY2013-14. We expect Lupin's net sales to post a 19.3% CAGR to Rs10,082cr and earnings to report a 26.5% CAGR to Rs31.1/share over FY2012-14E. We maintain our Buy rating on the stock with a revised target price of Rs652.
Tata Steel : The stock is currently trading at an inexpensive valuation of 5.1x FY2013E and 4.5x FY2014E EV/EBITDA. On a P/B basis, the stock trades at 0.8x FY2013E and 0.7x FY2014E earnings. We maintain a Buy on the stock.
Wipro : We believe that the step taken by Wipro to hive off its non-IT business is positive for its shareholders. The demerger would result in an increase in ROCE and ROE of the listed entity, as non-IT business had lower return ratios. We expect a 12.8% and 11.1% CAGR in EBITDA and PAT over FY2012-14E. We value the stock at 15x FY2014E EPS of Rs28.1, which gives us a target price of Rs421 and recommend it as one of our top picks with a Buy rating.
DB Corp : Due to cyclical headwinds such as sluggish ad revenue (due to slower GDP growth) and higher newsprint costs in INR terms (due to INR depreciation vs USD), the stock is currently trading at relatively cheaper valuations of 14.6x FY2014E consolidated EPS of Rs14.4 (at 5% premium to Sensex). However, considering the structural positives of print business (high brand loyalty and significant entry barriers) and DB Corp's multistate leadership, in our view, the stock deserves a higher premium to the Sensex. Hence, we assign a target multiple of 18x FY2014E EPS, benchmarking it to our print media sector valuations (which are at 15% premium to the Sensex) and maintain our Buy view on the stock with a target price of Rs259.
MRF : At the current market price of Rs10,169, the stock is trading at a PE of 7.1x its SY2013E earnings, which we believe is attractive. We maintain our Buy rating on the stock with a target price of Rs12,884 based on a target PE of 9.0x for SY2013E.
United Phosphorous : Over FY2012-14E, we estimate UPL to post a 10% and 18.4% CAGR in its sales and PAT, respectively. Currently, the stock is trading at an attractive valuation of 6.7x FY2014E EPS. Hence, we maintain our Buy view on the stock with a target price of Rs170.
Alembic Pharma : Alembic's growth and profitability profile have improved post the restructuring carried out by the management. Over FY2012-14, we expect the company to post a CAGR of 13.3% and 14.6% in its sales and net profit respectively. We maintain our Buy recommendation on the stock.
Siyaram Silk Mills : At the current market price of Rs316, the stock is trading at a PE of 4.3x its FY2014E earnings. We maintain our Buy rating on the stock with a target price of Rs366, valuing the stock at 5x FY2014E earnings.
Spicejet : On the valuation front, SpiceJet is trading at EV/sales of just 0.3x FY2014E, lower than its peers. Hence we recommend a Buy rating on the stock.
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