Nov 12, 2012, 06.07 PM IST
Emkay Global Financial Services has come out with its report on conviction ideas.
Emkay Global Financial Services has come out with its report on conviction ideas.
Large Cap BUY:
Colgate-Palmolive : Construct of Colgate is synonymous to Glaxosmithkline Consumer (which trades at 30x 1-year fwd earning) due to 1) majority of revenue comes from single category; 2) pricing power; 3) market leadership. We have price target of Rs1400/Share (30x FY14E earnings).
Grasim Industries : Although VSF profitability in near term likely to remain under pressure led by subdued pricing, management guided bottoming out of VSF price over medium term, led by cost pressures restricting ability of Chinese player to further cut price. VSF volumes from new capacity to improve volume traction from Q3FY13 onwards. The resultant higher contribution of standalone earnings is expected to drive down current holdco discount of ~45% to more reasonable levels. Building in a 25% holdco discount and valuing Viscose biz at 6X FY14E EBIDTA, we re-iterate our conviction BUY on Grasim with a price target of Rs.4000. Sharp cement price remained rather firm in Q2FY13 creating further room for upgrade in earnings for Ultratech thereby further driving earnings upgrade for consol numbers.
ICICI Bank : We expect the bank to witness 19% CAGR in NII / customer assets each over FY12-14E. Improvement in margins with easing credit cost pressures would aid RoA performance. Any material spike in restructured loan portfolio remains key risk in near term. Maintain positive bias.
Infosys : Valuations at ~14.3x/13.7x FY13/14E P/E and 4%+ FCF yield make us keep the faith despite recent misses and Infosys having lost it’s bellwether status to TCS.
NHPC : NHPC will deliver good returns over a longer time frame of 2-3 yrs (longer time frame is due to nature of hydro business and from current stage, 2-3 yrs sufficiently covers commissioning timelines and any further delays in those). Prefer NHPC over SJVN due to higher risk adjusted returns and growth.
Ranbaxy Labs : Launch of Actos, Diovan and Absorica in the US market are the key triggers for the stock. We expect Ranbaxy to report 27% growth in base business revenue in CY12E and 17% in CY13E. Base EBIDTA margins are expected to increase from 8.2% in CY11to 12.5% in CY12E & 14.1% in CY13E. Base Earnings are expected to register 9% CAGR over CY11-13E to Rs11.4bn clocking an EPS of Rs27 in CY13E. Rate the stock as Buy with a target price of Rs590 (20x CY13E base EPS of Rs27 and NPV of Rs16).
Tata Motors : Expect earnings performance at 10% CAGR in FY12-FY14E period aided by strong volumes in JLR and FCF generation. Emkay’s earnings forecast are Rs 39/share and Rs 45/share for FY13E and FY14E respectively. Strong quarterly earnings (due to improvement in product mix) to be the key stock trigger.
Large Cap SELL:
Asian Paints : Decelerating demand and potential earning disappointment; it does not offer any comfort with valuations at 29X 2-yr fwd P/E (current valuation is 61% premium to 10-yr avg valuation and 41% to 5- yr avg).
Dr. Reddys Lab : We expect Dr. Reddy to report 22% base revenue growth in FY13E and 13% growth in FY14E. We expect base EBIDTA margins to move from 21% in FY12 to 21.5% in FY14. Base earnings will grow by 14% CAGR over FY12-14E. Maintain target price of Rs1700. At CMP, the stock is trading at 18x FY13E/14E earnings.
Hindustan Unilever : Believe that, all positives are fully factored in earnings (factors best case volume growth and Ebidta margins) and valuations (trading @ premium to average valuations). We completely rule-out any room for earnings upgrades. HUL does not offer any comfort in event of negative surprise; it trades at 31.7X FY14E earnings.
State Bank of India : We expect bank to report 16% CAGR in customer assets over FY12-14E. The stock has outperformed its peers in recent past on basis of its stellar show on NPA front and recoveries. We however remain wary over slippages / recovery in FY13. Tata Steel: We value the stock on SOTP basis, with the Indian business at 6xFY14 EV/ EBITDA and European and other subsidiaries at 4xFY14 EV/ EBITDA. This translates to a target price of Rs 349/ share. Any sharp fall in steel prices and delay in incremental volume addition from the newly commissioned 2.9 mtpa brownfield expansion at Jamshedpur would weigh further on the stock.
Mid Cap BUY:
Aurobindo Pharma : We expect Aurobindo to report 20% revenue growth in FY13 and 15% growth in FY14. We expect EBIDTA margins excluding dossiers to improve from 12% in FY12 to 16% in FY13/14E led by better capacity utilization at Unit VII and launch of recently approved products from Unit III. Earnings will grow at 14% CAGR over FY12-14E. At CMP, the stock trades at 10.8x FY13E and 9.0x FY14E earnings.
Dish TV : Incremental subscriber addition from digitalization with stable churn rate and ARPU improvement are near term catalyst for the stock. We estimate Adj. net loss would reduce to Rs836mn in FY13E from Rs1.3bn in FY12 and finally it would turn profitable in FY14E. Maintain BUY on the stock with target price of Rs79.
Exide Inds : We recommend a BUY on Exide with a TPof Rs 175 based on 16xFY14E earnings for the core business and Rs 9/share for its stake in ING Vysya Life Insurance business. We expect the company to report earnings CAGR of 31% in FY12-FY15 and act as a counter cyclical stock when OEMs are facing demand slowdown pressures.
Federal Bank : With the largest branch network among old pvt sector banks and a healthy deposit profile, moderation in GNPA number could trigger a re-rating in the stock. Expect GNPA to come down to 2.4% by FY14 from 3.6% in Q1FY13. LIC Housing Finance: believe that growth in developers’ loan book can come back easily in any quarter due to the bulk nature of the business. We see trend reversal with improving retail spreads. With resilience of retail loan portfolio and low NPA risks, the downside in the stock is limited at current valuations of 2.0x/1.7x FY13/14E ABV. The upside trigger to the stock would be faster than expected growth in the developers' loans and better overall spreads driven by the same.
Madras Cements : MCL cost structure to improve further driven by contracted pet coke requirement and decline in international coal prices. Further ramp up in TN CPP (45MW) over H2FY13 should further help contain energy cost. Further MCL’s robust volume growth and accelerated debt repayment would drive further re-rating helping continued stock out performance despite recent rally (+18% in 3M), as current valuations at FY14E 5.9X EV/EBIDTA & EV/T of USD 104, remain attractive and leaves enough upside. Maintain Accumulate.
Tech Mahindra : We continue to back upsides in Tech M /Mah Satyam given upside risks to our earnings estimates. We retain ACCUMULATE on Tech M with a TP of Rs 1,050 (based on 11xFY14E pro forma earnings). Merger swap ratio of 8.5:1 implies a TP of Rs 123 for Mahindra Satyam.
Wockhardt : Wockhardt has one of the largest and the most profitable US businesses with steady India business. It has one of the best in class operating and balance sheet ratios. Going forward 31% CAGR in earnings & reduction in net debt to zero will re-rate the stock from current 14x FY13E to 18x FY14E EPS of Rs120. Initiate coverage with a BUY and TP of Rs 2,160 which is 50% upside from CMP of Rs1,458. At CMP, the stock trades at 16x FY13E and 14x FY14E EPS.
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Tags: Colgate-Palmolive, Grasim Industries, ICICI Bank, Infosys, NHPC, Ranbaxy Labs, Tata Motors, Asian Paints, Dr. Reddys Lab, Hindustan Unilever, State Bank of India, Aurobindo Pharma, Dish TV, Exide Inds, Federal Bank, Madras Cements, Tech Mahindra, Wockhardt, Emkay Global Financial Services
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