With improving macro in India driven by positive government policy action and rising risk appetite globally being the key themes for 2013, Deutsche Securities is betting on cyclical recovery plays--both domestic and global. The brokerage is betting that safe haven stocks will lose their appeal as investor confidence in improving macro rises over the course of the year. Following are Deutsche’s nine top picks in the midcap space. 13 conviction picks: Reposition your portfolio
Bharat Forge Target price: Rs 300 We believe that Bharat Forge is better prepared during the current downturn due to a) market share gains on the back of higher value-add products, b) the ramp-up of the non-auto business (25% of consolidated revenues), and c) better cash flows. The company is working on new programs with global auto makers that should be operational over the next 12-18 months.
Dish TV Target price: Rs 92 Dish TV has turned free cash flow(FCF) positive with Rs 100 crore FCF over the last three quarters. Dish TV is the only listed company with a positive FCF and the ability to add 2.7 million digital subscribers this year without raising further capital (including 1.2 million inventory). We believe this balance sheet strength will be a strong competitive advantage.
Financial Technologies Target price: Rs 1350 Our positive view is predicated on (1) improvement in FCF due to operating leverage in technology business and (2) material improvement in performance of key group companies like MCX, IEX and NSEL, which now contribute Rs 552/share (vs. Rs182 earlier) to FT’s target price. Near-term catalysts: potential stake sales in MCX-SX and IEX.
IndusInd Bank Target price: Rs 495 We see IndusInd Bank as a strong growth story with a 27% CAGR loan growth, expanding margins as wholesale liabilities reprice and CASA momentum continues. On asset quality, given its presence in retail and working capital related lending on corporate side, we do not see much stress. We expect RoAs to expand by 10 bps and RoEs to move back to 18% in FY15E.
Jaiprakash Power Target price: Rs 52 Jaiprakash Power is our preferred utility pick given: (1) leveraged assets in a falling interest rate environment tend to outperform; (2) growing investor confidence in deleveraging efforts; (3) superior valuation of its hydro business in a cost inflationary environment and (4) dearth of quality assets at a time when demand is growing.
Mahindra Finance Target price: Rs 1335 MMFS is well positioned to capitalize on continued economic buoyancy in rurban (rural & semi-urban) India. It has a unique business model which focuses on low-end markets, creating formidable entry barriers, and has diversified across both products and manufacturers. MMFS will continue to decline as wholesale funding rates are falling and banks have also started cutting their base rates.
Petronet LNG Target price: Rs 210 With a rising domestic natural gas demand-supply deficit, LNG-importer Petronet LNG (PLNG) is our top pick amongst the mid-cap oil & gas stocks. With capacity expansion at Kochi (5mmtpa) and Dahej (3mmtpa) over the next 15 months, we estimate LNG volume CAGR of 23% over FY13-15 to drive operating profit CAGR of 23% and cash earning per share CAGR of 22% over this period.
Shree Cement Target price: Rs 5200 The stock offers an attractive FCF yield of 8.3%, despite the stock returning 104% in CY12. Secondly, its 35% capacity addition over the next two years comes at a time when the industry is heading into an upturn. Thirdly, FCF is growing at a 19% CAGR in FY12-15E and the stock is available at a 15% discount on a replacement cost basis.
Tech Mahindra Target price: Rs 1220 Enhanced revenue visibility (due to recent acquisitions and large deals) and sustained margin improvement are two key advantages of the company that leave room for earnings beat. We expect the company to deliver a 13.8% CAGR in earnings over FY13-15E. Undemanding valuation and impending merger with Satyam make it ideally suited for a PE rerating