Siddharth Sedani of Anand Rathi Shares & Stock Brokers advises investors in companies with strong growth, good management, low debt and a reasonable valuation
Anand Rathi Shares and Stock Brokers
The result season has begun on a positive note with IndusInd Bank and Tata Consultancy Services reporting a robust set of numbers. A buyback announcement by TCS and HCL Technologies, coupled with a strong dollar-rupee, has increased investor interest and confidence in IT companies that are available at reasonable valuations.
Macro environment concerns are discounted to some extent after the recent fall in share prices. Market participants are now awaiting Q1 FY19 results with keen interest as there is a possibility of a bounceback in beaten down midcap stocks, if results match market expectations. July has been a month of revival to an extent till now on the back of a normal monsoon and strong results till now.
June Goods & Service Tax collections of Rs 95,610 lakh crore shows that government revenues are stable due to robust economy and higher compliance. In our view, markets will remain stock specific and look for direction in this result season.
It is advisable to be invested in companies with strong growth, good management, low debt and a reasonable valuation.
Persistent Systems | CMP: Rs 844 | Target: Rs 960
We think Persistent is can stage a strong recovery in FY19. Over the last two years, the company’s focus has been on Digital, which has helped it build capabilities in key technology areas as it transforms to software-driven businesses.
The company will invest more in Sales and Marketing in FY19.
In FY19, part of the revenue shortfall is likely to be reversed and margins may be supported by currency/tax breaks.
With its cash balance now, of $175m, it will be seeking more acquisitions to expand its geographical reach, mainly in non-US markets, and is not keen on acquiring legacy businesses.
Levers to improve margins expansion
1) Better business mix,
2) Incremental IP revenue.
3) Greater utilization ratio
4) Pricing (up 4.5 percent y/y onsite, 2.5 percent offshore in Q4)
5) Favorable currency factor.
We value Persistent at 18x FY20EPS, leading to a `960 target.
IndusInd Bank | Rating: Buy | CMP: Rs 1,915 | Target: Rs 2,248
The strategic Bharat Finance deal would be synergistic in the medium term.
Growth would be primarily driven through the focus on the retail portfolio, as management intends to rebalance the corporate- and retail-book ratio to 50:50 (from 60:40).
Credit growth grew 29.4 percent y/y in Q1-FY19, driven by secular growth across all segments, led by corporate (up 30 percent y/y), vehicle and retail (both up ~28 percent y/y).
We expect 26 percent loan growth in the medium term.
Asset quality improved with Slippages easing to ~1.26 percent of loan book (down 83bps y/y, 111bps q/q) and credit cost softened to 55bps.
We expect the bank to maintain its stable asset quality over FY19-20 due to overall improvement in the rating profile of its corporate book and declining risk weightings of its vehicle-finance book.
NIM to be resilient in the medium term, which was ~3.92 percent in Q1-FY19, down 5bps sequentially, on account of a sharp increase in the cost of funds (up 35bps sequentially). Nevertheless, we expect NIM to be resilient at current levels on the back of the strong CASA franchise (43.4 percent) and an increase in the share of the retail portfolio.
With better headline asset quality parameters and loan-growth prospects over FY19-20. We have a buy recommendation with a target of 2248 based on the two-stage DDM Model.
This implies a 4.15x P/ABV multiple on its FY20e book.
Apollo Tyres | Rating: Buy | CMP: Rs 265 | Target: Rs 340
The continuing strong demand due to the anti-dumping duty and sales of higher-ton CVs is benefiting Apollo Tyres, in our view.
Hence, we expect double-digit replacement growth in FY19, too.
Strong growth in truck radial tyres. The company plans to increase its Radial capacity in Chennai from 10,000 tyres a day to 12,000 by September 2018.
The Hungary plant’s capacity is expected to be increased by FY19 to 16,000 tyres a day and would be the volume growth catalyst in FY19 and FY20.
Operating margin of its European business to improve from 2.6 percent in FY18 to 4 percent in FY19.
The company has started foundation work for a new passenger-car-tyre plant in Andhra Pradesh and expects volumes to scale up in FY20.
We expect revenue to clock a 19 percent CAGR over FY18-20 to Rs. 21,100 Cr and expect the margin to expand from the present 11.1 percent in FY18 to 12.5 percent in FY20.
Accordingly, we expect earnings to come at Rs. 1390 Cr, leading to an EPS of Rs 24.3 in FY20. We maintain a Buy.Disclaimer: The author is Vice President - Equity Advisory, Anand Rathi Shares and Stock Brokers. The views and investment tips expressed by investment experts on Moneycontrol are their own and not that of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.