Centrum Wealth Research said if Indian corporate earnings can experience long term mean-reversion to those levels at 5.30 percent, robust earnings uptick can be expected.
Centrum Wealth Research
2018 is a year of consolidation (after breath-taking extended-honey-moon rally of 2017) for the market. We believe top priority of investors in 2018 should be capital preservation through efficient asset allocation (increasing allocation to large caps, high quality mid-caps, gold and hedging strategies).
On equity front, the stock selection has to be spoton as markets have become quite unforgiving for stocks even with minor taint. Markets have been rewarding right stocks (backed by quality research and advice) quite generously, as smart money is eagerly chasing quality.
We are in the winner-takes-it-all market with top quality stocks getting top valuations; and markets are ignoring companies with doubtful credentials even though optically they appear to have low valuations. So, it is crucial for investors to take professional advice backed by research.
Indian political developments will keep the markets guessing about upcoming Lok Sabha election outcome, which is quite crucial as the very foundation of 2014-2017 Indian market rally was political stability. Investors can keep the buffer of dry powder ready, to take advantage of volatility around elections.
With the in-built volatility in the markets on the back of host of complex variables (oil price, bond yields, politics, elections, trade war), 2018 is turning out to be classic traders market (where trading is offering higher returns than buy-and-hold). Of course, with the underlying Indian potential, this scenario will change and India will re-emerge as “investors paradise” (once variables unfold positively).
Further, Indian corporate financial health is apparently improving as the long-awaited earnings pick-up is unfolding with Corporate-Profits-to-GDP ratio moving up to 3.10 percent in FY18 and expected to reach 3.30 percent in FY19E, from a multi-year low level of 2.90 percent in FY17.
To put things in perspective, for the period between FY05–FY17, this ratio was at an average of 5.30 percent. If Indian corporate earnings can experience long term mean-reversion to those levels at 5.30 percent, robust earnings uptick can be expected.
Further, with major debt clean-up taking place, Indian corporate aggregate balance sheet is also getting healthier with BSE 500 (ex-financials) Debt/Equity ratio slipping to lowest levels in two decades.
On a crucial note, if there is a repetition of positive political surprise in the ensuing Lok Sabha elections with a single party winning full majority, the current market correction is just a hiccup in the feast of wealth creation.
On balance, we believe we have to be more hopeful than to be fearful, but admittedly the number/degree of 'fear' factors is increasing.
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Going ahead, with presence in high growth businesses aided by a pan-India presence and healthy financials, the company is expected to perform well on consolidated basis.
With increasing focus on retail & SME segments, loan book is expected to continue growing at a pace of +25 percent. Aditya Birla Sun Life AMC (mutual fund business) gained market share (at 10.75 percent) to become the 3rd largest AMC in India with AAUM of Rs 2.68 lakh crore, up 27 percent YoY.
Aditya Birla Sun Life Insurance (ABSLI), to improve growth going ahead, has tied-up with several bancassurance partners such as HDFC Bank, DBS, Lakshmi Vilas Bank, DB, DCB and KVB.
Risk factors: 1) Highly competitive market in the lending business with the presence of several banks and NBFCs may offer stiff competition as well as margin pressure, 2) The dynamic nature of AMC business may affect consolidated numbers adversely in case of a market downturn, 3) Any large slippages in any of the lending businesses may affect overall profitability of the company.
APL has one of the largest basket of injectable products and in future, the major growth is likely to come from US, Europe and rest of the world (RoW) markets.
We expect APL to report good performance, driven by good growth in the US market from injectable business, new ANDA approvals and volume growth in existing products.
APL plans to launch differentiated products in the US with new launches across oncology, microsphere, peptide, liposomal, hormones, oral contraceptives, depot injections and complex substance filings.
Risk factors: 1) Slower growth in the US business could affect overall profitability, 2) Regulatory risk for the manufacturing facilities, 3) Any delays in ANDA approvals and/or new product launches would delay the growth expectations.
The high valuations enjoyed by the stock could be attributed to improving economies and business across states, benefits arising out of SARFAESI Act, better recoveries along with declining slippages and expectations of healthy business growth - loan book to witness 22 percent CAGR over FY18-20E to Rs 55,805 crore.
Considering CIFCL’s consistent performance track record and management pedigree, the stock is likely to continue trading at higher valuation. Hence, we are positive on the stock.
Risk factors: 1) Slower than expected business recovery, 2) Delay in recovery of NPAs especially in LAP (loan against property) book, 3) Increasing competition in the commercial vehicle (CV) segment.
We believe recovery in the core infrastructure services business, better development in Mode 2 & 3 services and contribution from the recent acquisitions would augur well for the company.
Going forward, HCL is looking to capitalise on the traction witnessed in Japan and Europe for its ER&D business along with the US, which is the major market.
Risk factors: 1) INR appreciation, 2) Slowdown in key markets (US, Europe), 3) Any adverse impact on operating margins, on the back of acquisitions.
The healthy business growth, expected decline in NPAs along with entry into microfinance space and the expansion therein would help improve the return ratios further to 1.8 percent RoA (Return on Assets) and 18 percent RoE (Return on Equity) by FY20E.
Over FY18-20E, we expect the business to grow 28.7 percent with advances and deposits growing 30 percent and 27.5 percent, respectively.
Risk factors: 1) Slowdown in loan growth, 2) Incremental bulky slippages especially from the corporate book (which is 59 percent of total advances) would deteriorate asset quality.
The government has increased focus on infrastructure spend so as to boost the sector. We believe L&T is one of the best positioned companies to capitalise on investments and reforms in the infrastructure sector.
Pick up in order execution in both the domestic and international markets would bode well for the company thus providing revenue visibility. In addition, the company is looking at exiting non-core assets which would help improve balance sheet position and return ratios.
Risk factors: 1) Delay in execution, 2) High net working capital, 3) Low awarding of contracts, 4) Loss of contracts due to aggressive bids.
L&T Finance Holdings (LTFH) has maintained its focus on increasing the return ratios to the top quartile, in the industry and has been on track towards it with 15.03 percent RoE at the end of FY18 versus 12.31 percent in FY17 and 9.78 percent in FY16.
This along with consistent robust growth in key segments, improvement in NPAs post moving to 90dpd recognition and successful sell-down of the de-focused book, has built confidence in the company’s future business growth and profitability.
Going ahead, we expect 29 percent loan book CAGR over FY18-20E and return ratios of 2.6 percent RoA and 20.7 percent RoE by FY20E.
Risk factors: 1) Slippages in large corporate accounts, 2) Slowdown in core businesses, 3) Increase in competition in key segments.
We believe growth trajectory for MSIL is likely to continue, driven by uptick in rural demand supported by rise in disposable income and good monsoons.
This along with new product launches is expected to keep up the growth momentum going forward.
Risk factors: 1) Depreciation of INR versus Japanese Yen, 2) Rural slowdown impacting auto demand, 3) High dependency on imported raw materials.
PIL has a strong brand with market leadership and pricing power in the adhesive market. PIL enjoys high RoE of around 25 percent+ with a strong balance sheet and cash flows.
This, along with PIL’s strategic initiatives (enhanced portfolio/services), focus on gaining market share and good balance sheet position are key positives for the stock.
Risk factors: 1) Weak industrial demand, 2) Rise in raw material prices and forex volatility, 3) Delay in break even in international business.
Since last few months, the stock of CHFL has corrected around 9 percent on concerns of slowing growth, higher NPAs and delays in implementation of RERA in the company’s key market - Karnataka. However, in Q4, the improvement in sanctions and disbursements has resulted in a +18 percent loan growth thus giving comfort on growth revival.
Further, the management has guided improving recoveries in FY19 along with better loan growth of about 24 percent to Rs 19,500 crore.
Considering the management pedigree and focused approach towards growth and better asset quality, we are positive on the stock.
Risk factors: 1) Higher concentration in south (around 76 percent of business), 2) Further delay in implementation of RERA in key states (for eg. Karnataka), 3) Increase in competition from banks and other NBFCs leading to slower loan growth.
Given the company’s leadership position, strong order bid pipeline and improving traction in the domestic and international markets, we anticipate the healthy EBITDA margin and order book trend to continue.
Further, we believe the pick-up in the non-T&D business (railways, cables, civil) could augur well for the company. We expect revenue and PAT CAGR of 15 percent and 21 percent, respectively over FY18-20E.
Risk factors: 1) Delay in project awarding/execution, 2) Political risk (has presence in over 60 countries), 3) Impact of regulatory changes (like GST), 4) Forex volatility.
We expect NPL to benefit from strong product pipeline till FY22 and its plans to build it further beyond FY22, expected 15-20 percent growth in domestic business, around 20 planned product launches in Cardio, gastro and oncology segments in FY19 along with its enhanced manufacturing and R&D capabilities.
Risk factors: 1) Regulatory issues for its manufacturing facilities, 2) Slowdown in new product launches, 3) Slower than planned growth in the domestic market.
RHFL’s efforts on collection front (incl. SARFAESI) has resulted in gross NPAs declining to 2.87 percent as on 31 Mar’18 after touching a high of 3.97 percent as on Jun’17.
Going ahead, we expect recoveries to continue resulting in gross NPAs reducing close to 2 percent by the end of FY19. Also, considering RHFL’s expected expansion in non-TN markets and possible improvement in TN, we estimate loan book CAGR of 15.4 percent over FY18-20E with return ratios improving 2.4 percent RoA and 17.6 percent RoE.
Hence, we are positive on the stock from a long term perspective. However, improvement in mining situation and market recovery in TN (around 60 percent of loan book) remains a key monitorable.
Risk factors: 1) Slower business recovery in key market (around 60 percent of loan book is from TN), 2) Aggression from banks/other NBFCs may impact advances growth.
The future growth of SMLI is expected to be driven by higher demand for buses and the increasing market share in the segment; new model launches in cargo segment expected in Q1FY19 (Samrat GS HD 19, Sartaj GS CNG with turbo and Samrat GS tipper – displayed in Auto Expo 2018) and expansion of distribution reach.
Hence, we are positive on the stock of SMLI which is trading at 14.7x/11.4x its EV/EBITDA on FY19E/20E basis.
Risk factors: 1) Slower than expected pick-up in demand for buses, 2) Delay in new launches in the cargo segment, 3) Further increase in R&D costs affecting operating efficiencies.
We believe the growth in the mature parks would help support the addition of new parks.
Higher discretionary spends, addition of new rides, better contribution from non-ticket revenues and downward revision of GST rate from 28 percent to 18 percent, could result in better footfalls there by aiding profitability.
Further, the in-house rides manufacturing facility helps WHL save on cost and achieve better operational efficiency.
Risk factors: 1) Lower discretionary spends, 2) Changes in government policies (GST/Service Tax), 3) Risk of mishaps.Disclaimer: The views expressed by brokerage house on moneycontrol.com is its own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.