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Why Ridham Desai added CCD, M&M, HCL Tech to portfolio

Morgan Stanley's global forex team is bullish on the Yen, which is not good news for Maruti Suzuki, even though its domestic sales growth should remain supported in a consumption recovery, he says.

December 08, 2015 / 05:15 PM IST
 
 
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Research firm Morgan Stanley, whose India equity research is headed by noted analyst Ridham Desai, has added Coffee Day Enterprises (parent of coffee chain CCD), M&M and HCL Tech to its focus list and sector model portfolio. The three stocks came in into the portfolio at the expense of Bharat Forge, Dr Reddy's and Maruti Suzuki.

In a note, the research house said it expects both urban and rural consumption to pick up pace in the coming months and CCD and M&M were plays on each.

It explained the rationale behind the three stock picks as below:

CCD: Largest chain of cafés in India

CCD operates a highly optimized and vertically integrated coffee business. In addition, CCD has invested in select non-coffee businesses that are essentially opportunistic entrepreneurial ventures.

CCD runs the largest chain of cafés in India under the Café Coffee Day brand. Its dominance can be gauged by the café footprint, which is ~4x that of the next four competitors combined. Revenue in thecafé business is low (Rs 13,400 per café per day in F15) and is not sufficient to absorb costs, including depreciation.

This is the key reason for the low operating profit. We forecast same store sales growth higher than cost inflation.

M&M: Tractors at low end of the cycle

Given two consecutive below-average monsoons, weakness in commodity prices and a slowdown in rural development spend, the tractor industry is now close to -1 standard deviation.

We expect a normalized growth rate of 8 percent in FY17. Despite launching the new TUV300, M&M's stock has been flat, and the Street is skeptical about M&M’s success in future UV launches.

Expectations for the company are low; thus, we believe it could surprise on the upside, as the new S101 is tapping into new segments (urban), and the M&M UV portfolio will likely benefit from a recovery in consumer discretionary.

At 11.5x core F2017E P/E and a 20.5 percent F2016-18E earnings CAGR, downside risks are limited, in our view, but a volume recovery either in tractors or UVs could see thestock rerated and thus it offers attractive potential upside.

HCL Tech – Likely robust growth in 2HFY16

HCL Tech’s revenue growth has not been inspiring recently. We believe some of this may be attributable to the changein deal scopes as the mix of complex and transformational engagement increases.

The deal win run rate remains strong at USD 1 billion per quarter,and the company expects to show robust growth in 2HFY16, in line with or better than the average for the top three Indian IT companies in FY16.

Valuations are attractive, with the stock trading at 14xFY17e P/E, cheaper than some of its large Indian peers.

In its sector portfolio, Morgan Stanley is overweight consumer discretionary, energy, financials, industrials and technology, neutral utilities, and underweight consumer staples, materials, telecoms and healthcare.

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