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Last Updated : Apr 19, 2019 11:55 AM IST | Source: Moneycontrol.com

'With valuations not cheap, IIP growth slow, invest in a staggered manner'

Elections would continue to be on top of everyone’s mind in the short term along with corporate earnings

Siddharth Sedani
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Siddharth Sedani

Indian equity market recorded impressive performance boosted by positive domestic and global cues. Key domestic drivers were - strength in the rupee against the US dollar and easing of interest rates by RBI.

Gains in global equities also contributed to the rally after the US Fed indicated it may not raise interest rates in 2019.


Foreign institutional investors (FIIs) continued to invest aggressively in the Indian equities as they bought equities worth Rs 34,000 crore in March 2019 and Rs 17,000 crore in February 2019.

Investor interest remained high in financials and IT sector. Elections would continue to be on top of everyone’s mind in the short term along with corporate earnings.

However, valuations are not cheap and with the slow IIP growth, one should invest in a staggered manner in good quality companies.

Hindustan Unilever | Rating: Buy | CMP: Rs 1,737 | Target: Rs 2,250 | Upside: 29 percent

With HUL being largest FMCG company with one of the largest footprint in terms of products and distribution network and its strategy to target volume growth primarily should drive healthy growth in the medium term.

In terms of per capita FMCG consumption India stands lowest within its developing country peers at just around USD 29 as against Indonesia which amounts to almost double while China at four times India’s consumption.

For the H1-FY19, HUL has reported a growth of 11.2% in its revenues of which volume growth was around 11% for the period.

We expect HUL to grow at a CAGR of 13.5% in the next two years. We estimate the company to report revenues of Rs 401,280 million in FY-19E and Rs 457,561 million in FY-20.

The operating margins for the company should continue to improve with our estimate of around 120 basis points over two years. We expect the company’s EBITDA margins to be around 21.8% in FY-19E and 22.3% in FY-20E.

ITC | Rating: Buy | CMP: Rs 304 | Target: Rs 352 | Upside: 15 percent

ITC is the leading FMCG marketer in India, a preeminent hotel chain, the clear market leader in the Indian Paperboard and Packaging industry, a pioneering trailblazer in farmer & rural empowerment through its agri business and a global exemplar in sustainable business practices.

In FMCG Space, the company has recently commissioned consumer good manufacturing facility at Trichy, Tamil Nadu in Sep'18.

In hotel space, the company is making investments in new hotels at Kolkata, Ahmedabad, Bhubaneswar, Guntur, and Amritsar. Also, the construction activity of the company’s first overseas project in Colombo is progressing.

In paper space, the company has commissioned a new value-added paperboard line with a capacity of 1.5 lakh TPA in August 2018 taking the overall capacity to 7.4 lakh TPA in order to utilize overall macroeconomic opportunities.

ITC reported a growth of 14.9% in its standalone in Q3-FY18. Revenue growth was driven by broad-based growth across all the segments. Cigarettes business registered a volume growth of 8% after factoring in the price hike taken in this segment.

Overall, the company has shown growth across all the segments. With strong operating cash flows, continuous capacity expansions across businesses and a healthy balance sheet, we have a positive view on the company over medium to longer term.

Finolex Cables | Rating: Buy | CMP: Rs 479 | Target: Rs 507 | Upside: 6 percent

Finolex Cables is an Indian manufacturer of electrical and telecommunication cables and also polyvinyl chloride (PVC) sheets for roofing, signage and interiors.

We like Finolex Cables for its leading position in electrical and communications cables. Its strong brand equity, all-India distribution network, robust balance sheet and free-cash-flow generation would help it diversify into electrical goods, a large market with ample growth opportunities.

Despite a 14% YoY rise in Q3 standalone revenue, Finolex PAT stood at 759 (up 1% YoY) which was better than expected.

The huge cash balance (11bn, non-strategic) may help it expand inorganically and reward shareholders in some way.

The strong management team helped the EBITDA margin expand 490bps over FY13-18 coupled with the diversification into consumer-facing businesses.

Success in the new product categories, significant improvement in the JVs’ performances and strong earnings growth in the core business would decide the sustenance of high valuation.

The attractive valuation (11x FY21 P/E) drives us to maintain our Buy recommendation, with a target price of Rs 507.

(The author is Vice President - Equity Advisory at Anand Rathi Shares and Stock Brokers)

Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
First Published on Apr 19, 2019 11:54 am