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20 September, 2014 21:28 IST
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Source: rss (20-Sep-14)
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Prabhudas Lilladher has selected top large and small cap picks which look attractive from an investment perspective. The same are as follows with investment rationale:

Large Cap

1. Infosys-Buy
Current Market Price (CMP): Rs 2,382
Target Price (TP): Rs 2,900

Infosys reported volume growth at 3.8% QoQ (Onsite: 4.4%, Offshore: 3.6%), which was better than our/consensus expectation. We see acceleration in volume growth; a positive for the overall business. Deal ramp-up, client budgets and bottoming out ramp down give management the confidence for stronger H2FY13. Infosys is currently trading at 13.1x FY14E earnings estimate, a trough valuation at which it traded post Lehman crisis. Retain ‘Buy’ due to valuation comfort, with a target price of Rs 2,900.

2. ICICI Bank-Buy
Current Market Price (CMP): Rs 1,081
Target Price (TP): Rs 1,200

The banks domestic book has been showing growth pick up with 22.0% YoY and 7.0% q/q growth reported in 2QFY13 driven by domestic corporate and revival in growth in retail assets. ICICI’s margins have improved from 2.6-2.7% and management has now guided to steady state margins of at least 3%. With easing rates and higher growth in the domestic book (higher margins), we believe ICICI’s NIM performance can further surprise the street. Current valuations are trading at 1.75x FY14 book and given improving ROEs and potential margin improvement we remain positive but the recent move have made risk-reward not as favorable as we see only 10-12% upside from current levels after which a BUY reco will have to be based on Bull market valuations.

3. Wipro-Buy
Current Market Price (CMP): Rs 366
Target Price (TP): Rs 440

Wipro reported another quarter of the weakest revenue growth of 1.7% QoQ (TCS:4.6%, INFO: 2.6%, HCLT: 3.2%), led by realization improvement 1.2% QoQ (Onsite: 1.9%, Offshore: 1.4%). However, volume growth of 0.2% QoQ is weaker by 2pp compared to peers. Nevertheless, the company guided for 1.2% to 3.2% QoQ growth which indicates pick-up in growth, as Q3 is seasonally a weak quarter. The management commentary was more confident and optimistic compared to previous quarters. According to the company, the decisions are getting made, sales cycle is improving and deal funnel is getting better. The management expects deal ramp-ups to start getting reflected in revenue momentum in CY13. We expect the volume growth to get stronger in FY14.

4. Cairn India-Buy
Current Market Price (CMP): Rs 120
Target Price (TP): Rs 133

Cairn upgraded its estimate of gross risked prospective resources to 530m boe from 250m boe in April 2012. However, as exploration period for the Rajasthan block expired in 2005, street has not accorded value to the exploratory upsides. With crude oil increasingly being treated as a financial asset, there is a strong negative correlation between dollar index and crude oil prices. At times of correction in crude, weakness in rupee is likely to support earnings. We estimate crude oil prices to average at USD 105/bbls for FY13 and FY14, respectively, with OPEC playing the balancing act in case of demand declines.

5. Power Grid Corporation-Buy
Current Market Price (CMP): Rs 120
Target Price (TP): Rs 133

We expect capitalization to increase to Rs 167 billion in FY17E from Rs 71 billion in FY11 and regulated equity base to increase by 2.6x to Rs 435 billion in FY17, resulting in earnings CAGR of 16% over FY12-17E. The CWIP in balance sheet has also increased 2x to Rs 266 billion in FY11 from Rs 132 billion in FY09, indicating higher capitalization over the next few years. The management highlighted that it is highly focused on execution and ambitiously looking at reducing CWIP in FY13 despite huge capex plans of Rs 200 billion in FY13. This effectively means that the management is indicating capitalization numbers of Rs 200-210 billion for FY13. PWGR reported capitalization of Rs 40.72 billion for Q1FY13. It has further capitalized assets worth Rs 10 billion in July till date taking the total capitalization to Rs 50 billion. The management had earlier indicated capitalization of Rs 200 billion for FY13 and sounded confident and on track to achieve the same. We expect the company to deliver 16% EPS growth over FY12-17E with core RoEs of 17.6% over the same period.

6. Axis Bank-Buy
Current Market Price (CMP): Rs 1,220
Target Price (TP): Rs 1,325

Axis has been generating best in class ROA’s at 1.6% and ROE’s at 19%, underpinned by strong liability and fee income franchise and they have been able to hold on to their liability franchise and have surprised on core fees in 2Q13 with market expecting a disappointment. Over the past 12 months 50% of the incremental loan growth has come from retail advances, with retail book now constituting 25.7% of the book, as against 20.9% in 2QFY12. We believe that focus towards retail book would provide opportunity to maintain the growth trajectory in a scenario of low loan demand from corporate and is also aiding core fees. The bank is currently trading at 1.7x FY14 book as against our target of 1.9x FY13 book implying target price of Rs 1,325 a share.

7. Maruti Suzuki-Buy
Current Market Price (CMP): Rs 1,452
Target Price (TP): Rs 1,593

Manesar has ramped up to full production of 1,700 cars/day which is likely to increase to 2,000/day by end-November. Given the strong order book for ‘Swift’ and the ‘Dzire’ (1lac units), the timely ramp-up will help MSIL to cater to the festive season demand which has just began. The new 800cc ‘Alto’ has received a booking of 30,000 units in the first month of its launch. Royalty expenses are lower by 60bps QoQ on account of revision of provision in Q1FY13 to the tune of Rs 380 million. Other income includes a MTM gain to the tune of Rs430m as against a MTM loss of Rs 260 million in Q2FY12. Effective tax rate is likely to be 20% for FY13E. We maintain MSIL as top-pick in Auto space with a TP of Rs 1,596 based on 14.5x FY14E consolidated EPS (MSIL +SPIL) of Rs 110.

8. Dr. Reddy’s Laboratories-Buy
Current Market Price (CMP): Rs 1,787
Target Price (TP): Rs 2,038

Dr Reddy’s has built a very strong global generic business and has emerged as one of the leading Indian companies in the large generic markets like US, Europe and Russia/CIS. Apart from strong formulation business, the company is one of the largest suppliers of API’s to global generic companies. We believe that the company will be a key beneficiary of large patent expiries taking place in US and Europe and strong growth movement in branded generic markets like Russia, LatAm and India. We expect strong earnings CAGR of 31% over FY12-14 led by robust topline growth of 22% over the same period. All the key business segments excluding Europe are likely to contribute to the performance. Further, the company will benefit from the operating leverage going forward. The concerns over FY14 revenue and PAT growth are overdone as we expect 14% YoY earnings growth in FY14 despite a high base. The stock currently trades at 10-15% discount to some of its peers which we feel is unjustified. At current price, the stock trades at 18.1x FY13E and 16x FY14E earnings. BUY with target price of Rs 2,038.

9. Adani Port & SEZ-Buy
Current Market Price (CMP): Rs 135
Target Price (TP): Rs 165

With the coal terminal operational since Q4FY11, volumes are likely to witness strong growth. Notwithstanding current issues surrounding the price of imported coal, the Adani Power plant and Tata UMPP volumes are likely to scale up to a level of 28m tonnes by FY15 from the current 8m tonnes in FY12. Overall, total port volumes are expected to more than double in the same period from FY11 levels of 51m tonnes, largely led by coal, crude and container volumes. Our SOTP for the company stands at Rs 165, of which 76% is contributed by the Mundra asset, 8% contributed by Abbot Point and the remaining by the SEZ as well as the other Indian ports.

Mid Cap

10. Yes Bank-Buy
Current Market Price (CMP): Rs 421
Target Price (TP): Rs 480

Yes Bank's margins have inched up in Q2FY13 to 2.8% (10bps QoQ) after stagnating at ~2.7% for the last 5-6 quarters. Being largely wholesale funded, Yes Bank has started to gain from easing rates (CD rates down 70-80bps and AAA yields down 50bps in last 3mnts) and we believe margins to continue to gain over the next 2-3 quarters. Yes generates 22-23% ROEs which is among the highest in the industry and valuations on a PE basis is extremely reasonable for a bank with negligible thermal power exposure. An impending dilution will be 15% book accretive leading to favorable valuations of 1.88 on FY14 book without denting ROEs <18-19%.

11. Mahindra & Mahindra Financial Services-Buy
Current Market Price (CMP): Rs 894
Target Price (TP): Rs 1,100

MMFS has been reporting better-than-expected growth of ~35% YoY driven by all segments excl. tractors as Mahindra continues to add new OEMs and aid in their rural sales financing. Fixed rate book - Margins to inch up: MMFS's margins have been inching down as funding costs increased over last 4-6 quarters as MMFS did not pass on the entire cost hike to consumers. With wholesale rates easing and a completely fixed rate book, we believe margins for MMFS will bounce back over the next 3-4 quarters. Sensitivity to Rs 8 billion dilution indicates a post dilution ROE of 20% which remains best in class and valuations on diluted book at 1.9x FY14 book is undemanding in our view.

12. Jammu & Kashmir Bank-Buy
Current Market Price (CMP): Rs 1,305
Target Price (TP): Rs 1,400

J&K Bank enjoys a very strong liability franchise due to its state advantage, with CASA within J&K at 55%. Despite just 15% CASA outside J&K, J&K Bank’s total CASA at 38.2% is among the best in the industry, providing the bank with a significant cost advantage. Low fees income and CA ratio are the only commonalities with PSU banks, apart from which J&K Bank is more of a private bank on most fundamental parameters like high CASA and margins, sound underwriting and high ROAs/RORWAs. Management continuity, which is a big issue with PSUs, is also absent in J&K Bank with 5-6 years of average tenure for the Chairman; thus, valuation benchmarking to mid-cap PSU banks is unwarranted. The bank is trading at 1.3x FY13 P/B with ROE at plus 20%.

13. IPCA Lab-Buy
Current Market Price (CMP): Rs 462
Target Price (TP): Rs 551

Consistent improvement in profitability along with strong growth in business. Both of the key business segments of the company viz. international formulation business and domestic formulation business are likely to do well over next couple of years. We expect strong earnings CAGR of 34% over FY12-14 led by robust top line growth of 17% over the same period. Despite Rs 5 billion capex planned over next 2 years, the company is likely to sustain healthy return rations and low gearing. Expect RoCE to remain above 25% for next 2 years with free cash-flow generation of Rs 3.5 billion. The stock is trading at 15.1xFY13E & 11.7xFY14E earnings which is at significant discount to large cap and some of the mid-cap companies in the sector.

14. Torrent Pharmaceutical-Buy
Current Market Price (CMP): Rs 682
Target Price (TP): Rs 843

It is one of the better managed companies in the Indian pharma space with high standard of corporate governance. Company’s international formulation business is expected to lead the performance of the company in the medium term. We expect strong EPS CAGR of 24% over FY12-14 led by 25% CAGR in international business. The company has strong balance sheet with lean working capital and zero net debt. Expect RoCE to remain above 25% over next 2 years and free cash-flow generation of Rs 5.8 billion during the same period. The stock is trading at 14.0xFY13E and 11.3xFY14E earnings which is at significant discount to large cap and some of the mid-cap companies in the sector.

15. Amara Raja Batteries-Accumulate
Current Market Price (CMP): Rs 258
Target Price (TP): Rs 294

Management is confident of a double-digit growth in the automotive replacement market in FY13E based on robust automobile sales in FY10. AMRJ is expanding its capacity in the four-wheeler automotive segment from 5.6m units to 6.0m units in FY13E. With the sixth consecutive quarter of outperformance of Amara Raja over Exide, we believe the valuation discount between the two could narrow. We expect the historical valuation discount of AMRJ (30%) to Exide to narrow, given the consistent performance by the company. Our Target Price of Rs294 is based on 14.0x FY14E EPS (13% discount to 16.0x FY14E earnings’ target multiple for Exide).

16. Persistent Systems-Buy
Current Market Price (CMP): Rs 481
Target Price (TP): Rs 540

Persistent witnessed ramp down from top clients due to end of projects and M&A activity (of clients). Top clients, whose projects got shelved after acquisition, are already captured in quarterly run-rate. Moreover, due to project completion with other top-client, we may see no spill-over in Q3FY13. Nevertheless, the company is working with the same client on other projects to back-fill the gap. Hence, we expect it to recoup some of the negative impact. We believe the option value of IP sales along with success of “Sell with Partner” could spin a positive surprise. Currently, Persistent is traded at 8.7x FY14E earnings estimate with 20% earnings CAGR (FY12-14E).

17. NIIT Technologies-Buy
Current Market Price (CMP): Rs 288
Target Price (TP): Rs 350

The company has a niche presence in travel, transportation & logistic (38% revenue). A specialized presence in the segments and small size gives room for strong growth. It is rated as one of the most preferred vendor in the space. We are factoring in modest growth expectation of 2.8% CQGR over the next five quarters, despite reporting strong growth of 7% CQGR over the last 12 quarters. NIIT Tech is a unique IT services provider for TTL and Insurance sector (non-life) with a 28-year heritage. NIIT Tech is best positioned in the niche IT space to meet or exceed our above consensus forward estimates and grows faster than peers. With a P/E multiple of 6.5x, is at steep discount compared to the peer group, moreover with a predicted EPS growth CAGR of 16%, the valuation looks compelling.

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