ICICIdirect has selected twelve stocks from investment perspective for 2013. The stock broker has provided following investment rationale on these companies:
1. Balkrishna Industries
Buying range: Rs 255-275
Target Price (TP): Rs 356
Balkrishna Industries (BIL) is a leading producer and exporter of off-highway (OHT) tyres. The industry is controlled by a few global players. BIL derives ~90% of revenues from exports to ~120 countries. The company has an achievable capacity of 166,000 MT and holds 3.5% of the global OHT market.
Important triggers for BIL are: capacity expansion at the Bhuj facility, which will add 120,000 MT on becoming operational by FY15E. The company has been able to maintain margins amid soaring international rubber prices. With a decline in prices and firming of the rupee, we expect BIL to be able to sustain high margins. Key risks: Weak recovery in the agricultural segment in Europe, US.
BIL has a strong track record of meeting volume guidance and maintaining robust margins. We expect the company to clock revenue, EPS CAGR of ~13%, 8%, respectively, in FY12-15E. Margins are expected to remain at ~20% for FY14E and FY15E. We have valued the stock at 9.0x FY14E EPS with a target price of Rs 356.
2. Cadila Healthcare
Buying range: Rs 840-880
Target Price (TP): Rs 1069
Cadila Healthcare (CHL) is a leading pharma company with a presence in core pharmaceuticals across the value chain besides the wellness and animal healthcare business. CHL has a dominant presence in the Indian formulations market with a market share of ~3.8%. It is improving its market share by launching more than ~40 products per year. We expect new product launches to drive the domestic business and grow at a CAGR of 19% between FY12 and FY15E.
The resolution of USFDA CGMP issues at the Sarkhej facility has opened up avenues for the high margin injectable business of the company. It is looking to launch at least five to 10 injectables (including launches via Hospira JV) per year in the US. Besides, it has a strong pipeline of ~150 ANDAs in the US with only ~50 launches. Key risks: Delay in USFDA approvals and pricing pressure in domestic formulations especially in acute therapies.
The management has set a revenue target of USD3 billion by FY16 from USD1 billion in FY11. We expect revenues, EBITDA and PAT to grow at a CAGR of 19%, 23% and 23%, respectively, in FY12-15E driven by a robust pipeline across geographies and required capabilities. We have ascribed a value of Rs 1069, based on 17x FY15E EPS of Rs 62.9.
3. HeidelbergCement India
Buying range: Rs 50-53
Target Price (TP): Rs 69
Heidelberg Cement (HCIL) is player with cement manufacturing capacity of 3.1 million tonnes. Its two units at Damoh and Jhansi together constitute 58% of its total capacity in central region. The company is a subsidiary of Cementrum I BV, which is 100% controlled by HeidelbergCement AG.
HCIL's new additional clinker & grinding capacities of 1.9 MTPA & 2.9 MTPA, respectively, are all set to commence operations from December-January 2013 onwards. This will increase its total cement and clinker capacity to 6.0 MTPA and 3.1 MTPA, respectively. This would enable the company to increase its market share and enjoy the economies of scale. In addition to this, the company has also invested ~Rs 2 billion in setting up a conveyor belt to bring down the cost of transporting limestone.
With majority of the capex plans almost over, we believe, return ratios would start improving from CY13E onwards. Currently, the stock is trading at P/BV of 1.4x and EV/EBITDA of 6.2x its CY14E earnings. On an EV/tonne basis, the stock is trading at USD56/tonne on full capacity, which is ~50% discount to its current replacement cost. We have assigned a target price of Rs 69 based on FY14E EV/tonne of USD65.
4. Idea Cellular
Buying range: Rs 97-98
Target Price (TP): Rs 120
The recent cut in reserve price in four circles augurs well for Idea Cellular as it reduces its one-time spectrum fees and spectrum renewal charges when its licenses come up for renewal. Moreover, unlike other incumbents, Idea has no licenses coming up for renewal till FY15, which makes it least susceptible to any regulatory uncertainty.
Only two new operators entered the industry again in the recent auctions. Also, they have won spectrum in only six circles further reducing the possibility of price wars. We believe the financial outgo for incumbents and new operators alike call for a tariff hike. Idea has already hiked tariffs in Madhya Pradesh. Key risks: excessive bidding in forthcoming auctions.
We expect the EPS to more than double from FY12-15 to Rs 5.8. We have not factored in any tariff hike in our financials. A tariff hike, however, is likely in the industry and can provide further upside to our estimates. We have valued the stock using the DCF methodology to arrive at a target price of Rs 120.
Buying range: Rs 330-350
Target Price (TP): Rs 415
InfoEdge is among the leading internet companies in India. The company runs Naukri, India's no.1 job site along with 99acres.com (real estate portal), Jeevansathi.com (matrimonial portal). The company also has significant investments in emerging internet companies - meritnation, policybazaar, zomato, mydala, floost, 99labels, canvera and happily unmarried.
The recent government reforms could improve the investment and, thus, the hiring climate in India. Being the market leader (~60% market share), Naukri could be a key beneficiary in this recovery similar to the post-2008 period when it improved its market share. The growth in other business has accelerated, which could also boost revenues in FY14E and FY15E. Key risks: overall weakness in the job market and delays in IT spending patterns could impact the hiring patterns of Indian IT companies. InfoEdge earns 25% of its revenues in the recruitment business catering to IT sector demand.
We expect revenues, EPS to grow 24.7%, 25.8% in FY14E and 22.4%, 17.6% in FY15E, respectively. This translates to revenue, EPS CAGR of 23.3%, 24.4% for FY11-15E. We have arrived at our DCF based target price of Rs 415, which discounts our CY14E EPS estimate of Rs 17.7 by 23.4x.
6. Kansai Nerolac Paints
Buying range: Rs 1,040-1,100
Target Price (TP): Rs 1,335
Kansai Nerolac Paints (KNPL), a market leader in the industrial/automotive paint segment (~35% of the Rs 291 billion paint market), supplies over 90% of OEM requirements. The company is expanding its presence in the decorative paint segment through the launch of an eco-friendly range of products.
Being the dominant player in the automotive segment and largest supplier to Maruti Suzuki (paints), we believe growth of the automobile sector (~10% CAGR FY12-15E) would drive KNPL's sales growth at 11.3% CAGR in FY12-15E. Further, as the outlook for crude oil (key raw material) remains grim, we expect KNPL's EBITDA to increase at ~16% CAGR over FY12-15E and margins to improve to ~15% by FY15E from ~13% in FY12. Key risks: Slowdown in automobile sector, particularly Maruti.
KNPL's strong position in the industrial segment would aid the company to capitalise on the improving economic conditions and revival in industrial growth. Further, with input prices expected to stabilise, we expect KNPL's earnings to grow at a healthy CAGR of ~16% in FY12-15E.
7. Mahindra Lifespace Developers
Buying range: Rs 380-410
Target Price (TP): Rs 505
Mahindra Lifespace Developers (MLDL) is a leading real estate developer with a presence in SEZ & DTA development and residential segment. Leveraging on the success of the Chennai SEZ totalling ~1550 acres and Jaipur SEZ aggregating ~3000 acres, it is also planning its second integrated business city in north Chennai over 750 acres. Furthermore, with the Land Acquisition Bill on the radar, MLDL will have early mover advantage in terms of prices as it owns huge large tracts of land in SEZs.
MLDL has ramped up its residential portfolio with a robust residential development pipeline (total developable land bank of 22.2 million sq ft (including ongoing projects of 4.0 million sq ft). Furthermore, the standalone level (which carries residential development) is net-debt free, giving us further confidence on the balance sheet front while it is developing a sustainable residential project portfolio in the long run. Key risks: clarity over tax rates for its SEZ business, retrospective effect in land acquisition bill.
At the CMP, the stock is currently available at 0.6x its FY14 potential NAV and 1.5x FY14E P/BV. MLDL is one of our picks in the real estate space considering the quality of management with better execution exhibits, strong balance sheet and 37.6% CAGR during FY13E-15E.
8. Page Industries
Buying range: Rs 3,210-3,320
Target Price (TP): Rs 4,109
Page Industries (Page), the sole domestic licensee of the Jockey brand, manufactures and distributes innerwear and leisurewear (men and women). In July 2011, it acquired the exclusive license to manufacture and distribute Speedo brand swimwear, apparel, equipment and footwear.
Page has the license to sell Jockey's products in India, Nepal, Sri Lanka, Bangladesh and UAE. Despite operating at 85-90% utilisation levels, the company was unable to export due to strong domestic demand. Page has been consistently expanding its capacity by ~30% each year. Its capacity has increased from 2.2 crore pieces (FY07) to 10.9 crore pieces (FY12). Key risks: Lower demand, competition eating Page's share and non-renewal of licensing agreement (post 2030).
Over the years, the sales, EBITDA and PAT have grown at a CAGR of 35-40%. Conservatively, we expect the company to report revenue, EBITDA and PAT CAGR of 27.0%, 29.2% and 29.6% during FY12-15E, respectively. Considering the healthy return ratios, consistent dividend payout (45-50%) and negligible leverage, we believe Page is a good play on the Indian consumption story.
9. Tata Consultancy services (TCS)
Buying range: Rs 1,210-1,260
Target Price (TP): Rs 1,450
TCS has consistently outperformed its peers and is likely to exceed Nasscom's industry growth guidance of 11% in FY13E. Initial FY14E hiring guidance (25,000 campus hires; 12,000 offers made) and management commentary indicates continued momentum in FY14E. TCS' ability to win large deals (Friends life, UK government contracts, etc.) helps improve pipeline visibility while scale and efficiency help in flawless execution. This coupled with non linear initiatives such as iON, platform BPO and products could help sustain revenue growth momentum and margin profile.
Key risks: CY13 IT budget decision delays led by fiscal cliff could alter spending patterns and impact growth assumptions given TCS earns 53% of its revenues from the US. Further, deterioration in Europe could lead to projects ramp downs, budget freezes and cross currency volatility.
We expect revenues, EPS to grow at 9.8%, 8.6% in FY14E and 11.4%, 10% in FY15E, respectively, translating to revenue, EPS CAGR of 19.2%, 15.9% during FY11-15E. TCS is currently trading at 16.3x our CY14E EPS estimate of Rs 78.7 and provides 15% upside relative to our target price of Rs 1450 (18.5x CY14E EPS).
10. Tata Motors
Buying range: Rs 290-305
Target Price (TP): Rs 360
Tata Motors (TML) is India's largest commercial vehicle manufacturer with a market share of ~60% and third largest passenger vehicle maker with a market share of ~13%. The company also owns the iconic brands Jaguar and Land Rover (JLR). With the rate cycle reversal in India and product up-cycle in JLR, we believe FY14E will clock a significant performance.
Launch of the new Jaguar F-type will add significantly to flagging Jaguar volumes while there will be margin accretion due to the launch of the new Range Rover. A better-than-expected recovery in the US, coupled with high growth in Chinese markets will augur well for JLR. On the domestic front, we believe the earnings cycle has reached a nadir and a revival in industrial activity will boost the domestic performance. Key risks: significant slowdown in Chinese markets.
Valuations remain attractive at 3.5x EV/EBITDA JLR vis-à-vis higher cash rich peers, strong RoEs (>20%) on consolidated business. Thus, post JLR multiple rerating, we arrive at an SOTP target price of Rs 360.
11. Tech Mahindra
Buying range: Rs 880-915
Target Price (TP): Rs 1,150
The combined entity (TechM + MSat) could likely earn ~ USD2.8 billion in revenues with ~90,000 employees and service 489 clients. The EBITDA margin profile is on the rise with both companies reporting margins of ~20% in Q2FY13 (aptly aided by rupee tailwinds). Cost synergies from the impending merger and employee pyramid rationalization could likely help sustain the current margin profile. PE multiple re-rating is likely as the combined entity - sixth largest in size - could fill the gap between HCL Tech (~USD4.6 billion FY13E revenues) and a number of Indian vendors with revenues of ~USD1 billion.
Key risks: Demand slowdown from its largest client BT. CY13 IT budget decision delays led by fiscal cliff could alter spending patterns and impact growth assumptions. Deterioration in Europe could lead to projects ramp downs, budget freezes and cross currency volatility. Though MSat has settled all its external legal disputes, an adverse ruling in income tax and ED disputes could lead to cash outflows.
We expect revenues, EPS to grow 7.7%, 5.9% in FY14E and 5.8%, 11.2% in FY15E, respectively, translating to revenue, EPS CAGR of 12.5%, 21.5% during FY11-15E. TechM is currently trading at 8.8x our CY14E EPS estimate of Rs 104.1 and provides 27% upside relative to our target price of Rs 1150.
12. Zee Entertainment Enterprise
Buying range: Rs 180-200
Target Price (TP): Rs 268
The successful implementation of digital cable in Delhi and Mumbai along with good progress in other metros suggests that sooner or later the whole country would be digitised, with revenue leakage being plugged, thus benefiting broadcasters. With a strong portfolio of channels and bargaining power of Media Pro, we expect subscription revenues of ZEEL to more than double from FY12-15.
ZEEL has posted a strong turnaround in ad revenue growth since it started investing in high cost content including reality shows and newly released movies. The company posted an ad growth of 26.1% in H1FY13 as against 6.9% de growth in FY12. Also, likely rate cuts from the RBI would improve the ad environment for companies across the media sector. We expect ad revenues to grow at a CAGR of 12.5% in FY12-15. Key risks: Slower-than-expected rollout of digitisation.
Revenue is expected to grow at a CAGR of 18.1% in FY12-15. Given that majority of operational costs are fixed in nature, the spurt in subscription revenue will bring in higher operating leverage. We have valued the stock at 23x FY15E EPS to arrive at a target price of Rs 268.
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