Rajat Rajgharia, director-research, Motilal Oswal Securities has selected 5 companies as stock picks for 2013. He has provided following investment rationale on these companies:
1. ICICI Bank
Core RoA has improved decisively to 1.5%+ on back of structural improvement in balance sheet and improved risk management practices and efficiency. Strong capitalization of Tier I at 12.8% will enable bank to deliver dilution free growth at-least till FY16. Led by increase in leverage, Core RoE is expected to improve to 16.5% as compared to average of 11% over FY08-12. On asset quality, it has continued to deliver strong performance (GNPA% declining in last ten quarters) and has built cushion with PCR now at 79% as compared to 53% in FY09. ICICIBC trades at near five years average valuation of 1.8x FY14E BV. ROE improvement and uptick in economic cycle will lead to re-rating in our view.
2. LIC Housing Finance
LICHF continues to deliver well on growth and asset quality fronts. Remain well positioned to make most of the strong growth opportunities in the housing finance industry led by long term structural growth drivers in place (we expect ~25% loan CAGR over FY12-15E). Spreads have bottomed and should improve from current levels led by higher spreads on new business, moderation in interest rates and increase in developer loan portfolio. Asset quality continues to remain healthy. Earnings will grow at a 25%+ CAGR during FY13-15E. Stock trades attractively at 1.9x FY14E BV.
3. Tata Motors
JLR's volume momentum would remain strong driven by significant upgrades of its flagship Range Rover and Range Rover Sport models coupled with other product actions and continued momentum in China. While medium profitability would be driven by improving product mix, play out of modular strategy and operating leverage, initiative of captive engine and Chery JV(China) would support long term profitability. Improvement in macro-economic environment led recovery in industrial activity would drive sharp recovery in M&HCV business in FY14/FY15, yet to reflect in earnings estimates. Tata Motors is expected to be zero net debt (excl NBFC) in 2 years time, despite high investment program in both businesses. The stock trades at 7.5x FY14E consolidated EPS.
Volume growth of 13% CAGR to 39mtpa over FY12-15, with (1) easing logistics bottlenecks, (2) CEC permission for forward sales in Karnataka, and (3) increase in capacity to 47mtpa by the end of FY14. Investments in pelletization capacities in India will lead to acceleration in demand and, in turn, higher prices for iron ore fines, which constitute ~ 65% of NMDC's product, mix. Also strong domestic demand coupled with constrained supply has improved fundamentals of Indian iron ore miners like NMDC. NMDC has been stepping up dividend payout, which will improve RoE and stock returns. We expect total dividend of Rs 5.5 a share in FY13, implying a payout ratio of 35% and dividend yield of 3.4%. NMDC's free float has increased to a meaningful 20% after recent government stake sale. The stock is available at an attractive 7.8x FY15E EPS and an EV of 4.1x FY15E EBITDA.
Organic growth prospects at in the combined entity (ex-BT) remain healthy in the near-to-medium, despite nearly half the revenues from the challenged Telecom vertical after the merger. TECHM's revenues from second largest customer continue to grow (~25% contribution before acquisitions), room exists to increase the wallet share further. Ramp ups in deals won will facilitate growth, and Satyam is seeing increasing participation in large deals. TECHM has let go off revenues from low margin Indian BPO accounts - substantiating its focus on revenue quality; and cushioning concerns around margins. The stock trades at 9x FY14E EPS. Growth rates comparable to peers and stable margin performance are potential re-rating drivers for the stock.