NAVRATANAS FOR A SPARKLING DIWALI
By Premium Research Bureau
The festival of lights is here and like every year, we all fervently hope and pray that Goddess Lakshmi continues to bless one and all. This is also the time when we all loosen our purse strings and go shopping in full throttle. And like every year, we present a list of stocks which you should buy to ensure that your next Diwali will be even more ‘dhamakedar!’. These are nine precious stocks, like nine precious gems which will adorn your portfolio, giving it a golden hue and sparkle.
All these stocks are for the long term, at least till next Diwali and remember, it is always patience which pays and here, these stocks could not just pay but also give you that elusive pot of gold at the end of the rainbow!
Happy Diwali and happy investing!
TCS
The equation has changed in the IT sector, with investors preferring TCS over Infosys. This Tata group company, which holds 73.96% stake has been consistently beating all expectations. TCS is India's second biggest outsourcer and its has outperformed its rival Infosys across most parameters, establishing its position as the bellwether of India's over $100 billion IT sector. On all five fronts – growth, margins, visibility, better employee morale and valuations, TCS has been scoring high. In Q2FY14, the company posted the highest volume growth in last nine quarters at 7.3% v/s the 3.1% volume growth of Infosys. The best part, financially, about TCS has been its margins, which have constantly beaten all estimates and even in current Q2, operating margins were at over 30% and in current fiscal, the IT company expects margins to be around 26-28%.
TCS does not give guidance but the management stated that it expects to beat NASSCOM’s 12-14% growth estimation for the sector and FY14 is expected to be much better than FY13. The company has ended FY13 with a net profit at Rs.13,941 crore. TCS had ended H1Fy14 with a consolidated net profit at Rs.8473 and with two more quarters to go, clearly it is on the right track to surpass FY13 earnings. Apart from investors, employees also seem to prefer TCS as the attrition rate of the company stands at 10.9% v/s 17.3% of Infosys. Its employee utlisation rates have also been above 80%.
TCS might seem costlier than the rest in the IT pack but given the expected growth of the company, the current price seems like a bargain. Buy at the current price and one can expect the price to touch Rs.2600 by next Diwali.
AXIS BANK
India’s third largest private sector lender Axis Bank is on a very sound footing, especially in the private sector banking space. The Bank reported a good growth story without adding stress to the assets. It in fact maintained its asset quality with net NPAs at Rs. 838 crore, expanding to 0.37% from 0.35% as of 30th June 2013. Bank’s capital position is very healthy with CAR (as per Basel III) at 15.85%, thanks to the Rs. 5,500 crore QIP and preferential allotment undertaken in January this year, which keeps it adequately capitalized and fuel growth.
The company’s growth is also led by a retail story wherein savings bank deposits for Q2 grew 18% (YoY) and domestic CASA and Retail Term Deposits constituted 73% of total domestic deposits. Net Profit for Q2FY14 grew 21% (YoY) at Rs.1,362 crores, while Net Profit for H1FY14 rose 22% at Rs.2771 crore. Bank’s cost-to-income ratio stayed at moderate levels of 41.5% in Q2.
With a branch network of 2,225 and 11,796 ATMs, compared to its peers, HDFC Bank and ICICI Bank – valuation of Axis Bank is favourable, given its sound and consistent financials. PSU banks might have become the choice for now but it is private sector banks, especially Axis Bank which are healthier and on much firmer solid ground. Frontline private sector banks are showing steady growth and Axis Bank is recommended for buy with a target price of Rs.1500 over the next 12 months.
GSK CONSUMER
GlaxoSmithKline Consumer Healthcare or GSK Consumer as it is recognized, is as blue as any blue blooded MNC can get. A 72.46% subsidiary of UK based healthcare major GlaxoSmithKline Group, it owns some famous brands in its basket like Horlicks, Boost, Maltova, Viva and OTC products like Crocin , Eno, Iodex . Its oats breakfast product, sold under the brand of Horlicks is also garnering good market share, clocking double digit growth.
A debt free MNC, for H1CY13, the company posted a net revenue of Rs.1793 crore and a net profit of Rs.276 crore. Its equity stands at Rs.42.06 crore, giving an EPS (Rs.10 face value) of Rs.65.71. Reserves stood as at 30th June 2013 stood at Rs.1594 crore, giving a networth of Rs.1636 crore. The company is flush with cash and cash equivalents too, which stood at Rs.1440 crore, translating into cash per share of Rs.342. The company is to declare its Q3 numbers on 6th November.
For CY13, if one assumes 25% EPS growth, company is likely to report an EPS of about Rs. 130, which discounts the current share price by a PE multiple of 36 times, which is not expensive, given the liberal dividend payout, solid business model, high corporate governance practices and parent’s increasing focus on the Indian business. Share at current price is recommended for a buy with a target price of Rs.5,400 for a bountiful Diwali for next Samvat.
M&M
Mahindra & Mahindra (M&M), flagship of the US $ 16.2 billion Mahindra Group is India’s premier utility vehicle and farm equipment company. The company is a market leader in utility vehicle with 44.4% market share and 58% market share in the fast growing pick-up segment. It is also the world’s largest tractor manufacturer by volume, commanding a 41.4% market share in India. For Q1FY14, company reported a consolidated PAT at Rs. 1,165 crore, resulting in an EPS of Rs. 19.73. South Korean subsidiary Ssangyong Motor turned profitable for the first time since its acquisition in March 2011, reporting a profit of Rs. 41 crore. Over the next 3 years, company plans to invest Rs 10,000 crore (Rs 7,500 crore capex for new plant to launch new products and Rs 2,500 crore on group companies).
Apart from strong operational performance, its stakes in various group companies are expected to give it a bounty. Its key subsidiaries are Ssangyong Motor Company (69.63%), Mahindra & Mahindra Financial Services (51.20%), Mahindra Lifespace Developers (51.04%), Mahindra Holidays (78.67%) and associates like Tech Mahindra(combine with Satyam Computers). These subsidiaries and associates contribute nearly 20% to the company’s EPS. Based on the book value and market cap of listed subsidiaries and associate companies, M&M is sitting on unrealized gains of around Rs. 15,000 crore on its group investments, which carry cost of Rs.3,644 on M&M’s balance sheet.
The company is to declare its Q2FY14 performance on 14th November and though it could be a challenging quarter given the macro economic factors, festive demand is expected to boost demand for farm equipments. It is expected to end FY14, with standalone revenue of around Rs. 42,000 crore and PAT of close to Rs. 3,500, resulting in EPS of around Rs. 60. On consolidated basis, FY14 EPS is estimated at Rs. 75, which translates into PE multiple of 12x, based on current year expected earnings. This is very attractive valuation for a front-line Sensex company, part of a group well known for ethical management and strong corporate governance practices. The stock at current price is a good buy and in the next one year has the potential to scale to Rs.1100 levels.
HDFC
Housing Development Finance Corporation Limited (HDFC) is as solid as soild can be and as blue as a true royal blooded blue chip can be. A leader and pioneer of housing finance in India, even in difficult times, it has a commendable 85% of the loan sourcing, through its own channels where average ticket size of loan is about Rs. 21.6 lakh. HDFC has interests in mortgage, life and non-life insurance, asset management, bank among others. Key subsidiaries and associates, which account for around 305 of its net profit, includes listed entities like HDFC Bank (22.83% stake) and Gruh Finance (59.69% stake).
For H1FY14, HDFC’s consolidated profit after tax was at Rs.3598 crore, up 26%. Share of profit from subsidiary was at 32% of total H1FY14 profit. Capital adequacy ratio increased to 19% as against the minimum requirement of 12%. It showed a 29% growth in the individual loan book (after adding back the loans sold in the preceding 12 months). Its asset quality has never come under any suspicion, ever, even post the Lehman collapse. Thus asset quality remains intact, with gross NPA coming at 0.79% v/s 0.77% (YoY). Its provision for contingencies showed a sharp downturn, from Rs.40 crore to Rs.15 crore and this was due to National Housing Bank reducing the provisioning for standard loans for commercial real estate-residential housing. Unrealised gains on HDFC’s listed investments were Rs 28,938 crore.
Fundamentally, HDFC remains rock solid. Those looking to build a long term portfolio, this is a must-have stock. HDFC is probably the most sound financial sector play in India, and is trading at attractive valuations currently with a favourable risk-reward. HDFC is recommended for a buy with a twelve month target price of Rs.1100.
HINDUSTAN ZINC
Hindustan Zinc Limited is an integrated mining and resources producer of zinc, lead, silver and cadmium. It is a 64.92% subsidiary of Vedanta Group’s Sterlite Industries and India’s largest and the world's second integrated producer of zinc and lead, with a global market share of 6% in zinc. Being one of the lowest cost producers in the world, the company has 4 mines in Rajasthan, 4 smelting operations (3 in Rajasthan, 1 in Andhra Pradesh) and captive power plant. Its product portfolio includes refined zinc metal, refined lead metal, silver, cadmium and sulphuric acid. Besides being debt-free, company has over Rs.23,632 crore of cash and cash equivalents which is a big positive for the stock, given the market's discomfort with debt-ridden companies.
Led by higher sales from lead and zinc, for H1FY14, the company posted a 6% jump in net profit at Rs.3301 crore on a 17% rise in revenue at Rs.6460 crore, giving a very healthy NPM of 51%. Higher production at Rampura Agucha and restarting of Zawar mines led to a 22% jump in mined metal production. Improved operational efficiencies also led to a 19% jump in integrated zinc production. Better realizations on lead and a 13% rupee depreciation helped undo the falling realization of zinc and silver. Regarding its expansion projects, Rampura Agucha underground mine project is operational via ramps and commercial production will ramp up in Q3 and Q4 of FY 2014. The Kayad mine project will also commence commercial production in the current fiscal year and will this become a big earning booster.
The big trigger for the stock is the stake sale from Govt in Hind Zinc and Balco. The Govt holds a residual stake of 29.5% in the company, which is in the non-promoter category. Though Vedanta has evinced its desire to buy the residual stake from the Govt, the Finance Ministry has recommended auction of its stake. Stay invested as the stock promises to give you a cracker of a return of Rs.160 by next Diwali.
GOODYEAR INDIA
Goodyear India, a 74% subsidiary of US-headquartered, is one of world's largest tyre companies. This debt free MNC enjoys leadership position in the domestic farm tyres market, which are manufactured at its Ballabgarh (HP) plant. Medium commercial truck tyres are also manufactured at the same facility. The company also trades in Goodyear branded tyres for passenger and off-the-road (OTR) vehicles, mainly catering to replacement demand, manufactured at Aurangabad by a group company. This accounts for nearly one-fourth of company's sales turnover.
The company has done well for the 9-month ended 30th Sept 2013, posting a net profit of Rs.66.50 crore, which is already much higher than the net profit of Rs.56 crore posted for CY12. Given the rich monsoon and bountiful harvest, tractor sales are expected to jump in and this in turn would mean much better earnings for the company in Q4 as Goodyear is a leader in the farm tyre segment.
Robust earnings apart, there are two major triggers for the stock. First is the persistent expectation of delisting. The company had unsuccessfully undertaken a delisting move in April 2010 at Rs. 340 per share, which did not sail through due to poor participation from public shareholders. The delisting move, may once again, be initiated by the overseas parent in the next 12 months, at a much higher price, which will be a big trigger for the stock price. Second major trigger is the sale of land. The company owns tracts of land at Faridabad , outskirts of New Delhi. And if the company decides to sell this, it could earn the Goodyear a major fortune. Sit on this MNC and you could end with a golden egg. Price target for Goodyear over the next 12 months is Rs.400 from the current price.
CAIRN INDIA
According to Platts Top 250 Global Energy Company Rankings, Cairn India is the fastest growing energy company in the world, and this is for the second consecutive year. Cairn India has a portfolio of nine blocks, located in four strategically focused areas: one in Rajasthan; two on the west coast of India; five on the east coast of India (including one in Sri Lanka) and one in South Africa. Cairn India is the operator in all the blocks except KG-ONN-2003/1, where as per the PSC, Cairn India is the operator during the exploration phase and ONGC becomes the operator in the development and production phase.
The company as at 30th Sept 2013, clocked in a group production at 213,299 boepd, which is very much on track to meet year-end target of over 225,000 boepd from all producing assets. Its Rajasthan block completed four years of oil production, crossing the 180 mmboe from Thar’s oil fields. In H1FY14, the company reported a NPM of 74.7% v/s 69.2% (YoY), with net profit coming in at Rs.6512 crore, up 6%. Its current cash flow from operations is at Rs.2,856 crore. Its net Cash in hand is at US$ 3.2 billion. Cash earnings for the first half of FY14 stood at Rs.29.50. It is this strong free cash flow and balance sheet which makes Cairn a very strong exploration & production company.
Strong fundamentals apart, buying Cairn India makes sense as it is currently selling crude at a price which is 13% lower than average Brent price. Crude price is only expected to go up once world economies bounce back and the benefit of this is sure to get percolated to the earnings of Cairn. The best
part about this price is that it does not have any kind of subsidy sharing and that make perfect economic sense. Cairn has the infrastructure to ramp up production and meet its targets, making it a very good portfolio buy, with a price target of Rs.375 by Samvat 2071.
ACC
This company is almost a synonym for cement in India. A 77 year old company is a brand name to reckon with. Though a part of the Swiss Holcim group, world’s second largest cement maker with global capacity of 217 million tonnes per annual (MTPA) spread across 149 plants, the brand equity of ACC remains intact. The third quarter ended 30th Sept 2013 were dull and this was very much on expected lines as seasonally, it is the weakest quarter due to monsoon. From the end of Sept, cement prices have started firming up, in the range of Rs.10 to Rs.50 per 20 kg bag, in different markets of the country. The stock is a good buy despite the numbers precisely because demand is expected to take off and remain robust due to the festive season and the upcoming elections. Rural consumption is also expected to take off, given the good monsoon which will leave them with a higher disposable income.
It is expected that the company will end FY14, with revenues of over Rs.14,600 crore and PAT of over Rs. 1,800 crore, translating into EPS of close to Rs. 100. At the current price, the PE multiple works out to 11.5x, based on current year expected earnings. With a current market cap of Rs. 21,600 crore and EV of Rs. 19,300 crore, resulting in a EV/tonne valuation of US $ 105, which is the cheapest among large cap cement stocks. Ambuja Cements currently commands EV/tonne of $ 152 while Ultratech is ruling at a value of $176/tonne. Even on a PE valuation, these two giants are ruling at multiples of 19x and 20x respectively, much higher than ACC. Thus, ACC is cheaper among peers and in coming days, the valuation gap is likely to reduce. The stock at current price is a good buy for a happy year ahead with a target price of Rs. 1,400.