IndiNivesh recommends top investment ideas for 2015
External factors such as lower crude oil prices and slowing global economies are likely to make foreign investors bullish on the Indian markets.
According to the brokerage, 2015 will be a year of tough battle between bulls and bears, therefore it will be quite volatile. Making handsome returns in 2015 will be much tougher than they were in 2014.
"We expect the calendar year 2015 to be mixed year for portfolios as there could be some stocks that will yield very high returns while there would be certain stocks which could result in huge negative returns thereby resulting in muted returns on overall portfolio. Thus the trick to portfolio performance will be stock selection," the report said.
Following are the top investment ideas from IndiaNivesh that may surprise the Street positively:
Capital First (CFL)
Asset under management (AUM) of CFL has grown at 79 per cent CAGR over FY10-14, led by low base. As a strategy to focus on retail segment (which includes consumer durable loans, two wheeler loans, loan against property, mortgage, gold loans and small business loans), AUM of CFL has gradually moved towards retail from 10 per cent in FY10 to 81 per cent in FY14 (84 per cent in Q2FY15).
The brokerage believes CFL is well poised to grow at 30 per cent CAGR over FY14-16E with more focus on the retail segment.
"We believe that CFL is well placed to move on to next stage of growth. At CMP of Rs 356, CFL is trading at P/ABV of 2.5x and 2.1x for FY15E and FY16E respectively. We maintain a ‘BUY’ rating on the stock with target of Rs 400/- (P/ABV of 2.3x for FY16E)," the report said.
The company witnessed strong improvement on operational parameters, production grew by ~7.5% YTDFY15 on the back of a concerted push by the government to meet demand from the power sector. The company has guided 8.5% off take volume growth to 520 MT and 8% production volume growth to 507 MT in FY15. However, we forecast FY15 production at 502 MT (+7% YoY); off-take 512 MT (+7%).
The company is likely to show strong performance in the long term due to 1) strong domestic coal demand; 2) monopoly in coal production in India; 3) ASP (average selling price) significantly lower than global prices—potential for price hikes 4) one of the lowest cost producers globally, and 5)strong balance sheet.
"At a CMP of Rs 382, the stock is trading at 14.4x of its FY16E EPS. We recommend to BUY Coal India with an upgraded target price of Rs 467 (earlier target was Rs 422)," the report said.
HIL Ltd, formerly known as Hyderabad Industries Ltd, is the market leader in the fibre cement sheet products with a market share of 23%. With the increasing thrust of the government on rural development and rural housing, rising income of rural India and reducing gap in between cement fibre sheets and alternative products, the fibre cement sheet industry is likely to grow at 5% CAGR over the next 2 years.
"We expect the company sales to grow at a CAGR of 26.4% over FY14-FY16E with 794 bps improvement in EBITDA margin. The expected ROE of 23.2% in FY16E provides additional comfort in improving financial performance. We value the stock at 6.6x its FY16E EPS of 136.2 arriving at a target price of Rs 898 and maintain BUY rating," the report said.
Indoco Remedies (INDR)
INDR has recently received approval for two products with combined market size of ~US$170mn under Watson agreement, for which sales would begin shortly. There are only 4-5 competitors for the products, indicating healthy margins for INDR.
The product pipeline is robust with total ANDA filing of 23 (17 for ACT and 6 for its own), and only two approved as of now. In addition, Watson has received tentative approval for one para IV product filed the from INDR site.
"We expect further re-rating of the stock on the basis of stronger execution going forward. We recommend BUY with a price target of Rs392, based on 20x FY17E EPS of Rs19.6," the IndiaNivesh report said.
Lumax Auto (LATL)
LATL produces manual automated gear shifter (AGS) for different clients. However, the company has now started to produce automatic gear shifter business.
There is an increasing demand for automatic gear based vehicles in India. In order to fully exploit this opportunity, LATL has entered into a joint venture (55:45) with Japan’s Mannoh Industrial Company.
"At a CMP of Rs 342, LATL is trading at 8.3x of its FY16E EPS of Rs 42. With comfortable D/E of 0.2x and robust ROCE of 17%+, we believe current valuations are attractive. We recommend BUY on LATL with a target price of Rs 417 (10xFY16e EPS)," the report said.
The company plans to achieve a top-line of Rs 13 bn in FY16E (vs. topline of Rs 6.9 bn in FY14A). It also plans to improve EBITDA per tonne from the current level of Rs ~390 per tonne to Rs ~700 per tonne, on account of plant modification which gives more plant-uptime and saving in power consumption.
"Owing to its smaller size, valuing Mangalam Cement at a discount to large cement players, we give it EV/EBITDA multiple of 6.5x (FY16E) and arrive at a price target of Rs 426. Seeing the upside potential of ~37% from current levels of Rs 311, we maintain a BUY rating on the stock," the report said.
Demerger (Services & Platform) and listing of Majesco-US on NYSE could lead to significant re-rating and improvement in performance going ahead.
The standalone services business profitability and ROE is likely to improve, which would lead to P/E multiple expansion. On the other side listing on NYSE will bring re-rating to platform business. Currently the platform business is valued at 0.8x (v/s 4.0x to 9.0x for Peers in P&C platform space) of Mcap to sales.
"We value software & services business at P/E multiple of 8.5x (TP Rs.142) and insurance vertical at M-cap/Sales multiple of 1.7x (TP Rs.412). On consolidated basis we arrive at a target price of Rs.554/share. We maintain a BUY rating on the stock," the report said.
Given the strong products portfolio and increased focus on the domestic market, MOL’s agrochemical business is ready for higher top-line and bottom-line growth.
"All investments either in the agro division or the pigments division are complete and all new facilities have been commissioned. We do not expect growth capex from here on, except for debottlenecking in some cases. Further, the board’s decision of not doing any growth capex for the next two years strengthens our view," the report says.
"The current valuations are significantly below 7.5x global peer average. On the back of available triggers, we have assigned 5.6x EV/EBITDA multiple (25% discount) to arrive at FY16E based price target of Rs.34/share. We maintain a BUY rating on the stock," it added.
The company is moving from pure commodity player to value added player with its range of engineering products. This transition is helping the company improve its consolidated margin. For H1FY15, the consolidated EBITDA margin of the company has improved by 77 bps (vs. H1FY14) to 8.3%.
"Average ROE for the past 3 year has been 12.9%, which is likely to move to 17% by FY16E on the back of increased capacity utilization and margin expansion. We maintain a BUY rating on the stock with TP of Rs 81 (13x FY16e EPS)," the IndiaNivesh report said.
The company’s US$4bn pet coke gasification project remains on schedule for implementation by the FY16 end, which is likely to help in expansion in operating margin of refining business.
Although RIL is not entitled to receive any benefit from the recent gas price hike as of now, however if RIL is able to prove that the production cut was indeed due to geological reasons (as it claims), the company will be able to claim the amount parked in the escrow account. We believe that the gas price hike for RIL’s KGD-6 is inevitable in the medium to long term.
"RIL’s new refining/ petchem projects are likely to add earnings from the end-FY16/FY17. Further, shale gas and retail business are also showing remarkable growth and are likely to be key revenue and profitability driver going ahead. At CMP of Rs 880, the stock is trading at 10.2x FY16E EPS which is lower than its mean of 15x. We maintain a buy rating on the stock with a target price of Rs 1,111," the report said.