Top investment ideas that look good despite weak Q4 results: IndiaNivesh
The fourth-quarter results have been disappointing and the next two do not look promising either according to IndiaNivesh.
Companies from capital goods & oil/gas sectors continued to perform poorly, but the negative surprises came from two most promising and outperforming sectors - IT and pharmaceuticals.
“After two consecutive quarters of poor corporate results, market participants have started cutting down on expectation of high growth in the next two years,” the IndiaNivesh report said.
“Going by commentary from managements in various post-result conferenc calls, we did not find any mention of major uptick or revival in their fortunes. This implies that Q1FY16 will also be a bad quarter in terms of corporate performance. It also means asking rate for remaining 3 quarters of FY16 to meet Street expectations will go up significantly,” the report added.
Following are the stocks that IndiaNivesh is positive on post Q4FY15 results:
Aurobindo Pharma (ARBP) has appreciated by 103 per cent and 99 per cent on absolute basis and relative basis, respectively, in the past one year. This has been on the back of re-rating as well as earnings upside due to strong execution post resolution of USFDA-related issues at some of its manufacturing facilities.
“We continue to remain positive on the stock with implied potential upside of ~20 per cent from the current levels. We believe that ARBP is in a sweet position to maintain sustained increase in sales as well as profitability over next 2-3 years,” the brokerage said.
“At CMP of Rs 1,327, the stock is trading at 19.4x FY16E EPS of Rs68.5 and 16.6x FY17E EPS of Rs 80. We maintain BUY rating with price target of Rs 1,600, based on 20x FY17E earnings,” it added.
The company has been able to maintain its high margins and return ratios (ROE close to 30%) in relatively tough economic conditions. Domestic volumes from entry level segment are improving on the back of new launches like Platina and CT100. The company has clocked in sales of 90,000 units in May (up from 45,000 units sold in March) and is close to achieving target of 1,00,000 units/month.
“We expect domestic volumes to improve on the back of new launches like Pulsar RS200, new CT100 and Platina. Further exports growth is also back on track. We expect revenue to grow at a CAGR of 10.4% from FY15 - FY17E on the back of 9.4% CAGR growth in volume,” the report said.
“EBITDA margins are expected to be in the range of 20% and EPS is expected to grow at a CAGR of 20% from FY15 - FY17E. At CMP of Rs 2,199, the stock is trading at PE multiple of 15.6x FY17E EPS. We maintain 'Buy' rating on the stock with target price of Rs 2820 (20x FY17E EPS),” it added.
Asset under Management (AuM) of CFL has grown at a CAGR of 44% over FY11-15, which is one of the best in the industry. As a strategy to focus on retail segment, AUM of CFL has gradually moved towards retail loan book from 10% in FY10 to 84% in FY15. As a result, wholesale loan book (which includes loans given to real estate developers) has come down to 16% from 90% over the same period.
The brokerage believes CFL is well poised to grow at 28% CAGR in FY15-17E mainly led by retail credit assets.
“Due to the company’s prudent management practices, focused lending approach, quicker turnaround time and healthy adequacy position, we believe the current growth momentum can continue over FY15-17E. At CMP of Rs 381, CFL is trading at P/ABV of 2.1x and 1.9x for FY16E and FY17E respectively. We continue to maintain ‘BUY’ rating with long term positive view on the stock and price target of Rs 465,” the report said.
The company has a strong balance sheet, with cash and cash equivalent at Rs ~592 bn (Rs 94/share) at end of FY15. In previous two years, the company has given dividend @100%. We believe the dividend payout will remain healthy, and would be ~50% in coming years.
CIL is one of the lowest-cost coal producers globally ($22/t compared with the global thermal coal average of $35/t). 90% of CIL’s mines are open cast, which have stable ground conditions, relatively simple geological structures and a low stripping ratio.
“We believe that company is likely to show strong performance in medium to long term (expect CAGR growth of 7% in next five years) due to strong domestic coal demand and monopoly in coal production in India. At CMP of Rs 406, stock is trading at 13.4X of its FY17E EPS. We maintain buy rating on the stock with DCF based target price of Rs 467,” the report said.
Mangalam Cement has the potential to improve its sales and margin from current levels without incurring further capex, as current capacity utilisation of the company stands at ~70%.
As the new government has announced many ambitious plans like more road length construction every day, housing for all and smart cities, even a small pick-up in infra activity can boost the plant utilisation levels of company. This will further improve EBITDA/tn ratio of the company from the current levels.
“At CMP of Rs 230, Mangalam Cement is trading at FY16E and FY17E, EV/EBITDA EV/EBITDA multiple of 8.2x and 7.0x, respectively. We maintain BUY rating on the stock with price target of Rs 376,” 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, platform business is valued at 0.6x (v/s 6.7x P&C platform of peer) of EV/Sales.
“At CMP of Rs 460, the stock is trading at P/E multiple of 32.1x FY16E and 12.7x FY17E earning estimate estimate. We value Software Software & Services Services business business at P/E multiple multiple of 8.5x FY17E (TP Rs.175) and insurance vertical at EV/Sales multiple of 1.7x FY17E (TP Rs.549). We have BUY rating with SoTP based TP of Rs 724,” the report said.
For the full year FY15, Pennar industries reported robust performance, both on topline and margin front. Topline of the company increased by 12.7% to Rs 12,675 mn led by strong growth in systems/projects and PEBS segment. Margin expansion across all business segments led to EBITDA margin improvement from 8% (FY14) to 9.3% (FY15). Net profit of the company increased by 38.4% to Rs 359 million in FY15.
“At CMP of Rs 45, Pennar Industries is trading at FY16E and FY17E, PE multiple multiple of 9.9x and 7.1x. We maintain BUY rating on the stock with revised target price of Rs 70 (11x FY17E EPS),” the India Nivesh report said.
Singapore GRMs, which fell to ~USD4.8 /bbl levels during Q2FY15, have recovered in the past few months, boosted by gasoline (US refinery strikes) and naphtha cracks.
In Q4FY15, RIL’s GRM stood at USD 10.1/bbl (v/s USD 9.3/bbl in Q4FY14 and USD 7.3/bbl in Q3FY15. The brokerage believes the recent margin uptick and rupee deprecation will help the refining EBIT margin of RIL going forward.
“Though RIL’s FY16e earnings growth is likely to be muted owing to start-up losses in the telecom business and weak shale gas economics owing to the sharp fall in US gas price, we expect the next earnings growth to come in RIL in FY17, when its large core projects get commissioned,” the report said.
“At CMP Rs 887, stock is trading at 11.4x FY16E EPS, which is lower than its mean of 15x. We maintain BUY rating on the stock with target price of Rs 1,111 (based on 14x FY16e earnings),” it added.
State Bank of India:
Asset quality for SBI was impacted in FY14, which is in line with industry trend. However, in FY15, the bank was successful in improving its Gross and Net NPA by 70 and 45 bps YoY to 4.3% and 2.1%, partly led by sale of assets to ARC. Fresh slippages were lower at Rs 294 bn in FY15, compared to Rs 415 bn in FY14.
However, fresh restructuring continues to remain higher at Rs 230 bn in FY15 (Rs 118.9 bn in Q4FY15) as compared to Rs 253 billion in FY14. Asset quality for SBI is expected to improve in H2FY16 led by improvement in macros.
“SBI remains our top pick in public sector banking space as it remains the biggest beneficiary of revival in economy. Although asset quality improvement in FY15 has largely come from asset sale to ARC, even after adjusting for the same, asset quality would have been stable; which is key positive. We recommend buy on SBI with SOTP based target price of Rs 370,” the report said.
Tech Mahindra is confident on future revenue outlook on the back of a four-pronged strategy. Management intends to continue its investment in: (I) high SG&A spending in momentum verticals [Telecom, BFSI, Manufacturing & Engineering]; (II) launch of new platforms in BPO space; (III) higher investment in product & innovation; and (IV) focus on M&A in new age IT & newer geographies.
On the back of strong growth momentum and large deal wins, we maintain FY16E/FY17E $-revenue growth to 20.2%/20.1% Y/Y with INR/USD realisation rate at 62.6 in each year.
“We expect smooth ramp-up of these recent large deal wins and also see quick integration benefits (cross-selling) of recent acquisitions. We have a Buy rating with target price of Rs 749 on the stock,” the report said