Yes Bank – multibagger in the making with 100% gains in next three years (Parag Jariwala, Religare Capital)
Yes Bank has good asset quality (low NPAs) and can potentially grow even double the industry rate
Let me start with asset quality of Yes Bank which is like a perennial concern for most of the market participants. We have seen one of the stringent asset quality exercises done by the Reserve Bank of India and the company has come out pretty well in terms of all the asset quality reviews. So if you look at their GMP and net NPA ratios, it is almost below 1 per cent and net NPLs are in single digit. So I think on asset quality, they have done a very good job and I think the same trend should continue. So that is one. and secondly on growth, your PSU banks are largely 70 per cent of the system and because of asset quality overhang and a lot of things which are going on in the PSU banks, the growth rates for mid-tier private sector banks is going to be very strong for the next three-four years. So far as the growths are concerned, for the industry we are projecting loan growth of anywhere between 10-12 per cent over the next two years. I think a company like Yes Bank can potentially grow even double the industry rate at somewhere around 22-24 per cent YoY for the next two-three years.
Valuations are cheap compared to peers, re-rating is on the cards
If you look at, basically their capital raising is on the card and they are likely to raise around Rs 6000 odd crore. So basically on a simple arithmetic basis, that is going to add around Rs 70 odd rupees to the book value. Again, as we talked about growth, etc, the ROEs, ROAs going to be in the 18-20 per cent range so that will give you a strong book value compounding for the next two-three years and in the last, we are expecting the stock to get rerated a bit. So if you look currently at the stock trading in the 2.2-2.3 kind of range, we expect as they slowly build their retail franchise, which is slightly weak as compared to other frontline private sector banks, I think by FY19 stock should reasonably trade at 2.8 times price to book. At this level also, the stock will be around 20-30 per cent odd cheaper to somebody like IndusInd , Kotak and HDFC Bank . So if you look at the combination of these three factors, strong book value accretion, the near term dilution and the rerating, the stock can potentially touch Rs 2000 in next three years.
Kajaria Ceramics & Somany Ceramics (Nehal Shah of ICICI Securities)
Phenomenal growth rate even in times of high gas prices, strong brands
Over the last five years these companies have grown at a phenomenal pace of around 20-25 percent. The bottom line has been very strong with margins scaling up. One thing we need to understand that between the phase FY10 and FY14, when the gas prices had rocked up at least by 2-2.5 times, even during those periods some of the companies were able to withstand margins while Kajaria took a leap up and had a great run in the margins as well. So that shows the kind of branding power all these companies have and now we are in a scenario wherein last six months we have seen carnage in gas prices and that is where there will be humongous opportunities for strong brands like both Kajaria and Somany to even further up their margins from these very high levels and that is where we get a high level of conviction while even if the topline would continue to remain under a bit of pressure like we do not see them going up to around 18-20 percent kind of growth anytime for the next couple of years but even if they showcase something like 10-12 percent kind of a growth, I think with the kind of inflection and gas prices or the savings in gas prices, we are going to see, I think that itself will give a strong bottoming growth for the next two-three years going forward.
High conviction growth coming in Somany
I think Somany Ceramics is a story where the margins can definitely play out incrementally going forward. If I look at the gap between Somany’s margin and Kajaria’s margins, it has gone up to 1,200 bps but now everything in Somany to play for and with the kind of value addition the company is now bringing on the table the large format tiles coming into play. The company has recently commissioned 4 million square meter of glazed vitrified tile (GVT), which is going to add to their value addition and the company also is now focusing on very important aspects of this industry which is organised display protocol at the exclusive showrooms. So company over the last two years has been very focused on exclusive side of the story which is where Kajaria has been predominantly doing it over the last five years and this is why Somany is strongly catching up and that is where we see very high conviction growth coming in as far as Somany is concerned going forward.
Bullish on plywood stocks:
Greenply Industries & Century Plyboards have seen strong growth rate, duopolistic industry, GST will aid rapid growth
I wouldn’t want to comment on any of the stocks in the space but yes, we are very bullish on the plywood space in general. This industry has lot of levers going forward and one of the biggest levers is the shift from unorganised to organised; even today we have 14,000 crore of the industry with still organised of the total 18,000 crore.
However, in the last ten years both Greenply and Century Ply grew at 28 percent and 23 percent respectively – that is topline CAGR which is very strong. Now because of the rise in inventories and real estate, all of a sudden you are seeing premium segment and both the cases has shown a dip and that is why we have seen the topline not growing for either of these company in the last four quarters. Where the story would now come in, is the mid segment which is the commercial grade segment, which is where of the 18,000 crore industry, you have 10,500 crore of industry which is sitting there and that is where both Green and Century been focusing very strongly over the last couple of years and that is where we will see a significant opportunity as far as shift from unbranded to branded play is concerned and that is why for both these brands growing at 6-7 percent till the time the inventory issues pass them – that is where they will grow at 6-7 percent but one of the biggest levers going forward would be GST as and when it comes in. As and when GST comes in, you will straight away see both these stocks and these are the only two stocks in the industry. It’s basically as duopolistic industry wherein both these plays command nearly 50 percent market share as far as the organised industry is concerned. I think with GST coming in both these brands will again start growing at 15-20 percent over the next five years or so and that is where the story lies ahead for both these brands.
PI Industries & Sadbhav Engineering (Sudip Bandyopadhyay):
PI Industries is an agro pesticide working in insecticide segment and the seed segment. This company is doing a great job. Custom synthesis manufacture CSM is a core strength and they are catering to the needs of about 20 large global corporations strong balance sheet with all the emphasis on agriculture by the government and expectation of a better monsoon is going to give a boost to the company. We have a target of Rs 800 in PI Industries.
Sadbhav Engineering has a focus on infrastructure development. The company has a bright prospect. We believe Rs 350 is a target for Sadbhav with one year time horizon.