Vineeta Mahnot of Hem Securities has a stellar reputation for finding winning stocks. Her latest stock pick is Deepak Fertilisers & Petrochemicals and she has promised a 40% upside to the stock. Let’s note her rationale:
“The company has registered robust results for the quarter ending March 2014. The revenues from operations grew by 62% to Rs. 1069.59 crores vs. Rs. 659.67 cr. in the like quarter previous year. Operating profit climbed sharply by ~ 135% at Rs. 165.45 crores as against Rs.70.39 crores in the previous year quarter. The adjusted net profit stood at Rs. 91.66 crore for the quarter as compared to Rs. 29.12 crore; registering a growth of ~215%.The robust profit growth was mainly due to strong performance of chemical segment. On the margins front, operating margin climbed about 480bps at 15.47% as against 10.67% while net profit margin expanded 416bps at 8.57% from 4.41% y-o-y.
With volumes building up; expansion plans, strong brand loyalty by customers and strong financial performance; DFPC Ltd. growth prospects and profitability looks positive. We believe the company is trading at an attractive valuation at 5.76x and 4.9x of FY15EPS of Rs.29.31 and FY16EPS of Rs.34.50. We initiate a ‘BUY’ on the stock with a target price of Rs.235 (appreciation of about 40%) with the medium to long term investment horizon.”
Daljeet Kohli’s latest stock picks
Daljeet has recommended two stocks in quick succession. Lets note them:
AUM growth much ahead of industry:
Asset Under Management (AUM) of CFL has grown at 79% 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% in FY10 to 81% in FY14. As a result wholesale loan book (which includes loans to real estate developers) has come down to 19% from 90% over the same period. We believe CFL is well poised to grow at 25% CAGR over FY14-16E with more focus on retail segment.
CFL’s management has delivered the promises of changing the business strategy which has yielded positive results despite struggling environment for financial services industry. Business mix has completely moved towards safer segments in retail after the new management has taken the charge in FY10 along with significant improvement in credit rating. Further CFL’s strategy of 1) moving out of non profitable business like securities and commodity broking, 2) focus on core business of SME financing and 3) best in class asset quality with higher provisioning than regulatory requirement drives more comfort. We believe company is well positioned to deliver the consistent growth of over 25% in next 2-3 years given its strong business model and increasing penetration. Though return profile of CFL is lower than its closest peer but we believe ROEs are likely improve to double digit by FY16E from current low single digit. Most of the NBFCs are trading at 2.0-2.4x for FY16 ABV and CFL is trading at P/ABV of 1.5x and 1.3x for FY15E and FY16E respectively. Though discount of CFL (currently at an average of ~40%) compared to other NBFCs is likely to narrow down on back of improving return profile yet we are not increasing the targeted multiple and rolling over FY15E multiple to FY16E. Hence we recommend buy on the stock with target price of Rs 257, valuing it at 1.5x FY16E ABV which is much lower than peers valuation of 2.0-2.3x for FY16. Significant deterioration in asset quality, lower asset growth than anticipated and significant correction in property/gold prices remain the risk to our estimates. We intend to come up with detailed initiating coverage on CFL.”
“Liberty Shoes Ltd (LSL), second largest footwear company in India, is at an inflection point. The company is likely to grow at 27.8% CAGR over FY14-FY16E driven by higher domestic revenues and leverage its portfolio of well-known brands. It is in a sweet spot to leverage 15% CAGR growth in Indian footwear sector as it is expanding its reach aggressively. ROE of the company is likely to double to 19.6% in FY16E as compared to 9.6% in FY14. We initiate coverage on the stock with a BUY rating and target price of Rs 400 per share.
Outlook and Valuation
At current market price of Rs 306, the stock trades at PE of 21.8x and 14.8x its FY15E and FY16E earnings of Rs 13.5 and Rs 20.0 per share, respectively. We expect the company to grow at a CAGR of 28.7% CAGR over FY14P-FY16E lead by higher domestic revenue growth, including retail network and institutional sales. The profitability of the company is also likely to improve on account of operating leverage arising out of better sales. LSL has charted an aggressive expansion plan for its retail network, which is likely to provide the required impetus to improve the financial performance. Considering the strong brand recall, expansion plans and strategies to improve its growth rate, we are of the opinion that the valuation is attractive. Its peers, Bata India and Relaxo Footwear, are trading at average PE of 32.7x and 26.6x its FY16E Bloomberg earnings. Taking into consideration lower EBITDA margin and return ratios, we assign 20x (25% discount to average FY16E earnings) multiple to LSL to arrive at a target price of Rs 400 per share.”