Jaiprakash Associates has been a victim of the general apathy towards infra stocks. However, its’ shares have substantial upside potential, as it is set to monetize resources (coal, hydro and realty) to improve profitability, generate Free Cash Flow and reduce leverage.
BofA-ML believes that over FY12-15E, Jaiprakash Associates will benefit from the assets it has accumulated over the past decade and demonstrate its superior profitability – Karcham (RoE 23%), JP Infra (EBITDA Margin 55%) and cement (bottom-cycle in EBITDA/ton of Rs750/ton despite start-up losses)
Infosys has been a severe underperformer as compared to its peer TCS. However, Infosys is regaining traction in the market and this is reflected in the large and transformational deal wins being at highest ever in the past 6 quarters. It is also using acquisitions like Lodestone to expand offerings.
BofA-ML sees early signs of recovery in improved volume growth, uptick in large deal wins and acquisition of a strategic asset during Q2.
Infosys is trading at a 18 per cent discount to TCS at 13xFY14e PE. This is attractive given BofA-ML’s forecast of narrowing revenue differential and EPS CAGR of 12% over FY12-15.
DLF is readying to accelerate new residential project launches and its’ stock price will be driven by strong operational performance. A trigger would be reduction in debt as it sells non-core assets like Aman properties.
State Bank of India:
State Bank of India has been under-performing owing to the overhang over the NPAs and the quality of its assets. BofA-ML does not expect a sharp decline in SBI’s slippages in the near-term. As asset quality shows signs of improvement, one could see material down shift in credit costs and rise in profitability.
Turnaround in asset quality may provide justification of its banks premium over other Govt. Banks. Current valuations are at a +20-25% discount to the 5- year average, which should normalize back, as worries on SBI diminish.
Reliance Industries Ltd:
Better refining, petchem margins and positive newsflow in E&P like significant discovery along with higher than expected hike in KG D6 gas price are likely triggers for the stock to outperform the markets.
RIL’s E&P has been de-rated since mid-2010 due to declining KG D6 gas production, sharp cut in KG D6 reserves and production guidance says BofA-ML.
KG D6 gas price is due for revision in Apr’14 and BofA-ML feels that the prices may be hiked to US$8/mmbtu. A decision on KG D6 gas price is likely in FY14 for implementation from FY15, added the report.
A key trigger for BHEL will be if the Govt is able to give coal linkages to it and restore purchase preference. The government should be able to fix coal supply problems and start linkage window.
Adani Enterprises Ltd:
Adani Enterprises should be able to reduce power losses due to tariff hike or cheaper coal for its PPAs with Maharashtra and Gujarat. Adani should also improve corporate governance and honor inter-group contracts.
Adani Enterprises should also cut group capital expenditure, especially Australia mine capex to control leverage.
(Modified from an article in Economic Times)