Given the high interest rate regime, investors must buy stocks of companies with strong financials and low Debt-to-Equity because such companies would capitalize on the growth opportunity in the adverse environment.
Unicon Wealth has identified eight to-notch companies with strong growth trajectories and Debt:Equity Ratio less than or equal to one. It has a BUY/ ACCUMULATE rating on these stocks.
Tata Consultancy Services (TCS)
Macro economic conditions will continue to be a concern for TCS as substantial part of their revenue is generated from the US and Europe. Strong volume growth and management confidence in offshore IT service demand in an uncertain economic environment strengthens our confidence in this stock. Good double digit growth in service verticals like BFSI, Retail & Distribution, etc. as well as expansion in emerging markets could improve bottom-line margins going forward. At CMP INR 1064, the stock is trading at 17.2x its FY13E earnings estimate. Unicon Wealth has an ACCUMULATE rating on this stock with a price target of Rs 1,200.
BHEL
At the end of Q2 FY12, BHEL’s order book stood at Rs 1,61,000 crore i.e. 3.2x FY12E revenue. About 80% of the total order book (Rs 1,28,000 crore) is exposed to slow growing power sector which is facing various challenges like high raw material prices, high interest rate and execution and policy implementation delays.
BHEL is expected to register ~15% and ~12% CAGR growth in topline and bottomline till FY13. ROE is estimated to be 28.3% and 25.2% for FY12 and FY13 respectively. Hence, considering healthy order book, strong execution capabilities and expectation of policy reforms in power sector, Unicon Wealth recommends a BUY rating on the stock with a price target of Rs 347. Currently, the stock is trading at 2.2x FY13E PBV and 9.2x FY13E PER.
NMDC
The NMDC management is planning to ramp up its production capacity to 50 million tonnes by FY2014–15E through increased exploration of its existing mines and development of new mines. In addition to this NMDC’s initiation to move ahead in the value chain with production steel would further drive the growth of NMDC. NMDC has announced that it had signed a joint venture (JV) with OJSC Severstal (a vertically integrated steel maker from Russia) to build an integrated 2mn tonne steel plant in Karnataka.
During September 2011, NMDC purchased a 50% stake in Australia-based Legacy Iron Ore (Legacy) as a cornerstone investor for Rs 92,000 crore. Also, the company is currently prospecting various mining assets, including a phosphate mine in Australia, an iron ore mine in Brazil and a coking coal asset in Russia. NMDC has a strong balance sheet with a cash reserve of INR 207 bn which provides opportunity for future.
At CMP of Rs 187, the NMDC stock is available at EV/EBITDA of 4.3x its FY13E. Considering the forward integration along with expected volume expansion in the existing business, Unicon Wealth recommends a BUY on the stock with a price target of Rs 260.
Sun Pharmaceuticals
Sun Pharma has significant FTF (First to file) opportunities lined up which can generate a meaningful contribution to the revenue. The company is as well increasing its concentration in emerging market which could lead to a healthy growth. However, resolutions of USFDA issues with Caraco remain the key concerns.
On Taro front: On 22nd September, 2011, Sun acquired a controlling stake in Taro (economic interest of 48.7% and voting rights of 65.8%) at a price of USD 7.75 per share totaling USD 37 million for the stake.
Before this acquisition, Sun held 36% in Taro which it had acquired for USD 105 million. Sun has Cash and Bank Balance of Rs 2,311.2 crore as of September 20, which when converted to dollar terms amounts to USD 444mn. If Sun plans to fund the acquisition out of its own cash balance, it can sustain a maximum price of USD 29.6 per share for Taro which is a premium of 21% to the offer made by Sun.
It also has an extremely low debt/equity ratio of 0.04 as of September 20, 2011. Hence, it could also leverage its balance sheet to fund entire or part of the acquisition. Currently the stock is trading at 19.8x FY13E earnings. Unicon Wealth recommends an ACCUMULATE rating on the stock with a price target of Rs 576.
HCL Technologies (HCLT)
The macro economic environment will have a significant impact on the future revenue of IT services companies in the medium term. HCLT has adopted a fairly aggressive strategy in increasing its market share and thus has been able to show greater volume growth as compared to its peer. They are in the best position to benefit from the depreciation of the rupee versus dollar due to their low forex hedged position (appx USD 390 million) as compared to their peers.
At CMP of Rs 387, the stock is trading at P/E of 10.5x FY13E earnings which is at a discount as compared to its peers. Unicon believes the stock has a potential upside of 27% and hence recommend a BUY on the stock for price target of Rs 492.
Bajaj Auto
Bajaj Auto’s major concentration at the premium segment along with high export sales (CAGR of 38%) and significant exposure to the three wheeler segment makes its attractive compared to its peers. Recent strong export volume with further expansion to the new geographies would help Bajaj Auto overcome the strong domestic competition and maintain the over all volume growth.
In addition to this the recent price hike its product line would compensate for the reduction in the DEPB rates. We expect Bajaj Auto to maintain its operating margin at appx 19% going forward which seems to be attractive amongst peers. Bajaj Auto has strong balance sheet with cash reserve of Rs 570 crore and debt to equity of 0.1x. Considering all this fact Unicon believes Bajaj Auto’s earning will grow above 17%.
At CMP the Bajaj Auto stock is trading at PER of 14x of its FY13E. Unicon has a BUY on the Bajaj Auto stock with a TP of Rs 1,800.
Divi’s Laboratories
Divi’s laboratories is expected to maintain the strong revenue growth trend going forward in H2FY12, with expected increase in revenue from Carotenoids business and optimum utilisation of Vizag manufacturing unit. Currently the Divi’s stock is trading at 14.7x its FY13E earnings.
Considering the robust performance of Divi’s and stability in margins, Unicon has a BUY rating at the CMP of Rs 735 valuing the Divi’s stock at 15.8x its FY13E earnings with the target price of Rs 910.
United Phosphorus (UNTP)
United Phosphorus would continue to benefit from healthy growth of agrochemical industry in FY12 and integration of subsidiaries- DVA, Sipcam Isagro Brazil and Cerexagri. The United Phosphorus management has increased its revenue guidance to 30-35% sales growth versus 25-30% stated previously for FY12.
United Phosphorus’ Growth in sales would be driven by increase in volume in present business and acquisitions. EBITDA margin (including other income) is expected to drop to18-20% from the previous expectation of ~21% level. Lower EBITDA in newly acquired units resulted in reduction of FY12 margin expectation.
United Phosphorus continues to maintain high level of cash for suitable acquisition in its portfolio. United Phosphorus Stock is currently trading at 6.8x its FY13E earnings.
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