Hero Motocorp (CMP: Rs 1935, TP: Rs 2320, Buy)
The Indian market predominantly favours 100cc motorcycles; almost75% of total sales belong to this category. Splendor and Passion continue to drive HMC’s sales, contributing 45% to volumes. After splitting from Honda, these brands will remain a part of the Hero Group. In its 2012 annual report, Hero Honda’s total distribution network in the country (including dealers, sales and service network) numbered 5,100, covering over 100,000 villages. Hero Honda currently sells around 36,000 scooters a month. With only one model, it is already the second largest player in this segment also. It has recently launched ‘Maestro’ to appeal to the male segment.
Hero currently exports ~200,000 motorcycles a year compared to Bajaj Auto’s 100,000 a month. Bajaj Auto’s offering in global markets is a value proposition (US$500-600/motorcyle). With the split, the company would not find it difficult to match Bajaj’s offering, in turn boosting its volumes. The company is sprucing up its sales network in the export markets. All exports to international markets will be made under the brand name ‘Hero’. More emphasis is being laid on existing export markets. Several countries have been identified in Africa, Latin and Central America as potential international markets. We expect revenue to grow at a CAGR of 11% and PAT at 12% over FY12- 14. The stock currently trades at 12.9xFY14E. We recommend buy.
Mahindra & Mahindra (CMP: Rs 744, TP: Rs 808, Buy)
We remain bullish on M&M as it continues to post robust growth. With launches (Yuvraaj, the new SUV, GIO, Maxximo and Mahindra Navistar trucks) and newmarkets, we expect the growth momentum to continue
The company expects tractor sales to slow-down a bit in FY13. We expect thetractor segment to grow at a CAGR of 8-10% over FY12-14. Our theory is basedon macro factors such as shortage of labour due to successful implementationof government scheme (NREGS), stable MSP bringing in higher rural income,higher cash sales (tractor financing now only ~75% of total sales compared to~92% last year). We expect revenue to grow at a CAGR of 13% and PAT at 5% (lower taxbenefit) over FY12-14. The stock currently trades at 14.7xFY14E(standalone). We recommend accumulate.
Berger Paints (CMP Rs 137, TP Rs150, Accumulate)
We continue to prefer paints sector over other consumer segments on back of sustained volume growth and huge opportunity of consumer up-trading. Berger Paint is focusing on converting its product portfolio towards the premium category from the current mid range segment. We expect the share of water based paints in the overall pie to gain by 100-200 bps every year, driving margins and profitability.
Berger Paint is expanding its capacity 250,000 tonnes to half a million tonnes over the next three years. This shall be internally funded, and help it to sustain market share.
We estimate revenue and net earnings CAGR of 15% and 20% respectively during FY12-14E, led by volume growth of 11-12% over the next couple of years. We are also building in 30 bps operating margins gains for FY13. We recognize that the stock has had gained in valuations over the last few months (+60% vs flat performance by BSE 200 YTD). However our medium term stance on the stock trades at 22x FY13E EPS of Rs 6.2 and 18x FY14E EPS of Rs 7.5. Remains our preferred pick in the India consumer space.
Pidilite Industries (CMP Rs 190, TP Rs 200, Accumulate)
Pidilite, a proxy on housing, construction and other industrial activity has over the years successfully converted niche commodity category into strong brands. The company is now extending its strategy in construction chemicals with its brand Dr Fixit. Construction chemical provides a huge opportunity and Pidilite with a focus on retail water proofing segment is well placed to take advantage of this opportunity.
Our assumptions are based on growth of 25% CAGR in construction chemical and 19% for the adhesive FY12-14E. We are also building in a positive bias for the margins at operating level to the extent of 177bps during FY12-14E. We believe uncertainty with respect to elastomer project would remain an overhang on the stock. We estimate a Revenue and PAT CAGR of 17% and 26% respectively during FY12-14E. The stock trades at 25x FY13E EPS of Rs 7.6 and 19x FY14E EPS of Rs 9.8.
ICICI Bank (CMP: Rs 956, TP : Rs 1323, Buy)
ICICI Bank’s traction in business expansion, improvement in margin, reduction in credit cost and decrease in leverage (with expansion in balance-sheet size) would yield higher return ratios going forward in our opinion. We expect credit book to expand in high teens (20% CAGR during FY12-14E) driven by SME, retail & working capital requirements. We expect the bank to to record NIM of 2.8-2.9% on the back of higher yield on investments, reduction in losses on securitized book, traction in overseas business and stability in CASA deposit share.
We expect that the bank’s other income to grow by 17% CAGR over FY12-14E on the back of healthy core fee income. With tier I capital of 12.8% (as on end-June’12), the bank is adequately capitalized. The bank would not be required to raise equity capital in near future. We find valuation attractive of 1.7x FY14 ABV. Hence offer an opportunity to add to the positions. At current price, the stock quotes at 1.8x and 1.7x adjusted book value (ABV) FY13 and FY14 respectively. Based on our price target of Rs 1323, the stock will trade at 2.6x and 2.3x ABV FY13 and FY14 respectively.
HDFC Bank (CMP: Rs 596, TP : Rs 627, Buy)
HDFC Bank’s diversified credit book with prudent expansion strategy has led to healthy yield and minimal delinquencies. High low-cost deposits share contain erosion in margin and also aides the bank to cross-sale its other products to huge low cost depositors base. We expect credit to expand faster than the system at CAGR of 21% over FY12-14. Slight re-balancing in credit book in favor of high-yielding assets aided yield on advances (mainly due to higher composition of retail loan book). Higher asset yield and expansion in C-D ratio aided margin. Going forward, we expect NIM to stabilize at 4.2% on yearly average basis. Majority of fee income comes from various retail segment and is quite diversified. Incremental adverse impact on the bank’s fee income would be muted.
HDFC Bank has demonstrated robust performance on asset quality front GNPA & restructured loan book remained almost stagnant. The bank has been maintaining most comfortable asset quality amongst the peer group with GNPA at 0.97% and NNPA at 0.2%. Total restructured assets were 0.3% of the bank’s gross advances as of Q1 FY13. At current price, the stock quotes at 4.0 xs and 3.4x adjusted book value (ABV) FY13E and FY14E respectively. Based on our target price of Rs 617, the stock would trade at 4.2x and 3.6x ABV FY13E and FY14E respectively.
Karur Vysya Bank (CMP: Rs 401, TP : Rs 512, Buy)
Karur Vysya Bank’s better understanding of clienteles’ business domain and widespread regional presence are the key strengths. Continued robust credit book expansion and contained delinquencies have been key outcomes of the bank’s strengths. We expect the bank’s credit book to expand by 28% cagr in FY12-14 much higher than the industry. Key focus area would be retail trade, SME and agriculture sectors. In Q1 FY13, KVB’s margin drifted by 22bps QoQ to 2.82% on higher cost of funds, however going forward, moderation in deposit growth and increase in credit-deposit ratio would protect erosion in margin. Though, the decline in CASA share remain our near term concern. We factor margin to drift by 26bps to 2.62% (on yearly average basis), as a conservative stance.
We expect GNPA to hold in the current level even as the marginal pressure on asset quality would be mitigated by higher recoveries and upgradations. At current price, the stock quotes at 1.4 xs and 1.3x adjusted book value (ABV) FY13 and FY14 respectively. Based on our price target of Rs 512, the stock will trade at 1.8 xs and 1.6x ABV FY13 and FY14 respectively.
Syndicate Bank (CMP: Rs 95, TP : Rs 145, Buy)
Syndicate Bank’s management plans to expand credit book faster than the industry, in the range of 18-19% and retail credit book would grow at even faster pace of 22%. Key focus area for credit growth would be retail, MSME and midcorporate. We expect credit book to grow 17.4% CAGR in FY12-14. Faster expansion in retail and MSME books would aid asset yield and margin The bank plans to increase its CASA share by 100-125 bps to 32% mark. Also, re-pricing of bulk deposits and CD at lesser rated would aid margin erosion in declining interest rate scenario.
The bank’s management expects 15bps decline in margin to 3.25% from 3.4% in FY12. We factor in 10 bps decline in margin to 2.96% (on yearly average basis) primarily due to decline in interest rates and re-pricing lag of liabilities. On the back of higher loan growth and alignment of processing charges with peers, fee income is expected to revive. We expect the bank’s other income to grow by 13% YoY in FY13. As on June’12, the bank’s asset quality improved on sequential basis; further higher PCR provides comfort for future NPL provisioning. The bank’s management expects to do substantial recoveries in FY13. At current price, the stock quotes at 0.65 xs and 0.56x adjusted book value (ABV) FY13 and FY14 respectively. Based on our price target of Rs 145, the stock will trade at 1.0x and 0.9x ABV FY13 and FY14 respectively.
IT Services-Top Picks
TCS (CMP: Rs 1315, TP: Rs 1465, Buy)
Remains one of our preferred picks inspite of its outperformance over the last year led by better revenue CQGR of 5.8% over Q1FY11-Q1FY13 (Infy-4%; Wipro-3.5%). The management continues to remain overall confident in its commentary, and feels that the high base would not be hindrance for high growth in coming period. Healthy pipeline and strong deal win ratio provide the much needed comfort for medium term visibility.
We do see limited scope for it to better key matrix drivers from here on it has best utilized various operating levers over last ten quarters and has gained over 440bps on operating profitability. The offshore/fix price contract efforts has increased by over 300bps in last 10 quarters and Utilization has improved by 440bps during the same period. Hence, from here on we believe it shall be the revenue growth that shall be driving the earnings than the operating efficiencies. Maintain our Buy rating on the stock with a target price of Rs1465, valued at 19x its FY14E.
Tech Mahindra (CMP: Rs 850, TP: Rs 1026, Buy)
We believe that as FY13 unfolds, the merged entity hangovers (weak demand in telecom, high client concentration (BT), stagnancy in top accounts and settlement of various claims/cases on Satyam) will recede and would lead to re-rating of the stock. Tech Mahindra will benefit from cross sell opportunities, wherein it will sell its managed services capabilities to Mahindra Satyam’s clients and leverage the enterprise services strength of Satyam for its telco clients. It has been able to bag a few deals on its integrated strength in FY12. Mahindra Satyam has witnessed strong deal traction in FY12 and would see the sustenance in FY13 as it has overcome the pre bid qualification hindrance of maintaining the last three year’s financials. This criterion restricted its qualifications on various contracts prior to the Q4 FY11 results.
The Q1 results (ex-Satyam) were in line with our estimates but the muted outlook in the management’s commentary indicates slower recovery in business ramp-up in the Telecom vertical. However, the compelling valuation (8x FY14E EPS) and declining share of BT (just 36%) is providing the much needed solace. We maintain our positive view on the stock with a buy rating at a revised target price of 1026 (earlier valued at 9x), valued at 10x of FY14E earnings.
KPIT Cummins (CMP: Rs 126, TP: Rs 160, Buy)
It has retained its annual guidance and would review post Q3 which we believe is quite conservative as it implies a modest 3% QoQ growth for rest of the year. The PAT guidance is also quite conservative at Rs 1.7bn (achieved 35% of its guidance in Q1 itself). KPIT is targeting for USD 100mn revenue from its Oracle practice in the manufacturing sector through consulting edge, domain expertise and references (through the acquisition of SYSTIME and CPG). Systime integration is in sync with the expected lines as it clocked quarterly revenues of USD 14.7mn and EBITDA Margin of 10% in Q1. The company expects sustained growth in the JDE business practice and may end up year with a 20%+ growth for the full year.
KPIT has resolved issues relating to battery management and is now confident of achieving desired efficiency across battery type – lead acid and lithium ion varieties. Negotiations with OEMs and fleet operators (retrofitter) are on track (will test 200 vehicles over next 6 months) but expect commercialization to begin in second half of FY14. The Company has sticked on to its margin outlook (EBITDA Margin 15.5-16%) but we believe it would possibly gain on it considering sustained utilizations and business segment optimizations. We maintain our positive view on the stock and has built in Revenue/ PAT CAGR of 36%/33% over FY12-14E. We maintain our Buy rating on the stock with a Target Price of Rs 160, valued at 11x of its FY14E earnings inline with its current PE multiple in view of its sustained financial outperformance and potential trigger in form of Revelo.
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