Edelweiss Top Stock Picks For 2013 – 2014

Alembic Pharmaceuticals Ltd (CMP: 140; Mkt Cap: 2,581 crs)

– Alembic Pharma, is a leader in several sub-segments of the Anti-Infective Therapeutic segment. Over the last two to three years, it has invested heavily in increasing its revenue contribution from chronic therapies & regulated markets, which are high margins businesses

– Alembic Pharma intends to increase its revenues from the chronic segment from 45% to over 50% of total domestic sales in the next two years. As a result, we expect the company’s domestic formulation business to grow at 12% CAGR over FY13-15E

– Alembic Pharma continues to improve its margins year-on-year, the company has ended FY13 at 16% EBITDA margins, and plans to improve it further by 100-125 bps every year, and expects margins to stabilize at 20% over the next 2-3 years

– Facility expansion for US, would start contributing from Q2FY14, which would help the company grow its US business at 25-30% CAGR from $20-30 mn currently to over $80-100 mn. The company has strong enough pipeline of filings in the US to support the growth. We expect the company’s international generic sales to grow at a CAGR of 28% over FY13-15E

– Negligible debt on books, company plans to become ZERO debt by FY15E

– The stock is currently trading at 12.4x/9.8x FY14E/FY15E EPS. We recommend BUY on the stock

Amara Raja Batteries Ltd (CMP: 255; Mkt Cap: 4,425 crs)

– Amara Raja Batteries Limited (ARBL), India’s second largest battery manufacturer, has a strong market share across auto and industrial battery segments due to its robust technology tie-up, branding and retail network

– The company has a debt-free balance sheet, average ROCE of 30%+ and has grown at more than double the pace of its closest competitor in the last six years (sales growth of 6.5x versus Exide’s 3x between 2006- 2012, which implies market share gains)

– ARBL’s technological prowess, brand equity, focus on certain product category (diesel car/tractor batteries) is filling product gaps within segments (UPS) and activating existing dealers with expansion in semi-urban/rural network, the company is well on track to gain market share over the coming years

– Company is doing capex of INR 750 cr which will substantially increase capacities across segment by FY15E. Given that demand for product is robust and company is constrained by capacity we expect capacity addition will result in increase in sales.

– The stock is currently trading at 12.6x/11.0x FY14E/FY15E EPS.

Astral Poly Technik Ltd (CMP: 536; Mkt Cap: 1,195 crs)

– Astral Poly Technik Limited (APTL) is the licensee of Lubrizol Inc. (Global leader in the CPVC segment with a market share of 80% and high R&D capabilities) to manufacture and market chlorinated polyvinyl chloride (CPVC) piping and plumbing systems in India. Apart from CPVC, APTL also manufactures PVC piping and plumbing systems

– The company has been a high-growth player (5 year revenue CAGR of 43%) on the back of strong demand environment, expanding dealership network, and improving brand saliency

– The company is set to benefit from the shift in demand towards PVC/CPVC pipes from GI pipes (current mkt share of 53%), and with its reputation for strong product quality, APTL will continue to witness robust growth going ahead

– The company’s capacities have multiplied by over 5 times over the past 5 years from 11,800 MT to 65,000 MT. And the company would be further expanding capacities by 40000 MT over the next two years to 105,000 MT

– We expect Astral Poly to clock 27% CAGR in revenues and 31% CAGR in PAT for the period FY13- FY15 on the back of expansion in capacities, increased distribution reach and greater acceptance of the company’s products

– At CMP of INR 532, the stock trades at 12.2x/9.4x FY14E/FY15E EPS

Bajaj Finance Ltd (CMP: 1,458; Mkt Cap: 7,357 crs)

– Bajaj Finance Limited (BFL), a subsidiary of Bajaj Finserv Ltd., is a leading and diversified NBFC in India. The company has a well-diversified portfolio bouquet with loan book spread across nine business lines and balanced in terms of scale and profitability

– Over the years, BFL has built pan-India presence, covering 225 points across India and more than 4,000 distribution partners and dealers

– BFL has exhibited strong growth momentum with 75% CAGR growth in AUM over the last three years

– BFL is trying to maintain the balance between profitability and growth – the consumer book will provide profitability and the non-consumer book will provide scale

– During the last four years, return ratios have improved significantly – RoA has improved from 1.3% in FY09 to 4.1% in FY13, while RoE has jumped from 3.2% in FY09 to 22% in FY13

– The company has maintained healthy asset quality with gross and net NPA of 1.2% and 0.3% in FY13 respectively

– BFL is maintaining the balance with the profitability (consumer segment) and scalability (infrastructure segment)
– Valuation: The stock is currently trading at attractive valuation of 1.4x FY15E book value

Bharat Forge Ltd (CMP: 240; Mkt Cap: 5,456 crs)

Bharat Forge Ltd. (BFL) is a leading supplier of critical components for automotive and non automotive market globally with a well-diversified customer base across all geographies. BFL has ~65% market share in Indian commercial vehicle market and 45% market share in Europe and US in crankshaft and front axle beam, which are its key products.

We believe BFL sales have bottomed out as 1) Destocking by OEMs is over and we expect OEM production to be aligned with sales 2) Data points suggest gradual recovery in key markets with global auto OEMs expecting the same 3) Non-Auto sales to revive on the back of capex spends.

With low capex spends over the next 2 years, significant reduction in debt and improvement in machining mix (higher margins), we expect BFL earnings to grow by 47% CAGR over FY13E-FY15E.

BFL’s forging subsidiaries are located in Europe, USA and China. We believe that these subsidiaries will turn profitable in FY14E, as US subsidiaries’ closure will result in cost savings of INR 40 cr even as demand will recover gradually in key markets.

The stock looks very attractive, as it is trading at EV/Sales of 1.13, valuation seen during 2008-09 global financial crisis. According to our bear case scenario we see limited downside.

Edelweiss Profit/ Loss Of Stocks under Coverage

Development Credit Bank Ltd (CMP: 44; Mkt Cap: 1,102 crs)

Development Credit Bank Ltd. (DCB) is a private sector bank which offers various commercial and retail banking products and services.

DCB under the new leadership is undergoing broad based transformation. With the induction of a new management in 2009, the focus has shifted to profitability, asset quality and balance sheet health. Over the past 2 years, DCB has seen consistent expansion in profits, strong rebound in margins and decline in NPAs.

DCB’s advances grew at a CAGR of 15% (below industry average) over the past 5 years mainly due to the bank’s focus on improving asset quality and profitability. With stronger processes and risk management systems in place, DCB is all set to step on the growth momentum

DCB’s has healthy asset quality with best in class provision coverage with GNPA and NNPA at 3.2% and 0.8%, respectively. Total stressed assets (restructured advances + gross NPA) are at comfortable levels of 3.8%.

We believe DCB is an attractively priced bank compared to its peers at 0.9x FY15E adjusted book and 6.3x FY15E earnings, will deliver RoEs of around 14% and RoAs of 1.1%.

In addition, Capital Adequacy Ratio (CAR) of 13.7% (Basel-II), Net NPAs of 0.7% and PCR of 88% make a strong case for the stock to trade at premium compared to the peer group’s valuations.

ICICI Bank Ltd (CMP: 1,138; Mkt Cap: 1,32,153 crs)

ICICI Bank is India’s largest private sector bank with total asset of INR 4.7tn. The loan book is expected to grow at 20% CAGR over next few years driven by retail segment and working capital related corporate loans

Average CASA is 38-40% which keeps cost of funds low and add to net interest margin

Asset quality has been improving steadily with Gross and Net NPA at 3.5% and 0.7% respectively. Restructuring book (1.6% of loans) has been declining. We do not see major restructuring in the future

The bank has near market leadership in almost all its businesses including mortgages, auto loans, commercial vehicle loans, life insurance, general insurance, and asset management. In future, the listing of Insurance business and asset management will lead to monetization of stake

Guidance of 20% domestic advance growth, NIMs of 3.2% for FY14, cost/income to be capped at 40%, CASA at 38- 40% and credit cost of 75bps will sustain the RoA/RoE at similar levels. Adjusting for valuation of subsidiaries of INR227 per share, the stock trades at 1.6x FY15 adj.book.

Mindtree Ltd (CMP: 818; Mkt Cap: 3,372 crs)

Mindtree is one of the few mid-tier Indian IT services companies to have employed a two-pronged complementary business model. The company’s IT services front embraces some of the more recent and more profitable service lines such as business intelligence and infrastructure management services, business intelligence, analytics, and testing & validation services.

Mindtree has built long-term relationships with marquee clients through successful execution and strong client references. Its established relationships with clients are reflected in the fact that of its top 10 customers, seven to eight companies have been present over the past seven years. We believe that Long-term engagement with marquee clients + focus on new client addition to fuel growth

The company has significant headroom for operational margin expansion given its multiple margin levers such as rationalization of employee pyramid, lower investments in SG&A, higher utilization, improvement in fixed price projects and lesser attrition rates. We expect margin levers to play out going forward

We expect steady performance from the Mindtree, both in terms of growth and margin expansion. Mindtree is trading at attractive valuations compare to its peers at P/E of 9.0x FY14E earnings, delivering sustainable RoE of around +25%.

Maruti Suzuki India Ltd (CMP: 1,547; Mkt Cap: 45,319 crs)

MSIL is India’s largest passenger vehicle manufacturer with more than 40% market share. It is a key player in the compact car segment with a dominant market share. MSIL offers the widest product range in passenger cars (10 models), with special focus on the compact car segment (five models).

Peaking of interest rates and competition are key positive for Maruti Suzuki where as near term INR Vs JPY is turning favorable for the company which will lead to margin improvement (as 25% of sales are imports). Increase in localisation will aid for margin expansion in long term thereby reducing currency risk.

New launches (Ertiga and Alto have been well received by market, and additional diesel capacity by FY14 to drive sales going forward.

Maruti Suzuki has been a preferred early interest rate cycle play. Its multiple expands to the range of 16x-21x 1-year forward earnings when growth returns and earnings up cycle begins. Stock currently trades at 13.2x/11.8x FY14E /FY15E EPS.

Larsen & Toubro Ltd (CMP: 1,410; Mkt Cap: 86,997 crs)

L&T is India’s largest infrastructure and EPC company with presence across major verticals like process, hydrocarbons, power, core infrastructure like roads, ports, bridges, industrial structures etc. It has a dominant position and market share in most operating verticals like oil & gas, process projects, roads, bridges, or industrial structures.

L&T targets to achieve over 20% RoE in next 3-5 years by improving internal efficiency, optimal cash flow utilization and optimizing the current manufacturing base in ship‐building, defense, heavy forgings and power equipment.

L&T would focus on divesting stake in several developmental projects for meeting equity requirement and exiting noncore businesses which are not scalable. Thus there would be value unlocking in those businesses.

L&T witnessed strong order inflows of INR 88000 crore in FY13 with 25% yoy growth. Further the management aims to achieve 20% growth in order inflows in FY14 on a high base.

The management is confident of achieving 15-17% growth in standalone revenue in FY14 with stable margins. The current order backlog of INR 1.5 lakh crore (2.5x FY13 standalone revenue) and expectation of strong order inflows in FY14 gives revenue growth visibility.

At CMP , the stock trades at FY14E and FY15x consolidated PE of 15.7x and 13.2x respectively

V-Guard Industries Ltd (CMP: INR 476; M.Cap: INR 1,405 crs)

V-Guard is one of the fastest growing small appliance company with presence in Stabliser, Cables, Pumps and DUPS, 5 year CAGR (FY07-12) is 35%

The company is expected to grow at a CAGR of 32+ for next 2 years along with maintenance of profitability

V-Guard is a dominant south Indian player and is aggressively foraying in other parts of the country
Company has a strong product presence, distribution and brand visibility

Company has turned cash flow positive in FY12 (earlier negative cash flow company) and would make cash flow in coming years

Asset light model , no significant capex ahead and ROE of 32% makes it an attractive bet

The stock is trading at a P/E of 11.5x FY15E

Zee Entertainment Enterprises Ltd (CMP: 239; Mkt Cap: 22,651 crs)

ZEE is India’s oldest private cable television broadcaster and one of the largest media companies in India. Besides Zee TV and Zee Cinema, the company has an attractive bouquet of regional channels. The company has 650mn viewers in total all over the globe.

ZEE will be a major beneficiary of digitization, with its large channel bouquet, strong distribution muscle, sound balance sheet, cash flows, large dividend payouts and ability to garner higher share of the subscription revenue pie.

As of FY12, subscription revenues contributed ~44% to ZEE’s total revenues. We expect subscription revenues to contribute ~56% to ZEE’s total revenues by FY16. ZEE’s international revenues will further add to the company’s profitability prospects.

Further, ZEE and STAR group have merged their distribution arms recently to form MediaPro. Digitization, coupled with the MediaPro distribution JV, will enable ZEE to grow its subscription revenues aggressively over the next few years.

At the current CMP the stock trades at a PE multiple of 24.4x FY15E earnings. We recommend a Buy on the stock with a target price of INR 301.