Espirito Santo recommends stocks based on their out-performance relative to the sector over the quarter. The performance of each stock is measured on a quarterly basis and no changes are made before the end of each quarter. This quarter, Espirito Santo has homed in on six top quality ‘Silver Bullets’ stocks that will enrich your portfolio.
(1) Coromandel International: Target price – Rs 247
Coromandel can turn the page on an extremely difficult FY13, with channel checks suggesting that most concerns are fading and that distributors in Andhra Pradesh expect 20-30% growth in NPK volumes in FY14.
The channel checks also suggest that demand for agri-inputs will return in FY14E as farmers, who had postponed orders for complex fertilizers, start to place orders as higher minimum selling prices (MSPs) for crops improve farm economics.
Coromandel is close to a three-year low on consensus P/E. Any uptick in volumes should drive the stock price. Coromandel has a target price of Rs 247.
(2) Sundaram Finance: Target price – Rs 660
Sundaram Finance has grown its asset base at a CAGR of more than 19 per cent without diluting minority holders over the past 12 years.
In FY13, Sundaram Finance’s credit quality was good with a Gross NPA of 1.04% and profitability high with a RoE of 24%. Housing Finance continued to post strong results with 34% AUM growth and 30% RoE in FY13.
General Insurance turned around, registering its highest ever profitability in FY13. Sundaram Finance is expected to post even better results as motor third party pool losses are behind it.
(3) Titan Industries Ltd: Target price – Rs 350
Titan Industries has a pan India presence and a product portfolio that spans across price points and unparalleled brand recall. Titan Industries is well positioned to emerge as the top player in the branded jewellery, watch and eyewear segment.
The market does not appreciate the uptick in demand post the recent fall in gold prices and is over-emphasising the regulatory risk. Any weakness provides a unique opportunity to buy into a proven brand. Even in a scenario of declining gold prices, Titan can protect its margins by a) reducing its advertising and sales promotion (A&P) spending; b) increasing inventory churn; c) improving store efficiencies and d) improving the sales mix toward studded jewellery.
(4) Tech Mahindra Ltd: Target price – Rs 1100
Tech Mahindra has already plunged nearly 15 per cent and has underperformed the BSE-IT index by 5 per cent in the last 3 months, largely driven by market expectations of weak Q4FY13 numbers.
While Tech Mahindra delivered numbers ahead of expectations, Satyam’s revenue growth disappointed. With Tech Mahindra chasing more deals and Satyam beefing up its front end sales team by appointing sales heads for different verticals, organic growth rates in Tech Mahindra should further accelerate.
The organic growth is expected to pick up in Satyam as well. Successful merger is the key near-term catalyst for Tech Mahindra.
(5) Wipro Ltd: Target price – Rs 410
Wipro is a top idea amongst Tier-I IT stocks. It has given 10 per cent return relative to the BSE-IT index (adjusted for demerger) in the last three months and its future results are expected to show an improving trajectory. On the delivery side, most of back end standardization has been done and on the front end sales side, Wipro is better placed to win deals as sales teams are able to forecast and offer better pricing to clients than before due to standardization done on the delivery side.
Wipro’s growth rates are expected to pick up from Q2FY14 onwards.
(6) Hindalco Industries Ltd: Target price – Rs 90
Massive expansion at Hindalco India and Novelis should provide a volume boost in FY14. However, margin pressure is likely to play spoilsport.
Flattish to downward EBITDA guidance at Novelis for FY14, despite the commissioning of new facilities, indicates operational headwinds in its international operations.
Also, a secular decline in aluminium EBIT margins from 30% in Q1FY11 to 12% in Q4FY13 tells the cost story for Indian operations.
The greenfield smelters at Hindalco India (Mahan & Aditya) are expected to face cost pressure due to delays in commissioning of associated coal blocks, resulting in an insignificant EBITDA contribution.
Hindalco’s consolidated net debt, which increased by Rs 130 bn in FY13 is expected to rise further and the stock should be sold for a target of Rs 90.
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