Reliance – Significant increase in capacity and margins expected, reasonable valuations:
Reliance has been our top pick in last calendar year 2015 and we have again added it in the top 10 for calendar year 2016. The Rs 1300 target is based on FY18 numbers where we feel most of this expansion plans would have started yielding results. We are bullish on Reliance mainly because of two things that they have done – one is the petcoke gasification plant which will add to the margins of the refining business by almost $2-2.5 per barrel. Already, Reliance is enjoying a very high margin spread. This will add to that and it will also take care of any kind of fluctuation in margins over a period of time in their Singapore margins whenever that happens. Second, the expansion in petrochemical side where they have almost doubled their capacity. Now at this time, petrochemical doubling capacity may not be a very good idea because prices are going down but once this cycle turns around in next one, one-and-a-half years, they will have double the capacity and the cycle will be in their favour. That will again add to the margins. So suddenly, you will see in two years’ time, their margins will jump very significantly and the numbers will also improve in absolute terms. This overhang about telecom has been talked about many a times. We have not built in anything from telecom because we feel that within the next two years, they will probably be beating the competition. It would not add anything to their kitty but given all these things, we came to the conclusion that Reliance is a good buy and at Rs 1300 will be 10 or 11 times of FY18, which again is not a very steep price to pay.
Coal India – Monopoly producer, production to double by 2020, high cash flow and high dividend yield:
In the last one year, Coal India production has grown in a manner which has been unprecedented in the last 50 years. Now that is purely because of the changes and the impetus from the coal ministry but at the same time, the company has shown the execution. So we have to give them the credit for that. They have already signed an MOU with the Government of India that by 2020 they will double the production from 500 million to one billion ton. Even if we assume that this target will not be met because this will mean that they will grow at CAGR of around 8-10 per cent or so. If we assume that they will go at less than 5-6 per cent which means that this target will be stretched to 2025. Even then, we assume only a price increase of 4 per cent CAGR. Then also, we see that the cash flow generation and the numbers will add up to much more than what they are currently. So Coal India is a high dividend yield company. They will probably continue with their monopoly status for the next many years. The demand from power producers is slightly slackening, but there is enough requirement in cement and in other industries which they can tap with this new change in the policy about captive usages. So I think Coal India again is a long-term bet. Again, these are stocks which we put them into 2020 Series like if you are buying for five years view then also this will qualify for that.
KEC International – High growth potential from ongoing electrification projects, good cash flow, reduction in debt and reasonable valuations:
KEC International is a play on power transmission. We have seen this budget also has given some impetus to electrifying more number of villages and doubling the capacity. This will mean more order flow for these kind of companies and KEC actually occupies a significant space in PGCIL’s order booking. So that gives a clear visibility of order coming in from the transmission side and that transmission itself makes around 80 per cent of the total business. The only hiccup for KEC has been that 50 per cent of their business comes from West Asian countries where they are doing these EPC work and a lot of transmission work and that has not been going very well. But to offset some of that, they have gone into railways and water treatment etc which is right now only 10 per cent of the business but that is improving very fast. We believe that they are all levers for this company to perform over the next one, one-and-a-half years and the stock has already come off almost 30 per cent in the last few months. This means that it is quite attractive. Despite the stock coming off and financials not playing out very well, the company has been repaying its debt which means that their cash flow position is much better as compared to their peers. So that gives confidence on the company’s future performance and therefore we have buy rating with the target of Rs 188.
HSIL – Play on Swachh Bharat & Housing for all theme:
HISL is a reiteration. It is a play on the housing for all theme, the Swachh Bharat theme. All these things are actually good for companies which cater to this consumption demand. If housing does well, then automatically they are the beneficiaries and in terms of the company’s own operational performance, in the last nine months they have done very well. Both the divisions, glass division was an always an overhang for them. It was not performing in the last year but this year all nine months it has performed well. So which means that half the business has come back to shape. The remaining half continues with its good growth that means that overall, the company is likely to continue on a growth path and we continue to be positive about HSIL. Although we have reduced our target from Rs 400 plus to Rs 329 now, I think so that is basically the multiple reduction, otherwise all the numbers remain the same.