Edelweiss’ track record speaks for itself. Its’ Top Picks have delivered a return of 65% since inception as against Nifty return of 24%, translating into an out-performance of 40%. On an annualized basis, Edelweiss’ Top Picks have delivered a return of 33% per annum as against Nifty return of 13%.
In their current Model Portfolio, Edelweiss has deleted two stocks (ITC & KPIT) and introduced two new stocks (Shobha Developers & Ramco Cements). Otherwise, the common theme of the portfolio is that all the stocks are in well managed companies, with a high ROE and reasonable valuations.
|EDELWEISS MODEL PORTFOLIO OF 12 STOCKS|
|S.No||Stock||CMP (INR)||P/E (X) FY14E||ROE (%) FY14E|
|2||Bajaj Finance Ltd||1,350||6.7||20.2|
|3||ICICI Bank Ltd||1,125||11.1||13.1|
|7||Larsen & Toubro Ltd||977||18.5||13.3|
|8||Maruti Suzuki India Ltd||1,636||15.8||13.1|
|10||Motherson Sumi Systems||265||16.2||34.0|
|9||Pidilite Industries Ltd||289||27.0||27.0|
|4||Sobha Developers Ltd||303||11 .0||13.3|
|5||The Ramco Cements Ltd||176||16.8||10.1|
|12||Zee Entertainment Enterprises Ltd||270||26.1||19.0|
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 has increased its revenues from the chronic segment from 45 percent to over 50 percent currently over the last year growing at over 20 percent in the chronic segment, and intends to increase its share further. As a result, we expect the company’s domestic formulation business to grow at 12 percent CAGR over FY13-15E
Alembic Pharma continues to improve its margins year-on-year, the company has ended FY13 at 16 percent EBITDA margins, and plans to improve it further by 100-125 bps every year, and expects margins to stabilize at 20 percent over the next 2-3 years
Facility expansion for US, would start contributing from Q2FY14, which would help Alembic Pharma grow its US business at 25-30 percent CAGR from USD 20-30 mn currently to over USD 80-100 mn. Alembic 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 percent over FY13-15E
Negligible debt on books, Alembic Pharma plans to become ZERO debt by FY15E
Bajaj Finance Limited (BFL), a subsidiary of Bajaj Finserv, 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 percent 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 percent in FY09 to 4.1 percent in FY13, while RoE has jumped from 3.2 percent in FY09 to 22 percent in FY13
The company has maintained healthy asset quality with gross and net NPA of 1.1 percent and 0.2 percent 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 1.2x FY15E book value
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 percent CAGR over next few years driven by retail segment and working capital related corporate loans
Average CASA is 38-40 percent 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 percent and 0.7 percent respectively. Restructuring book (1.6 percent 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 percent domestic advance growth, NIMs of 3.2 percent for FY14, cost/income to be capped at 40 percent, CASA at 38- 40 percent and credit cost of 75bps will sustain the RoA/RoE at similar levels. Adjusting for valuation of subsidiaries of INR221 per share, the stock trades at 1.1x FY15 adj.book
Larsen and Toubro
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 percent 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 percent yoy growth and maintained strong inflows in H1FY14 with INR 51700 cr (up 27 percent yoy). The management aims to achieve 20 percent growth in order inflows in FY14 on a high base
The management is confident of achieving 15-17 percent growth in standalone revenue in FY14 with stable margins. The current order backlog of INR 1.76 lakh crore (2.9x FY13 standalone revenue) and expectation of strong order inflows in H2FY14 gives revenue growth visibility
The company has over the years shifted its focus from anti-infective and TB, to chronic segment. The company has increased the contribution from 25 percent to 50 percent over the last five years. It plans to increase the same to 65-70 percent by FY14E
Lupin has a strong pipeline of products (120 products) for the US markets pending for approval. It is expected that the company would be able to get the approvals for the same in the next 2-3 years. Of the 120 products 20 have FTF status, and many are limited competition products. This would help the company to generate better margins with less competition for a longer period of time
Lupin one on the few players which has successfully managed to tap the Japanese market through its acquisition of Kyowa earlier and I’rom recently, now has a presence across value chain in Japan from oral formulations (through Kyowa) to Injectables (through I’rom)
We expect LPC’s total sales to grow at 17 percent CAGR between FY13-15E led by strong growth in US generics business over FY13-15E primarily exclusive product launches. Domestic business is expected to grow at 16 percent CAGR over FY15E. Net profits are expected to grow at 19 percent CAGR over FY15E
At CMP the stock is trading at 18.7x its FY15E earnings
Maruti Suzuki India
MSIL is India’s largest passenger vehicle manufacturer with more than 40 percent 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 competition is a 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 percent of sales are imports). Increase in localisation will aid for margin expansion in long term thereby reducing currency risk
Expected demand recovery on the back of good monsoon, substantial rural focus, shift to petrol cars and new launches/refreshes augur well for Maruti Suzuki.
MSIL multiple expands to the range of 16x-21x 1-year forward earnings when growth returns and earnings up cycle begins.
Currenly stock trades at 12.4x FY15E EPS.
Motherson Sumi Systems
Motherson Sumi Systems Ltd. (MSSL) is a global auto component supplier with market leading position in wiring harness (65 percent MS in India), rear view mirrors (22 percent Global MS) and polymer components (Bumpers, Dashboards etc).
The Management has significantly scaled up business (57 percent CAGR growth in 10 years ) through acquisitions/JVs (at the right time and right valuations), turned them around and created a global company with marquee clients while focusing on ROCE and maintaining dividend payout of 30 percent plus. MSSL customers include marquee names like VW, Audi , BMW, Porsche, Skoda, General Motors, Maruti Suzuki, Tata Motors, Hyundai etc.
Revenue visibilty – 1) Relationship with Sumitomo for technology and backward integration for wiring harness (Promoter is on Sumitomo, Japan Board) 2) Just in sequence supplies and replacement of plastics from metal for SMP 3)Industry firsts & one time mould cost for SMR.
New order wins in FY13 at SMP & SMR (Euro 4 bn) gives sales visibility while margins expansion (SMR/SMP) over last three quarters gives us comfort on MSSL effort to expand margins going forward.
Internal sourcing opportunities (INR 5000 crs) , tapping customers within business segments (SMR –SMP) and vertical integration (SMR) gives us sustained sales and margin visibility over a longer period.
Stock is currently trading at 12.1x FY15E EPS.
Pidilite Ltd. is a pioneer in the Indian adhesives space with extremely strong brands across categories – Fevicol, Fevikwik, Mseal, Fevistick, Dr. Fixit and Roff to name a few.
Brands from Pidilite’s stable enjoy age old recall among Indian consumers and command dominant (>70 percent) market shares in their respective categories.
Branding led consumer facing business of the company forms 81 percent of standalone revenues and 90 percent of profits with the balance being contributed by B2B industrial business.
Pidilite has an impressive long term track record, with volumes growing on an average by 2x India’s real GDP amid stable long term margins.
We estimate revenue CAGR of 16 percent and PAT CAGR of 18 percent over FY13-15E.
Secular long term growth, healthy return ratios (>35 percent ROCE), robust operating & free cash flow generation, net cash balance sheet, healthy dividend payout and attractive valuations at 22.7x FY15E (19 percent discount to FMCG median) are reasons why we like the stock.
We recommend a ‘BUY’, valuing the company at 28x FY15E earnings arriving at a price target of INR 340.
Sobha Developers is amongst the leading real estate players in India, with a strong track record of having developed over 53 million sq. ft. It derives majority of its business from South India, primarily Bangalore.
It is one of the most reputed developers known for its high quality construction, timely delivery and high corporate governance.
The company is having a sizeable low cost land bank of 2500 acres, translating into a saleable area of 220 million sq.ft which it has acquired at a FSI cost of INR 90/sq ft. The current value of the land bank is 4x historical cost.
Sobha has a strong ongoing project pipeline of 15 msf in the real estate segment and 10.0 msf in the contractual business segment and has lined up 8 msf of new launches.
It has comfortable D/E at 0.57x with high dividend payout of 32 percent. We see the stock as a major beneficiary of the improved real estate demand on the back of interest rate reversal.
Our NAV on the stock stands at INR 530 per share, with 23 percent of value derived from ongoing projects (net of debt), 12 percent from forthcoming projects, 5 percent from contractual business and balance 59 percent from land bank. We recommend a buy on the stock with target price of INR 530.
Madras Cements Ltd. (MCEM) (now re-named as Ramco Cements) is the fifth largest cement producer in the country and the second largest in south, with an installed capacity of 16.3 MTPA
MCEM is a leading player in lucrative markets of Tamil Nadu and Kerala. The company has further forayed into Eastern markets where the demand-supply scenario is relatively favorable, thus supporting volume growth. We expect the company to report a volume growth CAGR of 7 percent in over FY13-15e, which would lead to a revenue growth CAGR of 7.6 percent over FY13-15E.
MCEM is one of the most cost efficient producers of cement in India, with power and fuel cost per ton of cement comparable to top players in the industry, coupled with significant savings on the fixed cost, thus making it less susceptible to negative fluctuations in the realization or volumes viz-a-viz its peers.
MCEM over FY07-12 has invested more than INR 4500 crs in various expansion projects. The company has no major investment plans for the next 2-3 years. This would help the company to use the free cash flows to repay debt and thus improve its RoCe to 15 percent in FY15E .
MCEM is currently trading at a discount of 30 percent to the large-cap cement companies, against its historical mean of 15 percent discount. We value MCEM at 6.24x FY14E EV/EBITDA, which translates into a 20 percent discount to large-cap cement companies. We recommend a “BUY” with a price target of INR 223.
Wipro Limited is a leading Indian company with business interests in export of IT & BPO services and domestic hardware. It has the widest range of services, including Systems Integration and IT-enabled Services.
Revenue growth to improve – Post its restructuring exercise, Wipro realigned its client facing profiles and also increased its focus on mining strategic clients
It is also investing in sales and marketing to increase its new deal wins rate. Wipro is now effectively competing in higher number of deals than earlier and is hitting the final short-list of vendors
We believe that continued investments in S&M and increased focus on client mining would result in higher new deal wins and revenue growth going forward
Operating Metrics to improve from heron – Wipro’s EBITDA margin has been in the range of 20-21 percent over the last five quarters vs the earlier range of 22-23 percent in both FY10 and FY11. Going forward, we believe EBITDA margins are set to rise, largely due to improvement in utilisation and new deal wins. We expect utilisation to improve from current 72 percent level to 80-81 percent range
Attractive Valuations: We expect revenue growth to improve to 2-4 percent on a QoQ basis in FY14 versus the 0-2 percent in FY13, driven by improved client mining and enhanced deal flows. Wipro now trades at ~14.4x 1-year forward (FY15E) at ~30 percent discount to TCS. With some signs of 2H recovery, recent INR depreciation and current valuations, risk reward is favorable.
Zee Entertainment Enterprises
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 FY13, subscription revenues contributed ~44 percent to ZEE’s total revenues. We expect subscription revenues to contribute ~56 percent 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 CMP the stock trades at a PE multiple of 22.3x FY15E earnings. We recommend a Buy on the stock with a target price of INR 301.