Diversified portfolio of high quality mid-cap and large-cap stocks
The Model portfolio has 11 top quality stocks spread out across the large-cap space and the mid-cap space.
The stocks are chosen from diversified sectors such as Chemicals, Agriculture, Footwear, Engineering & Consulting Services, Banking, FMCG, Print & Publishing, Paper & Paper Products, Infrastructure, Automobiles, Oil & Gas.
The list of the 11 stocks to buy for 2019 is as follows:
|Company Name||CMP (INR)||Target Price (INR)||Upside %|
|JK Paper Ltd||168||259||54%|
|Balaji Amines Ltd||454||686||51%|
|Jagran Prakashan Ltd||114||164||44%|
|Mahindra & Mahindra Ltd||746||1044||40%|
|Engineers India Ltd||114||159||39%|
|Balrampur Chini Mills Ltd||110||152||38%|
|Bata India Ltd||939||1280||36%|
|ICICI Bank Ltd||345||464||34%|
|Larsen & Toubro Ltd||1271||1610||27%|
|Mahanagar Gas Ltd||821||980||19%|
Balaji Amines Ltd
Balaji Amines Ltd is one of the leading manufacturers of Aliphatic Amines in India. It commenced manufacture of Methyl Amines in the year 1989 and later added facilities for manufacture of Ethyl Amines and other derivatives of Methyl Amines and Ethyl Amines. The company has been consistently adding capaciti s and fi e tuning process to provide quality products at lowest cost to the customers. The company also operates a 5 start hotel in Solapur – Balaji Sarovar. It has tied up with Sarovar group for management of this hotel.
Outlook and Valuation
Balaji Amines is the leading manufacturer of amines in the country and thus enjoys a handsome market share. The cash rich company is also investing heavily in debottlenecking which resulted in good growth in volume. Moreover, the anti dumping duty on some of their products and import substitution opportunities led to better realization. The company is also expected to reduce its debt by INR130 Crore by the end of FY21. Considering this we assign a mul-tip e of 14x to its FY20E EPS of INR49 and arrive at a target price of INR686.
Largest manufacturer of Aliphati Amines in India: The company is the leader in in Morpholine, DMA HCL, NMP, NEP, PVK-30 and DMF. It has witnessed high volume growth for most of these products. This was supported by higher demand and recent capacity expansion. Govt. of India has imposed antidumping duty on some of the chemicals manufactured by the company resulting in higher volume growth. The quality of these products matches the global standards and provides a great potential in import substi uti n apart from exporti g opportunities to Europe and Asia.
Strong Demand from the user Industry is leading to high volume growth: The company caters to various Industry however pharma and agrochemical sector contributes more than 70% to the company’s revenue. Both the sectors are expected to grow at 11-12% CAGR growth in the next five years. Moreover, due to chemical supply disruptions in China, Indian companies are witnessing higher demand from MNCs for raw materials. The company has been playing a major role in offe ing value added products to both domestic and international customers.
Investment in speciality chemical business and Mega project will drive growth: The company has invested INR66 Crore in Balaji Specialty chemicals which is expected to start giving returns from the second half of this year. It is also expected to start its work on the greenfield Mega Project at Solapur from third quarter of the current fiscal year. This will also start contributing from FY20 onwards. Both these projects has got immense potential as some of the chemicals that will be produced is majorly imported in India. This will give the company opportunity to substitute import in the domestic market.
Balrampur Chini Mills Ltd
Balrampur Chini Mills Limited (BCML) is one of the largest integrated sugar companies in India. The allied businesses of the Company comprise distillery operati ns and cogenerati n. The Company presently has 10 sugar factories located in Uttar Pradesh having an aggregate sugarcane crushing capacity of 76,500 TCD, distillery and co-generati n operations of 360 KLPD and 163.2 MW (Saleable) respectively.
Outlook and Valuation
On the back of reduced cyclicality in earnings, sustainable cash flows and increasing return rati s, we feel P/E of 4.5x in FY20E is inexpensive. We have used DCF method of valuation to find the intrinsic value of the stock and derived at a Target Price of INR152 per share.
Early-mover advantage in ethanol productio : BCML has the third largest distillery capacity in the country with 360 KLPD producing aggregate 13 crore litre of ethanol every year. On August 8th, 2018, the Company approved setting up of another distillery of 160 KLPD in Gularia unit which is likely to be in operati n within 2 years and will help in producing extra 6 crore litre every year.
ZLD norms: Out of 159 sugar mills, around 25% of them have distillery capacities and few of them have environmental and pollution control norms. All its plant emissions are well below the pollution control limits, which will help in gaining an upper hand as it creates an entry barrier for others.
Strong Balance Sheet: BCML performance improvement helped in strengthening its balance sheet through the industry cycles. It has reported a peak long-term debt of INR668 crore in the last 5 years and repaid INR552 crore during the past 2 years, including prepayment. Even during a sectoral downturn, the Company selected to buyback 66 lakh shares for an aggregate INR99 crore in FY18.
Bata India ltd. is the largest retailer and manufacturer of footwear in the country, offe ing footwear, accessories and bags across brands like Bata, Hush Puppies, Naturalizer, Power, Claire, Weinbrenner, North Star, Scholl, & Bubblegummers to name a few. The company commands a strong pan India retail presence with more than 1375 stores and sold 47 mn pairs of footwear last year. Bata’s 75% of revenue comes from product below INR1000.
Outlook and Valuation
We expect Bata to report net revenue CAGR of 16.5% to INR3,575 cr over FY2018-20E backed by increasing brand awareness, new product launches, higher number of store additions in tier II/ III cities & focus on high growth women’s segment. Further, on the bottom-line front, we expect CAGR of 28% to INR366 cr over the same period on the back of margin improvement led by increasing premium product sales. Thus, considering facts we assign a P/E(x) multip e of 45 (x) on FY20E EPS, to arrive at a target price of INR1280.
Red Angela Store Concept: Bata took inspiration from the brand’s global retail concept, launching its internationally conceptualized “Red Angela Store Concept” in Kolkata & Delhi. The store design seamlessly marries visual merchandising with thematic windows to magnificently bring alive every product display. This will allow the company to win the consumer hearts. The company is planning to add 100 stores more, 50 COCO & 50 FOFO in FY19 and convert their existing COCO store to new phase modern looks store ‘Red Angela’.
Focus on Women’s Shoes: The company has taken various steps to reinvent its image, evident in the fresh and trendy new collection that have been successfully drawing in young buyers to its stores, which will drive their top line growth further. At present, women’s shoes account for around 40% of Bata sales in India which the company wants to grow to 50% in next 3 years. The company expects this segment to offe big potential of growth.
Savings from Rental Renegotiati : Bata is also renegotiating the rentals with existing landlords and optimizing retail spaces. The company is planning to surrender surplus space of the bigger stores if required to the landlords and get substantial saving in this cost which will help them to improve their margin.
Revival of the ‘Power’ brand: Bata has introduced Ms. Smriti Mandhana for their sports brand “Power” which contributes 12% of their total revenue. The new looks and design meet the aspirati n of the young youth which will help them to achieve their previous glory.
Engineers India Limited
Sector: Engineering and Consulting Services
Engineers India Ltd (EIL) is a leading global engineering consultancy and EPC company. Established in 1965, EIL provides engineering consultancy and EPC services principally focused on the oil & gas and petrochemical industries. The Company has also diversified into sectors like infrastructure, water and waste management, solar & nuclear power and fertil zers to leverage its strong technical competencies and track record. EIL is a ‘Total Solutions’ engineering consultancy company providing design, engineering, procurement, construction and integrated project management services.
Outlook and Valuation
Ongoing OMCs’ capex in India, recovering oil prices, strong order book and deal pipeline, place EIL in a sweet spot. The order inflow has improved significantly in last 2 years led by BS-VI emission norms and modernization of Vizag refinery. Looking ahead, we expect order inflow to remain strong in domestic market which provides promising revenue visibility for next couple of years. Considering all these, we have assigned a multip e of 18 tim s to its FY20 EPS and arrive at a price of INR 159.
PSU Giants to pump around INR1 lac crore for Capex plans: Indian Oil has lined up INR 22,000 crore capex plan for the current fiscal year. HPCL has plans to invest INR 75000 crore over five years to expand refining capacity, pipelines and LNG terminal. Considering the huge capex plans for upcoming two years, we believe Engineers India Ltd (EIL) will be greatly benefitted. We believe the huge capex plans by Oil PSU’s to boost order inflow of EIL for the next two years. Also since the company is a zero-debt company and has 14% revenues from export, it is safeguarded from current scenario of rising interest rate and to benefit from rupee depreciation.
Largest order win worth INR 5,000 crore: EIL bagged a INR5,000 Cr. project execution order from HPCL Rajasthan Refinery to build a greenfield refinery and petrochemical complex in Barmer, Rajasthan. As on Q1FY19, the EIL held a strong order book of INR 7,229cr on a standalone basis, out of this 53% orders are attributed to consultancy and rest to turnkey projects. This order book translates book-to-bill of around 3.6x on TTM revenue which gives healthy revenue visibility for the next 3 to 4 years.
Strong global opportunities especially in Middle East and African region: EIL is consistently expanding its presence in international markets. With current growth trends of fuel consumption and improved GDP numbers for some of the major nations in African continent, EIL expects future business opportunities in oil & gas sector in this region as well. With its engineering set-up in Abu Dhabi, EIL is well positioned to actively parti ipate in these upcoming opportunities in Middle East and African region.
ICICI Bank Ltd
ICICI Bank is India’s largest private sector bank with total consolidated assets of INR11,242 Bn. The bank is engaged in providing a range of banking & financial services. The area of operatins include commercial banking, retail banking, working capital finance, insurance, venture capital, private equity & investment banking. The bank has a strong & diversified distribution network.
Outlook and Valuation
The company is expected to continue it’s growth story, led by strong asset quality, resolution of cases at NCLT & stable NIMs. The leadership issues have been resolved and the bank is all set to grow on the opportunities available. We assign a multiple of 2.5x on the FY20E Book Value, to arrive at a target price of INR462.
Reduction NPAs: A sharp decline in slippages & write offs, followed by increase in PCR to around 70% from 60%, ensure that no further deterioratin is expected in asset quality. The resolution of cases at NCLT has further helped in reducing the NPA numbers.
Stable NIMs: In spite of the increase in interest rates, the bank has been able to maintain it’s NIM at 3.5% level due to increase in CASA rati & ability to pass on the interest rate hike. With MCLR re pricing coming up, the interest rates would be adjusted to protect the NIMs.
Diversified Loan Book: The bank has diversified lending portfolio. 57% of the total lending is for Retail customers. The share for SME lending is low at around 4.6%, which going forward could be seen as a major growth driver.
Well Capitalized: In the current scenario where lending system is crippled due to shortage of capital, the bank is more than adequately capitalized.
Strong Management: The leadership crisis seems to be resolved and with new management and focus on growth, the bank is expected to once again contiue on it’s growth trajectory. The newly appointed MD, has been a part of the ICICI group for the past 32 years.
ITC Ltd. has a diversified presence in Cigarettes, Packaged Foods & Confectionery, Branded Apparel, Hotels, Paperboards & Specialty Papers, packaging, Agri Business, etc. The Company holds around 72% market share in the legal cigarette market in India.
Outlook and Valuation
ITC is the market leader in the tobacco industry and enjoys pricing power. Branded Packaged Food Business, Personal Care products, Education & Statinary products and Hotel business are also likely to contribute more to the total revenue as the company is shiftng its focus to Non-Tobacco business. EBIT Margin showed improvement in FY18 and is expected to report a quarter lower to Industry average from FY20E onwards. We expect topline & bottom line to grow at 10% & 18% respectively over FY18-20E. We value the Company at 26x to its FY20E EPS of INR12.70 to arrive at a Target Price of INR330.
Riding on strong cigarette volume: Cigarettes business was hit with the implementation of GST and increase in cess. The industry witnessed 6-7% volume growth on stable prices in FY10-12. Since then, there was continuous increase in excise duty and cess and the company had to opt for price hike which resulted in volume de-growth by the organized players. The industry did not witness any increase in cess over the past 6 months and the price hike was not done during that period, which resulted in 1.5%/8% volume growth in Q1FY19/Q2FY19. Being a market leader in the tobacco industry, it enjoys pricing power. We expect the company to witness volume as well as value growth under stable GST rates and cess regime.
FMCG business poised for long-term growth: Focus to shift from Tobacco business to Non-Tobacco business, the Company is investing significantly to built brands under packaged food & personal care portflio. Backward integratin and appetite to enter new categories would help to scale up its existing portfolio.
Improved performance from Hotel/Paper/Agri businesses: Paper products backed by improvement in EBIT margins, Agri-products on better monsoon & higher yields and Hotel industry divisions backed by booming tourism and increase in tariff would help in aiding profitability of the company.
Jagran Prakashan Limited
Sector: Print & Publishing
Incorporated in 1942, Jagran Prakashan Ltd (JPL) is a media house with interests spanning across printing and publication of newspapers & magazines, FM Radio, Digital, Outdoor Adverti ing and Promotional marketing/Event management/on ground activation businesses. The Group publishes 8 newspapers and 2 magazines from 37 diff rent printing facilities across 13 states in 5 diffe ent languages. It also enjoys a strong footing in the radio market through Radio City/Radio Mantra in India.
Outlook and Valuation
With the economy improving and the impact of GST also waning, the second half of FY19 looks much better for print media. This is on the back of expectations that spending on advertising would pick up meaningfully in months closer to the general election in 2019. We expect incremental growth driven by healthy ad spend by FMCG, education and real estate. Further, strong footi g in the radio market and increasing presence in the digital space bodes well for the growth outlook. Considering all these, we have assigned a multiple of 12.5 tim s to its FY20 EPS and arrive at a price of INR 164.
Election fever will boost Ad revenue: Media plays an important role in helping political parties interact with voters and most of the parti s are now using the print media, television and radio. This will translate into huge revenue growth for the media industry at large. As the election is around the corner, JPL is expected to gain substantially on the back of a pick-up in advertising revenue, primarily in print media.
Undisputed leader in Hindi newspaper segment: According to the Indian Readership Survey 2017, Dainik Jagran retained its leadership position as the largest read Hindi daily of the country across languages with a total readership of 7.03 Cr. . According to IRS 2017 data, Hindi dailies saw a 45% surge in readership to reach 17.6 Cr. With its strong presence in Tier II and Tier III cities, the company will benefit from fast growing advertising spending in these cities due to strong economic growth and rising consumption, which allows it to charge premium ad rates.
Strong Growth Potential in Radio: Music Broadcast Limited (MBL) has expanded its presence over the years with footprint in 40 cities and is present in 12 out of the top 15 cities in India by population from 4 cities in 2001. MBL is reaping benefits of geographical expansion and market penetrati n. The acquisitin of Friends 91.9 FM gives access in the Kolkata market and it enhances the reach footprint from 62% to 72%. With 52.5 Mn. listenership, improving utilizations in Phase III markets and rate hike implemented in all 12 core markets, we believe Radio City will continue to generate robust cash flow and add significant value going ahead.
JK Paper Ltd
Sector: Paper & Paper Products
JK Paper is one of India’s largest producers of office, printing, writing and specialty paper, and packaging boards, with two fully integrated manufacturing facilities. It is the market leader in the writing and printing segment and among the top players in packaging & paperboard segment. It has 23% market share in the copier paper segment (B2C) which is primarily due to its strong distribution network and brand recall.
Outlook and Valuation
The robust demand outlook and rising consumerism bodes well for the Indian paper industry, which is expected to maintain its growth momentum in the near future. Rapid urbanization and transformati n in lifestyle habits have resulted in a larger offtak of packaged products. The recent acquisition of Sirpur Paper Mill will provide synergisti advantage both in terms of a strategically located manufacturing facility and access to raw material. We value the company at 9x to its FY20E EPS of INR28.74 and arrive at a Target Price of INR259.
Strong demand: The robust demand outlook and rising consumerism bodes well for the Indian paper industry, which is expected to maintain its growth momentum in the near future. Rapid urbanization and transformation in lifestyle habits have resulted in a larger offtake of packaged products. China cutting down its production to control pollution, rising Indian demand & depreciating rupee are the major tailwinds for the industry.
Market Leadership Positio : Market leadership in branded copier paper segment, focus on value added products, improving profitability and robust outlook for the Indian paper industry are the key positives for the company.
Acquisition of Sirpur Paper Mill: The recent acquisition of Sirpur Paper Mill will provide synergistic advantage both in terms of a strategically located manufacturing facility and access to raw material.
Capacity Addition: The company is setting up of additional capacity upto 2 lakh TPA of Packaging Board, pulping facilities upto 1.60 lakh TPA and utilities, etc. at Unit CPM, Gujarat. The Project cost of approximately INR1450 crore would be funded with a mix of internal accruals and long term debts.
Larsen & Toubro Ltd.
Larsen & Toubro Limited (L&T) is a technology, engineering, construction and manufacturing company. L&T also has an international presence, with a global spread of offices. A thrust on international business has seen overseas earnings grow signifi antly. It conti ues to grow its global footprint, with offices and manufacturing facilities in multiple countries. The company also in the business activiti s of Power, Infrastructure, Electrical & Electronics, Engineering Construction, Metallurgical & Material Handling.
Outlook and Valuation
We believe the company is already witnessing strong order inflow, improving working capital and stronger generati n of cash flows. Going ahead we expect the margins to improve with higher execution rate and internati nal orders. With huge domesti capex spending, the company is the best placed to capitalize the opportunity. We assign PE multiple of 20x to its FY20E EPS to arrive at a target price of INR1610.
Sizeable Order Backlog: The company has robust order book of INR271732 crore as of June 2018 which is equivalent to nearly 2.25 times of FY18 revenue. Its large and diverse order book mititates cyclical volatility. Order inflows grew 37% to INR36,142 crore in the June quarter, mainly driven by domestic projects. L&T sees order inflow growth at 10-11% for FY19. As historically witnessed, we expect the order execution to slowdown going into May’19 elections. However, it is likely to bounce back post the elections and recovery in capex cycles starts.
Margins to grow on Infrastructure and Defense push: The company is looking for opportunities in the defense and infrastructure sectors to drive growth. Much stress has been laid on urbanization through adoption of smart cities, smart infrastructure and construction of large linear infrastructure projects which L&T will be highly benefitted from. The Company is also focusing on defense engineering as a crucial business for its future growth strategy. India’s infrastructure and defense manufacturing push will likely to fuel L&T’s revenue growth and margins in the next three years. For FY19, company is expecting revenue growth at 12-15% while 25 basis points improvement in the margins.
Key beneficiary of the Government Modernizati n plan: The Company is expecting enormous opportunities as the Indian Government is on a massive spending spree for infrastructure development. The Company is well placed to capitalize the opportunities in Roads, Railways, Metro projects and urban infrastructure projects. For upcoming months, the industry expects government to step up the tendering activity in segments such as roads; airports & Urban Infrastructure and L&T will be among the key beneficiaries to take up the opportunity.
Mahindra & Mahindra
Mahindra & Mahindra Limited, is the flagship company of the Mahindra Group, which operates in nine segments and is having diverse business interests across the globe. The automotive segment includes sales of automobiles, spare parts and related services. Farm equipment segment includes sales of tractors, spare parts and related services; informati n technology (IT) services which consists of services rendered for IT and telecom; financial services includes services relating to financing, leasing and hire purchase of automobiles and tractors; and its others segment includes logistics, aft r-market, two wheelers and investment.
Outlook and Valuation
Considering consecutive good monsoon, Govt.’s increased focus on improving rural infrastructure, rise in MSP, stringent emission norms, implementati n of fleet modernization program, series of new launches in the PV space, strong R&D, increasing global foot-print and first mover advantage in EV, we are assigning a PE of 17x to FY20E EPS of INR61.4 to raise our Target Price to INR1044 from our earlier Target Price of INR862.5.
Robust industry outlook: The tractor space saw a growth of 22% led by two consecutive years of normal monsoon, easy availability of credit, increased use of tractors in the non-agricultural sector and hike in MSP. Going forward, the tractor industry’s 5 year CAGR is expected to be around 8-10%. M&M, with a mammoth 43% market share, is expected to get benefitted from this.
Focus on improving market share in the domestic tractor industry: M&M is focusing on states where it has a less than national average market share of 43%, which amount to roughly half the states. It plans to introduce crop-specific products, which should help in regaining market share in these states. Apart from this it is going to pursue three brand strategy, namely: Mahindra as a high-tech product, Swaraj as a reliable product with high resale value and Trakstar for the price sensitive segment (5-10% cheaper than cheapest national competitor).
Expansion into global markets: The global Farming Equipment Segment market currently stands at USD160 billion with tractor segment constituting USD60 billion and non-tractor segment USD100 billion. It has ventured into Turkey, which is a USD3.5 billion market, through acquiring Hisarlar & Erkunt tractors. The North American market is currently ~USD22 bn. It has a local assembly unit in markets like US, Mexico and Brazil to tap that market. In Japan, it is fourth -largest player with a market share of 7%.
Sector: Oil & Gas
Mahanagar Gas Ltd (MGL) is the sole authorized distributor of compressed natural gas (CNG) and piped natural gas (PNG) in Mumbai, Thane urban and adjoining municipalities and the Raigad district. They distribute CNG for motor vehicles and PNG for domestic household use as well as commercial and industrial use. With a wide distribution network, They have a well-established customer base across Mumbai Metropolitan region and adjoining areas.
Outlook and Valuation
CGD (City Gas Distribution) business is monopolistic in nature due to allotment of license for specified region and cities. Sequential price hike will help MGL to offs t the elevated gas price in the international market and rupee depreciation headwind. We expect MGL to report net revenue CAGR of 11% to INR2751 Cr. over FY2018-20E. Strong return rati s and low valuati n for a sustainable business gives us an opportunity to invest in the company. We expect an EPS of INR61.3 for FY20E. Thus, considering above facts we assign a P/E(x) multi le of 16 (x) on FY20E EPS, to arrive at a target price of INR980.
Infrastructure exclusivity: MGL holds infrastructure exclusivity in Mumbai, Thane and Raigad. MGL has established connectivity to supply gas to over 3,000 PNG consumers in Uran. Even with the existing areas that MGL covers, the growth prospects look promising with the govt’s push to use the cleaner fuel and with the rising urbanization.
Expansion plans in advancement: In the recently announced 9th bidding round by PNGRB, 86 geographical areas (GAs) covering 174 districts are being offe ed to set up the CGD network out of which MGL plans to expands its network by bidding for 20 of those GAs. MGL has also given capex guidance of INR300 Cr. for FY19E.
Crucial triggers-Natural gas under GST: Government has indicated that it intends to bring natural gas under the ambit of GST which will be positive for the sector and also for MGL, currently, the taxes on CNG in Maharashtra is roughly around 29% (i.e. 14% excise duty and 13.5% Maharashtra VAT). With GST, we presume the rates to be lower which will support volume growth.
First Mover Advantage: MGL is well placed with domain expertise and capacity to have access to the most cost competitive priced gas. For any new entrant aiming to compete with MGL (Shipper), usage of MGL’s distribution network would require them to pay an additional transportation tariff to MGL and thereby increasing its costs as compared to MGL.