Sandip Sabharwal, after confidently declaring that a huge bull market is in the offing and that investors should arm themselves with top-quality stocks, has made a short-list of the best stocks you can buy now
Gujarat State Petronet:
Gujarat State Petronet is pricing sustainable decline in transmission volumes to ~20 per cent below Q3FY13 level of ~27mmscmd. Long term volumes for GSPL Gujarat network at 40mmscmd starting FY18 can be assumed. GSPL has booked 1.5MMTPA volumes from Dahej Jetty which could result in volumes growth of ~20- 22 per cent from the current levels (FY15). Moreover, capacity expansion at LNG terminals by FY16 (~25mmscmd) is likely to result in increased transmission for GSPL over longer term.
GSPL is currently trading at P/ABV and EV/DACF of 0.87x and 5.2x on FY15E. These levels are attractive considering the utility nature of the business and presence in the key gas market of India. It is also pertinent to note here that on P/BV the stock is trading closer to FY09 lows.
Due to prevailing uncertainties across the world, the decision-making has been pushed to next year. The larger deals are taking longer to culminate. However, NIIT Technologies’ India business seems to be on track. The management expects uptick in business activity from Q4FY13, primarily due to a rebound in the GIS business as government spending kicks in due to budgetary flush.
NIIT Tech is a unique IT services provider for TTL and insurance sector (non-life) with a 28-year heritage. NIIT Tech is best positioned in the niche IT space to meet or exceed our above consensus forward estimates and grows faster than peers. With a P/E multiple of 6.1x, it is at steep discount compared to the peer group. Moreover with a predicted EPS growth of 16 per cent, the valuation looks compelling.
Britannia has underperformed CNX FMCG index by 38 per cent in the past one year due to 1) uncertainty on pack size regulations, 2) declining volume growth, and 3) sharp increase in prices of key inputs like sugar, wheat and fuel etc.
Input costs have started softening as sugar and wheat prices have declined by 13 per cent from the recent highs and palm oil prices are down 28 per cent. Volume growth has started recovering as sales growth has jumped from 9.5% in Q2FY13 to 18.1 per cent in Q3FY13. We estimate 16.5 per cent sales CAGR post 14 per cent in FY13.
Britannia Industries is expected to post 16.5 per cent sales CAGR. 140bps margin expansion will enable 27 per cent PAT CAGR over FY13-15. 40 per cent ROE and 50 per cent payout ratio, coupled with 27 per cent PAT CAGR, makes stock attractive at 19.7xFY15 earnings. Potential value unlocking from real estate can add to potential returns.
United Phosphorus’ EBITDA margins is expected to improve by 80bps over the next two years to 18.8 per cent. EBITDA margin improvement is likely to be driven by shift in product mix, rationalization of costs and turnaround of DVA. DVA Agro’s margins are expected to improve by 200-250 bps over the medium term driven by consolidation of supply chain in Latin America, improved product profile and better customer mix.
United Phosphorus is expected to register 12.0 per cent/13 per cent CAGR in revenues/PAT over FY13E-15E. The ROCE is expected to improve by ~50bps to 13.1 per cent by FY15E. Sustainable earnings growth, DVA turnaround and improvement in working capital are likely to re-rate the stock.
At CMP, United Phosphorus trades at 6.9x FY14E earnings which is a discount of ~40% to industry average and 25 per cent discount to its 3-year average. United Phosphorus should be bought with a target price of Rs 185.
Jammu & Kashmir Bank:
Jammu & Kashmir Bank enjoys a very strong liability franchise due to its J& K state advantage, with CASA within J&K at ~53%. J&K Bank’s total CASA at ~39.4 per cent is among the best in the industry, providing the bank with a significant cost advantage.
Low fee income and CA ratio are the only commonalities with PSU banks, apart from which J&K Bank is more of a private bank on most fundamental parameters like high CASA and margins, sound underwriting and high ROAs/RORWAs. Management continuity, which is a big issue with PSUs, is also absent in J&K Bank with ~5-6 years of average tenure for the chairman. Thus, valuation benchmarking to mid-cap PSU banks is unwarranted. The bank is trading at 1.12x FY14 P/B with ROE at ~19-20 per cent.
Crompton & Greaves:
Crompton Greaves had a tough last 7-8 quarters due to issues relating to restructuring and global turmoil which impacted international operations. With restructuring behind us, efficiency-led gains are expected to drive margin improvement and help improve focus on execution. A record backlog, better/leaner cost structure, good & increasing product basket and improved reach in terms of geography will drive earnings over the next few years, given the inexpensive valuation.
Analysis of the spot LNG prices since Aug-2011 and Petronet LNG’s stock price movement reflects that its stock has demonstrated a strong inverse co-relation with spot LNG prices. The company’s stock price has corrected ~20-22 per cent from the highs in November, primarily due to high spot LNG prices (India destination LNG prices averaging 27.7 per cent higher in Q4FY13 from average prices witnessed in Q3FY13) as the other business variables largely remain the same.
PLNG’s utility nature of business (stable regasification margins and term contracts), low regulatory risks and expanding volumes on account of strong demand estimates hold it in good stead. The concerns over the regulatory intervention on the marketing margin front as well as PNGRB regulating regasification charges are exaggerated. Petronet LNG is a ‘buy’ with a target of Rs185 per share.
Reliance Infrastructure, which has 11 BOT road projects (8 are operational), is likely to see some light at the end of a long tunnel in FY15E. By H1FY14E, two of the projects under construction will declare COD and the balance one project will do the same by Q3FY14E.
Thus, in FY15E, the entire road portfolio will start contributing to sales. Delhi Metro has finally been commissioned and the current traffic is 10000-12000 pax per day, with renegotiation with real estate players already started. Mumbai Metro’s trial runs for 2kms have been completed and the 8km Versova-Andheri stretch is ready.
Though the investors have been keeping their distance from the stock in the recent past, the asset pipeline is expected to mature in the next 2-3 years which shall start reflecting in earnings and prices soon. Thus, the Reliance Infrastructure can be accumulated. At CMP of Rs 344, the stock is trading at valuations of 0.3x FY15E P/BV.