Sharekhan’s 11 Large-Cap & Mid-Cap Stock Picks For 2014

ITC

• ITC’s core cigarette business is least affected by the slowdown in consumer spending; the volume growth in the cigarette business would pick up (4-5%) in FY2015 on a lower base in FY2014 (dented by steep price hikes post-increase in excise rates)

• Unwarranted correction in the stock offers a good entry points for steady and healthy returns

Key risk: another round of a steep hike in excise duty

M&M

• The tractor segment contributing about 40% of the revenues is likely to maintain a double-digit growth on the back of a higher crop output and increased minimum support prices

• Automotive volumes are expected to recover in FY2015 on the back of a conducive macro-economic environment; new product launches would help regain market share in the utility vehicle (UV) space

• The outlook and performance of the key subsidiaries (Ssangyong Motor Company, Tech Mahindra and M&M Financial Services) have also improved which adds to the overall sum-of-the-parts valuation

Key risk: a delay in the recovery of the UV segment; also, increased competitive launches may further reduce the market share

ICICI Bank

• With significant improvement in the liability profile, the bank is poised to expand its market share especially in the retail segment

• ICICI Bank is among the well capitalised banks and is better prepared to face asset quality challenges; the performance of its subsidiaries could improve further with a recovery in the economy

Key risk: continued slowdown in the economy would add to asset quality stress

L&T

• Strong order inflow guidance indicates healthy revenue visibility; diversified presence, superior execution capability and healthy balance sheet remain its strengths

• The ongoing efforts to improve its returns ratios by monetising the long-term development assets are going to be a positive trigger for the stock

Key risk: a significant delay in the capital expenditure cycle reversal

HCL Technologies

• It remains a prime beneficiary of the emerging rebid/ restructuring IT market, which still poses a $45-50 billion opportunity for the company

• The company has a proven track record of winning and executing large restructured deals in the past; it has a very robust order book of over $4 billion which provides robust revenue visibility.

• At a 28% discount to Tata Consultancy Services, there is still room for re-rating from the current levels

Key risk: a prolonged slowdown in the key markets (the USA and Europe) remains a key risk to our investment thesis

Cadila Health

• New drug approvals (over 100 abbreviated new drug applications pending) and settlements launches (of Asacol HD in Q1FY2016) in the USA

• An improvement in profitability on a better product mix (better traction in the branded formulation business and the launch of niche products in the USA)
• The stock is currently available at a 25% discount to its three-year historical average (price/earnings multiple)

Key risk: a delay in obtaining product approvals in the USA

CESC

• Steady cash generation from the regulated utility business continues and significant improvement is visible in Spencer’s and FirstSource Ltd (FSL); the business outlook for FSL has improved and with regular repayment of debt FSL will achieve a leaner balance
sheet

• Spencer’s is expected to break even at the operating level in the next four quarters and potential monetisation would be a trigger for the stock

Key risk: a delay in achieving a break-even in Spencer’s and inability to sign a power purchase agreement for the Chandrapur plant (a new capacity) for a long time

Jyothy Laboratories

• It is expected to achieve a strong growth of above 20% in revenues and operating profit, driven by the integration of Henkel, the launch and relaunch of products and the rationalisation of the distribution network

• The recent repayment of debt through funds raised by preferential allotment to promoters and issuance of non-convertible debentures would result in interest cost savings of Rs45-50 crore at the consolidated level from FY2015; this along with a strong operating performance would result in an exponential growth
in the bottom line

Key risk: an increase in competition in some of the key categories

Raymond

• Its restructuring exercise is largely done (in terms of supply chain revamp, cost rationalisation etc) and the benefits are likely to become visible in the results going ahead; thus we expect the branded apparel business to revive its profitability track record

• The management’s enhanced focus on the monetisation of its lucrative 120-acre land bank (with its core team in place, the master plan for the real estate business is expected soon)

• The stock is ruling at an attractive valuation of enterprise value (EV)/EBITDA of less than 4x FY2015E and so we maintain our Buy rating on the stock with a revised price target of Rs387 (core business valued at 5x EV/ EBITDA+ land valued at 50% market price)

Key risk: slow discretionary spending and high gestation time for monetisation of the land bank

Selan Exploration

•Received approvals recently for developing eleven wells in its key oil fields; it has commenced drilling operations and the early signs from the four wells drilled recently are encouraging which would considerably boost production and earnings over the next couple of years

• It remains a debt-free company and its current cash/ share is around 25% of its market price

Key risk: a substantial delay in the commencement of production

Sun TV Network

•The implementation of the digital addressable system (DAS) across the country is expected to lead to a sixfold increase in the average revenue per user levels (from Rs4 to Rs15-20)

• Given the upside potential from the DAS regime and a gradual recovery in advertising, Sun TV’s growth prospects look favourable going ahead
•The company enjoys an industry leading margin profile (73% EBITDA margin), has close to 53% dividend payout and a superior return on equity of 27%, and so it deserves a richer valuation

Key risk: any major delay in DAS implementation would negatively affect our investment thesis