Top 10 Diwali Stock Picks Of Rajen Shah Angel Broking

Wipro (CMP: Rs. 492/ TP: Rs. 567/ Upside: 15%)

Wipro has identified four momentum industry verticals: 1) BFSI, 2) energy & utilities, 3) retail and 4) lifesciences and healthcare; these verticals account for 65% of the company’s revenue. The Managements of all its peer companies have indicated that IT spend in industry verticals such as retail and energy & utilities is expected to grow higher than the overall industry growth and Wipro’s exposure to energy & utilities is ~100% higher than the next largest competitor in this space (Infosys). We expect USD and INR revenue CAGR for IT services to be at 9% and 16%, respectively over FY2013-15E.

– Wipro has operating margin levers such as improving utilization level and increasing offshore revenue. Wipro’s utilization level is currently at at 66.1%, which is nearer to its historic low levels. The company has headroom to improve its utilization by ~500bp even if the Management does not want to run a tight ship.

– The portfolio of top-10 client accounts has seen a change at Wipro (with only 2 hi-tech/telecom clients within the top-10 client roster vs 4-5 clients from the hi-tech/telecom segment earlier). We value the stock at 15.5x FY2015E EPS of Rs. 36.5, which gives us a target price of Rs. 567 and recommend it as one of our top picks with a Buy rating

ICICI Bank (CMP: Rs.1,025/ TP: Rs.1,181/ Upside: 15%)

ICICI Bank’s strategic transformation over the past five years has expectedly resulted in a significantly better balance sheet and earnings quality. CASA ratio, which was 29% at the end of FY2009, has improved to around 43% as of 1QFY2014.

– Apart from the paradigm shift in the deposit mix, the bank has largely exited unattractive business segments such as small-ticket personal loans in the domestic segment and most non-India related exposures in its international business, which has resulted in a commensurate decline in credit costs for the bank. Even during FY2013, credit costs for the bank remained under check at 66bp (which was lower than the Managements’ guidance of 75bp).

– The bank’s substantial branch expansion (from 1,388 branches at the end of 1QFY2009 to 3,350 branches by 1QFY2014) and strong capital adequacy at 18.35% (tier-1 at 12.5%) positions the bank to grow its loan book at a faster rate than the system average as and when business environment turns conducive. In the near term, we expect the bank to grow moderately taking into account the current challenging times for the sector.

– The stock is trading at an attractive valuation of 1.5x FY2015E P/ABV. Hence, we maintain our Buy view on the stock with a target price of Rs.1,181, valuing the core bank at 1.7x FY2015E P/ABV and assigning a value of Rs.187 to its subsidiaries.

Hindustan Zinc (CMP: Rs.135/ TP: Rs.156/ Upside: 16%)

For Hindustan Zinc (HZL), we expect zinc-lead/ silver volumes to grow at a CAGR of 5.8%/6.2% over FY2013-15. Also, HZL is expanding its mining capacity at the Kayar mine, which has 11mn tonne of high-grade reserves. The company expects to increase its capacity from 1.0mn tonne to 5.0mn tonne over the coming five years.

– At current levels of ~US$1,900/tonne, zinc prices stand near marginal cost of production for several zinc producers globally. Hence, we believe that the probability of a further decline in zinc prices from the current levels remains muted. Further, over the next 3-5 years, several zinc mines are expected to be exhausted; hence, production is likely to suffer. This should support zinc prices over the medium term in our view.

– With net cash of Rs.23,632cr as on September 30, 2013, the company continues to explore new reserves. Its reserves and resources have increased to 348mn tonne as on March 31, 2013, compared to 210mn tonne as on March 31, 2007, indicating that HZL has added more reserves and resources than it has mined during the same period.

– The stock is currently trading at an inexpensive valuation of 4.6x FY2014E and 3.6x FY2015E EV/EBITDA. On a P/B basis, the stock trades at 1.5x FY2014E and 1.3x FY2015E. We maintain a Buy on the stock.

Axis Bank (CMP: Rs.1,210/ TP: Rs.1,392/ Upside: 15%)

Axis Bank has aggressively expanded its branch network at around 30% CAGR over the past ten years (~2,250 branches now), which has not only aided the bank in steadily growing its retail liabilities profile (CASA ratio stands at ~43% and share of domestic CASA & retail deposits to total deposits at 73%), but has also laid a strong platform for building up a sustainable retail assets portfolio (share of retail advances to total advances at 30%).

– Axis Bank has been able to sustain its healthy growth on the non-interest income front and maintain the fee income contribution at a meaningful 1.9% of total assets.

– Axis Bank’s tier-I ratio stood at 12.8% as of 2QFY2014, which gives it enough headroom for credit growth for the next three years. We expect the Management to meet its guidance of above-industry average loan growth and improve its credit market share.

– Notwithstanding moderate concerns on its corporate book asset quality, we expect the retail business to drive earnings at a healthy CAGR of 19.2% over FY2013-15E. In our view, the current valuations at 1.3x FY2015 ABV are below our longer term fair value estimates. In the near term, given the weak macro environment and cautious outlook for the sector, stocks such as Axis Bank may undershoot fair value estimates, but from a relative point-of-view compared to peers, it remains one of the preferred banks, in our view, from a medium term perspective. We maintain our Buy recommendation, with a target price of Rs.1,392.

Cipla (CMP: Rs.423/ TP: Rs.504/ Upside: 19%)

For Cipla, exports contributed 53% to the total turnover of FY2013, with Africa, US and Latin America constituting more than 60% of total exports. In the US, Cipla has entered into a partnership with more than 22 players and has a strong product pipeline of ANDAs, of which 47 have been launched, out of the 76 approved. With the Medpro acquisition, the company now has a front end in the fast growing African market.

– Cipla is one of the largest players in the domestic formulation market, with a market share of around 5%, contributing 47% to the total turnover in FY2013.

Cipla’s distribution network in India consists of a field force of around 7,500 employees. The company plans to focus on growing its market share and sales by increasing penetration in the Indian market, especially in rural areas, and plans to expand its product portfolio by launching biosimilars, particularly relating to the oncology, anti-asthmatic and anti-arthritis categories.

– For FY2014, the Management has given a revenue growth guidance of 14-15% (excluding Medpro). We expect the company’s net sales to post a 15.5% CAGR to Rs.10,796cr and EPS to record a 12.1% CAGR to Rs.23.9 over FY2013-15E.

Tata Steel (CMP: Rs.335/ TP: Rs.390/ Upside:16%)

Tata Steel completed its 2.9mn-tonne expansion program at the Jamshedpur plant during FY2013. We expect this expansion to contribute ~ Rs.2,000cr per annum to the company’s consolidated EBITDA as the new plant reaches optimum utilization over the coming two years.

– Tata Steel is in the process of restructuring its European operations. Over the past two quarters, its European operations have shown better-than-expected improvement in operating profit. Going forward, we expect European operations to continue to improve on the profitability front, which have been dragging down the company’s consolidated profits in the past.

– Tata Steel is setting up a 6mn-tonne integrated steel plant (including cold rolling mill) in two phases of 3mn tonne each for a capex of Rs.34,500cr. Phase 1 of the 3mn-tonne plant is expected to be completed by FY2015. This project is expected to have high returns on invested capital as it would be backed by captive iron ore.

– The stock is currently trading at an inexpensive valuation of 5.8x FY2014E and 5.2x FY2015E EV/EBITDA. On a P/B basis, the stock trades at 0.9x FY2014E and 0.8x FY2015E. We maintain a Buy on the stock.

Cadila (CMP: Rs.660/ TP: Rs.894/ Upside: 35%)

Cadila is the fifth largest player in the domestic market. The company’s domestic sales, at Rs.2,987cr in FY2013, accounted for ~48% to its overall top-line. The company enjoys a leadership position in the CVS, GI, women’s healthcare and respiratory segments, and has a sales force of 4,500 MRs. Going forward, the company expects these segments to grow at above-industry rate on the back of new product launches and field force expansion. While FY2014 sales would be lower, however FY2015 should witness a strong sales growth.

– Cadila has a two-fold focus on exports, wherein it is targeting developed as well as emerging markets, which contributed around 53% to its FY2013 top-line. The company has developed a formidable presence in the developed markets of US, Europe (France and Spain) and Japan. In the US, the company achieved a critical scale of Rs.1,500cr on the sales front in FY2013. The company’s exports growth to the US market will be subdued in FY2014, on back of lack of new products along with price erosion among its key products and with just 5-8 approvals. However, in FY2015, the region is expected to post a growth of 20% on back of 20 approvals.

– We expect Cadila’s net sales to post a 16.6% CAGR to Rs.8,367cr and EPS to report an 18.1% CAGR to Rs.44.7 over FY2013-15E. While the growth momentum has slowed down, the stock has corrected significantly, making it attractive.

United Phosporus (CMP: Rs.154/ TP: Rs.225/ Upside: 46%)

United Phosphorus (UPL) figures among the top five generic agrichemical players in the world, with a presence across major markets such as the US, EU, Latin
America and India.

– The global agrichem industry, valued at ~US$45bn (CY2012E), is dominated by the top six innovators, viz Bayer, Syngenta, Monsanto, BASF, DuPont and Dow, which enjoy a large market share of the patented (28%) and off-patent (32%) market, while in generic, the top-5 companies occupy 61% of market share (of the 40% off-patent market). In fact, from an overall market perspective, the top 11 players control 84% of the total agrichemical market. This is due to high entry barriers by way of investments required for product registration and to set up manufacturing facilities. Thus, one-third of the total pie worth ~US$15bn, which is controlled by the top six innovators through proprietary off-patent products, provides a high-growth opportunity for larger integrated generic players such as UPL.

Moreover, as we go forward, around US$7bn worth of products would be going off-patent in the next 2-3 years, augmenting the overall growth opportunity for generic players like UPL.

– We estimate UPL to post a 12.0% and 15.0% CAGR in sales and PAT, respectively, over FY2013-15. The stock is trading at an attractive valuation of 6.8x FY2015E EPS.

Aurobindo Pharma (CMP: Rs.216/ TP: Rs.271/ Upside:25%)

– Aurobindo Pharma (APL) has increased its filing (ANDAs and dossiers) dramatically from 313 in FY2008 to 1,647 in FY2013, as it proposes to scale up from SSP and Cephs to NPNC products. APL has entered into long-term supply agreements with Pfizer (March 2009) and AstraZeneca (September 2010), which provide significant revenue visibility going ahead. APL is also in discussion with other MNCs for more supply agreements.

– APL’s business, excluding the supply agreements, would primarily be driven by the US and ARV segments on the formulation front.

– The company has been an aggressive filer in the US market, with 281 ANDAs filed until 1QFY2014. Amongst peers, APL has emerged as one of the top ANDA filers. APL expects to file 15-20 ANDAs every year going forward.

– We estimate net sales to log a 14.9% CAGR to Rs.7,637cr over FY2013-15E on the back of supply agreements in the US and ARV formulation contracts. Even after factoring in lower profitability going forward, the stock trades at an attractive valuation.

Crompton Greaves (CMP: Rs.98/ TP: Rs.115/ Upside:17%)

Crompton Greaves (CG) is among the leading players in the power transmission & distribution equipment business. It is a globally diversified company, deriving more than 50% of its order backlog from international operations as of FY2013.

– The under-performance of the stock in the last few years can be attributed to intense competition in the domestic market, slowdown in European market and restructuring of the Belgium plant which led to execution delays and margin contraction. However, we are of the opinion that CG’s margins have bottomed out in FY2013 and expect operating margin to gradually improve over the next 12 months, partly due to expected recovery of margin in overseas business (aided by cost savings on account of restructuring of Belgium operations and transfer of orders to Hungary plant).

– Given the attractive valuations (stock trading at 0.5x FY2015E EV/Sales compared to its trading range of 0.5x to 1.5x and median of 0.9x), we maintain our positive stance on the company. We have assigned an EV/Sales multiple of 0.7x to arrive at a target price of `115, implying an upside of 17% from the current levels.