First of all, we must compliment Edelweiss for having a consistent track record of picking winning stocks. In their report of June 2013, Edelweiss recommended a buy of stocks like Alembic Pharma, Amara Raja Batteries, Astral Poly Technik, Bajaj Finance, etc. At that time, these stocks were available at throwaway valuations. Today, several of these stocks are multi-baggers and are still looking good for more gains for several years to come.
Even their recent “Mid-cap Marvel” stocks have given handsome returns. I reported in October 2014 that the selection of seven top-quality mid-cap stocks had given an annualized return of 114%. These stocks are fundamentally strong and will continue to grow from strength to strength.
Now, let’s focus on Edelweiss’ top six stock picks for 2015:
(i) Bharat Forge:
This is the ideal auto ancillary/ engineering stock to take advantage of the boom in the auto Industry/ economy. The stock was recommended by Motilal Oswal in its Initiating Coverage report of June 2014 when the stock was at Rs. 579. At the CMP of Rs. 889, there is already a gain of 50% in just six months.
IIFL has also recommended Bharat Forge in it’s “Double your stake, quadruple your money” report of 30th June 2014 with a target price of Rs. 1,250. Even the followers of that advice have made a chunk of money.
Edelweiss has now recommended the stock on the basis that “With low capex spends expected over the next 2-years, significant reduction in debt and improvement in machining mix (higher margins), we expect BFL earnings to grow by 42% CAGR over FY14-FY16E. Improving demand in Europe, subsidiary utilization level will improve and operating leverage benefit will kick in further.”
(ii) Repco Home Finance:
Repco Home Finance needs no introduction to us given that we have been closely following the stock since Basant Maheshwari declared it to be one of his favourite stocks. He has also put the stock in his Model Portfolio.
Vinay Khattar of Edelweiss earlier recommended the stock as a “structural buy” and as one that must form part of our core portfolio.
Edelweiss now points out that during the last five years, Repco’s loan book has grown at a CAGR of 38% from INR 655 cr. in FY08 to INR 4,661 cr. in FY14 while its PAT has also grown by 38% CAGR from INR 15.6 cr. to INR 110 cr. in FY14.
Edelweiss opines that Repco will be able to sustain growth in excess of 20% and RoAE in excess of 20% in coming years. It adds that the company is well capitalized (24.95% capital adequacy ratio) and that the stock is currently trading at attractive valuation of 3.6 FY16E book value.
(iii) Cholamandalam Investment & Finance:
I wrote about Cholamandalam where I pointed out that it is the ideal low volatility, slow-n-steady stock where you can park large sums of money, without having to nervously look over your shoulder for hidden dangers.
Cholamandalam boasts of having won the confidence of a number of super-savvy investors like Akash Prakash of Amansa Capital, Brahmal Vasudevan of Creardor Capital, Renuka Ramnath of Multiples Equity etc, each of which have entrusted large sums of money to the stock.
Edelweiss points out that Cholamandalam Investment is one of the leading vehicle finance companies with market share of 9.8% and 11.8% in Commercial Vehicles (CV) and Light Commercial Vehicle (LCV), respectively.
Cholamandalam also has a 5 year PAT CAGR of 40%. Edelweiss opines that it will be able to sustain growth in excess of 20% and RoAE of ~18% in the coming years on the back of strong growth. It is also pointed out that Cholamandalam is currently trading at attractive valuation of 2.1x FY16E book value.
(iv) to (vi): Three other stocks that have been short-listed by Edelweiss are Natco Pharma, KNR Construction and Motherson Sumi.
Natco Pharma and KNR Construction are known to us because they were earlier recommended by PN Vijay and have delivered huge returns. Motherson Sumi also needs no introduction given its stature as a powerhouse stock that has delivered mind-boggling returns to shareholders over the past several years.
So, one can confidently say that Edelweiss has got its selection of stocks correct once again.