Top Stock Portfolio Recommendations By Emkay

 
Emkay Global Financial Services Ltd has released its list of Top Stock Recommendations. Emkay has identified stocks on which they are overweight and stocks on which they are underweight. The Investment rationale for each stock has been given.

Bajaj Auto

14x FY2013E CMP : Rs1,600 RECO : ACCUMULATE TP : Rs1,950

Investment Rationale

§ Focus on demand pull to ensure market share gains along with strong profitability. 1QFY12 market share of ~25% is still below its previous peak of ~32% in FY07

§ Expect strong volume growth of ~15.5% CAGR FY11-13E driven by launch of variants within its umbrella brands (Discover, Pulsar), introduction of Boxer in domestic market and continued traction in exports

§ Factoring in DEPB withdrawal in our estimates. Extension of the scheme to result in EPS upgrade of ~7%

Irrespective of DEPB, expect exports to remain a key growth driver

Valuations

§ We have valued the stock at a target PER of 17x our FY13 estimates.

§ Lowered our rating to ACCUMULATE from BUY on valuations. Here on there is limited scope of valuation
rerating.

§ Stock performance will be driven by earnings

§ Key trigger for the stock would be strong monthly volumes and quarterly earning surprises

Cadila Healthcare

16.1x FY2013E CMP : Rs823 RECO : ACCUMULATE TP : Rs1021

Investment Rationale

§ Cadlila Healthcare emerges our top pick given its strong growth prospects (>20% revenue & earnings CAGR over FY11-13E), strong domestic foothold, wide geographical reach and foray into difficult to manufacture generics such as transdermal patches, bio-similar and vaccines.

§ US (contributes 21%) likely to witness 8-10 ANDA launches in FY12E and FY13E each. Currently 67 ANDAs have been approved and 43 been launched. Expect FY11-13E revenue CAGR of 22%

§ Hospira JV currently has launched 3 products. Cadila has recently started the supplies of docetaxel to Hospira (Q4’11 sales were Rs1.1bn). 3 more products set to get introduced in US and 6 in Europe over the next 18 months. Hospira ramp-up to allay concerns around Nycomed JV

§ Bayer JV is expected to commence the operations from H2FY12, with a focus on women’s healthcare, metabolic disorders, diagnostic imaging, CVS, oncology and anti diabetic

§ Current strategic alliance with Abbott for 24 products (for emerging markets), can be extended by another 40 products

§ Expect international business to grow at a CAGR of 22% over FY11-13E

§ Domestic formulations (contributes 38%) continues to grow above industry rates –cash cow for the company.
§ The company is aiming to attain revenue of US$3bn by 2016. Healthy return ratios (RoE > 35%)

Valuations

§ We expect earnings to grow at 25% CAGR over FY11-13E to Rs10.5bn.

§ At CMP, the stock is trading at 21x/ 16x, FY12E/ FY13E EPS of Rs39.9/ Rs51.1 respectively.

ICICI Bank

1.6x FY2013 ABV CMP : Rs852 RECO : ACCUMULATE TP : Rs1,200

Investment Rationale

§ NIMs may improve in H2FY12 led by favourable asset liability repricing: The bank has increased its base rate by 200bps over last two quarters; however yield on advances has increased by just 70bps during the period.

As all advances get fully reprised by December 2011 only, we may see margin improvement from Q3FY12 onwards.

§ Slippage rate to remain stable @ 1.2%: The bank expect it’s slippage rate to stablise at FY11 levels of 1.2%.

The bank draws comfort from the fact that it has only ~5% of its exposure to SME and less than 3% exposure to unsecured retail portfolio, which normally throw concern in a rising rate scenario. Moreover its infra exposure is also relatively lower at 10%, as against 14-17% for other peers. Of the total infra exposure, power exposure is 4.5% with very small exposure to SEB’s.

§ Limited exposure to troubled nations: Over the last three years the bank has reduced its banks/ Financial institutions bonds exposure significantly from USD2.2bn to USD600mn only. Even of this exposure they have a
very miniscule exposure towards UK, Germany, and France and no exposure to PIIGS countries. Moreover its non India linked credit derivatives exposure also stands at just USD600mn.

§ Valuations and view: Valuations at 1.7x/1.6x FY12E/FY13E standalone ABV does not look unreasonable with improving operating matrix. Maintain ACCUMULATE rating with TP of Rs1200

LIC Housing Finance

1.5x FY2013 ABV CMP : Rs204 RECO : BUY TP : Rs250

Investment Rationale

§ Earnings momentum to remain strong: LIC Housing Finance with loan portfolio of US$11bn, is the second largest housing finance company in India. Strong parentage, domain expertise and rising income levels, we expect LICHF to witness robust 28% CAGR in its loan book, 37% CAGR in NII and 20% CAGR in net profit over FY11-13E.

§ Low mortgage / GDP provides ample room for growth : Mortgage/GDP ratio in India has remained in sub- 10% levels providing room for growth. Despite steep price in real estate prices in certain pockets, with rising
income levels, evolution of nuclear family concept and flexible EMI, we expect demand for mortgage to outpace
overall system credit growth.

§ Tighter provisioning norms to act as a cover against uncertainties : Cap on LTV ratio and stringent provisioning norms towards NPA including provisions towards dual rate scheme are likely to act as a cover in uncertain environment. GNPA/NNPA at 0.67%/0.18% remain comfortable.

Valuations

§ With average RoE of 26% over FY11-13E, and valuations at 1.9x/1.5x FY12E/FY13E ABV, we believe that stock offers an attractive investment opportunity.