The Business Standard has spoken to leading research houses such as Morgan Stanley, Macquarie, Ambit, Credit Suisse, IIFL, Angel Broking and Religare and collated a list of top ten high quality stocks for investment:
Gujarat Pipavav – 33% earnings CAGR and 61% free cash-flows over CY13-CY16:
The ports operator will benefit due to growth of EXIM volumes as well as business growth in the Western corridor benefitting Gujarat-based ports. As per Credit Suisse, Gujarat Pipavav would also gain from limited spare capacity (in near-term) at JNPT leading to a spill over. The strong rail linkage and upcoming capacity would also increase its importance for shipping lines. Gujarat Pipavav also remains a top pick of Deutsche Bank in the Indian Infrastructure space; the research firm estimates a CAGR of 33 per cent for earnings and 61 per cent for free cash-flows over CY13-CY16 as the company turns debt-free. Volumes are expected to grow annually at 18 per cent on timely expansion and ramp up in its bulk and liquid business.
HCL Tech – valuation at 13.8 times FY16E EPS is attractive:
It is a play on high-growth area of infra management services (34.5 per cent of revenues). Well diversified growth across its businesses is another positive. HCL’s software services business (60.5 per cent of revenues) has witnessed improving deal wins and revenue growth in recent quarters, while BPO business is turnaround. Analysts expect it to post high teen operating profit margin over the next three years. Strong deal wins, confident management commentary, improving margin profile provide confidence given the outlook shared by some peers. The company continues to invest in infrastructure, engineering and digitisation to drive growth. Valuation at 13.8 times FY16 estimated earnings is attractive vis-a-vis peers.
ICICI Bank – strong ROE + value unlocking potential:
The bank stands to gain from economic recovery and reforms push to infrastructure sector. At 12.2 per cent tier I capital adequacy ratio, the bank is well-funded for strong growth ahead and better placed to meet Basel III norms. It will have an edge over its PSU counterparts as they dilute their equity to comply with Basel III norms. Higher focus on retail loans will drive market share gains as well as lead to faster profit growth for the bank. Strong earnings growth in turn will boost return on equity (RoE) ratio by 190 basis points over FY15-17. The bank also has multiple value-unlocking avenues through listing/stake sale in its various subsidiaries (insurance, AMC, Securities, etc) at its disposal which could boost its overall valuation.
L&T – best infra stock play
Most analysts agree that Larsen and Toubro is the best play to ride the Indian growth story. Emkay Global believes that L&T’s diversified presence across infrastructure segments puts it in a sweet spot against weaker peers, allowing it to take advantage of the trend reversal. The consolidated order flow that stood at ~92,461 crore in FY13 is likely to touch ~128,908 crore in FY15 and rise further to ~1,82,053 crore by FY17, estimates Kotak Institutional Equities. Despite the slowdown and the difficulties witnessed by its hydrocarbon business, L&T has been able to maintain margins in 17-18 per cent range over FY11-14. Macquarie finds it to be a top pick among industrial segment, which is likely to outperform post fall in crude oil prices.
Maruti Suzuki – margins expected to see sharp 250 bps uptick over the next three years:
Return of the first time buyers, higher sales enquiries and lower operating costs for customers, indicate a revival in car volumes. Volumes are expected to grow annually at 17 per cent over the next three years not just from the uptick in entry level segments which the company dominates but also Maruti’s traditionally weak segments. These include mid-sized sedans (Ciaz) and new segments such sports utility vehicles, crossover, large sedans and light commercial vehicles among others. Margins are also expected to see a sharp 250 basis points uptick over the next three years. This is due to higher operating leverage, increased localisation, higher proportion of premium products and lower discounts.
Shriram Transport – AUM and ROEs will improve with macros:
Stable freight rates coupled with declining operating costs for truck operators, pick up in industrial activity and gradual rise CV sales are catalysts. This will improve cash-flows of Shriram Transport’s borrowers and rub off favourably on its asset quality, which has bottomed out. As macros improve, analysts expect RoE as well as asset (AUM) growth to pick up. The AUM annual growth is pegged at 10-15 per cent over FY14-17. However, adopting a 90-day NPA recognition norm versus 180 days prevailing (draft NBFC guidelines) could mean that NPA levels will rise gradually. Strong provision coverage though provides comfort. Going ahead, falling interest rates would lower funding costs and boost profitability.
Sobha – lower interest rate is the key trigger:
Launch of products in the lower ticket size segment is expected to improve volumes. This will help the company achieve its pre-sales target of seven million square feet by FY17-18 from current annual rate of about four million square feet. Higher ticket size projects are in Gurgoan, Kozhikode and Coimbatore and should help it diversify its product basket further from its predominantly Bangalore-based projects. Pick up in new launches is expected to improve cash flow and reduce leverage further to 0.6 times by the end of current fiscal from the current levels of 0.7 times. Lower interest rates (company and consumer) and strong demand in its core Bangalore market continue to be key triggers for the stock.
Sun Pharma – stellar track record of inorganic growth, excellent execution and cash on balance sheet:
The key trigger would be the merger of Ranbaxy Laboratories with itself which will make Sun Pharma the largest player in the Indian pharmaceutial market. In addition, product synergies across key markets, cost savings and research pipeline should aid margins and growth for the merged entity going ahead. The stock will continue to gain on twin themes of strong India growth led by fast growing chronic therapy sales and profit boost from niche product sales in the US from Taro and
Sun stables. The valuation premium (23-25 times FY16 estimates) of the company vis-a-vis peers is justified given the company’s stellar track record of inorganic growth, excellent execution and cash on balance sheet.
TVS Motor – rerating candidate:
The stock continues to get rerated on expectations of strong volume growth (25-30 per cent over FY14-17) which is double sector growth, market share gains and improvement in margins. It has lined up new launches/refreshes which should keep volume momentum going over the next year. The success of the refreshed executive segment bike Victor is key, as it will not only establish its presence in executive segment but also boost TVS’s current market share of about six per cent. Operating leverage, healthier product mix (three wheelers, premium segments) and price increases should drive a 300 basis point margin gain over the next two to three years which will help bridge part of the margin gap with peers.
UltraTech Cement – high growth:
The pan-India leader having added capacities both organically as well as inorganically will benefit from the expected surge in cement demand and realisations. Its current capacity of 60.2 MTPA will reach 70 MTPA by 2015. Cement volume growth, which has picked up to 6-7 per cent in FY15 (three per cent in FY14), is pegged at 7-8 per cent by FY16/FY17 while prices are seen rising 7-8 per cent annually, say analysts at India Infoline. Macquarie estimates profits to grow at CAGR of 26.7 per cent over next three years versus 17.7 per cent in past five years. Ambit analysts, however, say that UltraTech’s growth targeted organically or inorganically could restrict RoCE expansion even though it may enjoy superlative volume growth.
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