Nifty will be at 9500 by Diwali – every dip is a buying opportunity:
Based on pure fundamentals, by around Diwali next year, the Nifty could be somewhere around 9,500 plus or minus 5 percent from where we are currently. We are expecting earnings to pick up towards the backend of FY16. There is a definite case for the interest rates to be coming down and a lot of the uncertainties that are plaguing global markets currently — whether it is oil or otherwise, we are by and large expecting a stable phenomenon in the second half of FY16 and a lot more clarity might emerge with respect to US interest rates as well. So all things equal given the fact that iron ore, coking coal, crude prices are all in our favour. They will start showing up with a lag of one-two quarters, you might find a bit of an inventory loss in first one-two quarters, Q4 of this year and Q1 of the next but momentum should pick up in the second half of the next financial year. So by and large, every dip that you possibly get in this market, should be a good entry point where it is today as well could be looked at entering from a longer-term horizon.
SBI – 25 to 30% upside expected in the short-term due to increase in credit off-take and improvement in asset quality:
We had a chance to interact with the SBI management very recently. We are very positive on the stock. Our analysts believes that the stock will still give you 25-30 percent from where it currently is.
Some of the takeaways we have from the management was they were expecting credit offtake to pick up quite substantially in FY16 not so much for the backend of this year. They are expecting slippages to ESOP substantially from here. They are expecting steady net interest margins from here as well and they didn’t give us any indication of capital raising at least for the rest two-three quarters. These are sort of things that the street wants to here from the largest public sector bank in the country.
Specifically, on pressure points, we found out that there were some accounts, obviously no bank will name those individual accounts. But there too they said that the pressure has started easing. So we value the bank at about 1.85 times price to adjusted book value, which is about 15 percent premium to what it has been trading at in its recent history and if we are having a slightly longer-term horizon, this is probably still the best positioned PSU bank to be playing.
If you want to play even into FY17 probably the upsides could be more but I think a lot of the concerns that we have on asset quality and slippages, even on recoveries, I think a lot of them are sort of getting addressed. So the specific question on insurance could definitely be an upside trigger in terms of value unlocking but I think SBI, even standalone whatever concerns we had on the business as we enter the meeting, we sort of came out readdressing a lot of them.
V-Mart Retail – Great stock with huge upside potential:
V-Mart Retail is a very interesting play, it has about 110 outlets. It is not a metro and tier-I player. If I am not mistaken, close to 65-70 percent of them are between Uttar Pradesh and Bihar. If you take a look at the GDP of Uttar Pradesh and Bihar over the last two years and compare it with the national average, it is far in excess for both of these and that has reflected in the V-Mart numbers over the last two years as well.
This is a company that will probably open 25 stores over the next three years and they will generate about Rs 90 crore worth of operating cash flow, which will be used to fund this. It operates in margins of about 9-9.5 times which is far more than Trend, Shopper’s Stop and Pantaloon, but part of the reason is because they operate in an environment where the lease rentals would be lower and salary cost will be lower.
For a company that will be probably giving you this kind of cash flows is trading at about 15-20 percent discount to any other larger guys. 30-40 percent revenue and EPS growth between here and FY17, we value the stock at about Rs 790. So it is probably in the retail space, it doesn’t have an FII window yet because 24 percent of it has been taken up by one fund itself, which is the FII limit that you have but it is a great stock for domestics if you want to play retail.
Strides Arcolab – High-conviction mid-cap Pharma stock with huge upside potential:
If you look at Strides Arcolab standalone, it is not a vertically integrated play. Shasun coming in gives it a strong presence in the United States. It is a virtual debt free company and even with Shasun coming in at USD 100 million worth of debt, the debt to equity does not go more than 0.5 times.
It is a company where we are expecting nearly 30-35 percent earnings CAGR over the next two years that is between FY15 and FY17. We have always discussed companies where we wanting the return profile of companies to grow up quite substantially so both the return on equity and the return on capital employed, we are expecting it to go up by 500-700 bps between FY15 to FY17 and the way they are growing their African business, my analyst expects the Africa business of Strides to grow in excess of 50 percent in the next two years.
With Shasun coming in, the monetisable aspects of US pipeline goes up quite substantially as well. So from current price targets wise we are 30 percent higher than the current market price and expecting about 50 percent EPS CAGR between now and FY17. So that is one in addition to other names like Natco Pharma and Aurobindo, this will probably be one of those higher conviction mid-cap pharmaceutical ideas we would have right now.