Following are 11 top value picks from the broking firm Sharekhan:
BHEL
CMP: 2,085
Target Price: 2,781
Upside %: 33.4
Remarks:
>Bharat Heavy Electricals (BHEL) is a premier power generation equipment manufacturer and a leading EPC company. It has emerged as the prime beneficiary of the fourfold increase in the investments in the power sector in India.
>BHEL currently has orders worth Rs 1,580 billion on hand, which provides revenue coverage for the next three to four years. We believe the order inflow momentum would remain strong for the company. However, the key challenge for BHEL would be the timely execution of projects.
>The company is confident of bagging orders for at least five boilers and four turbines as far as the bulk tendering by National Thermal Power Corporation (NTPC) is concerned. The order finalisation for the same is expected in Q4FY2011.
>The company has already expanded its capacity to 15GW in FY2011. Also, the project to expand the capacity to 20GW by FY2012 is being executed on a fast track. In our view, the stabilisation of the new capacity coupled with the de-bottlenecking of the supply chain would aid order execution and sustain robust growth in BHEL’s revenues in the coming years. We estimate the profits to grow at a compounded annual growth rate (CAGR) of 21.8% over FY2010-13.
>At the current market price, the stock is trading at 15x its FY2012E earnings. The near-term positive trigger in the stock is the order inflow in the power equipment business. We have, therefore, included BHEL amongst our Top Picks.
GRASIM INDUSTRIES
CMP: 2,300
Target Price: 2,500
Upside %: 8.7
Remarks:
>Grasim Industries is well placed to capture the growing opportunity in its core division, VSF, in terms of both volume and realisation. In addition, the performance of its cement business (i.e., its key subsidiary Ultra-Tech Cement) has shown some signs of improvement in the volume growth on a sequential basis. Further, the cement prices across the country remain strong, the benefits of which will be reflected in the coming quarter.
>Due to a shortage of cotton and an improved demand environment, the performance of VSF division of the company continues to shine. The VSF realisation has increased by Rs 5-7 per kg after Q3FY2011 on account of a pick-up in the global demand. Hence in Q4FY2011 also the realisation is expected to remain healthy.
>The cement capacity of the company at a consolidated level is the highest among the other domestic players at 52.75 MTPA. Hence, the company will benefit the most from a likely pick-up in the demand through government infrastructure projects in the coming couple of months.
>On the other hand, the company is planning to expand its VSF capacity by another 120,000 tonne by FY2013 and its cement capacity by another 9.2MTPA by FY2014. We believe the capacity addition will provide volume growth in the longer run.
>We believe the company will benefit due to its strong balance sheet as most of its capex will be met through internal accruals.
>However, in light of the upcoming capacity and the stabilisation of the newly added capacity, the cement prices are expected to come under pressure. Moreover, cost pressure in terms of increased coal prices and higher freight cost remains a key concern.
>At the current market price of Rs 2,300 the stock trades at a PE of 10.4x and 8.8x its FY2011 and FY2012 earnings respectively estimates on a consolidated basis.
INDIAN HOTELS
CMP: 83
Target Price: 106
Upside %: 28.3
Remarks:
>An improvement in the macro environment and the consequential improvement in foreign tourist arrivals and domestic corporate travel have created a favourable business environment for a rebound in the hotel Industry. We believe Indian Hotels, being the largest hotelier in the country with its presence in India and the key destinations across the world, is on track to capitalise on the growth opportunities in the coming years.
>Hotel occupancies have shown a remarkable improvement and this is likely to be followed by an improvement in the average room rate (ARR). Thus, we foresee the company witnessing a substantial improvement in its profitability in the near to medium term. The profit growth will also be aided by new property additions.
>A turnaround in the international properties and an improvement in the ARR would be the key mentionable in the coming quarters.
>We believe a rampant growth in new properties would act as one of the key risks to the performance of the hotel industry in general and Indian Hotels in particular over the coming years. Also, any failure/delay in the turnaround of the international properties would pose a risk to the performance of the company.
>At the current market price the stock trades at 25.8x its FY2012E earnings per share (EPS) of R3.2. We maintain our Hold recommendation on the stock.
ISMT
CMP: 51
Target Price: 69
Upside %: 35
Remarks:
>ISMT, an integrated seamless tube manufacturer in India, is set to benefit from the improvement in demand from its traditional automobile sector. Its enhanced product offerings would help to increase its penetration in the growing power and E&P sectors.
>Since its tube production capacity has expanded to 475,000 tonne per annum, its sales volume is expected to grow at a CAGR of 27.8% over FY2010-12. The new premium finishing mill (PQF) technology will help increase the addressable market and thus the market share (currently 30%).
>A favourable sales mix, savings from power cost (due to the start of the 40MW power plant in Q1FY2012) and a reduced production cost are likely to help sustain the margins at 17-18% despite competition.
>Any delay in the commencement of the power plant and a slower export growth especially in Europe and over capacity in China are the key concerns for the company.
>Volume growth and sustainable margins will help the earnings to grow at a CAGR of 44% over FY2010-12. At the current market price, the stock is trading at 4.8x FY2012E EPS. We maintain our Buy recommendation on the stock.
ITC
CMP: 172
Target Price: 211
Upside %: 22.4
Remarks:
>Its cigarette business, which dominates the category, continues to be a cash cow for ITC. The company endeavours to make a mark in the Indian FMCG market and with successful brands such as Bingo, Sunfeast and Aashirwaad, ITC is already in the reckoning among the best in the industry. With the new portfolio of personal care products gaining market share, its FMCG business promises to compete with the likes of Hindustan Unilever and Procter & Gamble.
>After a sharp increase of 16% in Union Budget FY2010-11, the Government has spared cigarettes from an excise duty hike in the FY2012 budget. We expect ITC’s cigarette sales volume to grow at mid single digits in FY2012.
>Other businesses, such as hotel, Agri, non-cigarette FMCG business and paper, paperboard and packaging, are showing a strong up-move and will provide a cushion to the overall profit in FY2011.
>An increase in taxation and the Government’s intention to curb the consumption of tobacco products remain the key risks to ITC’s cigarette business over the longer term.
>We expect ITC’s bottom line to grow at a CAGR of about 20% over FY2010-13. At the current market price, the stock trades at 22.1x its FY2012E earnings. We maintain our Buy recommendation on the stock.
ITNL
CMP: 199
Target Price: 395
Upside %: 99
Remarks:
>ITNL is India’s largest player in the BOT road segment with 10,269 lane km in various stages of development, construction or operation. It has a pan-India presence and a diverse project portfolio consisting of 23 road projects, bus transportation and a metro rail project.
>It is well equipped to capitalise on the huge and growing opportunity in the road infrastructure sector due to its established track record in operating BOT road projects, its execution capabilities and the strong support from IL&FS.
>It has a fair mix of annuity and toll projects in its portfolio which provides revenue comfort. Further, it is present across the value chain except the civil construction services which it out-sources to the local contractors. This helps the company to handle a large number of projects at a time and diversify geographically, reducing the risk of concentration.
>Thus, we expect the sales and the earnings to grow at a CAGR of 45.8% and 25.5% respectively over FY2010-12.
>At the current market price, the stock is trading at 10x and 7.1x its FY2011 and FY2012 estimated earnings respectively. We maintain our Buy recommendation with a price target of Rs 395.
LUPIN
CMP: 397
Target Price: 520
Upside %: 30.9
Remarks:
>Global dominance in certain products, focus on niche, less-commoditised products, a geographically diversified presence in markets such as Japan and a presence in the US branded segment distinguish Lupin among the mid-cap players in the generic space.
>In FY2012, Lupin expects to launch 12 products with at least four in niche therapies, like oral contraceptives in the USA. Along with a strong presence in the branded space through Suprax and Aerochamber, Antara has enabled Lupin’s US business to grow at a staggering CAGR of 65% over FY2006-10. With the expansion in the branded portfolio through the anticipated launch of AllerNaze we expect the US business to grow at a CAGR of 20% over FY2011-13. We expect the branded business to contribute about 35% of the total US sales over the next two years.
>With the strong core business and aggressive abbreviated new drug application (ANDA) filings (cumulative 132 ANDA filings till date), a differentiated strategy augers well for Lupin. Niche product launches like generic Geodon, Fortamet ER, Cipro and OCs would drive upwards performance of the stock.
>Potential delays in the US Food and Drug Administration approval for oral contraceptives and its other niche filings, and ramp-up delays in Antara and AllerNaze (expected launch in FY2012) are the key challenges for Lupin.
>We expect Lupin to report earnings CAGR of 19% over FY2011-13 with strong margins at the operating level. At 20.8x FY2011E and 17.2x FY2012E earnings, Lupin offers limited downside from the current levels. We maintain our Buy recommendation on the stock with a price target of Rs 520.
MAX INDIA
CMP: 148
Target Price: 234
Upside %: 58.1
Remarks:
>Its life insurance business, ie Max New York Life (MNYL), accounts for 85% of the revenues and is growing at a steady pace. MNYL annual premium equivalent (APE) has grown 7.8% year till date (YTD) compared to the 12.6% decline in the industry. Further, MNYL market share (among the private players) has expanded to 6.7% in January 2011 from 4.0% in the corresponding month of the previous year. Given the substantial growth in premiums and better operating metrics, we expect a strong growth in revenues going forward.
>In order to contain cost overruns, the company has entered into a long-term tie-up with Axis Bank for distribution of its products. As a result, the company has rationalised its agency force and branch network, leading to a sharp reduction in its operating costs. We expect MYNL distribution network to expand in line with Axis Bank’s branch expansion plans. This will bring down the operating expenses-to-sales ratio (currently 30%) and contribute significantly to the bottom line.
>MNYL is now focusing on traditional policies having a longer tenure (ten years and more). While the other companies are focusing on mass products, MNYL is targeting affluent customers, mainly in the top 100-120 cities in India that contribute 80-85% of the revenues. We believe this will lead to a further improvement in the persistency ratio (currently 81%) and increase the operating efficiency.
>Max India is aggressively expanding its healthcare business and plans to add 1,000 beds in FY2011. The healthcare business has turned positive at the earnings before interest, tax, depreciation and amortisation (EBITDA) level. We expect it to turn profitable post-expansion. Max Specialty Films (packaging films) continues to grow at a robust pace as it reported EBITDA and profit before tax (PBT) of Rs 39 crore and Rs 260 million respectively in M9FY2011. However, an increase in crude prices will lead to a decline in the margins though not substantially as the price gets negotiated at the beginning of every year.
>Max India is among the best-managed companies in the life insurance space which is evident from its balanced product mix, high persistency ratio, higher average case per agent etc. We remain convinced about the long-term growth prospects of the life insurance industry in spite of the regulatory concerns plaguing insurance sales in the near term. The company is already done with capital infusion in the life insurance business while the treasury corpus of Rs 5.8 billion and inflows from the life insurance business will take care of the funding requirements of the health insurance and healthcare segments. We maintain Buy with our sum-of-the-parts (SOTP) based price target of Rs 234.
POLARIS SOFTWARE
CMP: 185
Target Price: 234
Upside %: 26.6
Remarks:
>For the Indian IT services industry, the strong revival in demand has been led by an increase in the IT spending by customers in the BFSI vertical. Polaris Software Lab (Polaris) with its strong presence in the BFSI space and offerings in both the service and solution segments is well poised to capitalise on the incremental spending from the sector.
>Intellect, the flagship banking product of the company, would be a game changer on a longer-term perspective. Over the years, Intellect has been growing steadily with new client additions and increasing geographical reach. The expected increase in the revenue from the product business augurs well as it would help improve the margin dynamics as well as the overall profitability of the company.
>Polaris has carried out several mergers and acquisitions. It has filled the gap in its product offerings, got new clients and entered newer geographies, thereby creating a strong presence in the BFSI space. With a war chest of Rs 5 billion we believe that the inorganic initiatives will continue to form an integral part of Polaris growth strategy.
>Polaris is one of the few integrated mid-cap IT companies having a strong foothold in the BFSI vertical and offerings in both the service and solution segments. We expect a compounded annual growth of 22% in its earnings over FY2010-13. At the current market price the stock trades at 9.2x FY2011E and 8.3x FY2012E earnings. Ex-cash (end Q3FY2011), the stock trades at 6.7x FY2011E and 6x FY2012E earnings.
SELAN EXPLORATION
CMP: 324
Target Price: 507
Upside %: 56.6
Remarks:
>Selan Exploration Technology (Selan) is set to benefit from its huge capital investment plans of around Rs 1 billion (Rs 400-500 billion for seismic survey in FY2011 and another Rs 400-500 million in FY2012 for drilling activities in the Brakrol and Indorora fields). This will enable Selan to monetise its oil assets and could substantially increase its hydrocarbon reserve base. We highlight that the company’s healthy cash position of Rs 79 crore as on March 31, 2010 and its internal accruals in FY2011 and FY2012 are sufficient to fund its aggressive capex plans.
>We believe that the company would witness a substantial jump in its crude oil production volume after the commercialisation of wells in its two important oilfields: Brakrol and Indorora.
>Any delay in the company’s capex could significantly affect the company’s drilling activities and delay the development of the two important fields.
>The company’s reasonably good cash flow from operating activities of Rs 431 million despite lower profits in FY2010, its low debt-to-equity ratio of 0.1x in FY2010 and strong long-term growth prospects support the re-rating of the stock. We maintain our Buy recommendation on the stock with a price target of Rs 507 (valued at EV/2P oil reserves of USD 2.1 per barrel on the reserves of 73.6 million barrels).
YES BANK
CMP: 275
Target Price: 415
Upside %: 50.7
Remarks:
>Yes Bank has grown its advances at a CAGR of 74% over FY2006-10. The bank’s management expects to sustain the growth momentum with a targeted growth of 35% CAGR in advances over FY2011-15 led by the corporate and SME segments. In our estimates we have factored in a loan growth of 45% CAGR for the next three-year period, FY2010-13.
>The net interest margin (NIM) is expected to decline in the rising interest rate scenario, though not substantially due to the strong re-pricing power on the asset side and favourable asset liability duration. We believe the increase in the deposit base led by robust branch expansion and higher advances growth in the relatively high-yielding segments like retail and SME would support the NIM in the long term. However, keeping in mind the bank’s dependence on bulk deposits, we have factored in a 20-basis-point decline in its NIM in FY2012.
>Although asset quality risks have emerged from the microfinance, telecommunications (telecom) and real estate sectors, yet we do not expect any significant deterioration in the Bank’s asset quality. Yes Bank’s total exposure to microfinance institutions (MFIs) is close to 1% of the loan book (i.e., Rs 3 billion with its exposure to Andhra Pradesh-based MFIs at only Rs 750 million). In case of advances to the telecom operators (6.2% of its total loans), the bulk of the exposure (close to 95%) is spread among the large and established players. With gross NPA of 0.22% and net NPA of Rs 0.06%, Yes Bank’s asset quality remains among the best in the industry. The bank’s restructured assets are merely 0.23% of its loans (Rs 690 million), much lower than that of its peers. We expect the bank to have gross NPA of around 0.5% in FY2011 and that of 0.6% in FY2012.
>Yes Bank’s return ratios have consistently remained at higher levels (18-20%) despite several rounds of equity infusion. We have considered a 10% equity dilution in FY2012; despite that the bank will maintain its RoEs and RoAs at about 20% and 1.3% over the next two years led by a 40% CAGR in its earnings.
>The bank is aggressively increasing its branch network (has a target of 250 branches by Q1FY2012) to attain a critical scale that would enable it to considerably improve its current account - saving account in the coming years. However, in the near term, aggressive expansion would increase the cost-income ratio.
>In our view, the strong growth in the earnings, consistent return ratios and stable asset quality should contribute to better valuations. Currently, the stock is trading at attractive valuations of 1.8x FY2012 and 1.3x FY2013 BV. We recommend Buy on Yes Bank with a price target of Rs 415.
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