Tuesday, October 25, 2011

5 Diwali mahurat picks from ICICIdirect

The global economy is once again passing through turbulent weather in terms of the growth trajectory. Soft economic data points coming out of western economies (weak PMI readings breaching the critical level of 50 globally, discouraging consumer confidence retesting the 2008 lows and stressed housing sector) coupled with the perplexing sovereign debt crisis in the peripheral Euro zone has once again raised the odds of a double dip recession in the troubled western economies. Hence, the downgrade of US debt (July 2011) by the rating agencies was merely a catalyst for the ruthless sell off that risky asset prices have witnessed post the downgrade, further adding to the odds of a double dip. The impact MSCI Developed Markets were down by 15% from July-September 2011 coupled with huge volatility.

``We expect more of a time based correction and expect the markets to oscillate in a broad trading range till the time reasonable clarity emerges from the various local and global macro headwinds. In case of a negative outlier event, the markets may fall further in the wake of panic selling. However, we do not expect the markets to sustain at such levels. In such an environment, timing the markets would become extremely difficult. We believe any sharp cuts should be bought into from a three to five years perspective. Buying is recommended in large caps and selective quality midcaps. Hence, for Mahurat 2011, we would stick to high quality large caps and midcaps such as Bharti Airtel, Biocon, HPCL, HDFC Bank and ITC,`` said the broking firm ICICIdirect.

Following is the investment rationale on 5 Diwali Mahurat picks from ICICIdirect:

Bharti Airtel:

> The industry scenario has improved over the past few quarters with the ongoing CBI enquiry into the 2G scam. The recent price hike by incumbents signifies reducing competitive intensity and returning pricing power. Airtel is expected to post an improvement in ARPMs in the coming quarters on the back of the recent price hike and traction in 3G services. With the withdrawal of unsustainable customer acquisition offers from the market and reducing dual SIM phenomena, margins in the domestic market are expected to improve, going ahead

> Africa operations have shown continual improvement in key metrics. EBITDA margins have expanded by 276 bps in the past three quarters. With outsourcing agreement in place, the benefit in terms of further margin expansion is expected to kick in from FY13 onwards.

> DoT expects NTP 2011 to come into effect by Dec. 31, 2011. Most of the negatives related to one-time spectrum fees seem to be already priced in. Spectrum trading, pooling and sharing would help larger players like Bharti Airtel. At the CMP of Rs 385, the stock is trading at 16.1x FY13EPS against its long-term average of 19.3x. Also, with most of the capex already incurred, return ratios would also improve, going ahead


> The out-licensing deal with Pfizer to launch four human insulin products in emerging and advanced markets post patent expiry augurs well for Biocon. It has started supplying Fidaxomicin (antiinfective) API to US based Optimer`s patented product Dificid for which the company is a sole supplier. The recent launch of reusable pen in the domestic market is a promising move for the company. Divestment in Axicorp is expected to boost EBITDA margins.

> The R&D services business is witnessing a consistent improvement both in terms of revenues and profitability over the last three quarters. The key trigger will be the unlocking of R&D business through IPO.

> We expect sales and profits (after adjusting Axicorp numbers in FY11) to grow by 22% and 20%, respectively, between FY11 and FY13E. Biocon is currently trading at 18x FY12E EPS of Rs 19.3 and 15x FY13E EPS of Rs 24.


> We expect healthy business growth of 20% CAGR over FY11-13E with a well diversified loan book (50:50 between retail and wholesale) and strong liability franchise (CASA ratio of 48%)

> Margins will be protected at over 4% (one of the best across industry). Healthy asset quality will lead to lower credit costs The bank commands a premium multiple of 3.8x FY13E ABV because of consistent track record of 30% YoY growth in PAT, higher margins and healthy asset quality. We expect PAT growth of 30% CAGR over FY11-13E and RoA of 1.9% and RoE of 21% by FY13E.


> Hindustan Petroleum Corporation (HPCL), a Fortune 500 company, is engaged in refining and marketing of petroleum products in India. It operates two refineries with 16.3 mmtpa capacity in FY11 and has 18% share in marketing of petroleum products. HPCL, in a joint venture with Mittal Energy, is setting up a 9 mmtpa refinery at Bhatinda, which would be operational in FY12E

> We believe capacity expansion, increase in retail sales volume and higher refining margins would create value for investors, going forward. Also, government policy and reforms in the pricing of sensitive petroleum products could reduce net underrecoveries of the company. We have assumed Brent crude oil prices of USD 100 per barrel and net under-recoveries of 8.8% for OMCs in FY13E.

> HPCL is trading at 7.5x FY12E and 6.3x FY13E EPS of Rs 46.1 and Rs 55.2. HPCL`s book value of Rs 439 in FY13E also offers good risk reward ratio to long-term investors. Sustained higher crude oil prices and adverse government policy remain risks to our recommendation.


> With a leading position in its various businesses, we expect ITC to sustain its gross revenue growth at 12.6% (CAGR from FY11-14E), driven by healthy growth in FMCG (18.6%), agri business (16.3%) and paperboards (13.7%) with a moderate growth in cigarette (10.1%) and hotel (8.8%) revenues.

> ITC is the market leader in the Indian cigarettes industry and enjoys 75% volume share (FY11). Its cigarette revenues (gross) have grown by 1.5x, from Rs 1,28,337 million in FY07 to Rs 1,98,276 million in FY11, largely driven by price growth of 11.3% with volume growth remaining flat. Being a dominant player, passing on the impact of higher taxes through price increases has not been tough for ITC. Therefore, we expect revenues from cigarettes to continue growing at a CAGR of 10.1% (FY11-14E) driven by 5.3% price growth and a lower volume growth of 4.5%

> Comparing with global peers like British American tobacco (BAT), Philip Morris and Japan Tobacco, ITC should trade at a premium given the opportunity size of the Indian market and expected higher earning growth. Simultaneously, a substantial reduction in FMCG losses and visibility of break-even would result in the FMCG segment commanding a higher valuation than the historic average. We remain positive on the stock from a 9 to 12 months perspective. 

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