Best Buys for 2011 Enam

Top Picks for New Year - 2011

Enam

2011 Picks

India Coal India CMP 308 Upside 25% Target (Rs) 385

Powergrid CMP 98 Upside 29% Target (Rs) 125

Elgi Equipments CMP 92 Upside 38% Target (Rs) 127

Prism Cement CMP 52 Upside 27% Target (Rs) 66

Whirlpool CMP 282 Upside 26% Target (Rs) 355

Hitachi Home CMP 217 Upside 28% Target (Rs) 279

Redington CMP 81 Upside 22% Target (Rs) 99

Pantaloon Retail CMP 364 Upside 33% Target (Rs) 485

Sterlite Tech CMP 74 Upside 55% Target (Rs) 115

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Best Buys for 2011 Forbes India

The change in sentiment is palpable on Dalal Street. Just two months ago, stock market pundits were vying with each other to assign aggressive ‘fair value’ targets to BSE Sensex and NSE Nifty. The projected earnings ofSensex stocks in 2011-12, in the range of Rs. 1,250-1,275 were quickly discounted into the price and people started talking about profitability expectations for the following year, 2012-13. But the warning signs were all there. Companies had failed to sizzle the markets with their second quarter (July-September 2010) results and the interest rate cycle had turned upwards. Not a day passed without the news of yet another scam breaking out. For a while, the market seemed to ignore these details. Everybody seemed to take comfort from the fact that Indian markets had proved to be one of the year’s best performing in the world, attracting half of all portfolio fund flows to Asia. The rude awakening came in the form of the housing scam. “We got into the mood for a bloodbath almost immediately,” recalls the research head of a Mumbai brokerage. Suddenly, corruption and political troubles came to the fore. The market hasn’t been the same since. Investors and brokers have turned very cautious and have become ready to penalise any stock they think is low-quality. This anger was seen even in some IPOs that failed to garner enough money even while the issues of public sector companies couldn’t handle the subscriptions they received. In this unforgiving environment in which both fundamentals and sentiment are wounded, what kind of companies should an investor choose? First of all, at 23 times trailing earnings and 16 times the earnings of 2011-12, the market is fully valued. There is absolutely no margin for error. The investor has to be obsessed with buying cheap and compare individual P/E ratios with industry averages before taking a decision to buy. At the sight of any more danger or earnings disappointment, the market will flee to safety, abandoning highly priced midcaps and ‘multi-bagger’ stocks. This is not the time for adventure. Indian companies will have to contend with high interest rates in 2011. This means any company exposed to high debt or planning to borrow more will be penalised. Also, firms depending on borrowing-led consumption, like home builders and car makers, will hurt. Companies with strong cash flows will benefit. There are several companies that smartly invested in capacity expansion when cost of funds were low and are ready to start production from the new capacity just as demand picks up. These firms will be able to benefit from the economic growth without having to incur a heavy cost. Our recommendations comprise a set of 10 companies that will not only thrive in a high interest rate regime, but also find themselves the beneficiary of the strongest growth impulses in the economy. These are the themes that will drive the economy forward despite the turbulence in macro indicators. Theme: Agricultural Growth Stock: Coromandel International At a growth rate of 4-5 percent, agriculture is expected to play a crucial role in GDP growth in the coming year. Indian farmers have begun to invest handsomely in improving yields and Coromandel has positioned itself as a complete farm inputs company. While the company has a strong franchise in fertilizers, it is the new businesses such as speciality nutrients that will be the key growth driver. This new revenue stream now accounts for 10 percent of sales, but is seeing a 40 percent annual growth rate. The profit margins are about three times that of the fertilizer business at 10-12 percent. Theme: Freedom from Interest Rate Impact Stock: Bajaj Auto Unlike cars which are mostly bought through loans, three out of four two-wheelers are bought with own cash. Bajaj Auto would thus be able to bypass the interest rate impact as it seeks growth. After the exit of Honda from Hero Honda, the spotlight is on the second largest two-wheeler maker in the country. Investors who are bearish on Hero Honda could shift to Bajaj for the two-wheeler play. Under managing director Rajiv Bajaj, the company is focussing on a stronger product line and growth opportunity in emerging markets. Theme: Control of Raw Material Costs Stock: Tata Steel Neither JSW nor Steel Authority of India has the kind of raw material arrangements that Tata Steel enjoys. The company is 100 percent self-reliant and will not be affected by price increases in iron ore or coking coal. At the same time, it will fully benefit from increase in steel prices. This will lead to improved profitability. It is also the cheapest steel stock among its peers.

Theme: Demand for Industrial Consumables Stock: Savita Oil Technologies The company supplies industrial lubricants, waxes and other industrial consumables. It has been showing a scorching growth in net profit for some time now. With a good promoter, sound business model and a great dividend record, it is poised to benefit from industrial growth in the coming year. It is also attractively priced. Theme: Rural Growth Stock: Mahindra & Mahindra Financial Services The company has a strong presence in rural markets and derives about 90 percent of its revenues from there. Its business model reflects the company’s nuanced understanding of the rural segment. As the demand for tractors grows, the company will be a direct beneficiary.

Theme: Domestic Pharma Play
Stock: Torrent Pharma
Torrent has a very strong domestic focus, an advantage as the attention of global pharma majors turns towards India. The ongoing consolidation has created a lot of excitement about drug companies and this highly profitable company will be in the limelight. The company’s penetration in smaller cities and towns will be an advantage in the coming years.

Theme: Suppressed Value in Banking
Stock: Punjab National Bank
With banks accounting for almost a fourth of the market capitalisation of index stocks, it is hard to ignore the sector. But even the well-run public sector banks have not been able to get the valuation of nimble private sector competitors. Punjab National Bank has a stellar record in operational parameters, but still trades below industry average P/E. The rapid credit growth will keep the bank busy in the months ahead.

Theme: Increased Use of Natural Gas
Stock: Gujarat State Petronet
From Bharat Petroleum to Petronet LNG, some really large companies are investing serious money in the changing energy mix of India in favour of natural gas. In the coming years, hundreds of miles of pipeline will carry natural gas to nooks and corners of India. Gujarat State Petronet is a strong play on this theme, trading at surprisingly low P/E.

Theme: Retail Expansion
Stock: Colgate-Palmolive
The spread of organised retail is opening up under-explored markets to fast-moving consumer goods companies. With 3 million rural distribution outlets and a leadership position in oral care products, Colgate is at the right place at the right time.

Theme: US Economic Recovery
Stock: Oracle Financial Services Software
The resurgence of the US will bring back big-time technology spending and Indian companies stand to gain. However, mainstream software services companies are highly priced. Oracle Fin is one of the few tech stocks that still have some headroom for appreciation. When US banks invest in technology to comply with new regulations, Oracle will rake in the moolah.

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Best Buys for 2011 ICICI

Following are the top picks for 2011 from the broking firm ICICI Securities:

Aurobindo Pharma:

The company has changed itself from a pure plain-vanilla Active Pharmaceuticals Ingredients (APIs) supplier to a niche formulations player. This transformation is still on and that has improved the EBITDA margin of the company, recently. Henceforth, the next big growth drivers will be huge capacity optimization and monetization of the huge US Abbreviated New Drug Application (ANDA) pipeline. Recent deals with MNCs have given the company a new identity. Aurobindo on account of its proven capabilities and huge capacities is well equipped to cater to their incremental requirements.

Axis Bank:

Axis Bank`s performance is characterised by the consistent profitability growth of above 30% YoY for the past 24 quarters, one of the best records industry wide. Healthy CASA ratio of 42% provides a respite to cost of funds, thus comforting NIM. RoA of above 1.4%, RoE of above 17% and healthy asset quality (NNPA ratio at 0.3%) warrant a higher multiple at 3x FY12E ABV. Moreover, the recent price correction offers comfort to valuation. Currently, it is available at 2.6x FY12E ABV, thus making the stock attractive.

Balrampur Chini:

The higher availability of sugarcane would increase the sugar sales volume of the company by 40% in SY11. With domestic sugar prices crossing Rs 30 per kg and sugarcane cost at Rs 22 per kg, the margins for the company would improve considerably. Simultaneously, an increase in ethanol prices to Rs 27 per litre would also add to the margins. We believe the stock is trading at the lower end of the replacement cost band and looks attractively valued.

Escorts:

Escorts, the third largest player in the tractor segment, is expected to gain market share as tractor sales will move northwards due to newer product launches in the popular Powertrac and Farmtrac variants. We expect the growth momentum of agri-GDP led by increasing demand to inject further steam towards farm mechanisation as labour migration towards urban areas continue. The construction business has also turned EPS accretive and is expected to gain further traction due to improvement in infrastructure offtake in FY12. On the financial perspective, the company has de-leveraged its balance sheet significantly having brought down its debt/equity to a comfortable 0.2x from 1.0x in the last couple of years. We expect the net sales and PAT to grow at a CAGR of 18.7% and 31.9%, respectively, for FY10-12E.

GAIL:

GAIL is India`s flagship natural gas company, operating in various business segments including exploration and production, LPG production, petrochemicals, transmission, distribution and marketing of natural gas. GAIL plans to double its gas transmission and petrochemicals capacity in the next few years. The stock is trading at a P/E of 17.9x TTM EPS of Rs 28.2. With the current capital expenditure plans in place, GAIL offers a lot of safety and visibility of earnings growth to investors over the next few years.

TCS:

TCS, the largest IT company both in revenue (FY11E ~| 37 billion) and employees (174417) terms, is expected to report broad based volume growth leading to US dollar revenue growth of 23% CAGR in FY10-FY12E. Further, we expect 17% CAGR earnings growth during the same period. After almost five quarters of relative out-performance compared to Infosys, we believe the P/E discount rationale would subside.

HCL Technologies:

HCL Technologies is a leading IT services company with revenues of Rs 15 billion (FY11E) and 46,540 professionals. HCL Technologies is well positioned to participate in incremental demand with low utilisation, superior lateral gross hires coupled with operating levers, which could help sustain operating margins. We expect revenue and earnings to grow at 17% and 29% CAGR during FY10-FY12E period.

Hindustan Zinc:

Hindustan Zinc is engaged in production of Zinc and lead ingots. It is the world largest integrated player and one of the lowest cost producers of zinc and lead. It is a debt free company having huge cash and cash equivalent of Rs 130 billion. Going forward any improvement in the zinc prices will lead to margin expansion for the company. We continue to maintain our positive outlook on stock, at current market price stock is trading at EV/EBITDA of 8.1x FY11E and 5.4x FY12E.

Larsen & Toubro:

L&T has witnessed a strong order inflow in the past few years. At present, its order backlog is at a historical high. We expect this momentum to continue in the next few years as capex activity in L&T`s core end-markets returns on a strong note and as the company diversifies into power (generationequipment and nuclear energy) and defence (that are characterised by large, high-value add orders). The management has guided for 25% growth in order inflows for FY11E. Going ahead, we believe value unlocking by divesting a stake in its core subsidiaries like L&T Finance Holdings, L&T InfoTech and L&T IDPL will lead to huge value creation for L&T`s shareholders. On the valuation front, the stock is trading at 28x and 21x its FY11E and FY12E standalone earnings. This is accompanied by huge hidden value in the company’s subsidiaries. L&T is expected to deliver a 19% CAGR in earnings over FY10-FY12E.

Lupin:

With sustained growth for the last many quarters, a strong foothold in developed markets through a combination of branded and generic generics, a foray into niche segments such as Oral Contraceptives (OCs) in the US, good growth in domestic branded formulations and a strong balance sheet with ever reducing working capital cycle, we believe the company has achieved the critical mass to warrant a higher multiple.

Natco Pharma:

With around three Para IV filings (including two FTFs), the company is taking a calculated risk in order to penetrate the US generic space. Although most of them are risky ventures, the company has cautiously tied up with leading marketing players to mitigate litigation risk. One successful product launch will change the prospects drastically. Being a niche player in the oncology segment, Natco Pharma should fare well in domestic formulations.

Oil India:

Oil India is engaged in exploration, development, production and transportation of crude oil and natural gas. Going ahead, we believe Oil India`s large reserve base and new discoveries would create value for investors. Oil India is trading at 10.7x FY11E and 9.9x FY12E EPS of Rs 129.7 and Rs 140.6, respectively.

Source ICICI

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Best Buys for 2011 IIFL

In its edition of Prime Picks, broking firm IIFL (India Infoline) has put together eight large cap and six midcap companies that are well placed to deliver high returns in the year 2011. The highest exposure is to the Auto and Financial space (assuming equal investment in each stock irrespective of market cap) followed by the Energy related space.

``We like consumption themes like Autos that will continue to benefit from rising income levels, both in rural and urban markets,`` it said.

While Finance companies may be seen having tough time in the near future, it believes they will be one of the alpha generators over 12 months.

The Energy related space comprises Metals and Oil & Gas stocks. Commodity prices will continue to rise in 2011 in our view. This will benefit integrated metals players.

For the Oil & Gas space, the impact will be mixed, but deregulation expectations are high. The midcap names have been vigilantly picked after giving due consideration to corporate governance, growth and valuations.

IIFL recommends avoiding the Cement sector facing supply overhang and Real estate, as the sector faces a sluggish demand scenario, financing problems and has serious governance issues.

Large caps

Bajaj Auto: Robust domestic & export growth; industry best margins

L&T: Best placed to benefit when Government & industrial capex revives

M&M: Rural India play; Ssangyong acquisition to be value accretive

REC: Play on power capex; strong traction in sanctions; stable spreads; robust asset quality; impressive return ratios

Reliance Industries: Recovery in GRMs, stable petrochemical spreads; healthy balance sheet

SBI: Extensive reach; well-diversified portfolio

Sterlite: Extremely attractive valuations; strong earnings from zinc and power businesses

Tata Steel: Raw material integration; earnings boost with improved European performance

Mid caps:

Escorts: Volume growth to beat consensus estimates; balance sheet restructured; Valuations cheap at P/E of 6.9x F9/12E.

OnMobile: Dominates domestic VAS industry (33% share); Telefonica deal to bear fruit in FY12; 49% EPS cagr over FY10-12E.

Petronet LNG: Gains from strained demand-supply balance for natural gas.

Radico Khaitan: 15% volume growth in mainline brands; earnings 53% cagr between FY10-12E.

Unity Infra: Healthy balance sheet; robust revenue cover; strong earnings growth potential; cheap valuation.

Yes Bank: Best bet in private banking; Robust balance sheet growth; superior return ratios; negligible NPLs.

Source IIFL

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