Here's why we picked the 20 stocks and why you too should have them in your portfolio
by Pravin Palande, T Surendar | Jul 6, 2010
There are stocks in the market and there are stocks in the market that do well. Our recommendations belong to the latter category. Make sure your portfolio has them in the coming year:
AUTO
In Auto, we look for companies that have pricing power and should, ideally, not be affected by any negative international shocks. We have included Auto ancillaries in this segment.
1. Exide Industries
Exide Industries operates in the domestic markets and is a leader in batteries. The company is a market leader in batteries for two-wheelers and has seen a capacity expansion of 35 percent in the current year. There is a huge demand from both the replacement market as well as original equipment manufacturers and this will do well for the company. The core return on capital employed of Exide works out to 85 percent. The management is confident of maintaining a double digit growth rate for the next five years and see electric cars and hybrid cars as a big opportunity. Markets see a 20 percent upside for this stock for the next one year.
2. Escorts
Escorts is a domestic, auto and an agri-play company all packed together. This company can ride on the agriculture and monsoon story of India as 70 percent of the revenues of the company are based on selling tractors. And this segment has already registered 48 percent growth in the last year. The stock has moved up by 100 percent over the last year but looking at the overall prospects of the Indian economy, this company will only benefit. Escorts has only a 17 percent share in the tractors segment and this can only go up. The company has done some financial restructuring whereby the debt: equity ratio has been bought down to 0.3:1. Debt is down by Rs. 200 crore.
3. Maruti Suzuki
Another domestic demand growth story. Maruti Suzuki is under margin pressure but volumes will easily go up by 15 percent in the domestic market. Maruti has a huge market share in the small car business. And this business is on a growth path. At some level the stocks appears fully priced.
But this is one company that has pricing power and other companies can only follow. The company is also increasing its focus on moving into non-EU territory where a chunk of its export volumes were dependent. The company crossed the 1 lakh sales mark in the month of May 2010 showing a growth of 28 percent over last year. This company is a clear long term buy and we are not setting any targets for appreciation.
POWER & INFRASTRUCTURE
1. BGR Energy
Power generation is expected to go up in the next three years and there is a 30 percent growth in capacities and BGR is expected to be a major participant in this. BGR Energy is engaged in power equipment and construction.
Based on a recent Goldman Sachs report, BGR is expected to add $4.7 billion in orders and report 43 percent sales growth CAGR (compound annual growth rate) and 33 percent ROE (return on equity) over the next two years.
There is an order inflow of $2 billion - $2.5 billion each for FY’11 E and FY’12 and
compare this to the earlier year of FY2010 where the same number was $0.8 billion. Over the next year, analysts expect BCG’s share price to move up by about 25 percent
2. Rural Electric Corporation (REC)
REC deals with the power sector in India. The company basically lends to state electricity boards (SEBs) in India and is riding on the growth in the investments in the power sector. The company falls under the ministry of power and provided 16 percent of the total debt required by SEBs and expects its loan book to grow by 25 percent in the next 5 years. Looking at this growth rate, the company is now looking for funding requirements.
The company is raising $400 million through ECB for five years at a 6 month London Interbank Offered Rate + 175 bps (basis point) which is considered very cheap. The company provides finance to the power sector in India and since this segment is expected to do well, this company looks attractive. The stock has an upside of 25 percent from here onwards and looks like a decent buy at this price.
3. Unity Infrastructures
The company wants to increase revenues to Rs. 5,000 crore in the next 4 years and has moved up by 40 percent over the last 3 years and this growth will continue. For FY’10, It had an order book of Rs. 3,800 crore. Now, the company wants to move out of Mumbai and get into Pune, Goa, and Kolkata.
The average contract size of the company has increased from Rs. 50 crore to Rs. 200 crore. Earlier, building and housing orders were the biggest pullers for this company. Now the company concentrates on irrigation, water supply and transportation.
Orders in this segment have increased from Rs. 300 crore in FY’06 to Rs. 1,900
crore today. The revenue visibility of the company is good as the average execution of the order book is around 24 months. Even the National Housing Association of India has awarded the company projects worth Rs. 25,700 crore. It is expected that the order book position to improve by 30 percent from here onwards which means an order book of around Rs. 3,500 crore for FY’12.
The company has grown and maintained its growth rate when many of the peer companies were showing a decline in growth in FY’09. It has always maintained a constant growth in its order book positions.
4. IVRCL
IVRCL is expecting revenues of Rs. 7,000 crore for FY’11 and has an order book of Rs. 35,000 crore. The company, which is an integrated play on infrastructure, is a complete India story. Earnings are expected to grow at above 20 percent for the company in the next two to three years. The company is taking higher exposure to power and other industrial projects and a land sale is expected to release cash for the company. The company has also become active in irrigation and water projects, whose order book works out to Rs. 17,000 crore. The company will ride the infrastructure story in India and the stock is still fairly priced and an upside of 25-30 percent can easily be expected from here onwards.
5. JSW Steel
JSW steel is one of the lowest cost steel producers in the world and it is just not a steel company. The group has diversified interests in mining, carbon steel, power, industrial gases, and port facilities, aluminium, and cement and information technology. The company has a capacity of 7.8 million tonnes. At current market price, stock is trading at 6.4 multiples of its FY’11 earnings.
6. Crompton Greaves
This company should benefit from the thrust that India is giving to the power sector. The company is engaged into advanced electrical products related to power generation, transmission and distribution and also consumer products like fans, luminaries and light sources. The company has a book of Rs. 3,400 crore in the standalone business and Rs. 6,400 crore on consolidated basis.
The company has cash of Rs. 470 crore and operates on a high ROE of 38 percent. The company is trading at 19 times FY’11 earnings. Presently trading at Rs. 250, we can expect a price appreciation of 30 percent in the next one year.
7. ESAB India
A welding equipment manufacturer, and an MNC subsidiary, of England-based company Charter Plc. Since consumption of steel and steel based products should go up, we feel that this company would do well on the back of this demand. Its global revenue is 1.03 billion pounds.
In India, welding equipment market has a size of Rs. 3,500 crore out of which 50 percent is seen as unorganised market. Competitors for Esab include Ador Welding, Ador Fontech, Lincoln Electric (and various other smaller players).
Since the company is an MNC subsidiary, where the parent owns 56 percent, the local company gets advantage of technology transfers very easily.
BANKING & FINANCE
1. Yes Bank
Yes Bank, by any standards, is still a small bank in the private banking space. But the company is on the right track and expects to show an earnings growth of 35 percent in the next two years. The company is putting special focus on the SME market and at the same time has plans to get into the high margin business of micro-finance. Overall, its collaborative model with other banks has worked well and it plans to open more branches over the country. The company is already delivering an ROE of 19 percent.
2. Bajaj Finserv
Bajaj Finserv has everything going strong for itself. The company is in news because it is now in a position to give its stake to Allianz at a much higher price due to changes in some RBI guidelines. Its portfolio includes insurance, consumer finance, financial advisory and is also planning for an asset management.
The company has good promoters and some of its group companies are showing huge growth rates riding on consumer finance and auto loans. Its life insurance has delivered its first full year profit and the auto finance division has shown a growth of 70 percent to Rs. 25.2 crore.
3. ICICI Bank
ICICI bank is on the sell recommendation for most brokerage houses. One of the reasons being that the bank was acquiring Bank of Rajasthan for a profit to book ratio of 3 times with a swap ratio of 1:4.7. But the bank is going through a lot of interesting changes. This is high risk recommendation as the ROE is also low at 8 percent. This is our contra bet. We think, under Chanda Kochhar, the bank is doing some interesting changes.
The bank is increasing its CASA (current and savings account) deposits, concentrating on high capital adequacy ratio, keeping controls on operating costs and reducing unsecured retail portfolios. For March 2010, the CASA ratio stood at 41 percent, the highest
in the last seven years.
The bank has reduced NPA (non performing assets) from Rs. 1,400 crore in the first quarter of FY’10 to Rs. 500 crore in quarter 4 of FY’10. Its non-banking subsidiaries are also gaining market share which includes insurance, mutual funds and broking services.
We would like to believe in the changes that the management is bringing through and expect that things can only change for the better. The bank is one of the few large cap stocks in this group and can deliver around 15- 20 percent in a year’s time.
4. Andhra Bank
Retail loan book is expected to grow by 50 percent this year which means that the bank will be able to maintain last year’s growth of 48 percent. The bank is slowly making ways into retail finance and for FY’10 almost 16 percent of its loans were disbursed in this segment. The bank has become very active in education loans, consumer loan and home loans. The bank operates through 1,700 branches all over India.
Available at a good price, the bank is very well run. The bank is still available at a P/BV of 1.45 times. It is much lower than most banks in this range and the business keeps expanding.
DOMESTIC GROWTH
1. Zee Entertainment
Riding on the back of a robust economy, media stocks are expected to show
high growth potential. Zee Entertainment has concentrated on regional areas and some of its powerful properties are in the Marathi and Bangla space. The regional GEC (general entertainment channels) for the company are also doing well.
The company’s DTH segment is growing fast and it is the leading player in this market. The company has improved its cash position. Its subscriber revenues are growing faster than its competitors. And it has an increasing regional focus. The company has a cash position of Rs. 520 crore. The company has already shown an almost 100 percent growth over the last year in its stock price but still has huge potentials for the future. The stock can go up by 25 percent from here.
2. HDIL
This is a very high risk stock. The company has a huge presence in Mumbai where the real estate market has been rising for a long time. Though some feel that real estate market can correct from these levels, it may or may not happen. For those who want to take an exposure in this sector, HDIL is a decent bet.
For HDIL, growth is primarily driven by transferable development rights (TDR) prices. TDR prices are at Rs. 3000 per square foot now and are expected to go up further as the High Court in Mumbai has given a ruling that it will not allow an increase in FSI (floor space index). The company is planning to ride on the strong demand from mid-income residential projects and has launched a 2.75 million sq. feet of residential projects in Mumbai.
HDIL is a high risk stock with a beta of 2. IF the market moves up by 25 percent, chances are that this stock has the potential to give you much more than that. But same is true if the market falls. This stock will fall fastest.
3. Asian Paints
This company leads pricing power in the paints segment. Strong pricing power is something that works very well for Asian Paints. For every 1 percent hike in retail prices, Asian Paints gains 3 percent in EPS (earnings per share). Now from July 1, the company has gone in for a price rise and it will help net profits by 5 percent. There is a possibility that the volumes of the company will fall marginally because of the price rise. Overall, Asian paints is in a comfortable position because other players only follow the direction of this company thus competition should not eat into the market share.
On FY’11 earnings, the stock is available at a P/E (price to equity) of 22 times and has managed to give good returns.
4. Glaxo
There is a lot happening in the pharma space. Glaxo Smithkline is one of the few companies that managed to maintain growth and introducing new products in the market.
GSK launched Mycamine, an antifungal antibiotic, in-licensed from Astellas, Japan. The Company also launched the Stiefel range of products in Cosmetic dermatology therapies. Stiefel Laboratories Inc. was acquired in the recent past by the parent GSK Plc. With this, GSK is expected to further strengthen
its leadership position in the Dermatology segment. The company is richly priced at a P/E of 57 times on historical earnings.
SOFTWARE & TECHNOLOGY
1. Mphasis
The world is still in a crisis. We have maintained that this is not a time to get into stocks which are heavily dependent on international factors like rupee appreciation, US slowdown and the Euro debt trap.
But in software segment, some companies can actually do well even if the world is not in a healthy position. The demand for application services has actually been robust and that is what is doing well for some companies. Mphasis is one company that is on the radar of many analysts. It has already given around 55 percent growth over the last one year but there is a lot to come from this company.
Application services, for Mphasis have done really well clocking a 25 percent growth YOY (year-on-year) in the last quarter ended FY’10. Its billable rates are steady and this works well for the company as 90 percent of their revenues come from time and material projects. The company has Rs. 1,400 crore in cash, and has recently begun a series of acquisitions. Almost, 70 percent of the business still comes from the partnership with HP & remaining 30 percent from independent clients.
2. HCL Tech
HCL Tech is another interesting company that has shown a faster growth rate as compared to the big three of Indian software over the last four quarters. Even if its BPO operations are not doing well, IT infrastructure growth continues at 15 percent and client addition is strong. The company has recently bagged a $500 million project for a period of 5 years. Even manufacturing has shown a revival after two quarters at 10 percent growth.
Discretionary spending is returning sooner than expected, and we expect HCL to be a key beneficiary from the revival in ERP (enterprise resource planning) consulting projects. Besides, its valuation is cheap compared to its peers.
AUTO
In Auto, we look for companies that have pricing power and should, ideally, not be affected by any negative international shocks. We have included Auto ancillaries in this segment.
1. Exide Industries
Exide Industries operates in the domestic markets and is a leader in batteries. The company is a market leader in batteries for two-wheelers and has seen a capacity expansion of 35 percent in the current year. There is a huge demand from both the replacement market as well as original equipment manufacturers and this will do well for the company. The core return on capital employed of Exide works out to 85 percent. The management is confident of maintaining a double digit growth rate for the next five years and see electric cars and hybrid cars as a big opportunity. Markets see a 20 percent upside for this stock for the next one year.
2. Escorts
Escorts is a domestic, auto and an agri-play company all packed together. This company can ride on the agriculture and monsoon story of India as 70 percent of the revenues of the company are based on selling tractors. And this segment has already registered 48 percent growth in the last year. The stock has moved up by 100 percent over the last year but looking at the overall prospects of the Indian economy, this company will only benefit. Escorts has only a 17 percent share in the tractors segment and this can only go up. The company has done some financial restructuring whereby the debt: equity ratio has been bought down to 0.3:1. Debt is down by Rs. 200 crore.
3. Maruti Suzuki
Another domestic demand growth story. Maruti Suzuki is under margin pressure but volumes will easily go up by 15 percent in the domestic market. Maruti has a huge market share in the small car business. And this business is on a growth path. At some level the stocks appears fully priced.
But this is one company that has pricing power and other companies can only follow. The company is also increasing its focus on moving into non-EU territory where a chunk of its export volumes were dependent. The company crossed the 1 lakh sales mark in the month of May 2010 showing a growth of 28 percent over last year. This company is a clear long term buy and we are not setting any targets for appreciation.
POWER & INFRASTRUCTURE
1. BGR Energy
Power generation is expected to go up in the next three years and there is a 30 percent growth in capacities and BGR is expected to be a major participant in this. BGR Energy is engaged in power equipment and construction.
Based on a recent Goldman Sachs report, BGR is expected to add $4.7 billion in orders and report 43 percent sales growth CAGR (compound annual growth rate) and 33 percent ROE (return on equity) over the next two years.
There is an order inflow of $2 billion - $2.5 billion each for FY’11 E and FY’12 and
compare this to the earlier year of FY2010 where the same number was $0.8 billion. Over the next year, analysts expect BCG’s share price to move up by about 25 percent
2. Rural Electric Corporation (REC)
REC deals with the power sector in India. The company basically lends to state electricity boards (SEBs) in India and is riding on the growth in the investments in the power sector. The company falls under the ministry of power and provided 16 percent of the total debt required by SEBs and expects its loan book to grow by 25 percent in the next 5 years. Looking at this growth rate, the company is now looking for funding requirements.
The company is raising $400 million through ECB for five years at a 6 month London Interbank Offered Rate + 175 bps (basis point) which is considered very cheap. The company provides finance to the power sector in India and since this segment is expected to do well, this company looks attractive. The stock has an upside of 25 percent from here onwards and looks like a decent buy at this price.
3. Unity Infrastructures
The company wants to increase revenues to Rs. 5,000 crore in the next 4 years and has moved up by 40 percent over the last 3 years and this growth will continue. For FY’10, It had an order book of Rs. 3,800 crore. Now, the company wants to move out of Mumbai and get into Pune, Goa, and Kolkata.
The average contract size of the company has increased from Rs. 50 crore to Rs. 200 crore. Earlier, building and housing orders were the biggest pullers for this company. Now the company concentrates on irrigation, water supply and transportation.
Orders in this segment have increased from Rs. 300 crore in FY’06 to Rs. 1,900
crore today. The revenue visibility of the company is good as the average execution of the order book is around 24 months. Even the National Housing Association of India has awarded the company projects worth Rs. 25,700 crore. It is expected that the order book position to improve by 30 percent from here onwards which means an order book of around Rs. 3,500 crore for FY’12.
The company has grown and maintained its growth rate when many of the peer companies were showing a decline in growth in FY’09. It has always maintained a constant growth in its order book positions.
4. IVRCL
IVRCL is expecting revenues of Rs. 7,000 crore for FY’11 and has an order book of Rs. 35,000 crore. The company, which is an integrated play on infrastructure, is a complete India story. Earnings are expected to grow at above 20 percent for the company in the next two to three years. The company is taking higher exposure to power and other industrial projects and a land sale is expected to release cash for the company. The company has also become active in irrigation and water projects, whose order book works out to Rs. 17,000 crore. The company will ride the infrastructure story in India and the stock is still fairly priced and an upside of 25-30 percent can easily be expected from here onwards.
5. JSW Steel
JSW steel is one of the lowest cost steel producers in the world and it is just not a steel company. The group has diversified interests in mining, carbon steel, power, industrial gases, and port facilities, aluminium, and cement and information technology. The company has a capacity of 7.8 million tonnes. At current market price, stock is trading at 6.4 multiples of its FY’11 earnings.
6. Crompton Greaves
This company should benefit from the thrust that India is giving to the power sector. The company is engaged into advanced electrical products related to power generation, transmission and distribution and also consumer products like fans, luminaries and light sources. The company has a book of Rs. 3,400 crore in the standalone business and Rs. 6,400 crore on consolidated basis.
The company has cash of Rs. 470 crore and operates on a high ROE of 38 percent. The company is trading at 19 times FY’11 earnings. Presently trading at Rs. 250, we can expect a price appreciation of 30 percent in the next one year.
7. ESAB India
A welding equipment manufacturer, and an MNC subsidiary, of England-based company Charter Plc. Since consumption of steel and steel based products should go up, we feel that this company would do well on the back of this demand. Its global revenue is 1.03 billion pounds.
In India, welding equipment market has a size of Rs. 3,500 crore out of which 50 percent is seen as unorganised market. Competitors for Esab include Ador Welding, Ador Fontech, Lincoln Electric (and various other smaller players).
Since the company is an MNC subsidiary, where the parent owns 56 percent, the local company gets advantage of technology transfers very easily.
BANKING & FINANCE
1. Yes Bank
Yes Bank, by any standards, is still a small bank in the private banking space. But the company is on the right track and expects to show an earnings growth of 35 percent in the next two years. The company is putting special focus on the SME market and at the same time has plans to get into the high margin business of micro-finance. Overall, its collaborative model with other banks has worked well and it plans to open more branches over the country. The company is already delivering an ROE of 19 percent.
2. Bajaj Finserv
Bajaj Finserv has everything going strong for itself. The company is in news because it is now in a position to give its stake to Allianz at a much higher price due to changes in some RBI guidelines. Its portfolio includes insurance, consumer finance, financial advisory and is also planning for an asset management.
The company has good promoters and some of its group companies are showing huge growth rates riding on consumer finance and auto loans. Its life insurance has delivered its first full year profit and the auto finance division has shown a growth of 70 percent to Rs. 25.2 crore.
3. ICICI Bank
ICICI bank is on the sell recommendation for most brokerage houses. One of the reasons being that the bank was acquiring Bank of Rajasthan for a profit to book ratio of 3 times with a swap ratio of 1:4.7. But the bank is going through a lot of interesting changes. This is high risk recommendation as the ROE is also low at 8 percent. This is our contra bet. We think, under Chanda Kochhar, the bank is doing some interesting changes.
The bank is increasing its CASA (current and savings account) deposits, concentrating on high capital adequacy ratio, keeping controls on operating costs and reducing unsecured retail portfolios. For March 2010, the CASA ratio stood at 41 percent, the highest
in the last seven years.
The bank has reduced NPA (non performing assets) from Rs. 1,400 crore in the first quarter of FY’10 to Rs. 500 crore in quarter 4 of FY’10. Its non-banking subsidiaries are also gaining market share which includes insurance, mutual funds and broking services.
We would like to believe in the changes that the management is bringing through and expect that things can only change for the better. The bank is one of the few large cap stocks in this group and can deliver around 15- 20 percent in a year’s time.
4. Andhra Bank
Retail loan book is expected to grow by 50 percent this year which means that the bank will be able to maintain last year’s growth of 48 percent. The bank is slowly making ways into retail finance and for FY’10 almost 16 percent of its loans were disbursed in this segment. The bank has become very active in education loans, consumer loan and home loans. The bank operates through 1,700 branches all over India.
Available at a good price, the bank is very well run. The bank is still available at a P/BV of 1.45 times. It is much lower than most banks in this range and the business keeps expanding.
DOMESTIC GROWTH
1. Zee Entertainment
Riding on the back of a robust economy, media stocks are expected to show
high growth potential. Zee Entertainment has concentrated on regional areas and some of its powerful properties are in the Marathi and Bangla space. The regional GEC (general entertainment channels) for the company are also doing well.
The company’s DTH segment is growing fast and it is the leading player in this market. The company has improved its cash position. Its subscriber revenues are growing faster than its competitors. And it has an increasing regional focus. The company has a cash position of Rs. 520 crore. The company has already shown an almost 100 percent growth over the last year in its stock price but still has huge potentials for the future. The stock can go up by 25 percent from here.
2. HDIL
This is a very high risk stock. The company has a huge presence in Mumbai where the real estate market has been rising for a long time. Though some feel that real estate market can correct from these levels, it may or may not happen. For those who want to take an exposure in this sector, HDIL is a decent bet.
For HDIL, growth is primarily driven by transferable development rights (TDR) prices. TDR prices are at Rs. 3000 per square foot now and are expected to go up further as the High Court in Mumbai has given a ruling that it will not allow an increase in FSI (floor space index). The company is planning to ride on the strong demand from mid-income residential projects and has launched a 2.75 million sq. feet of residential projects in Mumbai.
HDIL is a high risk stock with a beta of 2. IF the market moves up by 25 percent, chances are that this stock has the potential to give you much more than that. But same is true if the market falls. This stock will fall fastest.
3. Asian Paints
This company leads pricing power in the paints segment. Strong pricing power is something that works very well for Asian Paints. For every 1 percent hike in retail prices, Asian Paints gains 3 percent in EPS (earnings per share). Now from July 1, the company has gone in for a price rise and it will help net profits by 5 percent. There is a possibility that the volumes of the company will fall marginally because of the price rise. Overall, Asian paints is in a comfortable position because other players only follow the direction of this company thus competition should not eat into the market share.
On FY’11 earnings, the stock is available at a P/E (price to equity) of 22 times and has managed to give good returns.
4. Glaxo
There is a lot happening in the pharma space. Glaxo Smithkline is one of the few companies that managed to maintain growth and introducing new products in the market.
GSK launched Mycamine, an antifungal antibiotic, in-licensed from Astellas, Japan. The Company also launched the Stiefel range of products in Cosmetic dermatology therapies. Stiefel Laboratories Inc. was acquired in the recent past by the parent GSK Plc. With this, GSK is expected to further strengthen
its leadership position in the Dermatology segment. The company is richly priced at a P/E of 57 times on historical earnings.
SOFTWARE & TECHNOLOGY
1. Mphasis
The world is still in a crisis. We have maintained that this is not a time to get into stocks which are heavily dependent on international factors like rupee appreciation, US slowdown and the Euro debt trap.
But in software segment, some companies can actually do well even if the world is not in a healthy position. The demand for application services has actually been robust and that is what is doing well for some companies. Mphasis is one company that is on the radar of many analysts. It has already given around 55 percent growth over the last one year but there is a lot to come from this company.
Application services, for Mphasis have done really well clocking a 25 percent growth YOY (year-on-year) in the last quarter ended FY’10. Its billable rates are steady and this works well for the company as 90 percent of their revenues come from time and material projects. The company has Rs. 1,400 crore in cash, and has recently begun a series of acquisitions. Almost, 70 percent of the business still comes from the partnership with HP & remaining 30 percent from independent clients.
2. HCL Tech
HCL Tech is another interesting company that has shown a faster growth rate as compared to the big three of Indian software over the last four quarters. Even if its BPO operations are not doing well, IT infrastructure growth continues at 15 percent and client addition is strong. The company has recently bagged a $500 million project for a period of 5 years. Even manufacturing has shown a revival after two quarters at 10 percent growth.
Discretionary spending is returning sooner than expected, and we expect HCL to be a key beneficiary from the revival in ERP (enterprise resource planning) consulting projects. Besides, its valuation is cheap compared to its peers.
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