Sharekhan Top Picks

After the run-up following the general election outcome

the benchmark indices were largely stuck in a consolidation
range in the last month, ie June 2014. During the month
the Sensex and Nifty appreciated by 3.4% and 3.7%
respectively whereas Sharekhans Top Picks basket
appreciated by 7.8%, which is largely in line with the
movement in the CNX Mid-cap Index during the same month.
The strong performance of Sharekhans Top Picks basket
was aided by superlative gains in TVS Motor Company (up
25.8%) and Gabriel India (up 17.2%) both of which were
added in the previous month. The other smart movers were
Lupin, Zee Entertainment and Federal Bank.
July 01, 2014 Visit us at www.sharekhan.com
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Absolute outperformance
Constantly beating Nifty and Sensex (cumulative returns) since April 2009
Name CMP* PER (x) RoE (%) Price Upside
(Rs) FY14 FY15E FY16E FY14 FY15E FY16E target (Rs)# (%)
Apollo Tyres 203 10.5 9.9 8.7 25.2 21.4 19.9 ** -
Crompton Greaves 203 52.1 23.7 18.0 6.7 13.4 15.6 225 11%
Federal Bank 131 13.4 12.7 10.2 12.6 12.2 13.7 142 8%
Gabriel India 52 19.3 10.9 8.3 14.9 20.6 22.6 56 9%
Gateway Distriparks 234 17.9 16.5 14.0 17.5 18.0 20.3 250 7%
ICICI Bank 1,438 16.9 15.1 12.7 14.0 14.5 15.7 1,728 20%
Larsen & Toubro 1,725 32.5 28.3 23.7 15.6 16.0 17.4 1,840 7%
LIC Housing 325 12.4 10.4 8.7 18.8 19.4 19.9 373 15%
Lupin 1,051 25.7 22.3 18.7 26.5 24.1 22.8 ** -
UltraTech Cement 2,630 35.2 25.6 22.2 12.0 14.3 14.3 2,868 9%
Zee Entertainment 300 32.3 28.0 22.1 20.6 20.6 23.1 367 22%
*CMP as on July 01, 2014 # Price target for next 6-12 months ** Under review
Consistent outperformance (absolute returns; not annualised) (%)
1 month 3 months 6 months 1 year 3 years 5 years
Top Picks 7.8 19.6 31.2 44.4 60.9 148.6
Sensex 3.4 14.1 20.8 30.4 36.5 80.7
Nifty 3.7 14.0 21.2 29.3 36.7 83.8
CNX Mid-cap 7.7 29.7 37.6 48.7 33.9 103.0
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Sharekhan Sensex Nif ty
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CY2014 CY2013 CY2012 CY2011 CY2010 CY2009
Sharekhan (Top Picks) Sensex Nif ty CNX Mid-cap
This month we are making two changes in the Top Picks
basket. We are booking profits in TVS Motor Company and
replacing it with Apollo Tyres (a beneficiary of the revival
in the commercial vehicle segment and soft rubber prices).
The other change relates to UltraTech Cement replacing
Reliance Industries, which could languish due to the
deferment of gas price hikes by the government and other
negative news flow on the counter. On the other hand,
UltraTech Cement is among the beneficiaries of improving
cement prices in the western and southern regions. The
new governments thrust on infrastructure investments
should also keep investors interested in the cement sector.
sharekhan top picks
2
Name CMP PER (x) RoE (%) Price Upside
(Rs) FY14 FY15E FY16E FY14 FY15E FY16E target (Rs) (%)
Apollo Tyres 203 10.5 9.9 8.7 25.2 21.4 19.9 ** -
Remarks: Apollo Tyres is a leading player in the domestic passenger car and truck tyre segments. The tyre industrys volume
has been subdued given the weak macro environment. We expect the demand to improve in H2FY2015 with a
pick-up in the economy.
The profitability of the tyre companies has improved given the soft natural rubber prices and this benefit is
expected to continue for a couple of quarters.
Apollos European operations too have reported a strong performance with a strong volume growth and high
profitability. The company will be investing EUR200mn for setting up a greenfield facility in Eastern Europe which
will start production in Q4FY2017 and cater to the long-term growth in Europe.
We like the stock for its consistent performance and long-term growth prospects (expansion in Europe and Chennai).
We have a Buy recommendation on the stock.
Crompton Greaves 203 52.1 23.7 18.0 6.7 13.4 15.6 225 11%
Remarks: Crompton Greaves deals in industrial and power systems, which hold high potential, given the prospective
turnaround in the investment cycle, with higher focus on the power transmission & distribution sector. It also has
a strong presence in domestic consumer products which is expected to witness a high growth, thanks to brand
leverage, deep presence and stable demand.
Though the power system business in the USA and the subsidiaries in Canada are still not out of the woods, the
overall performance of the international subsidiaries would improve backed by a recovery in the European business,
which was hit by a restructuring exercise. A reversal in the outlook for domestic demand would improve sentiment
too. Consequently, we expect a sharp improvement in its margin, earnings and return ratios which would be the
key driver of a re-rating. We remain positive on the stock.
Sharekhan
July 2014
3 July 2014
Sharekhan
sharekhan top picks
Name CMP PER (x) RoE (%) Price Upside
(Rs) FY14 FY15E FY16E FY14 FY15E FY16E target (Rs) (%)
Federal Bank 131 13.4 12.7 10.2 12.6 12.2 13.7 142 8%
Remarks: Federal Bank undertook structural changes in the balance sheet, viz increasing the proportion of the better rated
assets and improving the retail deposit base, and is thus better prepared to ride the recovery cycle. As the
economy is gradually showing signs of a revival, the bank is much better capitalised (tier-1 capital adequacy ratio
of 15%) compared with its peer banks to expand the balance sheet.
Asset quality has improved substantially over the past three to four quarters and is likely to improve further in
the coming period. Higher provision coverage of 84% and a possibility of recovery from one large-ticket account
(likely in the next two to three quarters) would further increase the comfort on asset quality.
The valuation of 1.4x FY2016 BV is attractive when compared with the regional banks and other old private
banks. The expansion in the return on equity (RoE) led by a better than industry growth (FY2014-16) will lead to
an expansion in the valuation multiple. We have a Buy rating on the stock with a price target of Rs142.
Gabriel India 52 19.3 10.9 8.3 14.9 20.6 22.6 56 9%
Remarks: Gabriel India (Gabriel), a leading manufacturer of shock absorbers is perfectly set to reap the benefit of strong
growth in two-wheeler segment and revival in the passenger and CV segments. The management is focusing on
increasing the revenue share from the after-sales (high margin segment) and export segments.
Additionally, the revenue share with Hondas two-wheeler business (the fastest growing two-wheeler company) is
expected to increase as it starts to ramp-up production at its new Karnataka facility. No major capex, strong free
cashflow generation would help to reduce debt burden going forward. Consequently, it would lead to higher
margins and return ratios.
In recent time, the stock has generated healthy return of 40% and almost achieved our target price of Rs46. We
continue to remain firm on companys fundamental, given the fact of strong market share across business verticals,
improving outlook of CV/PV segments and recent restructuring exercise to concentrate on each of the business
verticals (two-wheeler, PV and CV) to improve the product-mix, after the sales service as well as to improve the
exports, which would lead better financial performance.
4
July 2014
Sharekhan
sharekhan top picks
Name CMP PER (x) RoE (%) Price Upside
(Rs) FY14 FY15E FY16E FY14 FY15E FY16E target (Rs) (%)
Gateway Distriparks 234 17.9 16.5 14.0 17.5 18.0 20.3 250 7%
Remarks: An improvement in exim trade along with a rise in port traffic at the major ports are signalling an improving
business environment for the logistic companies. Gateway Distriparks being a major player in the CFS and rail
logistic segments is expected to witness an improvement in the volumes of its CFS and rail divisions going ahead.
The improving trend in the rail freight and cold chain subsidiaries would sustain on account of the recent efforts
to control costs and improve utilisation.
We continue to have faith in GDLs long-term growth story based on the expansion of each of its three business
segments, ie CFS, rail transportation and cold storage infrastructure segments. First, we believe the listing of SLL
will unlock the inherent value and the potential of the cold chain operations. Second, the coming on stream of
the Faridabad facility and the strong operational performance will further enhance the performance of the rail
operations. Third, the expected turnaround in the global trade should have a positive impact on the CFS operations.
We maintain our Buy rating with a price target of Rs250.
ICICI Bank 1,438 16.9 15.1 12.7 14.0 14.5 15.7 1,728 20%
Remarks: With an improvement in the liability profile, ICICI Bank is better positioned to expand its market share especially
in the retail segment. We expect its advances to grow at 18.7% compound annual growth rate (CAGR) over
FY2014-16 leading to a CAGR of 17.0% in the net interest income.
ICICI Banks asset quality had shown some stress in recent results due to rise in restructured loans. However, the
banks asset quality is significantly better than public sector banks (PSBs) and has improved in the past few
years. We believe the strong operating profits should help the bank to absorb the stress which anyway is expected
to recede due to an uptick in economy.
Led by a pick-up in the advance growth and a significant improvement in the margin, the RoE is likely to expand
to ~16% by FY2016 while the return on assets (RoA) is likely to improve to 1.8%. This would be driven by a 15.3%
growth (CAGR) in the profit over FY2014-16.
The stock trades at 1.9x FY2016E BV. Moreover, given the improvement in the profitability led by lower NPA
provisions, a healthy growth in the core income and improved operating metrics, we recommend a Buy with a
price target of Rs1,728.
5 July 2014
Sharekhan
sharekhan top picks
Name CMP PER (x) RoE (%) Price Upside
(Rs) FY14 FY15E FY16E FY14 FY15E FY16E target (Rs) (%)
Larsen & Toubro 1,725 32.5 28.3 23.7 15.6 16.0 17.4 1,840 7%
Remarks: Larsen & Toubro (L&T), the largest engineering and construction company in India, is a direct beneficiary of the
strong domestic infrastructure development and industrial capital expenditure (capex) revival now.
L&T continues to impress us with its order inflow growth achievement and good execution skills even in a slowdown.
Now it is looking at better days ahead with the domestic environment improving. We believe in such a situation,
L&T would be a major beneficiary as it is placed much ahead of its peers with a strong balance sheet. Moreover,
monetisation of various assets would help the company to improve the RoE.
A sound execution track record, a healthy order book and a strong performance of its subsidiaries reinforce our
faith in L&T. We believe it is one of the best bets to play the cyclicals now.
LIC Housing 325 12.4 10.4 8.7 18.8 19.4 19.9 373 15%
Remarks: LIC Housing Finance being the second largest housing finance company (a loan book of over Rs90,000 crore) will
benefit from the recovery in the housing market. The company has strong brand recall (due to the LIC parentage)
and widespread distribution network which will aid expansion in the business.
The re-pricing of the fixed rate loans to floating rate loans over FY2015 and FY2016 coupled with a moderation in
the interest rates will boost margins. The companys gross and net NPAs are at 0.67% and 0.39% respectively,
amongst the best in the system.
Currently, it trades at 1.6x FY2016E book value, which seems attractive considering the stable RoE of around 18-
20% and healthy asset quality. Going ahead, a revival in the economy and moderation in the borrowing rates could
be the key triggers for the stock. We have a Buy rating on the stock with a price target of Rs373.
6
July 2014
Sharekhan
sharekhan top picks
Name CMP PER (x) RoE (%) Price Upside
(Rs) FY14 FY15E FY16E FY14 FY15E FY16E target (Rs) (%)
Lupin 1,051 25.7 22.3 18.7 26.5 24.1 22.8 ** -
Remarks: A vast geographical presence, focus on niche segments like oral contraceptives, ophthalmic products, para-IV
filings and branded business in the USA are the key elements of growth for Lupin. The company has remarkably
improved its brand equity in the domestic and international generic markets to occupy a significant position in
the branded formulation business. Its inorganic growth strategy has seen a stupendous success in the past.
While most of the geographies have recorded an impressive growth for the company in FY2014, Japan (due to
restructuring at the step-down subsidiary, Irom Pharma) and India (due to the impact of the new drug pricing
policy) saw a weaker performance during the fiscal. However, we expect the Indian business to bounce back, as
the pricing related issues are gradually getting settled.
Lupin is expected to see stronger traction in the US business on the back of the key generic launches in recent
months and a strong pipeline in the US generic business (over 91 abbreviated new drug approvals pending approval
including 86 first-to-files) to ensure the future growth. The key products that are going to provide a lucrative
generic opportunity for the company include Nexium (market size of $2.2 billion), Lunesta (market size of $800
million) and Namenda (market size of $1.75 billion) that will be going out of patent protection in FY2015. We
expect revenue and profit CAGR of 22% and 17% over FY2014-16.
UltraTech Cement 2,630 35.2 25.6 22.2 12.0 14.3 14.3 2,868 9%
Remarks: We expect the demand environment to improve with a cyclical upturn in the economy aided by policy push
driving investments in the infrastructure sector. The cement prices across India have risen recently which can
boost the OPM of pan-India players like UltraTech.
UltraTech being an industry leader with a strong balance sheet is placed comfortably to grow inorganically by
acquiring assets at reasonable valuations and maintaining its dominant position. The company is slated to increase
its current capacity to 70MMT by 2016 from 55MMT currently.
We like UltraTech on account of its pan-India presence and a strong balance sheet. The current valuation of
cement companies is on the cusp of a re-rating considering the past cement cycles. UltraTech trades at a 39%
discount to its peak cyclical valuation. Consequently, we maintain our Buy recommendation on the stock with a
price target of Rs2,868.
7 July 2014
Sharekhan
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sharekhan top picks
Name CMP PER (x) RoE (%) Price Upside
(Rs) FY14 FY15E FY16E FY14 FY15E FY16E target (Rs) (%)
Zee Entertainment 300 32.3 28.0 22.1 20.6 20.6 23.1 367 22%
Remarks: Among the key stakeholders of the domestic TV industry, we expect the broadcasters to be the prime beneficiary
of the mandatory digitisation process initiated by the government. The broadcasters would benefit from higher
subscription revenues at the least incremental capex as the subscriber declaration improves in the cable industry.
On completion of 20 years of operations, ZEEL has issued redeemable preference shares (RPS) aggregating Rs2,000
crore (6% preference dividend) for eight years. The RPS will be issued at a ratio of 21 RPSs for every equity share.
The RPS will be redeemable from the fourth year till the eighth year.
ZEELs management acknowledged that the recent TRAI recommendation of capping the advertisement time at
12 minutes per hour would have an adverse impact on its advertisement volume. The company will take adequate
hikes in the advertisement rates in order to negate the impact of reduced volumes. Thus, we expect a very
minimal impact on the blended advertisement growth in FY2015 and FY2016.
ZEEL is well placed to benefit from the ongoing digitisation theme and the overall recovery in the macro economy.
Additionally, phase-wise rate hikes in the channel rates would augur well for the subscription revenues. We have
incorporated potential tax benefits from a merger of DMCL in FY2016. We maintain our Buy rating on the stock
with a price target of Rs367.