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| Summary of Contents | STOCK IDEA Finolex Cables
Recommendation: Buy
Price target: Rs165
Current market price: Rs119 Wired for sound growth Key points - A new beginning: Finolex Cables Ltd (FCL), a leading manufacturer of power and communications cables, is set to benefit from (1) an improving demand environment in its core business of cables; (2) a strategy to leverage its brand strength to build a high-margin consumer product business (of switchgears, lamps etc); and (3) the cleaning up of its books (no more losses on derivative contracts and a sharp reduction in foreign currency loans). Consequently, the valuation multiples are expected to improve significantly in line with the company's superior return ratios (return on invested capital over 30%), track record of a healthy earnings growth (close to 20% annually) even in a tough environment (FY2011-13) and extremely strong free cash flows from operations.
- Consumer business-revenue and margin booster: Despite a strong brand recall, FCL has lagged its peers (like Havells India) in building a consumer product business (of low-voltage switchgears and CFL lamps). However, the younger generation at the helm has chalked out an aggressive strategy to generate incremental revenues of close to Rs200 crore (by FY2016) from the high-margin (25-30%) consumer product business and accordingly beefed up the distribution network.
- Waning derivative and forex losses: In the past (during FY2008-13), the company had entered into derivative contracts which had hit its profitability (a cumulative loss of Rs300 crore had resulted from the derivative and forex contracts during FY2008-13). This was reflected in its valuation. However, the derivative contracts have matured and the company has also reduced its foreign currency loans (with the debt-equity ratio dropping to 0.2x now) significantly.
- Valuations-recommend Buy: With the overhang of the derivative and forex losses gone, margins improving and expectations of a compounded annual growth of 17% in the earnings, we believe the gradual re-rating of the valuation multiple will continue in the coming years. We value the stock's core earnings (excluding the other income from the investment in Finolex Industries) at Rs137/share, based on 10x FY2016 estimates. On top of that, we value FCL's investments in Finolex Industries at Rs28/share (at a 50% discount to the current market value) to arrive at a price target of Rs165/share (SOTP). We initiate coverage on the stock with a Buy rating and price target of Rs165.
STOCK UPDATE HDFC Bank
Recommendation: Hold
Price target: Rs807
Current market price: Rs726 Stable performance Result highlights - In Q4FY2014 HDFC Bank reported a 23.1% Y-o-Y growth in the net profits though higher effective tax rates and a moderation in the NII growth pulled the growth in the earnings below the 25% mark. The NIMs improved by 20BPS to 4.4%.
- The asset quality remained stable (on a Q-o-Q basis) and continues to be among the best in the industry. According to the management the asset quality trends across the segments continue to behave on expected lines.
- HDFC Bank continues to deliver steady numbers in a tough environment with a strong focus on containing the costs and the asset quality. We expect the bank's earnings to grow at a CAGR of 24% over FY2014-16 leading to a RoAs of 1.9%. The current valuation (2.9x FY2016 BV) seems reasonable in view of a strong operational performance though uncertainty relating to an increase in the foreign investment limits remains an overhang. We maintain our Hold rating on the stock with a price target of Rs807.
LIC Housing Finance
Recommendation: Buy
Price target: Rs335
Current market price: Rs278 Price target revised to Rs335 Result highlights - LIC Housing Finance (LICHF) for Q4FY2014 reported a healthy growth in the profits (up 17% YoY) led by a steady growth in the NII and a reversal of provisions on teaser loans (Rs20.5 crore). In addition, the margin (up 24BPS QoQ to 2.4%) and asset quality showed improvement on a sequential basis.
- While the loan growth moderated in FY2014 (a 17% growth vs a 23.4% growth in FY2013), the management suggested a strong growth in sanctions in Q4FY2014 and plans to grow the loan book by 20% in FY2015. In addition, the proportion of high yielding loans (loan against property and developer loans) could increase to about 10% (about 6% in FY2014) which will be positive for the margin.
- While the stock has appreciated by 20% since our initiating coverage (on 28 March, 2014) we continue to maintain a positive view on the stock owing to a sound asset quality and strong return ratios (RoAs of 1.6% and RoE of about 20%). Despite the improving outlook on the growth and margins, the stock trades at about 15% discount to its mean valuations. We revise the price target upwards to Rs335 (1.7x FY2016 book value) and maintain our Buy rating on the stock.
- Key risk: LICHF (along with other NBFCs) has requested for a waiver of the requirement of debenture redemption reserve (under new companies act), which if denied could have an impact on the margins.
| | Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article. | |
| Regards,
The Sharekhan Research Team |
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