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| Summary of Contents SHAREKHAN SPECIAL India Elections Special
Acche din aa gaye hain A thundering majority mandate to the National Democratic Alliance (NDA)-led formation under the leadership of Narendra Modi gives a fair amount of conviction that 'Acche din aa gaye hain' (good days are here again). Notwithstanding the near-term concerns such as a slowdown in consumption, muted industrial activity and an uncertain monsoon season amid inflationary pressures, we believe that the markets are set for a multi-year rally. Anyway, the equities have traditionally given handsome returns couple of years post-general elections. The reformist and pro-development track record and image of Narendra Modi and the NDA would also boost the overall sentiments and result in a re-rating of the valuation multiples. From an investor's perspective, in addition to the increasing exposure to select index stocks (like ICICI Bank, SBI, RIL, L&T, Maruti and Grasim), we advise increasing the exposure to quality mid-cap stocks for relatively superior returns due to a huge valuation gap. Accordingly, we have identified 20 quality mid-cap stocks that can potentially give ~40% returns over the next 12-18 months. The preferred picks are from the key themes of a policy-push in infrastructure (railways, power and roads), PSU re-rating and a revival in leading sectors (automobile, banks, and oil and gas).
STOCK UPDATE Bajaj Auto
Recommendation: Buy
Price target: Rs2,162
Current market price: Rs1,934 Performance under pressure; expect the company to bounce back aided by new launches Result highlights - Bajaj Auto (Bajaj)'s results in Q4FY2014 were under pressure owing to a fall in the volumes (4% down YoY) and a margin contraction of 63BPS on a sequential basis. The margins fell below the 20% mark after a gap of three quarters. The adjusted profits grew a modest 3.0% YoY to Rs788 crore.
- Bajaj's domestic volumes have been under pressure especially given the market-share losses in the motorcycle segment. However, the exports have been the silver lining for the company. We expect the company to claw back the domestic market share on the back of the new launches in the executive (Discover) segment. A release of new permits should also provide an impetus to the domestic three-wheeler volumes. We expect the company to maintain the margins in the 20% range.
- We continue to remain positive on the stock given its strong presence in the export market, leadership position in the domestic premium (Pulsar) motorcycle and three-wheeler segments. Additionally, the company has managed to maintain an industry leading EBITDA margin. We have rolled over our price target to FY2016 and maintain a Buy recommendation with a price target of Rs2,162 (earlier Rs2,072) discounting FY2016E earnings 15x.
Cadila Healthcare
Recommendation: Buy
Price target: Rs1,200
Current market price: Rs912 Growth accelerates on strong US back-up; Buy maintained Result highlights - Cadila Healthcare continues to maintain a healthy growth as the Q4FY2014 results show a 23% rise in the net sales to Rs1,971 crore and a 63.5% jump in the adjusted net profit to Rs265 crore on the back of a 169-BPS rise in the OPM to 19%.
- The quarter witnessed a healthy growth in the USA (up 75%) on the back of three product launches and the domestic business (up 10%), which effectively made up for a decline in the revenues in other segments, like its European (down 12%), joint venture (down 3.6%) and consumer (Zydus Wellness, down 1%) businesses.
- The management appears aggressive in the US market with a target to file over 40 ANDAs in FY2015 after filings near 50 ANDAs in FY2014. It expects the revenue to surpass Rs10, 000 crore by FY2016 (a CAGR of 18%) and a healthy improvement in the OPM (by 300BPS) in the next two years.
- We prefer to keep our earnings estimates intact with a price target of Rs1,200 (implies 17x FY2016E EPS). We maintain our Buy rating on the stock.
VIEWPOINT Balkrishna Industries
Current market price: Rs559
View: Positive Stellar performance; accumulate at lower levels Key points - Balkrishna Industries Ltd (BIL) reported another impressive performance in Q4FY2014 with a 33% top-line growth. The OPM expanded 455BPS YoY to 25.8% on the back of a continued benefit of the lower natural rubber prices. The net profit for the quarter was up 82% YoY to Rs154 crore aided by both a revenue growth and a margin expansion.
- BIL is in the process of ramping up the capacity at its new Bhuj facility which will cater to the future demand growth. The company will be expanding its capacity by 36% over the period FY2014-16. Additionally, given the high percentage of exports and the company's policy of hedging one-year forward, the benefit of the rupee's depreciation against the dollar since mid-CY2013 will accrue only in FY2015. Moreover, a recovery in the European and US markets will give impetus to the volume growth of the company.
- The stock has appreciated by close to 40% over the past three months and is currently trading at 8.7x its FY2016E earnings of Rs65.4. We believe the recent appreciation of the rupee against the dollar (in anticipation of strong election results) will be an overhang on the stock in the near term. However, considering the strong business fundamentals and potential earnings growth we believe the stock can be accumulated at the lower levels (Rs500-525) for a decent upside of 20% over the next six to eight months.
MUTUAL GAINS
Debt Mutual Fund Picks
Bond / Debt market round up
- Bond yields remained volatile and moved up as investors continued to offload their investments in bond markets and remained cautious ahead of the debt auctions scheduled during the month. Bond yields surged at the beginning of the month by as much as 16 bps on a single day as investors became concerned over tightening cash conditions after the Central Bank reduced the liquidity under the Liquidity Adjustment Facility (LAF). Bond yields rose further after the Central Bank's first debt auction of the new fiscal was under-subscribed for one of the tranches; increasing concerns over weak demand after the Central Bank set a higher underwriting fee for the same. Market sentiments remained weak as the Wholesale Price Index (WPI)-based inflation rose more than expected in March, compared to that of the previous year. There was further pressure on yields after a possibility of higher inflation emerged following the India Meteorological Department's forecast of below-average monsoon.
- After moving in the range of 8.81% to 9.13%, the 10-year benchmark bond yield closed up 3 bps at 8.83% compared to the previous month's close of 8.80%.
Bond / Debt Outlook - Market participants will closely follow the developments related to the general elections. The movement of the rupee against the dollar and the activities of foreign investors will also remain in focus. Next month, the RBI will conduct the auction of 91-days, 182-days and 364-days Government of India Treasury Bills for an aggregate amount of Rs. 60,000 crore. The RBI will also conduct the auction of dated securities for an aggregate amount of Rs. 84,000 crore.
| | | 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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