Investor's Eye: Stock Idea - Va Tech Wabag; Mutual Gains - Debt Mutual Fund Picks

 

Investor's Eye [December 18, 2014]  Sharekhan www.sharekhan.com

Summary of Contents STOCK IDEA       Va Tech Wabag Recommendation: Buy Price target: Rs1,900 Current market price: Rs1,488   Gallons of opportunity, take a sip of it   Key points  Increasing fresh water scarcity + niche expertise = Gallons of opportunity to flow: Globally, fresh water supplies are relatively static and with a rising population and urbanisation, the intensity of fresh water scarcity is on the rise. Therefore, investment in these areas like recycling and water treatment, water conditioning and desalination is likely to flow in significantly in coming days. The global water market is estimated at around ~$425-500 billion and is expected to grow at a 6% CAGR till 2030, and a large chunk is expected to be in the developing world. On this backdrop, VA Tech Wabag (VTW) is well placed having niche technical expertise and an impressive track record as its strength.  Domestic demand outlook to improve significantly over the next two years: With rising urbanisation and industrialisation in India, the demand for usable water, sewerage and solid waste management is going to rise; consequently, we expect significant spending in these spaces. In the last few years (2005-12), the government's allocation to water supply and sanitation has been about Rs45,000 crore cumulatively and under Jawaharlal Nehru National Urban Renewal Mission (JNNURM), the government plans to spend around Rs7-8 lakh crore in the next 20 years. Now, with the pro-reform BJP-led government at the center; the water segment is expected to get substantial focus and budgetary allocation including the clean Ganga project; moreover, we expect acceleration in project ordering and execution in FY2016 and FY2017.  View-Buy niche growth story: Given the large opportunity ahead and inherent strengths of VTW like professional management, niche technical expertise and global presence, the company will be one of the preferred investment opportunities in the water segment. We expect the earnings to grow by 23% (CAGR) during FY2014-17, backed by an 18% revenue growth and inch up in margins with increasing share of O&M business and cost rationalisation efforts by the management in international operations (subsidiaries). The company is poised to generate RoCE and RoE in the range of 22-25% and 16-17% respectively in the coming few years and with healthy cash generation from operations, the net cash is likely to remain positive. We initiate our coverage with a Buy recommendation on VTW and set a price target of Rs1,900 (based on 25x FY2017E earnings) for the stock. MUTUAL GAINS   Debt Mutual Fund Picks     Bond / Debt market round up Bond yields fell initially during the month on the back of continued fall in global crude oil prices. Bond yields fell further on the back of strong foreign fund inflows into the Indian debt market and after key macroeconomic indicators came along market expectations. The trend continued after Japan (the world's fourth-biggest crude importer) unexpectedly slipped into recession in the third quarter of 2014, reinforcing expectations of lower domestic interest rates. The trend continued to be sustained after China unexpectedly cut interest rates. Meanwhile, global crude oil prices continued to drop and witnessed their sharpest fall since 2011 after the Organization of the Petroleum Exporting Countries refrained from cutting its output. The yield on the 10-year benchmark bond dropped 19 bps to close at 8.09% against the previous month's close of 8.28%, after moving in the broad range of 8.09% to 8.28% over the month. Earlier during the trading session, bond yields fell to a 16-month low of 8.06%.   Bond / Debt Outlook Market participants will also track both wholesale and retail inflation numbers. The movement of the rupee, stance adopted by the FPIs and developments in the Euro and U.S. region will also remain in sharp focus. Market participants will also keep a close tab on the monetary policies adopted by the Central Banks across the globe. Next month, the Central Bank will conduct auction of 91-days, 182-days and 364-days Government of India Treasury Bills for an aggregate amount of Rs. 66,000 crore. It will also conduct the auction of dated securities for an aggregate amount of Rs. 42,000 crore. Click here to read report: Investor's Eye          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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