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THE SMART INVESTOR

Business Standard

TAKE 20: STOCKS YOU CAN GAIN FROM
Amid slowing growth and global uncertainties, here are the top recommendations of leading research houses
29%
LARSEN & TOUBRO
CMP

1,610

DIV YIELD

0.9

FY12 P/E

18.8

FY12 P/BV

3.3

Strong revenue growth guidance of 25% for FY12 Order inflow growth guidance of 15% Potential write-back of provisions created for Delhi airport in FY11 to limit margin fall Downside risk to earnings limited

Positives

Key risks

COAL INDIA
CMP

AXIS BANK
FY12 P/E

PANTALOON RETAIL
FY12 P/E

BHARTI AIRTEL
FY12 P/BV

Macro economic uncertainties may cap orders Higher raw input costs could hurt margins

375

DIV YIELD

1.0

13.6

FY12 P/BV

5.2

23%

CMP

1,075

DIV YIELD

1.3

10.4

FY12 P/BV

2.0

63%

CMP

294

DIV YIELD

0.3

FY12 P/E

24.7

1.8

23%

CMP

404

DIV YIELD

0.3

FY12 P/E

19.6

FY12 P/BV

2.6

31%

Positives

ITC
CMP

Key beneficiary of the structural coal deficit in India Washed coal volumes will surge to 150 million tonnes (25% of total) by FY17 spurring margins Average realisation for CIL is still 50% lower than import parity price of coal Largest coal reserves in the world of 22 bln tonnes Key risks Plan of 26% profit sharing for local development Inability to get environmental clearances or land

Positives

The bank’s loan book is expected to grow at a brisk pace of 25% plus in FY11-13 Stable margins and healthy asset quality Growing franchise, new products will further drive retail fee income As it delivers consistent earnings, valuation discount of 40% with HDFC Bank will narrow Key risks Deterioration of macro environment can result in higher slippages and slow down in business

Growing trend among consumers to allocate more income to consumption, lifestyle products Allowing FDI in multi-brand retailing The company plans to monetise its non-retail assets over next 12-18 months and reduce debt Valuation of investment in subsidiaries is worth ` 3,000-4,000 crore Key risks Higher inventory days remain Slow revenue growth due to rollout delays

Positives

Positives Turning point for Indian telecom industry led by improvement in rates Rate hikes should lead to gradual improvement in voice revenue per minute (RPM) and margins 3G services will also add 3-5% to RPM by FY13 Its African business and improving cash flows augur well and will boost earnings in coming years Key risks Any move to reverse rate hike will hit profits Trai recommendations on spectrum

200

DIV YIELD

2.2

FY12 P/E

24.2

FY12 P/BV

8.5

13%

BAJAJ AUTO
CMP

Positives Market leader in the demand-inelastic cigarettes business High pricing power, hence less impacted by input cost inflation FMCG business closing in towards breakeven Other businesses viz, agri, paperboard & packaging and hotels growing strong Key risks Trading at higher end of historical valuations A mid-year excise duty hike could hurt volumes

1,571

DIV YIELD

2.5

FY12 P/E

15.6

FY12 P/BV

7.2

12%

Growth visibility supported by strong volumes Better return ratios, good dividend payout and attractive valuations Better revenue mix will help sustain margins Focus on leading brands, drive to grow exports and ramp up capacity Key risks Increasing competition Rise in commodity prices could hurt margins

Positives

DR. REDDY’S LABORATORIES
CMP

1,494

DIV YIELD

0.8

FY12 P/E

16.6

FY12 P/BV

4.2

22%

MAHINDRA & MAHINDRA
CMP

738

DIV YIELD

1.6

FY12 P/E

15.7

FY12 P/BV

3.7

4%

Positives Strong pipeline in the US business; 76 ANDAs pending with US FDA for approval Robust growth in Russia continues on the back of strong traction in the OTC business Ten product launches in FY12 Strong growth in API business Key risks Muted India sales in some products Difficult pricing scenario hits revenue growth in Germany

M&M dominates the domestic tractors market enabling it to capture rising rural demand Enjoys good pricing power in tractors & UVs The launch of its sub-tonne Maxximo and Gio to lead incremental volume growth Long-term gains from Ssangyong Motors buy Key risks Higher duties on diesel vehicles would impact M&M, as its entire portfolio is diesel-based Higher interest rates may also impact demand

Positives

RELIANCE INDUSTRIES
CMP

JINDAL STEEL & POWER
1.1

JAIN IRRIGATION

782

DIV YIELD

0.9

FY12 P/E

10.6

FY12 P/BV

48%

CMP

520

DIV YIELD

0.2

FY12 P/E

10.3

FY12 P/BV

2.6

35%

CMP

172

DIV YIELD

0.5

FY12 P/E

17.2

FY12 P/BV

3.4

29%

HDFC BANK
CMP

472

DIV YIELD

0.7

FY12 P/E

21.6

FY12 P/BV

3.7

30%

Positives Consistent track record of strong earnings High asset quality, including lowest risk on asset quality due to small exposure to stress sectors Robust borrowing mix with high CASA of 49% to support margins High provision coverage ratio of 83% (including floating provision it is at over 125 %) Key risks Moderating loan growth and NIMs in a high interest rate scenario Benign retail asset quality

Company will be net cash positive in FY12, led by huge operating cash flow and proceeds from BP E&P business not fullly reflecting in valuations Doubling of petchem capacity in the next 2-3 years will boost its earnings significantly Key risks Higher cash allocation to unrelated areas Slowdown in global petrochemicals and refining businesses

Positives

Current valuations only reflect the operational power and steel assets Power expansion by 4,400 Mw, foreign coal and iron ore assets not fully reflected in valuations Cost of power & steel production among lowest Earnings to grow at about 22% annually, backed by volume expansion Key risks Final outcome of draft mining bill Decline in global commodity prices

Positives

MIS business, which is 50% of sales, will grow 30% annually over the next five years Growth is backed by expansion in new states, higher farm income and government initiatives Improvement in capital efficiency Stock trading at 6-year median level at EV/Ebitda Key risks Capital allocation to non-MIS business Slow turnaround in overseas markets

Positives

TATA STEEL
CMP

469

DIV YIELD

2.6

FY12 P/E

6.8

FY12 P/BV

1.4

58%

Positives Strong business model and attractive valuations Cash flows are expected to grow, driven by volume growth and better margins Projects in Jamshedpur to expand capacity from 6.8 million tonnes to 10 million tonnes moving fast Tata Steel Europe (TSE) to come out stronger after its recent restructuring at Scunthrope Room for TSE to improve productivity Key risks Demand scenario in Europe Lower steel prices could impact earnings

REDINGTON INDIA
CMP

GLENMARK PHARMA
FY12 P/BV

GODREJ CONSUMER
FY12 P/BV

96

DIV YIELD

1.2

FY12 P/E

13.3

2.1

34%

CMP

325

DIV YIELD

0.1

FY12 P/E

13.2

3.3

20%

CMP

425 Positives

DIV YIELD

1.4

FY12 P/E

24

FY12 P/BV

6.6

12%

BHARAT PETROLEUM
CMP

674

DIV YIELD

2.1

FY12 P/E

11.8

FY12 P/BV

1.5

20%

Positives Likely to derive significant value from its exploration activities in Brazil over the next two years Ramp, up in Bina refinery to boost GRMs Key beneficiary of cooling crude oil prices as well as fuel price deregulation Trading at attractive valuations Key risks Uncertainty regarding subsidy burden a major overhang on the stock

India, which is 61% of PBIT, continues to grow at a fast pace High growth and potential in the smart phone and iPad segments Strategic initiative to improve the working capital cycle Value unlocking from business such as NBFC and benefits from GST implementation Key risks Further interest rate hikes Currency fluctuation

Positives

Niche product launch to drive growth in the US market by 16 % during FY11-13 With an increase in market share, domestic business to grow at 16% during FY11-13 Valuations are lower compared to peers Upside from other products in the pipeline Key risks Lost Abbott and Sanofi cases, liable to pay $16 million, though it will appeal in higher court Pricing pressure in the US market

Positives

Firm growth in all its major categories Soft commodity prices and product price hike to add to margins Earnings surprise could come from Darling acquisition Earnings growth of 21 per cent over the next two years Key risks Rising competition in key segments Sharp rise in prices of inputs

SBI
CMP

1,946

DIV YIELD

1.5

FY12 P/E

10.5

FY12 P/BV

1.7

54%

The stock recommendations are of Edelweiss Research, ENAM Securities, Macquarie Research and Motilal Oswal Securities. All FY12 & FY13 figures are estimates

CIPLA
Company is the best play on emerging markets Supply agreements with 22 US players for 118 products to drive growth in the medium term Commencement of exports of CFC-free inhalers to Europe will be a key positive. Potential MNC contracts are likely to improve earnings for FY12/13. Key risks New pharma policy creates uncertainty over pricing NPPA liability of ` 1,200 crore (if it materialises) could result in a significant cash outflow

CMP

Positives

280

DIV YIELD

1.0

FY12 P/E

20.9

FY12 P/BV

3.0

29%

Positives With interest rates expected to ease, SBI should do well with better loan growth It has been able to protect its margins well Even if there are concerns over asset quality, provisioning coverage is near mandated levels Market leader trading at attractive valuations Key risks Higher interest rates Tightness in the G-sec yields