Investment Ideas
December 31, 2016 2
Market Outlook 2017
As we embark upon our investment journey into calendar year 2017, one cannot help but look at the
economic prospects with a greater degree of optimism than seen in recent years.
India stands today at an inflection point, thanks to major initiatives taken by honourable Prime Minister
Shri Narendra Modi. These steps will progressively result into every rupee worth of economic activitybeing accounted for as the drive for black money elimination and GST implementation reach aconclusion during 2017.
New legislations like Black Money Act, Benami Property Transaction Act and Real Estate (Regulation and
Development) Act will bring much needed and overdue transparency to financial dealings in India. Theywill also aid in creating a level playing field for honest business enterprise. Such an environment willmotivate those who might have creative ideas in terms of offering innovative product and services andin building business organizations par excellence. It will also largely discourage those who have so farthrived on financial manipulations and by creating unaccounted assets.
We enter into 2017 against a background of little or negative earnings growth for listed companies
during preceding three years. Inevitably therefore, as the economic cycle turns around, propelled bywhat is stated in the preceding paragraphs, prospects of considerably improved earnings growth forfinancial year ended March 2018 are very much on the cards. After a temporary speed breaker in theshape of demonetization, we expect the economy to be cruising on the growth highway.
December 31, 2016 3
Market Outlook 2017 (contd.)
The markets have withstood many negatives like Brexit, unexpected US election results and the US Fed
action with remarkable resilience to finish calendar year 2016 with marginal gains as measured in termsof performance of benchmark indices. However, with no further negatives in sight, against modesthistorical bases, earnings should bounce back with renewed vigor.
A higher PE has been ascribed to the broader indices like Nifty500 and S&P BSE500 based on current
earnings. The collective wisdom of the investing community at large, therefore, endorses much elevatedfuture earnings.
Inflation is well within the RBI targeted rates, interest rates are on a downward trajectory and
macroeconomic parameters are very stable – factors that are conducive for economic growth andcorporate earnings. The positivity may be further catalyzed by factors such as a path breaking unionbudget by the Finance Minister, outcome of five state elections that strengthen the government at thecentre, impetus to the US economy provided by policies of the newly elected US president DonaldTrump, implementation of GST and last but not the least further structural reforms by the Governmentof India lead by the PM.
We, therefore, look at future for the Indian economy and equity markets with optimism and expect the
markets to scale newer heights in 2017.
December 31, 2016 4
Company CMP (Rs) Target price (Rs) Expected Upside (%)
Bajaj Finance 845 1050 24
Bosch Limited 20760 28000 35
Dr. Reddy Lab 3055 3950 29
Force Motors 3745 4725 26
IDFC Bank 60 95 58
Infosys 1005 1275 27
Sudarshan Chemical 310 450 45
TCI Express 290 450 55
UltraTech Cement 3250 4100 26
Investment Ideas – 2017
Note: Investment period - 12 MonthsStock’s Price as on December 30, 2016
Profile:Bajaj Finance Limited, a subsidiary of Bajaj Finserv, is an Indian Non-Banking Financial Company. It is present in consumer finance, SME,commercial and rural lending. It is also leading player in consumerelectronics financing and has strong distribution presence.
Key Triggers: Strong leadership position in consumer durables financing: Its
strong leadership position in niche segment of consumerfinancing has fuelled healthy growth for the company over thepast many quarters. The company could gain market share inthis under penetrated segment .
Management remains positive post demonetisation:Management said that growth in consumer durables portfolio iswitnessing some improvement and they believe growth shouldbe back March onwards.
Correction in stock price post demonetisation providesinvestment opportunity for long term: Demonetization willhave a structurally positive impact on NBFCs due to the shiftfrom the informal unorganized segment to the organizedsegment. The finance sector will benefit from higher systemicliquidity and lower funding costs as a result. Over the long term,the move will also lead to increased adoption of technology forall transactions and will help reduce the expenses of the sector.
Valuation & View:At the current price of Rs 845, the stock is trading at TTM P/BVmultiple of 3.75X. Hence, we recommend a BUY rating for the targetprice of Rs 1050 in 12 months perspective.
Key Risk: Due to demonetization lower growth in disbursement could
restrict the increase in company's top line and lower collectionscould have a bearing on its asset quality.
Valuation Metrics
CMP (Rs.) 845
Target Price (Rs.) 1050
CNX NIFTY 8034
52 Week H/L 1180/535
Market Cap (Cr.) 43,453
P/E (ttm) 35.97
EPS (ttm) 23.33
P/BV (ttm) 5.91
Book Value (ttm) 142.11
Industry NBFCs
Bajaj Finance Ltd.
Source: Aceequity5December 31, 2016
Chart comparison with Sensex
Profile:Bosch is the flagship of the Bosch Group's subsidiaries in India.Founded in 1951, the company is India's largest auto componentmanufacturer and also one of the largest Indo-German company inIndia. Bosch has a strong nationwide service network which spansacross 1,000 towns and cities with over 4,000 authorizedrepresentations to ensure widespread availability of both productsand services. Bosch India has consistent focus on newer product,segment & customer is likely to drive its growth, going forward.
Key Triggers: Debt Free Balance Sheet: We have more faith in the company
as it has been funding its capex growth plans from its ownreserves. The company has very low leverage compared to itscompetitors. Bosch has debt to equity ratio of 0.01 as of FY17.
Well placed to capitalise on demand recovery: With its strongtechnology leadership & market share >70%, is one of the fewancillary companies with large bargaining power with OEMs.
Commitment To innovation: Bosch India has consistent focuson newer product, segment & customer is likely to drive itsgrowth, going forward. The government has announced itsplans to skip BS V norms and asked the industry to comply withBS VI emission norms by 2020.
Valuation & View:At the current price of Rs 20760, the stock is trading at ttm P/Emultiple of 48.47x. It always commands premium on the abovefactors. Hence, we recommend a BUY rating for medium to longperspective.
Key Risk: Slowdown in Auto sector. Any changes in government’s deadline related to emmision.
Valuation Metrics
CMP (Rs.) 20,760
Target Price (Rs.) 28,000
CNX NIFTY 8034
52 Week H/L 25649/15752
Market Cap (Cr.) 58,993
P/E (ttm) 48.47
EPS (ttm) 397.50
P/BV (ttm) 7.31
Book Value (ttm) 2637
Industry Auto Parts & Equipment
Bosch Limited
Source: Aceequity 6December 31, 2016
Chart comparison with Sensex
Profile:Dr. Reddy Lab offers solutions for unmet medical needs and betteraccess to existing medicines. Its offerings cover ActivePharmaceutical Ingredients (APIs), Branded Formulations, GenericDrugs, Biologics, Specialty Products and New Chemical Entities (NCE).It has a strong presence in key generics markets globally.
Key Triggers: Leader in Global Generics: Global Generics is its biggest
business driver. It offers more than 200 high-quality genericdrugs, keeping costs reasonable by leveraging its integratedoperations. Its expertise in active ingredients, productdevelopment skills, a keen understanding of regulations andintellectual property rights, as well as its streamlined supplychain, makes leaders in this segment.
Multiple Opportunities: There are some key product launchesthat are lined up including gGleevec (incorporated in FY17E),gCopaxone, gDoxil and gAloxi. Expected Rituximab launch inRussia and other EMs, along with other biosimilars launch inEMs to drive earnings further. Also, with Proprietary productsgaining traction (Zembrace and Sernivo), the company expectsto achieve peak sales of US$ 50 mn each over three years.Moreover, Teva portfolio is expected to add more value in FY18.In US, we expect other verticals like, OTC business, injectable,patches, derma filings, and other specialty oral products tofurther lift earnings going ahead.
Valuation & View:At the current market price of Rs 3055, the stock trades at 22.7FY17BE EPS of Rs 134 and 17.28x FY18BE EPS of Rs 176, valuationlooks attractive.
Key Risk: Any FDA issues and fluctuations in currency.
Valuation Metrics
CMP (Rs.) 3055
Target Price (Rs.) 3950
CNX NIFTY 8034
52 Week H/L 3689/2750
Market Cap (Cr.) 50,407
P/E (ttm) 45.16
EPS (ttm) 67.35
P/BV (ttm) 4.18
Book Value (ttm) 727
Industry Pharma
Dr. Reddy's Laboratories Limited
Source: Aceequity7December 31, 2016
Chart comparison with Sensex
Profile:Force Motors is a fully, vertically integrated automobile company,with expertise in design, development and manufacture of the fullspectrum of automotive components, aggregates and vehicles. Itsrange includes Small Commercial Vehicles, Multi Utility Vehicles(MUV), Light Commercial Vehicle (LCV), Sports Utility Vehicles (SUV),and Agricultural Tractors. Force provides appropriate solutions fortransport – both goods as well as passenger – rugged, reliable andefficient transport solutions for every need Rural or Urban, longdistance or local, over good roads and bad tracks.
Key Triggers: Strong Balance sheet: The Company is having a debt free
status. As on March 31, 2016, the company has cash reserves of~Rs. 318 cr. and it has a book value of Rs 1204 per shares, whichis very positive for the company.
Management Takeaways: Force Motors became the onlycompany in the world to supply engines to Mercedes-Benz andBMW, two of the world’s biggest luxury car makers. TheCompany expects to triple its revenue to Rs 3,000 crore in nextthree years driven by its contract manufacturing business forleading automobile companies like Mercedes Benz and BMW.Currently, the revenue generated (from OEMs business) isaround Rs. 1,000 crore.
Valuation & View:The Company is able to sustain its growth momentum in future. Atthe current price of Rs 3745, the stock is trading at annualized P/Emultiple of 23.8x with an annualised EPS of RS 154. Hence, werecommend ‘BUY’ for the target price of Rs. 4725 in medium to longterm.
Key Risk: Slow down in economic growth.
Valuation Metrics
CMP (Rs.) 3745
Target Price (Rs.) 4725
CNX NIFTY 8034
52 Week H/L 4839/2180
Market Cap (Cr.) 4803
P/E (ttm) 23.29
EPS (ttm) 154.93
P/BV (ttm) 2.98
Book Value (ttm) 1204
Industry Automobile
Force Motors Limited
Source: Aceequity8December 31, 2016
Chart comparison with Sensex
Profile:IDFC Bank Limited is one of the emerging banks in India, which hasdemerged from IDFC Limited. Going forward, IDFC Bank will have 3business verticals namely Corporate (Wholesale) Bank, Consumer(Retail) Bank and Rural (Bharat) Bank. It is wholly owned subsidiary ofIDFC Financial Holding Company Limited. It does not have anySubsidiary, Joint Venture or Associate Companies.
Key Triggers: Sept. Quarter Earnings: IDFC Bank reported over six-fold jump
in net profit to Rs 387.76 crore for the quarter ended onSeptember 30, 2016. It has reported a net profit of Rs 59.63crore in the corresponding quarter a year ago. Its total income,as per a regulatory filing, stood at Rs 2,493.13 crore as againstRs 91.81 crore in the quarter of the last financial year. The banksaid provisioning for bad loans for the quarter under reviewstood at Rs 22.34 crore. The pressure on asset quality eased alittle with gross NPAs declining marginally to 5.96%, comparedwith 6.09% in the preceding quarter. However, in the sameperiod, net NPLs rose slightly to 2.44%, compared with 2.32% inthe quarter ended March. The bank said that they have notseen any deterioration in the asset quality and that the level ofstressed assets has been contained.
Bank focus on Rural Areas: In India, there is only 35% of thepopulation have formal Banking accounts in rural areas. Hence,IDFC bank will be benefited from the focus in rural India.
Valuation & View:At the current price of Rs 60, the stock is trading at P/BV multiple of1.45x with the book value of Rs 42.09. Hence, we recommend a BUYrating for the medium to long term perspective.
Key Risk: The asset quality might be remain weak for at least a few more
quarter.
Valuation Metrics
CMP (Rs.) 60
Target Price (Rs.) 95
CNX NIFTY 8034
52 Week H/L 83.45/43.15
Market Cap (Cr.) 20,832
P/E (ttm) 19.64
EPS (ttm) 3.12
P/BV (ttm) 1.45
Book Value (ttm) 42.09
Industry Banking
IDFC Bank Limited
Source: Aceequity9December 31, 2016
Chart comparison with Sensex
Profile:Infosys is an India based IT major engaged in consulting, technologyservices and outsourcing. It has presence in more than 50 countrieswith 85 sales and marketing offices and 114 development centers. Itprovides software products, platforms and services includingapplication development/maintenance, Business processmanagement, Infrastructure management and product engineering.It caters to Financial Services and Insurance (FSI), Manufacturing,Energy & utilities, Communication and Services (ECS), Retail and LifeSciences and Healthcare (LSH) industries.
Key Triggers: Management reiterated confidence in growth outlook: Despite
the near term headwinds and the revision of conservativeguidance to 9%, the company is expected to beat the estimateafter the clarity over the U.S. presidential elections. Thecompany signed deals worth $1.2bn in Q2FY17 (new deal winsof $138mn, framework deals of $1,071 mn), taking theaggregate deal total contract value signed to over $2bn in H1.The management has reiterated its confidence in 2020 target of$ 20 billion revenue and 30% operating margins.
Strong financial position and corrected valuation: One of thestrongest IT majors have reported ~18% revenue CAGR,consistent operating margins of 25% and consistent ROE andROCE of >20% through FY11-16.
Valuation & View:Recently corrected valuation at 16.9x its ttm earnings provides buyingopportunity. Improving utilization, cost optimization initiatives andthe expected margins expansion makes us bullish on the investment.
Key Risk: Global macroeconomic uncertainties and fluctuations in
currency.
Valuation Metrics
CMP (Rs.) 1005
Target Price (Rs.) 1275
CNX NIFTY 8034
52 Week H/L 1279/901
Market Cap (Cr.) 2,30,544
P/E (ttm) 16.35
EPS (ttm) 61.40
P/BV (ttm) 3.56
Book Value (ttm) 282
Industry IT
Infosys Limited
Source: Aceequity10December 31, 2016
Chart comparison with Sensex
Profile:Sudarshan Chemical is the largest pigment producer in India and hasbeen prominent in global markets for over 60 years, supplying topaints, plastics, inks, cosmetics, textile and other applications. It isuniquely placed to offer a comprehensive range – general purposegrades, high performance and effect pigments. With equivalent orsuperior quality & consistency to the leading international grades itprovides solutions for all differing technical challenges, all from justone supplier.
Key Triggers: September Quarter Takeaways: Despite the nominal sales
growth during the Sept Quarter ended, the profitability (beforetax) has grown by 48% mainly on account of highercontribution, significant efforts taken in upgrading the sourcingfunction translating into raw material cost reduction inmanufacturing cost, lower interest cost on account of lowerborrowing and reduction in interest rates.
Largest Pigment manufacturer: The Company is one of thelargest manufacturers of pigments in India with more than 30%market share. The Company’s developments focus is onpigments mainly for automotive coatings and engineeringplastics that are produced in state of the art manufacturingfacilities.
Valuation & View:At the current price of Rs 310, the stock is trading at forward P/Emultiple of 13.95X FY18BE (Bloomberg Estimates) with an EPS of Rs22 FY18BE.
Key Risk: Demand slow down of this products can dent the earnings for
the company. Wild Currency fluctuation may dent profitability.
Valuation Metrics
CMP (Rs.) 310
Target Price (Rs.) 450
CNX NIFTY 8034
52 Week H/L 455/78
Market Cap (Cr.) 2123
P/E (ttm) 27.39
EPS (ttm) 10.10
P/BV (ttm) 6.10
Book Value (ttm) 45.53
Industry Chemical
Sudarshan Chemical Inds. Limited
Source: Aceequity11December 31, 2016
Chart comparison with Sensex
Profile:TCI Express Limited is India's leading door-to-door ExpressDistribution Specialist. The key focus sectors for TCIEXPRESS includeconsumer electronics, retail, apparel and lifestyle, automobile,pharmaceuticals, engineering, e-commerce, energy/power andtelecommunication. It is a demerged entity of Transport Corporationof India Ltd. The Demerged Company has listed on December15,2016 on NSE & BSE.
Key Triggers: Half yearly Earnings: The company revenues touched at Rs.
363.47 crore for the first half of the year registering a moderategrowth of 15% , and for the rest of the year company expects togrow in the range of 18%-20% . Net Profits stood at Rs. 18.43crore, registering a growth of 35.51% over the H1 of the lastfiscal. With strong cash flows TCIEXPRESS is looking atinvestments to the tune of Rs. 250 crore over the next fiveyears.
Implementation of GST is positive for the Company: Theregulatory reforms proposed in the GST, likely present anexcellent opportunity to revisit, rationalize and re-engineer thetransportation and logistics networks in India. With theimplementation of GST, there will be Improvement in thelogistic time after phasing out the border check posts resultingin enhancement in operational efficiency through quicker andincreased number of deliveries along with reduction in logisticcost during the transit.
Valuation & View:At the current price of Rs 290, the stock is trading at annualised P/Emultiple of 31.45x with an annualised EPS of Rs 9.7. Hence, werecommend a BUY rating for the medium to long term perspective.
Key Risk: Any delayed in implementation of GST.
Valuation Metrics
CMP (Rs.) 290
Target Price (Rs.) 450
CNX NIFTY 8034
52 Week H/L 386/265
Market Cap (Cr.) 1165
P/E (annualized) 31.45
EPS (annualized) 9.7
P/BV (ttm) 8.92
Book Value (ttm) 32.13
Industry Logistics
TCI Express Limited
Source: Aceequity12December 31, 2016
Chart comparison with Sensex
Profile:Ultratech Cement Ltd. is one of the largest company in the cementspace boasting of a strong distribution network across the country.The capacity at Ultratech is slated to increase from 62mtpa to76mtpa including the 5mtpa capacity of JP Associates’ MadhyaPradesh Plant post the completion of the merger process.
Key Triggers: Expansion Plan: The management is inclined towards building
capacity through organic routes, for which they have acquiredland to set up manufacturing units in the recent past.
Raw material benefits: The downward trajectory in cost ofinputs like pet coke, coal and fuel cost which form 20-30% ofthe total production costs would lead to improvement in theoperating margin and return ratios.
Strong Demand Outlook: Ultratech is betting big on the influxof demand for cement from the Southern region of the country.The company would stand to benefit from the growing demandfor cement on account of upcoming projects and improvementin government spending. Its ability to service such demandplaces it ahead of its peers.
Valuation & View:The government’s thrust on infrastructure development and thecurrent valuation makes optimistic on the future prospects ofUltratech Cement Ltd. At the current price of Rs 3250, We valuedUltratech on the basis of 13.5x EV/EBITDA and USD $210 for FY2017E.Hence, we recommend a BUY rating.
Key Risk: Downside risk would be tepid demand due to not improvement
in infrastructure and real-estate activity in India.
Valuation Metrics
CMP (Rs.) 3250
Target Price (Rs.) 4100
CNX NIFTY 8034
52 Week H/L 4130/2581
Market Cap (Cr.) 86,193
P/E (ttm) 32.45
EPS (ttm) 97.02
P/BV (ttm) 3.75
Book Value (ttm) 839
Industry Cement
Ultratech Cement Ltd.
Source: Aceequity 13December 31, 2016
Chart comparison with Sensex
Point of Contact
Team Point of Contact Contact Number
Fundamental Parashuram Prasad 011-43666509
Mitin Mohan 011-43666511
TechnicalNirav Vakharia 011-43666510
Umesh Sharma 011-43666543
14December 31, 2016
Disclosure
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immediately preceding the date of publication of the document.15December 31, 2016