Samvat 2073 Heading towards New Highs

Transcription

1 Samvat 2073 Heading towards New Highs The last Samvat was very challenging and volatile for equity markets as we witnessed sharp cuts in Nifty from 8,000 levels to sub-6,900 during the initial four months, touching the nadir on the budget day. Since then we have witnessed a secular movement with NIFTY gaining~25%. During full year since Samvat 2072 Nifty has gained 8% and Mid-caps/Small Caps have outperformed with stellar gains of 24%. However, Nifty could not achieve new peak as IT services, one of the largest sector with 14% weightage has underperformed fundamentally over the last few quarters. Indian markets have been the outlier among the global markets as well in the whole year as they continued to outperform despite the major global developments like rate increase by the US Fed, Brexit and slow down of the larger economies like China. NIFTY has gained by 8% whereas Nikkei & Shanghai (China) corrected by 8%, and Hang Seng witnessed a marginal rise of 2% in the same period. Indian macros have improved a lot in the last one year with stable inflation, low deficit on current account, contained fiscal deficit and largely stable currency. We also could get a clear pathway for GST, one of the biggest tax reforms in the post-independent India. Bottoming out of commodity cycle has led to high single digit sales growth and good double digit earnings growth for Indian companies after a gap of 3 years. Good monsoon after a gap of 2 years and increased salaries of government employees will also help in delivering good earnings growth in this as well as next financial year. Interest rates have moderated by ~75 basis points and, are expected to cool o further in the coming few quarters. We have seen strong performance in markets despite subdued earnings growth in the previous quarters as we are one of the few countries with a GDP growth of above 7%. Continuous reforms to bring in more investments through FDI, stable interest rates, low inflation, and contained fiscal deficit will set the stage for earnings to grow in double digit over the next few years. Valuations at overall level are just above the average of last 10 years and growth in earnings coupled with benign foreign liquidity will likely take markets to new highs in coming months. One of the biggest risks confronting the emerging markets like India is reversal of liquidity flows due to abrupt upward changes in global interest rates, which are at all-time lows. Our earnings growth will provide support on the downside but mid caps and small caps, which had a stellar run will face increased risk of reversal in stock performance in case liquidity situation changes for the worse. We believe that large caps will outperform from current levels because the valuation gap between Nifty and Small Cap Indices are at all time high. Therefore, we are recommending 3 large caps and 2 mid caps in this year s diwali recommendations. Wish you all a very happy and prosperous Diwali! Happy Investing! Research Team rsec.research@rcap.co.in 1

2 Performance of stocks recommended for Diwali Samvat-2070 Stock Name Reco. Price Target Price Booked Price % Change Aurobindo Pharma SBI ,400-2,600 2, CMC , DCB Swaraj Engines Booked Price is October 17, 2014 or target price achieved whichever is earlier Performance of stocks recommended for Diwali Samvat-2071 Stock Name Reco. Price Target Price Booked Price % Change TCS* 2,406 3,200-3, SBI* (2) Tata Motors (18) Lic Housing Bajaj Corp* *Corporate actions are adjusted in recommended price Booked Price is November 06, 2015 last date or target price achieved whichever is earlier Performance of stocks recommended for Diwali Samvat-2072 Stock Name Reco. Price Target Price Booked Price % Change Hexaware* (23) Persistent HDFC Bank* IPCA Labs (13) Shriram Transport* *Corporate actions are adjusted in recommended price Booked Price is October 20, 2016 or target price achieved whichever is earlier Recommendations for Diwali Samvat-2073 Stock Name Reco. Price Target Price % Upside Aurobindo Pharma HDFC Ltd. 1,337 1, JK Lakshmi Cement Persistent Systems Pidilite Industries *CMP as on. 2

3 NIFTY (CMP: 8,693) Technical View In our last Diwali Muhurat Picks Report (dated: 7th November, NIFTY level of 7,954), we mentioned that if NIFTY fails to surpass 9,200/9,250 mark, the Index will continue prior falling trend and on further decline, it will find support around its 50-months EMA (then placed around 7,000 mark), which is exactly what happened in the market, as NIFTY remained under pressure after last Diwali. Subsequently, NIFTY reached to 50-months EMA in February 2016, and after visiting that average, the Index reversed from 6,826 level and soon breached 13-months old falling channel to reach sub-9,000 mark. Key technical indicators i.e. RSI & MACD are trading above their averages after reversing from their bull market support zone (40-33 level) and prior resistance zone (sub-200 level), respectively which signals strengths in the NIFTY. However, some sideways movement or profit booking cannot be ruled out in NIFTY after such a stellar rally, with the Index rising by 2,143 points from 6,826 level in less than seven months. On the higher side, NIFTY will face hurdle around prior swing high of 9,119-mark (shown in horizontal line in the above monthly chart) and any sustainable movement above that mark will help the Index to visit the psychological level of 10,000. Though the chances of major decline is relatively less with the key technical indicators positively poised on monthly chart, in case of any negative surprises, its 50-months EMA will continue to work as the key reversal point for NIFTY, which is now placed around 7,400 mark or lower. 3

4 Aurobindo Pharma (CMP: Rs823) Aurobindo Pharma (ARBP) is a vertically integrated pharma company and has strong presence in regulated market such as the US (44% of sales) & Europe (22% of sales). ARBP has one of largest ANDA pipeline in the US. The Company has one of the cleanest track records with the US FDA cgmp among Indian pharma companies. ARBP s business mix has significantly improved over the past few years, with the contribution of high-margin formulations rising to 79% in FY16 from 56% in FY13 and is expected to reach 83% in FY18E. Notably, ARBP has increased its focus on complex generic segment (high-margin/low competition) i.e. injectables, hormones, oncology etc (38% of pending pipeline), which led to strong improvement in EBITDA margin to 23.1% in FY16 from 15.2% in FY13. We envisage ~150bps expansion in margin by FY18E led by turnaround in EU biz, ramp-up in high-margin injectables and new launches in the US. ARBP has one of the strong ANDA pipelines for its US business (cumulative filings: 403; pending: 175 including tentative). We expect ARBP to launch products in the US over next 12 months. Currently, it has received Target Action Date (TAD) for 22 products from the US FDA. We expect US business to see 22-24% CAGR over FY16-18E driven by sustained traction in injectable portfolio (41 pending ANDAs), ramp-up in niche launches and growth in Natrol business Outlook & Recommendation: We expect ARBP to deliver a 19-20% CAGR in PAT over FY16-18E. Reduction in capex (Rs6bn in FY18 vs. Rs12bn in FY17) would result in strong FCF generation (Rs2.3bn by FY18E). We forecast RoE & RoCE at 24% & 26%, respectively by FY18E. We maintain our BUY recommendation on the stock valuing it at 20x FY18E EPS of Rs49.1/share and arrive at a Target Price of Rs981. Aurobindo Pharma reversed finding support around its 38.2% Fibonacci Retracement level (at Rs580) of prior multi-fold up-move (which begun from Rs68 and ended at Rs890) and later, with the help of its 20-months EMA, it surged higher to record fresh life-time-high of Rs895. We believe stock will manage to surpass horizontal resistance line in the short-term, but till then sideways movement or some profit booking cannot be ruled out. Post breakout, the stock will face resistance around upper band of the rising channel (placed around Rs1,050). However, in case of a major decline, the stock will find support around Rs700, which coincides with 20-months EMA and 23.6% Fibonacci Retracement level of prior multifold up-move. 4

5 HDFC LTD (CMP Rs1,337) Over the last few years, HDFC has proven its competitive edge over its peers through decent growth in business, stable spreads, steady asset quality and performance in other business arms. Consequently, the stock traded at a premium to its peers with best-inclass return ratios. HDFC s core mortgage business is likely to see strong growth led by healthy growth in aordable housing. Improving macros amid positive change in government policy for aordable housing is the key driver for the segment. Decline in borrowing rates and rising income levels are likely boost demand for housing loans. Hence, we expect healthy growth in loan disbursements over the next 2-3 years. HDFC continues to maintain stable spread led by decline in CoF, which was partially oset by cut in BPLR. The RBI s liquidity stance will continue to support HDFC s margins in the near-term. As per the Management, HDFC will adjust the mix between bank funding and market linked borrowing depending on existing interest rates and liquidity situation. HDFC created additional buer provisioning out of the proceeds of stake sale in insurance arms i.e. HDFC Life & HDFC ERGO, providing additional comfort for slippages, if any, particularly in corporate portfolio. We believe that asset quality will continue to remain stable, going forward. Outlook & Recommendation: As we expect further improvement in operating performance in coming quarters owing to healthy NII growth and listing of insurance arm, we maintain our BUY recommendation on the stock with a Target Price of Rs1,560, valuing standalone entity at 3.5x FY18E adj. BV and subsidiaries fetching Rs594/share (after deducting holding company discount of 15%). HDFC (among the Top-5 weights in Nifty) being an outperformer has hit a new high of Rs1,465, crossing it previous high of Rs1,410 recorded in Mar 15, despite NIFTY not being able to record any new high. At Rs1,050, HDFC hit strong bottoms on monthly charts in first quarter of current calendar year and achieved an all-time high in September The stock has seen some profit booking with minor corrections, which confirms our belief that another leg of strong up-move is on the cards. At the same time, downside in the stock is protected with the help of rising 21-month SMA, which is currently placed at Rs1,250 combined with 50% price retracement of entire up-move in the last year. 5

6 JK Lakshmi Cement: (CMP Rs499) JK Lakshmi Cement (JKLC) is one of the prominent cement manufactures in India with a healthy exposure in Northern & Western markets. Further, it has also diversified into Eastern region in last 18 months to enhance its geographical reach in growing markets. Currently, it has a total installed capacity of 9.7mT (6.1mnT in Northern region) and is set of expand it to 11.4mnT in next 12 months. It has a wide network of >4,000 dealers spread across India. Healthy presence in Northern market and decent brand equity augurs well for JKLC amid firm realizations and favourable demand environment. Moreover, diversification into Eastern market provides further impetus considering decent demand scenario, which is evident from JKLC s volume growth. Further, new capacities in Odisha (1.0mnT GU) & Chhattisgarh (0.7mnT GU at Durg) in next months will aid JKLC to register sales volume CAGR of 13.5% over FY16-FY19E. Unlike Northern plants, manufacturing cost at Durg plant is higher by Rs /tonne. With a view to reducing cost of production at Durg plant, JKLC is undertaking a series of initiatives to improve operating eiciency i.e. (a) Commissioning of conveyor belt (entailing ~Rs30-40/tonne saving); (b) 7MW WHRS to meet 30% of its power requirement (entailing ~Rs150/tonne saving); (c) likely arrangement with private players to source low-cost electricity; and (d) railway siding (entailing ~Rs300/tonne saving). We understand that JKLC is set to generate a robust FCF of Rs13.2bn over FY17E- FY19E mainly on account of healthy volume growth, favourable pricing environment and sound operating synergies. JKLC may utilize this cash to de-leverage its balance-sheet from the current fiscal. Outlook & Recommendation: At CMP, stock trades at EV/EBITDA of 9.3x / 7.3x for FY18E / FY19E, respectively. We maintain our BUY recommendation on the stock with a Target Price of Rs550. JK Lakshmi Cement (JKLC) reversed forming Triple Top pattern around Rs425 and later remained under pressure for almost one and half years. In August 2016, the stock managed to surpass that long-term hurdle and subsequently recorded new highs. We believe JKLC will continue its northward journey for next couple of months completing the bullish pattern soon. In case of a major decline, prior break-out line will continue to work as key reversal point for the stock. 6

7 Persistent Systems (CMP Rs677) Persistent Systems is a global oshore product development (OPD) player for software product companies and enterprises in verticals like Financial Services, Telecom and Life Sciences. It provides OPD services, platforms, products and enterprise digital transformation services across geographies including Americas (87% of revenue), Europe (5.2%), India (5.4%) and Australia & APAC (2.4%). It has entered into long-term strategic partnerships with major global IT and platform firms including IBM, Oracle, Microsoft, AWS, Salesforce, Appian and Dassault Systèmes. Persistent recorded revenue of US$351.7mn in FY16 & US$104.8mn in 1QFY17. We expect Persistent to report industry-leading USD revenue growth of 23% CAGR over FY16-FY18E. The IBM Watson-IoT deal is likely to take the mid-sized IT firm to next level in financial terms while deepening relationships with its largest client and tapping huge US$70,000bn IoT opportunity. Persistent is deploying >1,000 engineers to work on this deal, which we expect to add ~15% to its FY17E revenue. While margin concerns of the streets are justified, as incremental revenue from IBM Watson-IoT deal will come at lower profitability levels, we believe FY17E will see a bottom (171bps decline to 15.2%). Persistent s 3 verticals ISV, Enterprise & IP saw healthy growth in 1QFY17, which is a key positive sign. While ISV grew 3.4% qoq, revenue from Enterprise & IP verticals grew by 5.9% qoq & 4.3% qoq. Digital/SMAC revenue remains core driver of Enterprise segment with 43% yoy growth contributing >26% to revenue which is expected to account for 35-40% of revenue in next 2-3 years. Outlook & Recommendation: We believe valuations are reasonable, at 14.1x FY18E EPS in light of healthy 23%/18% USD revenue/eps CAGR expected over FY16-FY18E. We reiterate our BUY recommendation on the stock with a Target Price of Rs790. Persistent System outperformed in the first six months to achieve a high of Rs798 in March 2016, but later started correcting in line with the overall IT services sector to make a low of Rs592 last month. The recent fall has managed to hold the monthly support of Rs565 coinciding with Stochastic-RSI already inching upwards from its oversold zone; the stock is displaying good strength compared to its peers. We anticipate the stock to initiate a fresh rally that should trade near to its recent high. 7

8 Pidilite Industries (CMP Rs714) Incorporated in 1959, Pidilite Industries (Pidilite) is a dominant player in India s adhesives, sealants and construction chemicals industry with iconic brands like Fevicol, M-Seal, Fevikwik & Dr. Fixit. Unmatched market leadership in an under-penetrated category, strong brand equity, robust pricing power and superior management bandwidth would continue to drive growth, going forward. We believe that Pidilite s core strengths continue to remain intact despite near-term headwinds on volume growth front due to weak consumer demand. Over the years, Pidilite has successfully leveraged on its core strengths to drive growth. That includes an expertise to identify the underserved segment where consumer demand is not being fulfilled, intervention with a brand in a commoditised space to fill the demand, and Significant focus on developing, nurturing and enhancing relationship with the chain of influencers as well as the end-users. We expect Pidilite to sustain robust profitability and current margin profile at least till any meaningful spike in crude prices due to strong brand equity and market leadership. We estimate the Company would post revenues of Rs59.5bn & Rs68.4bn and PAT of Rs8.9bn & Rs10.3bn in FY17E & FY18E, respectively. We estimate an EPS of Rs17.3 and Rs20.1 for the same period. Outlook & Recommendation: The stock trades at a price earnings multiple of 41.3x FY17E & 35.4x FY18E earnings. Pidilite currently trades at ~22% discount to Asian Paints multiple. Valuing at 10% discount to Asian Paints multiples at 38x Sep 18, we maintain our BUY recommendation on the stock with a Target Price of Rs832, implying an upside of 17% from current levels. Pidilite Industries is a stellar performer with continuous up-move as the pattern suggests a built-to-last over the past few years. We have observed some time-wise corrections along with price correcting from high of Rs769 it achieved in July This gives an opportunity to enter in the stock for consistent returns with strong averages; supports are placed at Rs We anticipate the stock to initiate a fresh rally to record new high of Rs.780 and then move towards Rs832, provided it does not move below its rising average or lower band of the rising channel support. 8

9 For detailed report of each of the above fundamental recommendation, kindly visit to research section under our website General Disclaimers: Reliance Securities Limited (RSL), the broking arm of Reliance Capital is one of the India s leading retail broking houses. Reliance Capital is amongst India s leading and most valuable financial services companies in the private sector. Reliance Capital has interests in asset management and mutual funds, life and general insurance, commercial finance, equities and commodities broking, wealth management services, distribution of financial products, private equity, asset reconstruction, proprietary investments and other activities in financial services. The list of associates of RSL is available on the website RSL is registered as a Research Analyst under SEBI (Research Analyst) Regulations, 2014 General Disclaimers: This Research Report (hereinafter called Report ) is prepared and distributed by RSL for information purposes only. The recommendations, if any, made herein are expression of views and/or opinions and should not be deemed or construed to be neither advice for the purpose of purchase or sale of any security, derivatives or any other security through RSL nor any solicitation or oering of any investment /trading opportunity on behalf of the issuer(s) of the respective security(ies) referred to herein. These information / opinions / views are not meant to serve as a professional investment guide for the readers. No action is solicited based upon the information provided herein. Recipients of this Report should rely on information/data arising out of their own investigations. Readers are advised to seek independent professional advice and arrive at an informed trading/investment decision before executing any trades or making any investments. This Report has been prepared on the basis of publicly available information, internally developed data and other sources believed by RSL to be reliable. RSL or its directors, employees, ailiates or representatives do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information / opinions / views. While due care has been taken to ensure that the disclosures and opinions given are fair and reasonable, none of the directors, employees, ailiates or representatives of RSL shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way whatsoever from the information / opinions / views contained in this Report. Risks: Trading and investment in securities are subject to market risks. There are no assurances or guarantees that the objectives of any of trading / investment in securities will be achieved. The trades/ investments referred to herein may not be suitable to all categories of traders/investors. The names of securities mentioned herein do not in any manner indicate their prospects or returns. The value of securities referred to herein may be adversely aected by the performance or otherwise of the respective issuer companies, changes in the market conditions, micro and macro factors and forces aecting capital markets like interest rate risk, credit risk, liquidity risk and reinvestment risk. Derivative products may also be aected by various risks including but not limited to counter party risk, market risk, valuation risk, liquidity risk and other risks. Besides the price of the underlying asset, volatility, tenor and interest rates may aect the pricing of derivatives. Disclaimers in respect of jurisdiction: The possession, circulation and/or distribution of this Report may be restricted or regulated in certain jurisdictions by appropriate laws. No action has been or will be taken by RSL in any jurisdiction (other than India), where any action for such purpose(s) is required. Accordingly, this Report shall not be possessed, circulated and/or distributed in any such country or jurisdiction unless such action is in compliance with all applicable laws and regulations of such country or jurisdiction. RSL requires such recipient to inform himself about and to observe any restrictions at his own expense, without any liability to RSL. Any dispute arising out of this Report shall be subject to the exclusive jurisdiction of the Courts in India. Disclosure of Interest: The research analysts who have prepared this Report hereby certify that the views /opinions expressed in this Report are their personal independent views/opinions in respect of the securities and their respective issuers. None of RSL, research analysts, or their relatives had any known direct /indirect material conflict of interest including any long/short position(s) in any specific security on which views/opinions have been made in this Report, during its preparation. RSL s Associates may have other potential/material conflict of interest with respect to any recommendation and related information and opinions at the time of publication of research report. RSL, its Associates, the research analysts, or their relatives might have financial interest in the issuer company(ies) of the said securities. RSL or its Associates may have received a compensation from the said issuer company(ies) in last 12 months for the brokerage or non brokerage services.rsl, its Associates, the research analysts or their relatives have not received any compensation or other benefits directly or indirectly from the said issuer company(ies) or any third party in last 12 months in any respect whatsoever for preparation of this report. The research analysts has served as an oicer, director or employee of the said issuer company(ies)?: No RSL, its Associates, the research analysts or their relatives holds ownership of 1% or more, in respect of the said issuer company(ies).?: No Copyright: The copyright in this Report belongs exclusively to RSL. This Report shall only be read by those persons to whom it has been delivered. No reprinting, reproduction, copying, distribution of this Report in any manner whatsoever, in whole or in part, is permitted without the prior express written consent of RSL. RSL s activities were neither suspended nor have defaulted with any stock exchange with whom RSL is registered. Further, there does not exist any material adverse order/judgments/strictures assessed by any regulatory, government or public authority or agency or any law enforcing agency in last three years. Further, there does not exist any material enquiry of whatsoever nature instituted or pending against RSL as on the date of this Report. Important These disclaimers, risks and other disclosures must be read in conjunction with the information / opinions / views of which they form part of. RSL CIN: U65990MH2005PLC SEBI registration no. ( Stock Brokers: NSE - INB / INF / INE ; BSE - INB / INF / INE , Depository Participants: CDSL IN-DP IN-DP-NSDL , Research Analyst: INH ); AMFI ARN No