Seven Picks for the quarter

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1 June 24, 2016 From the editor s desk With BREXIT the UK has voted to leave the EU thereby sending the pound sterling to a 30 year low against the $. Volatility and Turbulence in currency and equity markets is now the new norm globally and amidst this backdrop we at LKP present to you 7 Picks, a week ahead of its scheduled release. Given near zero interest rates and widening current account deficit UK is quite clearly in the midst of an economic and a political crisis post the referendum. With countries turning inward we believe that investors in India would look for domestic inward focus to pick stocks which would mean consumption and service oriented themes. India is witnessing incremental reforms at a time when populism is rising globally and given our demographic advantage monsoon to our mind is a crucial trigger for our markets. India has till date received a cumulative rainfall of 86mm which is 18% below normal and given the optimistic predictions by both the agencies we remain bullish on the prospects for a good monsoon this time around. In this edition of 7 PICKS for Q2 we have chosen a very unique blend of stocks aimed at outperforming the Index just as the way we did in Q1. Stocks Sector CMP ( ) Target ( ) Returns (%) Rationale Banco Products Auto Parts % Cool growth engine Greaves Cotton Engineering % Firing on all cylinders Jamna Auto Auto Parts % Leaf Spring Surprise State Bank Of India Banking % Much of the pain is behind Tamil Nadu Newsprint Paper % Chennai Paper Tiger Triveni Engineering Sugar % Sweet Inventory Gains VIP Industries Luggage % Trendy & Style is the mantra LKP Advisory Mr. S Ranganathan Head Research Mr. Kunal Bothra Head Advisory

2 BANCO PRODUCTS CMP : 134 The Baroda based Banco Products is the market leader in engine cooling systems with hardly any customer concentration risk. Armed with a strong balance sheet this debt free entity has more than 70crs of cash and at 6x EV/EBIDTA is available at 8x estimated forward earnings. With a book value of Rs100 and a dividend yield of 4% this focussed radiator play offers great value. Banco Products long term charts are showing a bullish pennant breakout. Typically in this Pennant Consolidation, we have witnessed that the volumes have been high, indicating higher probabilities that the stock has witnessed a strong buying action. With the Weekly RSI also poised for a swing breakout, we believe that the stock is at the cusp of a price uptrend. A thrust from an indicator generally acts as a catalyst for the stock price movement. We have a target of 150 assigned on Banco Products. LKP Advisory 2

3 GREAVES COTTON CMP : 130 Engineering company Greaves Cotton has been able to hold its ground and increase market share as well as margins despite competition from peers like Cummins & Kirloskar We like its ability to improve margins even during challenging business scenario across both its segments Engines & Farm Equipment Value Engineering & tight cost controls is yielding positive results and the stock with a 4% dividend yield is a play on the economic recovery in India A multi year uptrend is observed in Greaves Cotton chart. As we can see the stock is at a point of a strong support, after going through a grind in the last 2 years. Interestingly, the resistance line (dotted line, shown, by joining the three major tops) indicate that the stock has multiple support at the current price levels. Such reversals, if it happens, could lead to yet another strong multi year uptrend. We have a target of 147 assigned on Greaves Cotton. LKP Advisory 3

4 JAMNA AUTO CMP : 164 Market leadership position in leaf springs and parabolic springs along with continuation of strong uptick in CV demand to boost the company s financials in the current year. Increased possibility of materialization of the regulatory requirement entailing scrapping of trucks older than 10 years would spur replacement demand for trucks, thus triggering demand for Jamna s products. Implementation of BSIV emission norms by April 2017 would lead to pre-buying of trucks thus leading to a significant surge in demand in the second half of FY 17 for the CV ancillary industry. The stock price here is a classic case of a strong uptrend. The first stage pattern is a Bullish Flag pattern, after almost a multi year price consolidation. The Indicator, both Stochastics and RSI indicate that the stock price has the right ingredients of strong momentum. We believe with the thrust the price pattern is exhibiting and the support of the indicators, the price could continue its long term uptrend. We have a target of 181 assigned on Jamna Auto LKP Advisory 4

5 STATE BANK OF INDIA CMP : 208 SBI is our pick in the PSU banking space to play the prospects of an economic recovery and prospects of a better credit appetite given the massive clean up exercise underway Despite the ongoing asset quality stress led by AQR we believe that CASA of more than 40%, stable NIM of 3% and PCR of 60% is comforting for investors SBI trading at 1.3x price to adjusted book is our bet to play the large cap banking theme in India PSU Banking sector is now witnessing some strong price action buildup. We believe that the largest stock in this space, SBI, has a strong price chart pattern which can lead to a short term price uptrend in the medium term. The stock has already confirmed a swing breakout on short term price charts, along with strong volume accumulation. Price Convergence and a double bottom support at the support of 150 on SBI is also one key reason for the increased buying interest. We believe that with the sector as well as stock dynamics being currently under display the stock could head towards our target price of 232. LKP Advisory 5

6 TAMIL NADU NEWSPRINT CMP : 263 The 2400cr Tamil Nadu Newsprint Ltd -TNPL owned by the TN government has recently inaugurated its new paper plant with a capacity of 2lac MT in Trichy costing 1650crs TNPL trading at a MCAP of 1800crs trades at 7x historical earnings and on a forward basis is available at a compelling 5x and at price to book A well managed company, TNPL offers a dividend yield of 3% too and is our bet to play the growth story in Paper As we can observe from the charts, the stock is in a strong price uptrend since the last 2 years. Start of 2016 the stock witnessed a retracement of almost 50% from its top. However, with the current market strength and stock specific action, TNPL managed to come back quite strongly and make a fresh 52 week high. We believe that such strength and volume characteristics indicate that the stock could continue its long term uptrend, even after phases of correction / consolidation. We have a target of 289 assigned on TNPL. LKP Advisory 6

7 TRIVENI ENGINEERING CMP : 56 Triveni Engineering with a MCAP of 1500crs is a large integrated sugar complex with 7 sugar factories in western Uttar Pradesh operating at a healthy recovery of 10.8% Buoyancy in sugar prices since last couple of months has revived the sugar business and with an inventory of 41.5 lac quintals valued at Rs29 per kg the company is sitting on inventory gains of almost 200crs Triveni Engineering holds 22% equity stake in group company Triveni Turbine which itself is worth 800crs and we believe that the proposed de-merger of the sugar and gear business going forward is a positive trigger for the stock going forward. A classic rounding bottom formation is being witnessed on Triveni s daily chart. Volumes which form an essential part of a rounding bottom formation breakout confirmation have also been on substantial rise in the last 8 months. Historically also we have witnessed that the cyclical Sugar stocks which witness a turnaround have trending cycles which can last for few years at least. The target assigned to the stock is 64 for the coming quarter. However, if the trend continues than the stock could head for a 8 9 year of a pattern breakout. LKP Advisory 7

8 VIP INDUSTRIES CMP : 105 Q1 traditionally the strongest quarter with the peak wedding season & increased traveling from holidays, ~ 31% revenues coming from Q1 in FY15. Significant recovery in market share lost to competitors in CSD segment, new markets segment continue to perform well. Focus in value added brands Carlton, Caprese & Skybags expected to expand margins. A combination of multiple patterns is seen on the charts of VIP Ind. Since the last 4 years, the stock has witnessed a very large consolidation. However, in the recent past we have seen that the stock is showing a rising channel pattern. The current price is very close to the supports at the channel support zone. Also, since the start of the first big move from Point A to Point B, the stock went through a Fibonacci retracement which corrected exactly at the 61.8% retracement zone. Hence, we believe that the stock is poised for a strong potential upside till at least 118 levels. LKP Advisory 8

9 LKP Seven picks Q1-FY17 (Apr-16 to Jun-16) Name Reco Date Price Target CMP Capital Invested P/L (%) P/L Comments Ashok Leyland Buy 01-Apr ,000-10% (10,000) Open Balrampur Chini Buy 01-Apr ,000 15% 14,679 Target Hit Dalmia Sugar Buy 01-Apr ,000 15% 14,679 Target Hit KCP Ltd Buy 01-Apr ,000 12% 11,905 Target Hit KCP Sugars Buy 01-Apr ,000 17% 16,667 Target Hit KEC Intl Buy 01-Apr ,000 11% 11,290 Target Hit Manappuram Buy 01-Apr ,000 14% 14,286 Target Hit TOTAL 700,000 11% 73,505 NIFTY 7,713 8, ,000 6% 38,821 OUTPERFORMANCE 700,000 5% 34,684 Total Returns (in %) 16% 14% 12% 16% * Period (1 st April, 2016 to 30 th June, 2016) * Change in Nifty= +5%, * LKP Seven picks outperformance (Vis-à-vis NIFTY) +11% 10% 8% 5% 6% 4% 2% 0% Nifty Performance LKP 7 LKP Advisory 9

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