From the editor s desk The start of year 2014 has been extremely good for the stock markets, and we believe that when the ball is already in motion, it is essential now to start building your portfolio s for the long term. We believe that the markets have poised themselves fairly before the election results on May 16 th are announced, and expectations of a stable government are very high. However, we believe that volatility is part of the market cycle, and a portfolio which is built with good quality stocks, could withstand such a market cycle. With our objective to bring out good quality businesses at reasonable valuations which can be part of your portfolio we are happy to release our first edition of 7 picks for the quarter, which contains a good mix of large caps and midcaps, across sectors. We believe that stocks in this space can be suited to investors from not just a quarterly basis, but from a longer term view as well. We would review each of the recommended stocks and would revise the list on a quarterly basis, so that we are in line with the market cycles repeatedly. Mr. S Ranganathan (Head Research at LKP) Mr. Kunal Bothra (Head Advisory at LKP)
Stocks Sector CMP Target % returns Rationale CEAT Automobile Components - Tyres 386 460 ~20% EBIDTA has moved up smartly from 6.7% in mid-fy 13 to more than 11% in FY 14 which we believe is easily sustainable for the next 1 year given the fact that rubber prices are at a fiveyear low at present. SOUTHBANK Banking Private 24.2 0 30 ~24% With stable Net Interest Margins of 3% in a highly challenging working environment for banking we are seeing stabilization in incremental NPA additions in the bank ADANIPORTS Infrastructure 198 240 ~20% APSEZ is now de-leveraging its balance sheet and given the growth visibility, free cash generation and has competitive advantages over other ports in India PRICOL Auto Ancillaries 34 45 ~32% The global acquisition of the automotive electronics business of Johnson Controls by VISTEON augurs well for PRICOL in our view as it brings in a whole new range of high profile global customers into its fold. L&T Infrastructure 1350 1500 ~11% L&T offers the best proxy to play the recovery in India s capex cycle post elections and is also a huge play on the opening up of the defense sector in India. RELIANCE CAPITAL Financial Services 369 440 ~20% RCAP runs a best in class AMC business and is among the top-2 players in India on the mutual fund side. ICICI BANK Banking Private 1270 1450 ~15% We expect NII to remain strong driven by stable margins and higher loan growth.
NIFTY OVERALL MARKET VIEW View: Bullish Longer term pattern: Ascending Triangle breakout Breakout point: 6330-6350 A longer term trend line breakout indicates that it s the start of a fresh BULL Market for Nifty As conventional technical follows, the resistance becomes the most important support. Hence we believe from a long term view, 6350 could now become a long term monthly support.
CEAT CEAT operating at close to 90% capacity utilization ranks among the top-3 fastest growing tyre companies in India over the past 3 years and is growing faster than the industry in the passenger segment given the strong footprints it has with customers like Tata Motors, Hyundai, Maruti, M&M and all the 2-wheeler producers. Bus & Truck radials account for almost half its sales mix followed by 2-wheelers, LCV, Cars, UV and farm equipment. International business is over 20% of sales and has doubled to 1000crs in the last 3 years. EBIDTA has moved up smartly from 6.7% in mid-fy 13 to more than 11% in FY 14 which we believe is easily sustainable for the next 1 year given the fact that rubber prices are at a five-year low at present. Healthy ROCE of more than 25% along with an improved product mix makes CEAT look exciting despite its huge run-up as the stock is still available at a very compelling 5xFY 15E earnings.. CEAT has seen a very strong technical breakout of its 3-4 year consolidation, and has broken out with strong volumes. Technically, a breakout complimented with a strong volume always provides a strong confirmation of a long term trend. After a steep uptrend, CEAT has already witnessed a correction of almost 20% from its recent top of 450 odd, and with a support once again near the trendline, the probability of starting a fresh uptrend is extremely high on CEAT. Target for CEAT is placed at 460
SOUTH INDIAN BANK SIB is the second largest bank in the state of Kerala among private sector banks and has more than 435 branches in that state out of its total branch network of 800. With Kerala growing faster than the country over the last few years, SIB has been successful in growing its business at a CAGR of 17% over the past 5 years and during this period its net profits too have grown at a CAGR of 21% With stable Net Interest Margins of 3% in a highly challenging working environment for banking we are seeing stabilization in incremental NPA additions in the bank and recommend a BUY with a price target of 30 South Indian bank, has a chart, which is showing a fractal nature, a pattern similar to the one seen in the 2004-2006 consolidation. After a 3 year arduous consolidation, the stock broke out to start a multi year uptrend. A similar pattern is seen very likely to form at current levels. With a range of 19-30, the stock has seen almost a 3 year onerous consolidation. With supports of 19 holding firmly in this period, and with the overall market trend likely to improve, the breakout for South Indian bank, could trigger a strong uptrend.
APSEZ APSEZ operates the largest port at Mundra and in our view is well placed to win multiple port projects due to its operational capability. We expect the total cargo handled by APSEZ to more than double from the 87mn tons in FY 13 to almost 190mn tons in FY 16. Mundra continues to grow well driven by coal, crude and container and the company is best positioned to capture the huge cargo opportunity going forward at multiple ports that it operates presently. APSEZ is now de-leveraging its balance sheet and given the growth visibility, free cash generation and competitive advantages over other ports in India we recommend a BUY on APSEZ trading at 20xFY 15E earnings with healthy ROE of 20% Adani ports has given a confirmation of a channel breakout with a base at 110 levels and resistance at 190 levels. The uptrend has been steady for Adani and its also formed a series of higher high and higher low formation, a sign of a healthy uptrend. We believe with such a long term (4 year) breakout in the stock, supported with strong volumes is a strong indication of a new trend beginning in Adani ports.
PRICOL PRICOL is an auto component player with a formidable presence in instrument clusters which include dashboard instruments, sensors and oil pumps. It has a marquee customer profile and a debt-free balance sheet and aims to grow through strategic alliances and partnerships. The global acquisition of the automotive electronics business of Johnson Controls by VISTEON augurs well for PRICOL in our view as it brings in a whole new range of high profile global customers into its fold. We believe that PRICOL is at an inflexion point and the stock trading at compelling valuations can be bought with a price target of 45 A classical chart in the making, a Multi-year Downtrend, followed by a one year bull market and then at least a 3 year consolidation. What is more interesting, is the recent breakout in prices, forming a bullish Cup and Handle chart pattern. A cup and handle pattern is generally considered to be a strong bullish pattern from a long term view. This pattern has confirmed that the stock has made a fresh high for the first time on a longer term chart, and indicating that the stock could start a multi-year uptrend.
L&T L&T offers the best proxy to play the recovery in India s capex cycle post elections and is also a huge play on the opening up of the defense sector in India. Although the company management has guided for a 15% growth in order inflows, we forecast better numbers as the order cycle should most certainly improve post elections. Although its working capital position is at elevated levels, we expect better recovery in cash generation and inflows through potential stake sale in assets to improve the situation. Buy L&T trading at 23xFY 15E earnings for a price target of 1500. A clear bullish set of patterns is seen emerging in the Capital Goods major L&T. With a double pattern breakout, i.e. Traingle pattern and an Inverse Head and Shoulder pattern breakout, the stock could likely be one of the front runners if the market uptrend continues. The longer term charts also indicate a double bottom formation with a resistance around 1500 levels for the medium term. We believe stock could face some consolidation at those levels, before inching towards its all time high levels in the longer term.
RELIANCE CAPITAL RCAP is one of the largest financial services companies in India in terms of AUM with a well-diversified product portfolio with a strong position in non-lending businesses like Mutual Funds & Wealth Management, Life Insurance and General Insurance. RCAP runs a best in class AMC business and is among the top-2 players in India on the mutual fund side. RCAP has a 65% stake in the AMC and a 100% stake in the lending arm Reliance Commercial Finance. RCAP has a 75% stake in Reliance Life Insurance and a 100% stake in Reliance General Insurance. The latter should report better earnings this fiscal as the overhang of the third party motor pool goes away. Although the lending business is undergoing credit quality stress we are positive on RCAP trading at 10xFY 16E with an SOTP price target of 440 Reliance Capital, is an interesting chart in the making. Technically, it is trading exactly near the downtrend resistance line drawn from the top of Oct 2011. Recently, the stock has formed a triangle consolidation. The action is like a coiled spring action for Reliance Capital, and we believe, if the stock breaks out of this double pattern with strong volumes, the stock could swiftly move towards its previous resistance of 500-550 levels.
ICICI BANK ICICI BANK would in our view continue to gain market share from its PSU peers and although the pace of branch additions is slowing, the maturity profile is improving and the ratio of newer branches keeps declining. We expect NII to remain strong driven by stable margins and higher loan growth. The bank has a high exposure to project loans and the infrastructure book is less risky than its PSU peers given its low exposure to UMPP and gas projects. We see an opportunity here if there is a policy related support to the infrastructure sector and if the regulatory environment improves. We recommend a BUY on the bank trading at 2x book and value the bank at an SOTP price target of 1450 which includes 250 for its stake in subsidiaries ICICI Bank had been under a larger consolidation in the last 3 years, depicted clearly by the triangle chart pattern formation. Recently, the stock has seen a breakout of this triangle pattern on the upside, with a breakout above 1200 odd levels. Also, looking at the banking space and the performance of the private sector banks, it is one of the few names, which has seen strong market acceptance and participation. We believe, with the breakout holding firmly, the stock could notch up towards its all time high levels of 1500 levels.