ET OnlineQ) With the Fed uncertainty at bay, does it mean that a new bull run has started for the Indian markets? Even if the Fed does raise rates in 2015, will it have a major impact on the Indian markets?
Devang Mehta: With a major global hangover in the form of Fed interest rate decision out of the way, the stock markets have bounced back with a renewed vigor. The actions taken by the government as well as the RBI will in fact make India better equipped in case of a Fed rate hike.
We think that the five factors, namely revival of the capex cycle, softening of inflation/rates, introduction of GST, greater financial savings and greater productivity, will make India one of the most attractive destinations for investment.
Q) Despite infusion of liquidity by the government, the worst is still not over for China. On the other hand, India has managed to revive growth and manufacturing output. However, CLSA in its recent report said that the Chinese economy will be as big ($21 trillion) as the US economy by 2020. Do you agree?
Devang Mehta: Consumption has always been a strong point for India. The only worry was the capex cycle, which was not getting a boost. The signs of macroeconomic parameters bottoming out, faster clearances on the anvil and growing business confidence will put India on a fast growth trajectory for another 3 to 5 years. We feel that India is on a strong footing with manufacturing, infrastructure etc. again assuming greater importance.
Q) Everybody wants to ‘sell high and buy low’. But does that always work for traders or investors? Is there a way of gauging the right time to buy or sell? If not, what should investors keep in mind while using this strategy?
Devang Mehta: Timing and not timing is the key to equity investing. One can’t be on the right side of every trade. Construct a portfolio of fundamentally good stocks and diversify into different sectors.
If one doesn't have the time and resources to manage his own funds, let the professionals do it. Systematic investment plans of good mutual funds will go a long way in creating long-term wealth. One needs to have a goal in mind while investing, have patience, expect realistic returns, review your portfolio periodically & learn from your own mistakes.
Q) Give us five stock ideas that you are still liking and recommending to your clients.
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Devang Mehta: Time-frame: 12 months for all stocks -
L&T: Target 1745.
We like the stock and feel that it is a proxy play for India’s infrastructure growth story. With the geographical and segmental diversification, execution strengths, balance sheet and order book size, it is one of the best stocks to own in the current changing scenario.
Tata Motors: Target 605
JLR is expected to report robust numbers going forward and keep its outperformance going. Tapping new markets, launch of new models and new variants will help gain traction for JLR. Also, the domestic sales recovery will ensure that sentiment locally for Tata Motors will improve, though it’s a smaller portion of the overall pie.
At 6.5 times one year forward PE, it presents a very good valuation & price rerating.
Wipro: Target 650
Wipro has seen a fifth quarter of growth acceleration (measured on YoY basis) moving up from a low 3.2 per cent in 4QFY13 to 9.6 per cent (8.8% organic) in 1QFY15. Also, the deal momentum reassures us that Wipro could accelerate further in the next 12 months, adding to our positive view of the company. Stock weakness (perhaps due to guidance) can be used to take exposure.
REC: Target 375.
REC has managed to generate steady earnings CAGR of 20 per cent over FY09-14. RoE has increased from 21% to 24.5%. With stable government at the Centre and infrastructure bottlenecks likely to be eliminated, growth in these sectors should revive slowly.
REC Ltd with niche position and domain knowledge in the power sector should benefit from this and therefore we expect a 17 per cent CAGR loan book growth over a period of FY13-16E with sustainable margins of above 4 per cent.
Currently the stock trades at PB of 1.06x and 0.89x for its FY15 and FY16E BV. We assume current 1.26x PB multiple for FY16E BV, which brings us to the target of Rs. 375, which is an upside of almost 40% from the current price.
DCB Bank: Target 107
In the past five years, DCB Bank’s management has sharpened its focus on secured loans and their diversity, while maintaining a huge share of retail deposits (80%). This strategy has conferred remarkable results—improved credit quality, expanded risk-adjusted NIMs, and raised profitability as well as capital adequacy.
With this continuing, we estimate a 29.2 per cent CAGR in business over FY14-17. With relentless focus on loan quality, continuous monitoring, robust credit appraisal and limited exposure to consortium lending and troubled segments, the bank’s asset quality is one of the best in the sector.
We expect robust profitability over FY15-17, led by the bank’s prudent business growth strategy, focused network expansion and superior asset quality. We expect the stock to quote at higher-than-past valuations, led by better-than-past business growth, high asset quality and greater capital adequacy ahead.
Q) What is your advice to investors who want to invest in blue chip stocks which have already rallied quite a bit so far in the year 2014? Should they wait for corrections or buy stocks in the mid and small cap segments? What makes more sense?
Devang Mehta: While part of the investor community awaits a correction to enter, others are anxious to exit. We are confident that this is the start of a structural bull market. We expect India's GDP to swell from present levels, and this would drive strong earnings growth.
The portfolio has to be an ideal mix of large & mid-caps. Some of the blue chips which have a business with durable competitive advantage will continue to command premium valuations and continue to grow faster.
It is prudent to have both growth and value stocks in one’s portfolio. Having said that, the portfolio construction will depend upon a host of factors like age, risk profile & time horizon.
Q) Any stocks or companies that you have in mind which are not frequently discussed, but have the potential to give exponential returns in near future as the economy improves and reforms start taking shape? We also call them ‘Hidden Gems’.
Can Fin Homes –Target 550
Can Fin Homes (CANF), an associate of Canara Bank, has grown at a rapid CAGR of 39 per cent over FY11-14, much faster than 5.5 per cent in FY08-11. Its business model has gradually evolved with higher service levels and greater penetration.
Over 90 per cent of its loans comprise housing, primarily to urban areas. We expect CANF’s strong loan growth, higher NIM and stable asset quality to drive a 35 per cent growth in earnings over FY14-17.
On consistent growth, improved return ratios and attractive valuations, we feel it’s an attractive long-term stock to buy. At our target price of Rs 550, the stock would trade at PBV of 2.1x FY15e and 1.7x FY16e.
Bajaj Corp: Target 330
Owing to aggressive advertising, launch of new SKUs and distribution expansion, the company has been able to gain market share from 38.4 per cent in FY08 to 57.9 per cent in FY14. The company has indicated that it will be able to expand market share further to 67-68% over the next three years before any stagnation.
With most competitors still refraining from investing in advertising their products, we believe Bajaj Corp would easily gain market share. The company has already raised its market share to 58.5 per cent at the end of 1QFY14.
We value the stock at a target price of Rs 330 and PE of 21x FY16e earnings. With fall in input prices, we expect the company’s profitability margins to expand 100bps in FY15. With possibility of recovery in volumes, the stock could see re-rating in the coming quarters.
Q) The Indian markets have rallied close to 27 per cent so far in the year 2014. Do you think there are pockets (stocks or sectors) which have run ahead of their fundamentals and a correction is eminent?
Devang Mehta: It is very well possible that some companies with bad fundamentals also join the party and may be very tempting to buy on tips or hearsay. Some companies are best to be avoided as sometimes they tend to enjoy very high growth rates, which turn out to be a trap.
These companies require significant capital for such growth, and then earn a little or no money. Strict discipline must be observed to avoid companies who have fly-by-night promoters. Invest only in fundamentally-sound businesses with good corporate governances standards at right valuations.
Q) Where do you see the Indian markets (Sensex/Nifty) heading in the next 12 months (December and March 2015)? How valuations stack up as compared to historic levels?
Devang Mehta: At 16x times forward PE, the Indian markets’ valuations are somewhere near fair value. Earnings growth along with PE rerating going forward can lead the markets to new highs. However, a bottoms-up or a stock-specific approach with fair amount of diligence will be more rewarding rather than just focusing on the Sensex/Nifty targets.
(Views and recommendations expressed in this section are the analyst’s own and do not represent those of EconomicTimes.com. Please consult your financial advisor before taking any position in the stocks mentioned.)
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