10 top investment picks from Angel Broking post demonetization

By: |
December 08, 2016 3:35 PM

Indian markets corrected sharply in November as demonetization coupled with the outcome of US presidential election created huge volatility in the markets.

We believe that demonetization would have short to medium-term negative impact on sectors like jewellery and real estate sectors due to involvement of black money in transactions. (Image Source: Website)We believe that demonetization would have short to medium-term negative impact on sectors like jewellery and real estate sectors due to involvement of black money in transactions. (Image Source: Website)

Indian markets corrected sharply in November as demonetization coupled with the outcome of US presidential election created huge volatility in the markets. Demonetization has been the boldest reform of the current government, which has a potential to bring structural long-term benefits in the economy, while causing pain in the short term.

In the short term, demonetization looks negative for the economy as it impacts spending ability of the consumers. This means that cash-dependent sectors would be impacted the most in the near term. “We believe that demonetization would have short to medium-term negative impact on sectors like jewellery and real estate sectors due to involvement of black money in transactions. We also believe that recovery is likely to start from mid FY2018E in consumption sectors as consumers realign their preferences. Overall unorganized segment of the economy would be most hit as most small businesses are hugely dependent on cash for daily transactions,” Angel Broking in a research report said.

According to the report, owing to the temporary slump in demand, corporate earnings are likely to show negative impact of demonetization in H2FY2017E. Some spillover can be expected in H1FY2018E. However, from H2FY2018E onwards, consumption is likely to pick up with ease in liquidity and realignment of consumer preferences. With ~6% decline in broader indices after demonetization, markets are likely to have priced in the negative impact of demonetization; and as the dust settles, markets will track positive impact of demonetization.

Here we take a look at the 10 top picks from Angel Broking post demonetization:

Dewan Housing (Buy; Target Price Rs 350):

It is the 3rdrd largest private sector housing finance company. Angel Broking expects DHFL’s AUM to grow at a CAGR of 21% over FY2016-18, as demand for housing in the middle and low income group picks up, while PAT CAGR is expected to be 23%. The company has seasoned and granular loan book with stable asset quality and lower cost of funds will help maintain NIM at ~2.9%.

Outlook: The company is expected to post a healthy loan book CAGR of 21% over FY2015-18E, which is likely to translate in earnings CAGR of 23%, over the same period. The stock currently trades at 1.2x FY2018E ABV. Angel Broking has a Buy stand on the stock, with a target price of Rs 350.

Equitas Holdings (Buy; Target Price Rs 235)

Equitas was one of the ten NBFCs to get the license to start a small finance bank (SFB). As the entire book of Equitas qualifies for PSL, meeting the 75% PSL target will not be a challenge. Sizeable and diversified loan book will keep it ahead of other upcoming SFBs. Equitas will have to maintain CRR & SLR going ahead. Hence yield on total assets is likely to come down. However, as a bank it will be able to raise deposits and hence there will be reduction in cost of funds. As a result, spreads may not decline much, which in turn will help in maintaining the ROE & ROA which although could undergo a marginal decline. Any major deterioration in the asset quality going ahead is also not expected, while NIM is likely to remain healthy.

Outlook: Angel Broking expects the company to post a strong loan book & earnings CAGR of 38% & 37% over FY2016-18E. The stock currently trades at 2.1x FY2018E ABV. It maintains Buy on the stock, with a target price of Rs 235.

Amara Raja Batteries Ltd (Buy):

It is the second largest lead acid storage battery manufacturer in the country. It has been outpacing market leader Exide (ARBL grew at a 21% CAGR over FY2010-16 as compared to standalone Exide’s growth of 7%), leading to its market share improving from 25% in FY10 to about 35% currently. ARBL’s outperformance has been mainly on back of its association with global battery leader Johnson Controls Inc (which also holds 26% stake in ARBL) for manufacturing ducts. With the automotive OEMs following a policy of having multiple vendors and with ARBL’s products enjoying a strong brand recall in the replacement segment, the company is well poised to
gain further market share. Given the economic recovery and market share gains, the company is expected to grow at a CAGR of 18% over the next two years as against industry growth of 10-12%.

Outlook: ARBL is a well-diversified auto ancillary player having presence across the automotive and the industrial segments. It has a broad OEM as well as replacement customer base. ARBL is a high quality stock to play the auto sector revival. Angel Broking maintains Buy rating on the stock.

Asian Granito (Buy; Target Price Rs 351):

AGIL’s current, vitrified sales (35%) are lower as compared to its peers like Somany Ceramics (47%) and Kajaria Ceramics (61%). Recently, AGIL has launched various products in premium segment. Going forward, AGIL’s profit margin is expected to improve due to increase in focus for higher vitrified product sales, which is a high margin business. AGIL is continuously putting efforts to increase the B2C sales from the current level (35% in FY16). It is expected to reach up to 50% the in next 2-3 years on the back of various initiatives taken by AGIL to increase direct interaction with customers like strengthening distribution network, participation in key trade exhibition, etc. In July FY2016, AGIL acquired Artistique Ceramic which has a better margin profile.

Outlook: Going forward, the company is expected to improve its operating margin from 7.5% in FY16 (excluding merger) to 12-12.5% in the coming financial year. Artisique Ceramics has a contract with RAS GAS to supply quality natural gas at a discounted rate of 50% to current market rate, which would reduce the overall power & fuel cost of the company. Angel Broking expects AGIL to report a net revenue CAGR of ~9% to ~ Rs1,182cr and net profit CAGR of ~39% to Rs 48cr over FY2016-18E. Angel Broking has a Buy rating on the stock and target price of Rs 351.

Bajaj Electricals (Buy):

The company is among the top 4 players in the consumer durables space across all its product categories (leader in small appliances; number-4 in fans and lighting). It has a strong distribution reach with 4,000 distributors reaching out to 400,000 retailers. In the 3 years preceding FY2016, the company’s E&P segment had been underperforming owing to cost overruns and delays in project executions. However, the segment has turned around in FY2016 on the profitability front and delivered a healthy EBIT margin of ~6% for the year. Currently the segment’s order book stands at Rs 2,480cr.

With expectation of timely execution of new projects in the E&P segment and with the lighting and consumer durables segments expected to benefit from an improvement in consumer sentiments going forward, we expect the company’s top-line to grow at a CAGR of ~8% to Rs 5,351cr and bottomline to grow at a CAGR of 20% to Rs 38cr over FY2016-FY2018E. A Buy rating is recommended on the stock.

Blue Star (Accumulate):

BSL is one of the largest air-conditioning companies in India. With a mere 3% penetration level of ACs vs 25% in China, the overall outlook for the room air-conditioner (RAC) market in India is favourable. BSL’s RAC business has been outgrowing the industry by ~10% points over the last few quarters, resulting in the company consistently increasing its market share (~7% in FY2014 to 10.5% at present). This has resulted in the Cooling Products Division (CPD)’s share in overall revenues increasing from~23% in FY2010 to ~42% in FY2016 (expected to improve to ~47% in FY2018E). With strong brand equity and higher share in split ACs, we expect the CPD to
continue to drive growth.

Outlook: Aided by increasing contribution from the CPD, the overall top-line is expected to post a revenue CAGR of ~16% over FY2016-18E and margins may improve from 5.3% in FY2015 to 7.3% in FY2018E. Moreover, the merger of Blue Star Infotech has infused cash and strengthened the balance sheet. Angel Broking has an Accumulate recommendation on the stock.

Mirza International (Buy; Target Price Rs 107):

In the branded domestic segment, the company is expected to report a ~21% CAGR over FY2016-18E to Rs 258cr. We anticipate strong growth for the company on the back of (a) the company’s wide distribution reach through its 1,000+ outlets including 120 exclusive brand outlets (EBOs) in 35+ cities and the same are expected to reach 200 over the next 2-3 years and (b) strong branding (Red Tape) in the shoes segment. MIL’s major export revenue comes from the UK (73%), followed by the US (14%) and the balance from ROW. Export constitutes ~75% of the company’s total revenue. The company is expected to report healthy growth over the next 2-3 years on back of recovery in the UK market, strong growth in the US market and with it tapping newer international geographies like the Middle East countries. In FY2016, the company acquired Genesis Footwear which has a better margin profile than it. The deal resulted in MIL’s EPS increasing by ~4% and ROE improving from 15.9% to 17.5%. Further, due to this merger, the company’s capacity has increased from 5.4mn to 6.4mn units.

Outlook: MIL may report a net revenue CAGR of ~9% to ~Rs 1,106cr and net
profit CAGR of ~9% to Rs 92cr over FY2016-18E. Angel Broking has a Buy rating on the
stock and target price of Rs 107.

Siyaram Silk Mills (Buy; Target Price Rs 1,605):

SSML has strong brands which cater to premium as well as popular mass segments of the market. Further, SSML entered the ladies’ salwar kameez and ethnic wear segment. Going forward, the company would be able to leverage its brand equity and continue to post strong performance. The company has a nationwide network of about 1,600 dealers and business partners. It has a retail network of 160 stores and plans to add another 300-350 stores going forward. Further, the company’s brands are sold across 3,00,000 multi-brand outlets in the country.

Going forward, Angel Broking expects SSML to report a net sales CAGR of ~10% to Rs 1,948cr and adj.net profit CAGR of ~11% to Rs 107cr over FY2016-18E on back of market leadership in blended fabrics, strong brand building, wide distribution channel, strong presence in tier II and tier III cities and emphasis on latest designs and affordable pricing points. At the current market price, SSML trades at an inexpensive valuation. Angel Broking has a buy recommendation on the stock and target price of Rs 1,605.

HCL Technologies (Buy; Target Price Rs 1,000):

The company’s engineering services have been seeing lumpy growth over the last few quarters. This is however largely a function of the timing of large transformational deals. 6-8 of the large deals signed a few quarters ago will aid the company to continue to post industry leading growth. It is expected to post a USD and INR revenue CAGR of 16.3% and 18.0%, respectively, over FY2016–18E (inclusive of the acquisition of Geometric Software and the Volvo deal). For FY2017, revenues are expected to grow between 12.0 and 14.0% in CC. Revenue guidance is based on FY2016 (April to March’2016) average exchange rates. The above constant currency guidance translates to 11.2% to 13.2% growth in US$ terms.

Outlook: The stock is attractively valued at the current market price and hence Angel Broking maintains its Buy rating on the stock with a price target of Rs 1,000.

Infosys (Buy; Target of Rs 1,249):

The management has lowered its guidance for FY2017 to 8-9% in CC terms and 9.2-10.2% in INR terms (exchange rate as on March 31, 2016). For FY2016, the company posted a 13.3% growth in CC terms V/s a guidance of 12.8-13.2% growth (in CC). The company may post ~9.0% USD revenue growth in FY2017. The company expects its revenue to rise to US$20bn by FY2020, up from US$8.7bn in FY2015, as it focuses on acquisitions and winning more new technology services, implying a 14% CAGR over the period. Over the near term, Infosys is expected to post a 9.0% USD revenue growth in FY2017. Over FY2016-18E, USD and INR revenue may grow at a CAGR of 9.0% and 9.5%, respectively.

Outlook: The stock trades at a valuation of 14.1x FY2018E earnings. Angel Broking recommends Buy on the stock with a price target of Rs 1,249.

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