Angel Broking’s top 10 picks for January 2017

By: | Published: January 10, 2017 11:07 AM

The recent aggressive rate cut by industry leader SBI has brought hopes of revival in the credit growth of banks.

SBI Rate Cut, Angel Broking, Angel Broking's top 10 picks, RBI, Dewan Housing, Equitas Holdings, Amara Raja Batteries, Asian Granito, InfosysThe recent aggressive rate cut by industry leader SBI has brought hopes of revival in the credit growth of banks. (Source: Website)

The recent aggressive rate cut by industry leader SBI has brought hopes of revival in the credit growth of banks. The rural side of the economy is also expected to see recovery post the new measures announced by the government. In the last two years, deposit rates have fallen by 200bps. In such an environment, fixed deposits continue to lose attractiveness, indicating that equities will attract strong inflows in the near term for higher returns.

Recent interest rate cuts to revive the consumption demand: In line with expectations, low interest rate cycle has begun in the Indian economy. While RBI is on a wait-and-watch mode currently, retail banks have gone ahead with aggressive lending rate cuts. This is expected to result in 35-50bps cut in the home loans. Banks have been witnessing slower credit growth since October-2016 and with demonetization, credit growth has fallen further.

“In our opinion, with the recent rate cuts, credit cycle is expected to see revival. Lower interest rates are expected to propel the real estate demand. We believe that in the long run, current lower interest rates could prove to be a boon for the economy as a whole,” said Angel Broking in a research report.

Large part of transmission delivered, benefits on cards: The aggressive rate cuts done by retail banks were due for long. The RBI has cut the repo rate by 175bps in the last two years, but banks were not able to transmit the rates due to the inadequate liquidity in the system. Now with the huge liquidity in the system due to the low cost funds, banks are able to pass the lower rate to the borrowers. With this kind of transmission, the economy is expected to benefit in terms of reviving demand in multiple sectors.

Interest rates to fall further: The current 10-year bond yield is at 6.40% and has fallen by 40bps since the start of demonetization. Lead indicators further suggest that in the near term there would be further decline in the interest rate. The retail inflation for November stood at 3.63% and in view of slower consumption demand and high food production, inflation is expected to further soften. This increases the probability of further repo rate cuts by RBI. With banks having huge low cost deposits, the deposit and lending rates are also expected to fall further.

Government measures to further boost rural demand: The demonetization has largely impacted the rural economy due to its high dependence on the cash transactions. As an antidote to this, the government has announced new measures which we believe would bring the rural demand back to normalcy. The most important measures include 1) 60 days interest waiver for farmers, 2) 3-4% interest subvention on small ticket housing, and 3) higher credit guarantee for small businesses.

With government on its way to meet the fiscal deficit target of 3.5% of GDP due to higher tax revenues in the current fiscal, these measures are not likely to deteriorate our macros. With improving supply of low denomination currencies, the rural demand is also likely to recover faster.

In this backdrop, Angel Broking is positive on stocks such as L&T, Powergrid Corporation, and KEI Industries on the back of government spending and lower interest rates. It also maintains positive stance on Infosys and HCL Tech (IT sector) and Lupin and Alkem (Pharma sector) given their strong fundamentals and lower valuations. “In view of lower interest rates and new government measures, the correction in the consumption stocks should be used to accumulate quality companies,” it says.

Here are Angel Broking’s top picks for January 2017:

1. Dewan Housing
* 3rd largest private sector housing finance company: DHFL’s AUM may 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%.
* Seasoned and granular loan book with stable asset quality: Despite strong loan growth, the GNPAs and NNPAs are likely to be at ~1.17% and 0.82%, respectively, for FY2017. Any major deterioration in the asset quality is not expected going ahead.
* Lower cost of funds will help maintain NIM: Nearly 70% of the bank borrowings are due for maturity over the next three years and recently DHFL was able to raise large sum ~ Rs14, 000 cr via NCDs at a competitive rates and this should help maintain its 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 1.1x FY2018E ABV.
Angel Broking has a ‘Buy’ stand on the stock, with a target price of Rs 350.

2. Equitas Holdings
* Early mover advantage in the SFB category: 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.
* Asset quality and return ratios are likely to remain stable: 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. Also don’t expect any major deterioration in the asset quality going ahead.
* NIM likely to remain healthy: After conversion to SFB the company has started raising deposits at a lower cost vs borrowings leading to better cost of funds. Hence the NIM may remain strong at ~10-11%, going ahead.
* Outlook: The company may post a strong loan book & earnings CAGR of 38% & 37% over FY2016-18E. The stock currently trades at 1.9x FY2018E ABV.
Angel Broking maintains ‘Buy’ on the stock, with a target price of Rs 235.

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3. Amara Raja Batteries
* Amara Raja Batteries Ltd (ARBL) 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%.
* ARBL is a well diversified auto ancillary player having presence across the automotive and the industrial segment. It has a broad OEM as well as replacement customer base. ARBL is a high quality stock to play the auto sector revival.
Maintain ‘Buy’ rating on the stock.

4. Asian Granito
* 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, we expect AGIL’s profit margin 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% 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. Going forward, we expect the company to improve its operating margin from 7.5% in FY16 (excluding merger) to 12-12.5% in 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.
* We expect AGIL to report a net revenue CAGR of ~9% to ~Rs 1,182cr and net profit CAGR of ~39% to Rs 48cr over FY2016-18E.
Buy with a target price of Rs 351.

5. Bajaj Electricals
* 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 bottom-line to grow at a CAGR of 20% to Rs 138cr over FY2016-FY2018E.
Angel Broking has a Buy rating on the stock.

6. Blue Star
* 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.
* Aided by increasing contribution from the CPD, we expect the overall top-line to post a revenue CAGR of ~16% over FY2016-18E and margins to 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.
Rating: Accumulate

7. Mirza International
* In the branded domestic segment, we expect the company 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. We expect the company 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.
* We expect MIL to report a net revenue CAGR of ~9% to ~Rs 1,106cr and net profit CAGR of ~9% to Rs 92cr over FY2016-18E.
Rating: Buy with a target price of Rs 107.

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8. Siyaram Silk Mills
* 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, we believe that 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, we expect SSML to report a net sales CAGR of ~10% to ~Rs 1,948cr and 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.
Rating: Buy with a target price of Rs 1,605.

9. HCL Technologies
* Healthy pipeline: The company’s engineering services has 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.
We expect HCL Tech 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).
* Robust outlook: For FY2017 revenues are expected to grow between 12.0-14.0% 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 and Valuations: The stock is attractively valued at the current market price.
Rating: Buy with a price target of Rs 1,000.

10. Infosys
* Revenue guidance for FY17: 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). We expect the company to post ~9.0% USD revenue growth in FY2017.
* Aims to be US$20bn company by FY20: 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, we expect Infosys to post a 9.0% USD revenue growth in FY2017. Over FY2016-18E, we expect USD and INR revenue to grow at a CAGR of 9.0% and 9.5%, respectively.
* Outlook and Valuations: The stock trades at a valuation of 14.1x FY2018E earnings.
Rating: Buy with a price target of Rs 1,249.

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