Top Picks December 29, 2017 - Sharekhan
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Top Picks
December 29, 2017
Bharat Electronics
Bharti Airtel
HDFC Bank
IndusInd Bank
Jubilant FoodWorks
KEC International
Maruti Suzuki
ONGC Ltd
Reliance Industries
Sundram Fasteners
UPL Limited
ZEE Entertainment
Visit us at www.sharekhan.com
For Private Circulation onlySharekhan Top Picks
9-in-9! Yes, the money invested in the Top Picks by 58% much ahead of 28% and 29% gains in Sensex
portfolio would have gone up by nine times over nine and Nifty respectively, during the same period.
years, since its inception in January 2009. This works
out to annualised average returns of 27.6% for the We are suggesting two changes in the portfolio this
last nine years; as compared to returns of 14.5-15% in month. We are replacing Bajaj Finserv and Powergrid
the Sensex/Nifty over the same period. Corp with Bharti Airtel and ONGC. The changes are
in line with our views (as stated in the Market Outlook
The unmatched and consistent track record clearly report, “Winds of Change”) that some of the laggards
highlights the importance of making the right sector would lead the rally this year. For both ONGC and
allocations along with superior stock selection to Bharti Airtel, the conditions are turning supportive
build a portfolio. Moreover, it bursts the myth that of the growth of their businesses and the outlook
wealth creation or handsome returns can only be appears much promising now.
earned by dabbling into risky stocks and unknown
companies. With a portfolio of large-sized quality Last month, we highlighted the fact that it is
companies in the Top Picks basket, we have shown necessary to follow the monthly revisions in the Top
that it is possible to earn handsome returns that are Picks portfolio in a disciplined manner to harness the
far higher than not only the Sensex/Nifty but also the true potential of this superior investment product.
CNX Midcap 100 index. And soon we would be graduating the product to
an investment advisory platform, where a team of
This month again, the Top Picks portfolio has given experience relationship managers would assist
healthy returns of 4.2%, far ahead of 2.7% and 3.0% you with execution and other product-related
gains in Sensex and Nifty respectively. For the full clarifications. Watch out for more details on it soon.
year CY2017, the top picks portfolio has appreciated Wish you a Happy and a profitable New Year.
Consistent outperformance (absolute returns; not annualised) (%)
(%) 1 month 3 months 6 months 1 year 3 years 5 years
Sharekhan Top Picks 4.2 10.0 16.2 58.0 68.4 285.5
Sensex 2.7 9.0 10.3 28.0 12.1 80.1
Nifty 3.0 8.0 10.9 29.0 15.2 84.4
CNX MIDCAP 100 6.2 17.8 19.2 47.3 40.9 180.3
Absolute returns (Top Picks Vs Benchmark indices) (%) Constantly beating Nifty and Sensex (cumulative returns since April 2009)
Sharekhan Sensex Nifty CNX Mid- 1000
(Top Picks) cap 100 900
800
CY2017 58.0 28.0 29.0 47.3
700
CY2016 8.8 1.8 3.2 7.1 600
CY2015 13.9 -5.1 -4.1 6.5 500
400
CY2014 63.6 29.9 30.9 55.1
300
CY2013 12.4 8.5 6.4 -5.6 200
CY2012 35.1 26.2 29.0 36.0 100
Apr-09
Mar-10
Mar-11
Feb-12
Feb-13
May-14
May-15
Apr-16
Apr-17
Aug-09
Nov-09
Jul-10
Nov-10
Jul-11
Jun-12
Jun-13
Jan-14
Sep-14
Jan-15
Sep-15
Dec-15
Aug-16
Dec-16
Aug-17
Dec-17
Oct-11
Oct-12
Oct-13
CY2011 -20.5 -21.2 -21.7 -25.0
CY2010 16.8 11.5 12.9 11.5
Sharekhan Sensex Nifty
CY2009 116.1 76.1 72.0 114.0
Please note the returns are based on the assumption that at the beginning of each month an equal amount was invested in each stock of the Top Picks basket
CMP* PER (x) RoE (%) Price Upside
Name
(Rs) FY17 FY18E FY19E FY17 FY18E FY19E target (Rs)# (%)
Bharat Electronics 182 26.4 23.0 20.5 14.9 15.7 16.1 220 21
Bharti Airtel 530 42.7 110.3 54.6 6.8 3.2 5.6 600 13
HDFC Bank 1,871 33 28.5 23.4 17.9 16.6 16.4 2,100 12
IndusInd Bank 1,649 34.2 26.7 20.8 16.2 16.5 18.2 1,950 18
Jubilant FoodWorks 1,752 152.3 79.6 59.8 9.2 15.9 18.2 1,914 9
KEC International 384 32.3 23.6 18.4 21.2 23.3 24.2 ** -
Maruti Suzuki 9,731 40.1 34.0 28.3 21.0 20.7 20.6 ** -
ONGC Ltd 195 12.6 10.1 8.7 9.5 11.0 12.1 221 14
Reliance Industries 921 18.3 16.6 13.7 11.2 10.9 11.8 1,040 13
Sundram Fasteners 584 36.0 30.4 25.8 27.6 27.1 26.6 674 15
UPL Limited 762 21.3 18.8 15.2 27.2 25.0 25.4 980 29
ZEE Entertainment 586 46.1 42.4 32.4 18.3 17.3 19.4 650 11
*CMP as on December 29, 2017 # Price target for next 12 months ** Under review
December 29, 2017 2Sharekhan Top Picks
Name CMP PER (x) RoE (%) Price Upside
(Rs) FY17 FY18E FY19E FY17 FY18E FY19E target (Rs) (%)
Bharat Electronics 182 26.4 23.0 20.5 14.9 15.7 16.1 220 21
Remarks: Bharat Electronics Limited (BEL), a PSU that manufactures electronic, communication and defence equipment,
stands to benefit from enhanced budgetary outlay for strengthening and modernising India’s security.
The government’s ‘Make in India’ initiative and rising spends for modernising defence equipment will
support earnings growth in the coming years, as it is the only player with strong research and manufacturing
capabilities in the country.
Current order book of the company at ~Rs. 41,746 crore provides revenue visibility over the next 3-4 years.
We expect revenue to report a CAGR of 16.5% over FY2017-FY2020E, led by strong order wins and an
impressive execution rate.
BEL remains our preferred pick in the defence sector on account of its strong manufacturing and R&D base,
good cost control, growing indigenisation and strong balance sheet with improving return ratios.
Bharti Airtel 530 42.7 110.3 54.6 6.8 3.2 5.6 600 13
Remarks: Bharti Airtel (Airtel) is the largest mobile operator with over 280 million subscribers in India and over 80
million subscribers across 15 countries in Africa. In India, the company provides mobile services in 22 telecom
circles along with fixed line, enterprise data and DTH services.
Airtel owns 53.5% of Bharti Infratel (a towers company), which holds 42% of Indus Towers. Airtel has recently
offloaded shares of Bharti Infratel for Rs. 3,325 crore to reduce its debt profile.
Continuous focus of Airtel on remodeling activities in African business has resulted in steady improvement
in operating margin (up 730 bps) over the last four quarters.
Of late, the telecom sector is witnessing pricing sanity and diminishing competitive intensity. Further, with
media reports suggesting Reliance Jio going public in late 2018 or early 2019, we expect a favourable
competitive environment and lesser predatory pricing action.
Industry consolidation (three-player market, with the exit of smaller players) will help Airtel to maintain its
leading position in revenue market share with improving profitability. We have a Buy rating on the stock.
December 29, 2017 3Sharekhan Top Picks
Name CMP PER (x) RoE (%) Price Upside
(Rs) FY17 FY18E FY19E FY17 FY18E FY19E target (Rs) (%)
HDFC Bank 1,871 33 28.5 23.4 17.9 16.6 16.4 2,100 12
Remarks: HDFC Bank has a pre-eminent presence in the retail banking segment (~50% of loan book) and has been
able to maintain strong and consistent loan book growth, gradually gaining market share. Going forward,
economic recovery and improved consumer sentiments would be positive growth drivers for the bank’s loan
growth, which will in turn drive profitability.
Backed by a current account and savings account (CASA) ratio of over 40% and a high proportion of retail
deposits, the bank’s cost of funds remains among the lowest in the system, helping it maintain higher net
interest margin (NIM). In addition, the bank’s loan book growth is driven by high-yielding retail products such
as personal loans, vehicle loans, credit cards and mortgages, mostly to its own customers (which is also
positive for NIM).
HDFC Bank has been maintaining near impeccable asset quality, with its NPA ratios consistently being
among the lowest versus comparable peers. The bank has been able to maintain robust asset quality, owing
to stringent credit appraisal procedures and negligible exposure to troubled sectors.
Going ahead, HDFC Bank is well poised to tap the growth opportunities due to strong capital ratios, healthy
asset quality and a steady revival in consumer spending. As lending and transactions through formal routes
increase, HDFC Bank would benefit since it is a leading private sector bank and will likely gain market share
in this segment. The bank is expected to maintain healthy RoE of 18-20% and RoA of 1.8% on a sustainable
basis. Therefore, we expect it to maintain the valuation premium that it enjoys vis-à-vis other private banks.
IndusInd Bank 1,649 34.2 26.7 20.8 16.2 16.5 18.2 1,950 18
Remarks: IndusInd Bank is among the fastest-growing banks (25%+ CAGR over FY2012-FY2017), with a loan book of
~Rs. 1.23 lakh crore and 1,250 branches across the country. About 55% of the bank’s loan book comprises
retail finance, which is a high-yielding category, and is showing signs of growth.
Given the aggressive measures taken by the management, the deposit profile has improved considerably
(CASA ratio of ~42%). Going ahead, the bank would follow a differentiated branch expansion strategy (5%
branch market share in identified centres) to help ensure healthy growth in savings accounts and retail
deposits.
IndusInd Bank has maintained its asset quality despite sluggish economic growth and higher proportion of
retail finance in its loan book. The bank’s asset quality is among the best in the industry, with total stressed
loans (restructured loans + gross NPAs) forming less than 1.50% of the loan book.
A likely revival in the Indian economy will further fuel growth in the bank’s consumer finance division,
while strong capital ratios will support future growth plans. Although demonetisation has raised questions
regarding delinquencies in certain lending segments, management expects asset quality to remain under
control. The stock should continue to trade at a premium valuation, underpinned by strong loan growth,
quality management, high RoAs and healthy asset quality. We have a positive outlook on IndusInd Bank.
December 29, 2017 4Sharekhan Top Picks
Name CMP PER (x) RoE (%) Price Upside
(Rs) FY17 FY18E FY19E FY17 FY18E FY19E target (Rs) (%)
Jubilant Food- 1,752 152.3 79.6 59.8 9.2 15.9 18.2 1914 9
Works
Remarks: Jubilant FoodWorks Limited (JFL), India’s largest food service company, shifted its focus to customer
satisfaction from store additions to improve its store fundamentals over the long run.
Post the induction of Mr. Pratik Pota as the CEO, the company refreshed its menu by launching new items
and improving the quality of its pizzas with better offerings. The company gained good traction and posted
same-store-sales growth (SSSG) of 5.5% in Q2FY2018 (6.5% in Q1FY2018), as against a decline in SSSG in
earlier quarters.
Operating profit margin (OPM) improved by 440 bps in Q2FY2018 to 14% (highest in the last 14 quarters). JFL
is also focusing on reducing losses of Dunkin Donuts by shutting non-profitable stores and introducing value
product portfolio to improve store sales in the coming quarters. We expect standalone OPM to improve to
~14% in FY2020 from 9.7% in FY2017.
With negative working capital, the company’s balance sheet remained lean amid slowing SSSG and
sustained store additions.
JFL would be one of the key beneficiaries of improvement in the discretionary environment in the domestic
market. With a redefined strategy, revenue and earnings of JFL are expected to report CAGRs of 12% and
47%, respectively, over FY2017-FY2020.
KEC International 384 32.3 23.6 18.4 21.2 23.3 24.2 ** -
Remarks: KEC International (KEC) is a global power transmission infrastructure EPC major. The company is present
in verticals such as power transmission and distribution (T&D), cables, railways, water, renewable (solar
energy) and civil.
Globally, the company has powered infrastructure development in more than 61 countries. KEC is a leader
in power transmission EPC projects and has more than seven decades of experience.
Management sounded very confident of delivering growth across all verticals such as T&D, railways, solar
and cables. Management is banking on state transmission companies, private sector under tariff-based
competitive bidding (TBCB) route and overseas geographies for growth in the T&D segment.
Management expects the railway business to grow ~80% y-o-y to ~Rs. 800 crore and solar EPC business to
grow by over 3x to ~Rs. 500 crore in FY2018. KEC is witnessing improved revenue mix with the execution of
extra high voltage (EHV) cables, which have better profitability.
Over the years, KEC has grown through the organic as well as inorganic route. Going forward, we estimate
the company’s OPM to expand to 10% compared to 9.5% currently. Debt/equity (D/E) ratio is expected to
improve to 0.4:1 by the end of FY2020E from 1.3:1 in FY2017.
We expect earnings to report a CAGR of 29% during FY2017E-FY2020E, with strong cash flows and a leaner
balance sheet. Thus, we retain our positive outlook on the stock.
December 29, 2017 5Sharekhan Top Picks
Name CMP PER (x) RoE (%) Price Upside
(Rs) FY17 FY18E FY19E FY17 FY18E FY19E target (Rs) (%)
Maruti Suzuki 9,731 40.1 34.0 28.3 21.0 20.7 20.6 ** -
Remarks: Maruti Suzuki India Limited (MSIL) is India’s largest passenger vehicle (PV) manufacturer with a strong 47%
market share. Over the past two years, the company has been able to gain market share due to new
product launches, a vast distribution network (with increased focus on rural markets) and a shift in consumer
preference to petrol models from diesel models.
The recently launched premium hatchback, Baleno, Ignis and upgrade of Dzire have received strong
response, which will help MSIL to expand its market share in the segment. MSIL is likely to continue outpacing
industry growth as four of its models (Baleno, Brezza, Ignis and Dzire), which form 37% of its vehicle portfolio,
command a waiting period of 2-5 months.
The parent company of MSIL, Suzuki Motor Corporation, commissioned its Greenfield plant in Gujarat in
February 2017. Maruti Suzuki India Limited (MSIL) is ramping capacity in Gujarat, with production expected
to double to 20,000 units per month by Q4FY2018 as against the current rate of 10,000 units per month.
With capacity for the first line expected to be reached by the end of FY2018, MSIL has commenced work
on operating the second line, which has installed capacity of 2.5 lakh units. MSIL expects to reach the full
capacity of 7.5 lakh units at Gujarat by 2020. Enhanced production in Gujarat will ease capacity constraints
and help MSIL to reduce waiting periods for its models. we expect MSIL to outpace the industry and expect
volumes to post a 12% CAGR over FY2018-FY2020 as against industry growth of about 10%.
MSIL has recently announced price hikes of up to 2% to tide over input cost increases, effective January
2018. Moreover, increased sales of products having robust waiting period coupled with planned launches
would result in lower discounting for MSIL, which would augment margins. Further a favorable currency
position would aid margin improvement. We believe the above factors will offset the margin impact on
account of increased proportion of traded products and would enable MSIL to sustain higher margins of
15-16%.
We have introduced FY2020 estimates in this note. A better-than expected industry growth will justify
premium multiples for MSIL. We retain our Buy rating on the stock.
ONGC 195 12.6 10.1 8.7 9.5 11.0 12.1 221 14
Remarks: ONGC has reversed the decline in its gas production (declined at 2.1% over FY2013-FY2017) with robust
growth of 8.4% YoY in H1FY2018 and 3.3% in FY2017. The company has guided its gas production to grow by
8.9%/16.5% to 25.34 bcm/29.53 bcm in FY2018E/FY2019E. We have conservatively assumed oil/gas volume
CAGR of 1%/7% over FY2017-FY2019E, which is much lower than management’s guidance. This coupled with
higher oil and gas realisation is expected to drive adjusted standalone earnings growth at a 15% CAGR over
FY2017-FY2019E.
With the acquisition of 26% stake in Vankorneft in FY2017, oil and gas production of ONGC Videsh Limited
(OVL) is expected to increase to 15.1mtoe in FY2018 as compared to 8.9mtoe in FY2016. This coupled with
the recent surge in oil price would result in turnaround at OVL. Thus, we expect OVL to contribute EPS of
Rs. 2.7/Rs. 2.8 in FY2018E/FY2019E vs. Rs. 1.3 in FY2017.
Overall, we expect consolidated earnings of ONGC to report a CAGR of 20% over FY2017-FY2019E on
account of the likely improvement in earnings of the standalone business and higher profitability for OVL.
ONGC has received the cabinet’s approval to acquire the government’s 51.11% stake in Hindustan Petroleum
Corporation Limited (HPCL) and the transaction is expected to be completed by the end of March 2018. We
expect the acquisition of HPCL to be EPS accretive by ~6% for ONGC.
December 29, 2017 6Sharekhan Top Picks
Name CMP PER (x) RoE (%) Price Upside
(Rs) FY17 FY18E FY19E FY17 FY18E FY19E target (Rs) (%)
Reliance Industries 921 18.3 16.6 13.7 11.2 10.9 11.8 1,040 13
Remarks: We expect robust GRM for RIL at $11.8/12.5/12.5 per barrel in FY2018E/FY2019E/FY2020E, which is at $4.5-
5.0/bbl premium to our assumption for Singapore complex GRM as we expect GRMs of RIL to benefit from
the commissioning of petcoke gasification plant. Moreover, margin outlook for the petrochemical business
remains robust, given the likely delay in the commissioning of U.S. ethylene capacity expansion projects
due to floods caused by Hurricane Harvey.
RIL has doubled its paraxylene (PX) capacity to 3.7 million metric tonne (mmt) from 1.9 mmt earlier and
has recently commissioned its ethane import project and Refinery Off Gas Cracker (ROGC) plant (under
the stabilisation phase currently). The company has also commenced start-up activities for its petcoke
gasification plant and the economics of the plant has improved with the recent increase in oil prices.
Given lower freebies, we expect RJIO’s ARPU to increase in the coming quarters and, thus, model ARPU of
Rs. 155/Rs. 165/Rs. 175 for FY2018E/FY2019E/FY2020E. Moreover, we model subscriber base of 160 million
for FY2018E, 185 million for FY2019E and 205 million for FY2020E. Strong subscriber addition and APRU
accretion give us confidence on improving profitability of the telecom business going forward.
We expect consolidated EBITDA/PAT CAGR of 21%/13% over FY2017-FY2020E, driven by the commissioning
of core downstream projects in FY2018 and improvement in the profitability of the telecom business. Any
positive surprise in terms of better-than-expected financials of the telecom business would be an important
re-rating trigger for RIL going forward.
Sundram Fasteners 584 36.0 30.4 25.8 27.6 27.1 26.6 674 15
Remarks: Sundram Fasteners Limited (SFL) is the largest organised domestic player in the fasteners segment,
commanding ~35% market share. The company manufactures products for CVs, passenger cars, two-
wheelers and tractors. Fasteners constitute ~40% of sales, while motor vehicle parts and accessories
contribute the remainder.
SFL has consistently introduced new products in the recent past, which include pump assemblies, powder
metal shafts, hubs and rocker assemblies, which have enabled the company to significantly increase the
content per vehicle and reduce dependence on traditional fasteners. With OEMs increasingly opting for
modular platforms to reduce costs, SFL has introduced specialised fasteners that provide a huge growth
opportunity. In addition, the company has introduced products in the non-auto space to diversify its revenue
base.
SFL has increased the share of high-value products, which currently contribute to about half of the company’s
revenue. In addition to these, around two-thirds of the fasteners segment is specialized fasteners (high-
value products). Moreover, performance of the subsidiary has improved remarkably due to better capacity
utilisation and productivity. We expect SFL to sustain higher margins and expect margin to remain in 18-19%
range.
We expect SFL to continue to outpace industry growth on account of new product launches and increasing
content per vehicle. Further, with its product portfolio inclining towards high value-added products and a
marked improvement in its subsidiary performance, we expect robust 17% net profit CAGR over the next two
years. We have a Positive view on SFL.
December 29, 2017 7Sharekhan Top Picks
Name CMP PER (x) RoE (%) Price Upside
(Rs) FY17 FY18E FY19E FY17 FY18E FY19E target (Rs) (%)
UPL Limited 762 21.3 18.8 15.2 27.2 25.0 25.4 980 29
Remarks: United Phosphorous Limited (UPL) is a global generic crop protection chemicals and seeds company. UPL is
the largest producer of agrochemicals in India. The company is among the top five post-patent agrochemical
manufacturers in the world. UPL has ~23 manufacturing sites, including nine in India, four in France and two
in Spain. The company operates in every continent and has a customer base in 123 countries with its own
subsidiary offices.
Management of UPL is confident of the long-term growth prospects such as 1) introduction of new products,
at least two per year; 2) improving innovation turnover index; 3) partnership with Bayer in Brazil; and 4)
strong distribution network. However, FY2018E seems to be on the softer side than anticipated earlier owing
to the increase in inventory situation in Brazil, currency fluctuation and erratic weather conditions. These will
not have a major impact on long-term prospects.
Management has guided for 8-12% growth in overall revenue on a reported basis. Constant currency growth
will be still 12-15% along with a 50-75 bps expansion in EBITDA margin in FY2018. Management also expects
acceleration in growth in H2FY2018 versus H1FY2018, owing to a late season pickup in Latin America.
Owing to continuous product launches, UPL has managed to increase its innovation rate from 5% in FY2015
to 15% in FY2017 (it was 14% in FY2016).
A positive outlook for geographies such as India, Europe and Latin America would also drive revenue growth
going ahead. Further, patent expiry of significant agrochemicals, the value of which is pegged at ~$4 billion
over the next three years, augurs well for UPL to leverage the opportunity.
We see concerns around growth are overdone and believe management’s guidance for FY2018 topline
growth can be comfortably achieved on account of its strong product portfolio, new product introductions
and improved demand outlook. We maintain our Buy rating on the stock.
ZEE Entertainment 586 46.1 42.4 32.4 18.3 17.3 19.4 650 11
Remarks: Zee Entertainment Enterprises Limited (ZEEL) continues to lead the broadcasting industry in terms of growth
in advertising revenue. ZEEL is one of the leading players in television broadcasting with a bouquet of 34+
TV channels across genres.
ZEEL expects domestic subscriptions to grow at a low-teen CAGR for the next 3-4 years. However, the
ongoing litigation on TRAI’s tariff order is causing a delay in contract renewal negotiations with distributors.
ZEEL expects advertisement revenue growth to be in mid-teens during H2FY2018E, as it expects clients
across sectors to spend more on advertising. Programming hours in its flagship channel, Zee TV, have
reached 30 hours with new slot opening on weekends.
ZEEL will unveil its OTT 2.0 ZEE5 (replace its current advertising video-on-demand (AVOD)-based OZEE
and subscription video-on-demand (SVOD)-based Ditto TV) in the next three months. Management expects
margins to remain at around 30%+, even after increasing programming cost in digital content.
We continue to remain positive on ZEEL, as it is a structural India consumption theme. Moreover, the company
continues to invest across the media spectrum, including movies, music, events, digital and international
markets, to maintain its high-growth trajectory. We maintain our Buy rating on the stock.
December 29, 2017 8Know more about our products and services
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