Category: Economy, Markets and Macro Views

Check out the Small Cap Multibaggers in our Stock Research Section. Here are 3 more small cap stocks added to the same coverage.

Gujarat Apollo Industries:
Gujarat Apollo Industries (GAI), holds ~30% market share in the domestic road construction equipment industry. It is a key beneficiary of investments being made for up gradation and widening of roads and expressways under the National Highway Development Programme (NHDP), golden quadrilateral etc. A large part of these investments, estimated to be in excess of INR 2.2tn

Till date, only 15% of the total targeted roads under NHDP are complete, implying that a huge chunk of the budgeted investments are yet to be expended. This means that apart from the existing pent up demand, there is a good demand visibility for GAI over the next few years. Moreover, the company’s venture into new geographies through exports is likely to de-risk it from the rising interest rate concerns in India. With the capacity expansions in place, we expect GAI to achieve a turnover of INR 2.8 bn by FY10, with an improved product mix favouring better margins. At 11.1x its FY07 earnings, we consider GAI as the best proxy to the Indian road and infrastructure boom.

International Travel House:
The USD 53.5 bn Indian tourism industry (2006) is slated to grow to USD 128 bn by 2016 (Source: World Travel & Tourism Council (WTTC)), led by Government of India’s (GoI’s) tourism promotion efforts through “Incredible India” campaign, strong economic growth, rising income levels, consumerism, and increasing business, and domestic travel.

Given the booming tourism sector, the ITC pedigree, launch of portal, and strong focus on the car rental industry, the prospects of ITHL appear extremely bright. We expect ITHL’s revenues and profits to grow at 28% and 29.7% CAGR, respectively, between FY07 and FY09E. At the CMP of INR 165, the stock trades at 9.9x FY08E EPS of INR 16.7 and 7.7x FY09E EPS of INR 21.4.

Phoenix Lamps:
The Indian market for compact fluorescent lamps (CFLs) has been growing at ~40% over the past few years and is currently valued at INR 7 bn. India produced 44 mn CFLs in FY06, a mere 6% of the total number of traditional incandescent bulbs produced during that year. Phoenix Lamps, a leading player in CFLs, is looking to triple its current capacity of 25 mn units to 75 mn units by FY09E.

Phoenix Lamps’ CFL business, which has been growing at 34% CAGR over FY04-07, is likely steer the company’s growth over the next few years on the back of its leadership position in a radically changing industry. Sales and profits have grown at 23.4% and 49.4% CAGR, respectively, over FY04-07. Profits have grown at a faster pace as compared to sales over the last three years on account of lower tax rates.

Sarla Performance Fibers:
Sarla Performance Fibers (SPF) is the only producer and processor of multi-filament polyester and nylon textured yarn in India, catering to a varied set of applications and end users. As on FY07, SPF earned ~ 63% of its revenue from exports whereas the 10% was deemed exports. SPF is only export focused player has been successful in meeting and maintaining client specifications and is thus one of the preferred suppliers for most of its clientele.

Due to its focus across various geographies, SPF is well positioned to capture the huge opportunities across its product segments. Also, the Honduras JV is likely to provide an added upside to revenue growth once it is consolidated. That apart, a break through in high tenacity yarn will lead to margin expansion going forward. At CMP of INR 126, the stock trades at 8.1x its FY07 earnings.

HSBC is overweight on the prospects of BHEL. BHEL still dominates, with 55% share of incremental orders and 69.4% share of thermal. Increase earnings estimates by 5.6% and 10% for FY09e and FY10e respectively, based on the strong order inflow.

BHEL to outperform the market due to strong order book and potential success in supercritical projects. BHEL to continue to trade at a MACC range of 8.4-10.3% vs. earlier estimate of 8.0-11% MACC range, due to increase in revenue visibility post FY10e. Based on this, increased target price to INR2500 and Maintain Overweight rating.

It may be possible for HDFC to cut rates on the entire stock of floating rate loans. The 28.7% disbursal growth in the quarter ended June was a little higher than in preceding quarters. Target price of INR 2173, up from INR1985 previously, is a weighted average where the DCF is assigned a weight of 50% and the PE and P/B derived forecasts are assigned weights of 25% each. HDFC has risen 33.9% after end of June compared with an 18.8% rise in the Sensex and 19.1% in the Bankex. Rating methodology requires a minimum potential return of 6.3% to rate a non-volatile Indian stock Neutral. The potential return on HDFC is well below this threshold and hence HSBC continue to rate the stock Underweight.

India Inc had a robust 1Q, Citigroup expects Sensex ex-oil profits to rise by 21% in 2QFY08 (14.5% for Citi India universe ex-oil). Forex gains (a key driver of positive surprises last quarter) will likely be less of a factor this time, as the rupee appreciated by a modest 2% during the Sep-07 quarter.

Telecom (+114%), Media (+109%), Brokerages (91%), Hotels (54%), Capital Goods (47%), and Cement (50%) should lead in profit growth. Key laggards seen as Autos, Pharma, Textiles, Metals, and Sugar. IT Services companies are expected to report (18%) profit growth lagging behind the market average.

Autos: The sector’s performance will likely remain weak overall, with high interest rates continuing to have a negative impact on two-wheelers and fourwheelers alike. Sales for the sector are expected to remain flat on a yoy basis, while profits should decline. Likely best performers: Amtek Auto and Amtek India.

Banks: The sector has potential upside from bond portfolio appreciation and a facilitative trading environment. Expect strong performances from brokerages and possible earning dip for a few public sector banks to due to a high base effect. Likely star performers: Kotak Bank and IL & FS.

Capital Goods: Strong forecast earnings growth of 47% led by expected top-line growth of 35%, and margin expansion. Likely top performers: Thermax, Punj Lloyd, Jindal Saw, L&T and BHEL.

Cement: Higher cement prices should drive margin improvements. Profits likely up by almost 50% on a topline growth of 27%. Likely top performers: ACC and UltraTech.

Consumer: Expect a weak quarter with profit growth seen at only around 10%, Expected top performers: Britannia, and Marico. Likely laggards: TataTea, Colgate and Shoppers’ Stop.

IT Services: Expect strong volume growth should continue in a seasonally strong quarter. EBITDA margins seen down yoy, but likely to improve sequentially for most companies with visa costs and wage hikes being taken care off in 1Q. Likely top performers: Mphasis BFL
and NIIT . Laggard: Sasken Communications.

Oil&Gas: Assuming oil-bond issuance to the tune of Rs240bn for this fiscal, with Rs121bn for the first half, to be booked in this quarter. Rupee appreciation is likely to have a significant
positive impact on gas distributors. Likely top performers: Aban, Gujarat Gas and GAIL.

Pharma: Impact of currency appreciation on exports and margins should lead to a weak quarter with revenue growth in single-digits at 8%, and negative profit growth (-11%). Base effect should have a positive impact on Matrix and a negative impact on Dr. Reddy’s.

Telecom: Expect another strong quarter with profit growth well above 100% yoy. Forex gains in this quarter are likely but to a lesser than the previous quarter. Likely top performers: Idea Cellular and Reliance Communications.

In a recently conducted London Conference, here are Edelweiss Capitals top picks in India and their target prices.

• Akruti Nirman – NAV basis valuation @ Rs 1,231 per share
• Ashapura Minchem – Target not specified
• Axis Bank – deliver 13-15% RoE and 20% EPS CAGR during FY07-09E. The stock currently trades at 2.8x FY09E book and 23.6x FY09E earnings
• B L Kashyap – Expected to report an EPS of Rs 100 and Rs 131 for FY08 and FY09 respectively.
• Elder Pharma
• Ess Dee Aluminum
• Housing Development Infrastructure Ltd – HDIL – NAV basis valuation @ Rs 597 / share
• Infotech Enterprises – EPS expectations of Rs 17 and Rs 24 for FY08 and FY09 respectively
• Jindal Saw
• JSW Steel
• Kalpataru Power Transmission – EPS estimates of Rs 76.3 and Rs 94.4 for FY08 and FY09
• Mastek
• MIC Electronics – EPS estimates of Rs 24 and Rs 33 for FY08 and FY09
• Reliance Industries – The stock is trading higher than its target price of Rs 2,299
• Unitech

You can research and then enter the stock when the market corrects.

FII, Lehman Brothers just a while ago has released India strategy report.After the recent strong run, market valuations have become quite expensive compared with historical levels. However, the declining global interest rate environment coupled with strong flows could mean that the market remains expensive.

The report said,

We are overweight domestic cyclicals, especially those for which interest rates are key inputs in driving demand and valuations. These include banks, automobiles and utilities as key sector plays. We also recommend overweighting construction stocks given strength in both corporate and infrastructure capex. Moreover, we expect large consumption buoyancy, especially in durables, following the award of Sixth Pay Commission.

One can avoid sectors with INR costs and USD revenues. This means underweighting the technology and pharmaceutical sectors. Also underweight on global cyclicals such as metals at this time..

Ten large cap picks include Reliance Industries, ICICI Bank, Larsen & Toubro, Maruti Udyog, Mahindra & Mahindra, Union Bank, SBI, Nagarjuna Construction, NTPC and Zee Telefilms.

Tata Motors – Weak Sales
Weak domestic sales (down ~3% YoY); strong exports (+16%YoY) mitigated the impact somewhat. Within the domestic segment, MHCV sales fell 7%, whilst cars declined 4%. LCVs continued to exhibit strong growth (+13%) driven by product extensions of the ACE platform. Although sales fell Y/Y, sequentially (MoM) sales rose almost 22%, rising from an average of around 11k units to ~14k.

Interest rates are on a downtrend, with high credit quality clients reporting bulk CV deals at 10-10.25% (almost 400bps lower than the peak in Apr-May). For the broader industry, rates fell 200-250bps. TAMO management said incentives on trucks are minimal, while discounts on cars are now ~6-9% off face value, to push a jaded vehicle line. Citi maintains BUY with a price target of Rs 1,029.

Maruti Udyog Ltd – Sales Rise in September
Domestic sales rose 11%Y/Y (vs17.5% YTD), hampered by a strong base effect, which management indicated will temper growth rates over 2HFY08 too. The last few days of September were also hit by a religious festival, when consumers typically eschew vehicle purchases. Exports rose 55% Y/Y, 51% YTD as it continues to increase penetration in new African and Latin American markets (FY08 target of 55000 units appears achievable).

MUL has maintained its market share at 51% in Aug, with the main gain being c3.3% in the key A2 segment – driven by the Swift variants. Near term, Swift diesel might face competition from the newly launched Getz diesel (~9% more expensive than the Swift diesel).
Citigroup maintains a hold on Maruti Udyog with a price target of Rs 945.