While we are convinced about these stocks, given the market volatility, we have created a 20 percent cash cushion and will provide timely alerts to investors on deploying it.
Moneycontrol Research Team
If you are looking to construct a portfolio of large cap shares in this market, we have cherry picked fourteen stocks where the medium term outlook does not justify the steep erosion in price. This is an attempt to capture deep value from the large cap universe rather than to just create a conventional index hugging portfolio.
While we are convinced about these stocks, given the market volatility, we have created a 20 percent cash cushion and will provide timely alerts to investors on deploying it.
Aditya Birla Capital houses the financial services businesses of the Aditya Birla Group. It enjoys a leadership position (ranked 3rd) in the mutual funds business, with equity assets forming 35 percent of its AUM (assets under management). It is a promising player in the lending business (book size of Rs 43,242 crore, low delinquency, RoE of 14.2 percent and RoA 1.9 percent) and shows decent growth in its small-sized housing finance company (book of Rs 8,137 crore).
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With a strong partnership with banks to distribute its insurance products, the outlook for the company's life insurance business is improving. Aditya Birla Capital has a nascent presence in health insurance, financial advisory, securities broking and insurance broking and these could be long-term value drivers. The company, a good proxy for the shift in household savings from physical assets to financial instruments, has corrected significantly and is now close to its lifetime low.
Bajaj Auto had a bumpy start to FY18, but things have been looking up since then. The company’s sales—both in value and volume—have been rising and its margins have expanded. The problems from demonetisation and the roll out of of the Goods and Services Tax are behind.
Domestic three-wheeler sales have increased following the abolition of the permit system. Demand in export markets too has been good. We have turned positive on the company on the back of strong three-wheeler sales, an improvement in domestic motorcycle sales and strong demand in export markets.
Coal India is set for a good year with the company eyeing volumes of around 630 million tonne, a 9 percent growth. Also, the full benefits of recent price hikes and higher prices in e-auction of coal, which is about Rs 6,000 crore of gains on an annual basis, will be showing in this year’s numbers. It has also started levying additional coal transport and coal evacuation charges, the full benefits of which will be seen this financial year. These should allay concerns over pressures arising from wage hikes, which were fully provided for in FY18.
Emami, with around 52 percent of sales from rural areas, remain our preferred play on the rural-led growth in the FMCG sector. At 36 times its estimated earnings for FY19, the stock is available at a steep discount to market leader Hindustan Unilever. Further, some of the problems of the company are ebbing. Raw material prices have corrected by 30 percent in the current year, the Kesh King portfolio has stabilised and wholesale dependency has reduced from 50 percent to 38 percent now. Emami's distribution reach has also improved, with direct reach increasing by around 30 percent in the last two years
Hero MotoCorp, the largest two-wheeler company in India, continues to do well. Sales, both in terms of volumes and value, have been growing, and the company has maintained its margins by controlling costs. Strong leadership in the two-wheeler segment, revival riding on rural growth, a slew of new launches, structural changes from an upcoming product rejig, focus on export markets and reasonable valuations make it an ideal stock for long-term investors.
ICICI Pru Life, in our view, is well positioned in a structural growth sector, with the lowest operating cost and distribution strength through tie-ups with banks. Given its improved return ratios and headroom to improve profitability, the valuation discount of more than 70 percent compared to its closest peer is unwarranted. We expect the gap to narrow in the near-to-medium-term, with a rise in ICICI Pru Life’s stock price.
Indraprastha Gas is our favourite play on the growing shift to CNG. Policy incentives supporting gas, pricing power and aggressive expansion in new territories are the main triggers for this stock. We expect the margins to remain stable and volumes to rise steadily. Any increase in crude price makes makes gas attractive for both commercial and domestic use. Increased environmental concerns and policy support for gas usage, more cities being brought under the city gas distribution (CGD) network, mandatory inclusion of gas pipelines in new building constructions and the deeply under-penetrated Indian gas market, are the other key triggers.
L&T is expected to benefit from the government spending in sectors like infrastructure, oil and gas, metros, defence, water resources, roads and a few others. It is already sitting on an order book of close to Rs 2,63,000 crore or around 2.5 times its consolidated sales for FY18. The company's management is optimistic about achieving relatively better growth in the current financial year. It has guided for a 12-15 percent revenue growth this year and a 10-12 percent increase in order inflows. With the margins expanding, earnings outlook appears to be promising.
PI Industries had a difficult FY18 because of several operational and macroeconomic challenges. We feel that was an aberration and expect a better performance in FY19 from substantial growth in the custom synthesis manufacturing (CMS) segment, limited exposure to rising global raw material prices, new product launches lined up for the domestic business, strong order book line up, global agro-chem recovery, clearing up of inventory channels and a conducive domestic agriculture environment.
Reliance AMC's assets under management stood at Rs 3.96 lakh crore as at the end of March. Within that, the share of high fee earning equity assets was 36 percent of the average AUM. With 11 percent market share at the end of March, strong retail brand and well-diversified sourcing platform, Reliance AMC will continue to be one of the key beneficiaries of the rapid growth in the mutual fund industry. The stock's current valuation looks compelling, given the company's track record, and we expect it will be able to grow its AUM and improve its profitability in the coming years. The financial problems of the ADAG Group—of which the company is a part of, has hurt the stock. But Nippon Life being an equal partner with 42.88 percent stake in the asset management firm, helps assuage the concerns.
Symphony is one of India's leading air cooler makers, earning 80-85 percent of its revenues from domestic sales. A market share of over 50 percent in the organized Indian air cooling market, opportunities in industrial and centralised air cooling, turnaround of foreign subsidiaries, product innovations, an asset-light model, and steady financials make the stock attractive after the recent correction.
UltraTech Cement ended FY18 on a strong note although reported numbers were impacted by exceptional one-off charges. The company enjoys a cost leadership position and has raised capacity utilisation at the plants bought from JP Associates, to 75 percent. The recent acquisition of Century Textiles Industries's cement plants has further fortified UltraTech’s pan-India presence. Given the rise in infrastructure demand, the outlook for the company is robust as increasing capacity utilisation will give the industry in general a better pricing power.
Vedanta’s market capitalisation has eroded by nearly Rs 30,000 crore due to concerns over the closure of its Tamil Nadu copper plant. However, the stock has excessively reacted considering that this plant accounts for merely 5 percent of its consolidated earnings before interest, tax, depreciation and amortisation (EBITDA).
In terms of investments, this plant’s valuation (at 6 times EV/ EBIDTA or Rs 7,800 crore and fresh capex of about Rs 1,300 crore) is far less than the erosion in market capitalisation. Rating agencies like Moody’s see a marginal impact while S&P predicted no major threat to cash flows. Moreover, the company's other business are still in good health, thanks to the uptrend in commodity prices. Vedanta’s fair value is at around Rs 1,40,000 crore. Even if one ascribes around Rs 10,000 crore for the Tamil Nadu plant, its other businesses are still worth Rs 1,30,000 crore as against its current market capitalisation of around Rs 91,500 crore.
Voltas caters to a wide range of clients through its diversified product/service portfolio. Easing of hurdles in the Middle East and initiation of capital-intensive projects by the Indian government should bolster the prospects of the electro-mechanical projects and services segment. Order visibility in the Mozambique-based engineering products and services arm, coupled with a steady growth trajectory for unitary cooling products should augur well for the company.