The benchmark indices failed to break out of the narrow range in this week, weighed down by weakness in the Indian rupee and US Federal Reserve's plans on quantitative easing.
Signs of strength in the US economy fuelled fears that the Federal Reserve might soon begin tapering its massive stimulus program, which might not be positive for the equity markets.
Most analysts are of the view hat that the end of quantitative easing by the central banks might result in a 'risk-off' sentiment which means trouble for the equity markets.
The Indian markets wrapped up the week ended June 07, 2013 in the red zone, reversing the gaining trend of the previous week. The Sensex ended 1.67 per cent lower, while the Nifty fell 1.75 per cent in the week.
While the GDP data for the quarter ended March 2013 came at sub 5 per cent levels along with easing inflation rates, all eyes are on the Reserve Bank of India which will hold its next policy meet later in the month to ease policy rates.
However, with the rupee depreciating below 57, most analysts think it might just be a tall task for the Reserve Bank of India to ease policy rates in this month.
"The picture is getting more and more difficult for the RBI because of the inflation having dropped significantly which will not help in managing the fiscal deficit," Indranil Pan of Kotak Mahindra Bank said in an interview with ET Now.
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Signs of strength in the US economy fuelled fears that the Federal Reserve might soon begin tapering its massive stimulus program, which might not be positive for the equity markets.
Most analysts are of the view hat that the end of quantitative easing by the central banks might result in a 'risk-off' sentiment which means trouble for the equity markets.
The Indian markets wrapped up the week ended June 07, 2013 in the red zone, reversing the gaining trend of the previous week. The Sensex ended 1.67 per cent lower, while the Nifty fell 1.75 per cent in the week.
While the GDP data for the quarter ended March 2013 came at sub 5 per cent levels along with easing inflation rates, all eyes are on the Reserve Bank of India which will hold its next policy meet later in the month to ease policy rates.
However, with the rupee depreciating below 57, most analysts think it might just be a tall task for the Reserve Bank of India to ease policy rates in this month.
"The picture is getting more and more difficult for the RBI because of the inflation having dropped significantly which will not help in managing the fiscal deficit," Indranil Pan of Kotak Mahindra Bank said in an interview with ET Now.
"But the way things are panning we might also not be able to benefit out of the commodity price movements amid weak currency which may lead to uptick in inflation in the coming months," he added.
Another important point which is bothering investors is the fact that foreign institutional investors which have become new sellers in the Indian markets. FIIs have been a key support for markets as they have already bought over $15 billion worth of shares this year. Dealers say weakness in rupee could be one of the factors turning FIIs away.
However, one should note that the depreciation in the rupee is partly due to the appreciation in the dollar against all the other currencies globally. "But the loss of faith in the stability of the rupee can be a big risk to foreign inflows into the country," Sharekhan said in a report.
"Already there has been outflow to the tune of Rs1 1,000 crore from the Indian debt market in the past few days and this could rub off onto the equity market also," added the report.
The brokerage firm is of the view that the stock market will continue to take its cue from the global markets, the RBI and the monsoon, and consequently see increased volatility in the days ahead.
We have compiled stock-specific recommendations from various brokerage firms for your portfolio:
Brokerage Firm: Edelweiss
1) Alembic Pharmaceuticals:
The company intends to increase its revenues from the chronic segment from 45 per cent to over 50 per cent of total domestic sales in the next two years. As a result, we expect the company's domestic formulation business to grow at 12 per cent CAGR over FY13-15E. The company continues to improve its margins year-on-year. It has ended FY13 at 16 per cent EBITDA margins, and plans to improve it further by 100-125 bps every year, and expects margins to stabilize at 20 per cent over the next 2-3 years. The stock is currently trading at 12.4x/9.8x FY14E/FY15E EPS. We recommend 'buy' on the stock.
2) Amara Raja Batteries:
The company has a debt-free balance sheet, average ROCE of 30 per cent+ and has grown at more than double the pace of its closest competitor in the last six years (sales growth of 6.5x versus Exide's 3x between 2006- 2012, which implies market share gains).
ARBL's technological prowess, brand equity, and focus on certain product category (diesel car/tractor batteries) are filling product gaps within segments (UPS) and activating existing dealers with expansion in semi-urban/rural network. The company is well on track to gain market share over the coming years.
The stock is currently trading at 12.6x/11.0x FY14E/FY15E EPS.
3) Astral Poly Technik:
The company is set to benefit from the shift in demand towards PVC/CPVC pipes from GI pipes (current mkt share of 53%), and with its reputation for strong product quality, APTL will continue to witness robust growth going ahead.
The company's capacities have multiplied by over 5 times over the past 5 years from 11,800 MT to 65,000 MT. It would further be expanding capacities by 40000 MT over the next two years to 105,000 MT.
At CMP of Rs 532, the stock trades at 12.2x/9.4x FY14E/FY15E EPS.
Another important point which is bothering investors is the fact that foreign institutional investors which have become new sellers in the Indian markets. FIIs have been a key support for markets as they have already bought over $15 billion worth of shares this year. Dealers say weakness in rupee could be one of the factors turning FIIs away.
However, one should note that the depreciation in the rupee is partly due to the appreciation in the dollar against all the other currencies globally. "But the loss of faith in the stability of the rupee can be a big risk to foreign inflows into the country," Sharekhan said in a report.
"Already there has been outflow to the tune of Rs1 1,000 crore from the Indian debt market in the past few days and this could rub off onto the equity market also," added the report.
The brokerage firm is of the view that the stock market will continue to take its cue from the global markets, the RBI and the monsoon, and consequently see increased volatility in the days ahead.
We have compiled stock-specific recommendations from various brokerage firms for your portfolio:
Brokerage Firm: Edelweiss
1) Alembic Pharmaceuticals:
The company intends to increase its revenues from the chronic segment from 45 per cent to over 50 per cent of total domestic sales in the next two years. As a result, we expect the company's domestic formulation business to grow at 12 per cent CAGR over FY13-15E. The company continues to improve its margins year-on-year. It has ended FY13 at 16 per cent EBITDA margins, and plans to improve it further by 100-125 bps every year, and expects margins to stabilize at 20 per cent over the next 2-3 years. The stock is currently trading at 12.4x/9.8x FY14E/FY15E EPS. We recommend 'buy' on the stock.
2) Amara Raja Batteries:
The company has a debt-free balance sheet, average ROCE of 30 per cent+ and has grown at more than double the pace of its closest competitor in the last six years (sales growth of 6.5x versus Exide's 3x between 2006- 2012, which implies market share gains).
ARBL's technological prowess, brand equity, and focus on certain product category (diesel car/tractor batteries) are filling product gaps within segments (UPS) and activating existing dealers with expansion in semi-urban/rural network. The company is well on track to gain market share over the coming years.
The stock is currently trading at 12.6x/11.0x FY14E/FY15E EPS.
3) Astral Poly Technik:
The company is set to benefit from the shift in demand towards PVC/CPVC pipes from GI pipes (current mkt share of 53%), and with its reputation for strong product quality, APTL will continue to witness robust growth going ahead.
The company's capacities have multiplied by over 5 times over the past 5 years from 11,800 MT to 65,000 MT. It would further be expanding capacities by 40000 MT over the next two years to 105,000 MT.
At CMP of Rs 532, the stock trades at 12.2x/9.4x FY14E/FY15E EPS.
4) Bajaj Finance:
BFL is trying to maintain the balance between profitability and growth -- the consumer book will provide profitability and the non-consumer book will provide scale.
During the last four years, return ratios have improved significantly -- RoA has improved from 1.3 per cent in FY09 to 4.1 per cent in FY13, while RoE has jumped from 3.2 per cent in FY09 to 22 per cent in FY13.
The company is set to benefit from the shift in demand towards PVC/CPVC pipes from GI pipes (current mkt share of 53%), and with its reputation for strong product quality, APTL will continue to witness robust growth going ahead.
The company's capacities have multiplied by over 5 times over the past 5 years from 11,800 MT to 65,000 MT. It would be further expanding capacities by 40000 MT over the next two years to 105,000 MT.
At CMP of Rs 532, the stock trades at 12.2x/9.4x FY14E/FY15E EPS.
5) Bharat Forge:
With low capex spends over the next 2 years, significant reduction in debt and improvement in machining mix (higher margins), we expect BFL earnings to grow by 47 per cent CAGR over FY13E-FY15E.
BFL's forging subsidiaries are located in Europe, USA and China. We believe that these subsidiaries will turn profitable in FY14E, as US subsidiaries' closure will result in cost savings of Rs 40 crore even as demand will recover gradually in key markets.
The stock looks very attractive, as it is trading at EV/sales of 1.13, valuation seen during 2008-09 global financial crisis. According to our bear case scenario, we see limited downside.
6) Development Credit Bank:
DCB's advances grew at a CAGR of 15 per cent (below industry average) over the past 5 years mainly due to the bank's focus on improving asset quality and profitability. With stronger processes and risk management systems in place, DCB is all set to step on the growth momentum.
DCB's has healthy asset quality with best in class provision coverage with GNPA and NNPA at 3.2 per cent and 0.8 per cent, respectively. Total stressed assets (restructured advances + gross NPA) are at comfortable levels of 3.8 per cent.
We believe DCB is an attractively priced bank compared to its peers at 0.9x FY15E adjusted book and 6.3x FY15E earnings will deliver RoEs of around 14% and RoAs of 1.1 per cent.
7) ICICI Bank:
Asset quality has been improving steadily with gross and net NPA at 3.5 per cent and 0.7 per cent, respectively. Restructuring book (1.6 per cent of loans) has been declining. We do not see major restructuring in the future.
The bank has near market leadership in almost all its businesses, including mortgages, auto loans, commercial vehicle loans, life insurance, general insurance, and asset management. In future, the listing of insurance business and asset management will lead to monetization of stake.
Adjusting for valuation of subsidiaries of Rs 227 per share, the stock trades at 1.6x FY15 adjusted book.
8) Mind Tree:
The company has significant headroom for operational margin expansion given its multiple margin levers such as rationalization of employee pyramid, lower investments in SG&A, higher utilization, improvement in fixed price projects and lesser attrition rates. We expect margin levers to play out going forward.
We expect steady performance from the Mindtree, both in terms of growth and margin expansion. Mindtree is trading at attractive valuations compared to its peers at P/E of 9.0x FY14E earnings, delivering sustainable RoE of around +25 per cent.
9) Maruti Suzuki:
Peaking of interest rates and competition are key positive for Maruti Suzuki whereas near term INR Vs JPY is turning favorable for the company which will lead to margin improvement (as 25 per cent of sales are imports). Increase in localisation will aid for margin expansion in long term, thereby reducing currency risk.
New launches (Ertiga and Alto) have been well received by market, and additional diesel capacity by FY14 will drive sales going forward. Maruti Suzuki has been a preferred early interest rate cycle play.
Its multiple expands to the range of 16x-21x 1-year forward earnings when growth returns and earnings up cycle begins. The stock currently trades at 13.2x/11.8x FY14E /FY15E EPS.
10) Larsen & Toubro:
L&T witnessed strong order inflows of Rs 88,000 crore in FY13 with 25 per cent YoY growth. Further, the management aims to achieve 20 per cent growth in order inflows in FY14 on a high base.
The management is confident of achieving 15-17 per cent growth in standalone revenue in FY14 with stable margins. The current order backlog of Rs 1.5 lakh crore (2.5x FY13 standalone revenue) and expectation of strong order inflows in FY14 give revenue growth visibility.
At CMP, the stock trades at FY14E and FY15x consolidated PE of 15.7x and 13.2x, respectively.
11) V-Guard Industries:
V-Guard is a dominant south Indian player and is aggressively foraying in other parts of the country. The company has a strong product presence, distribution and brand visibility. It has turned cash flow positive in FY12 (earlier negative cash flow company) and would make cash flow in the coming years.
Asset light model, no significant capex ahead and ROE of 32 per cent make it an attractive bet. The stock is trading at a P/E of 11.5x FY15E.
12) Zee Entertainment Enterprises:
ZEE will be a major beneficiary of digitization, with its large channel bouquet, strong distribution muscle, sound balance sheet, cash flows, large dividend payouts and ability to garner higher share of the subscription revenue pie.
As of FY12, subscription revenues contributed ~44 per cent to ZEE's total revenues. We expect subscription revenues to contribute ~56 per cent to ZEE's total revenues by FY16. ZEE's international revenues will further add to the company's profitability prospects.
At the current CMP, the stock trades at a PE multiple of 24.4x FY15E earnings.
Brokerage Firm: UBS
13) Bajaj Electricals
The stock is a secular consumer appliance growth story with attractive valuations at 50-60 per cent discount to peers.
14) Redington India
It has large distribution network and very high barriers to entry. The recent Apple tie-up is ignored and Blackberry concerns are overdone. Valuations are cheap.
15) Petronet LNG
It is a secular play on gas shortage in India with visibility on volume growth now ahead.
The company is operating with strong brands, such as naukri.com and 99acres.com. It is well positioned to benefit from an increase in internet penetration as it would imply a gradual increase in advertising spends on the online platform.
17) Kajaria Ceramics
It is a key beneficiary of the housing growth given strong brand presence and wide distribution networks.
18) Coromandel International Ltd:
It is the best agri play. The last 4-5 quarters were tough due to weak monsoons but earnings still grew while the stock de-rated. It is cheap now and the next year is likely to be good with new capacity coming up.
19) Financial Technologies
It has strong execution capabilities and has established multiple exchanges, some of which are market leaders in their respective domains, including MCX. Increase in average daily turnover for its exchanges boosts revenue for its exchange solutions business and raises the valuation of their stake in these exchanges.
20) Motherson Sumi Ltd
The company is the fastest growing auto supplier globally with stronger German/emerging market OEMs through higher content per car and market share gain. Around 60 per cent EPS growth (sales beat on industry rates, margin improvement) and balance-sheet improvement (de-levering) to drive share price performance.
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