Portfolio To Create Alpha

There are enough empirical studies in the world that shows that equity as an asset class gives better returns to the investors and yet many times investors don’t park funds full heartedly. On the occasion of 26th anniversary issue, DSIJ Core Research Unit has constructed a unique portfolio of Rs 26 lakh keeping in mind a three years time horizon. The selection of the portfolio has been done by picking those companies which not only performed well in the recent past but at the same time have great potentials to offer good capital appreciation during the 36-months time horizon. We strictly evaluated each company and its potential for capital appreciation. We also looked at safety of the money and hence discarded some of the companies that may have given higher capital appreciation but comes with higher risk bracket. All our selected companies have reported minimum RONW of 15 per cent in last three years and strike a fine balance between large cap, mid cap and small cap.

Also we have selected few sectors that we believe would do well in next three years’ time even though they may not be favorite at current stage. The best part is that we have given weightage to each of the scrip keeping in mind over all balance of the portfolio and advise our readers to invest in the same weightage. Also in case you need to invest more or less amount as against Rs 26 lakh please invest in these companies in the same proportion. Please invest in all 9 companies rather applying the pick and chose method. Have a great investment time.

INDRAPRASTHA GAS
CMP: Rs 367

HERE IS WHY:

• Five year topline and bottomline CAGR of 27 per cent and 20 per cent respectively
• Consistently paying dividends since past nine years
• CNG prices at a steep discount to petrol & diesel prices and any hike in petrol & diesel prices is beneficial for IGL

Indraprastha Gas (IGL) has been recommended for a long term investment point of view on the basis of a slew of factors. These include strong presence in Delhi-NCR, healthy volume growth supported by the growing demand for gas, robust capex cycle and government’s strong emphasis on increasing the overall share of natural gas in country’s energy basket. Coming from the government’s stable, IGL powered by its 284 gas stations with compression capacity of 54.96 lakh per day is a sole supplier of compressed natural gas (CNG) to automobiles in Delhi. The company also supplies piped natural gas (PNG) to 310000 domestic customers and 730 industrial and commercial clients. Going forward, the company has envisaged a robust capex plan of Rs 500 crore for FY13, which will be equally allocated between CNG and PNG segments.

Demand growth in CNG would be primarily fueled by the steep discount that prices of CNG offer when compared to the prices of petrol and diesel. Furthermore, the recently introduced cluster system by Delhi Transport Corporation (DTC) would also help increase traffic volumes and benefit the company, as IGL has a 10 year supply contract with DTC and generates around 25 per cent of revenues from them. Growth in PNG segment would be fueled from the rising awareness about the advantages of PNG over LPG. Also the recent expansion into surrounding areas like Noida, Greater Noida and Ghaziabad would present the company with ample growth opportunities in its PNG segment considering the rampant development of small and medium industrial units there. On the financial front, during April-Dec 2011 IGL’s topline increased by 45 per cent to Rs 1798 crore surpassing the FY11 sales while bottomline rose by a decent 19 per cent to Rs 226 crore. At a PE of 12.5x its FY13E EPS of Rs 29.63, we recommend investors to buy scrip at current levels with a price target of Rs 450.

CUMMINS INDIA
CMP: Rs 473

HERE IS WHY:

• Strong traction expected in the segments like Power Generation and Industrial
• Parent Company planning to focus on Indian markets and targeting revenues of USD7 billion by 2016 from the current levels of USD 2.70 billion
• Strong Capex of Rs 1250 crore through internal accruals till 2015
• Debt free status an added advantage

Cummins India is a wholly owned subsidiary of US-based Cummins and manufactures diesel and gas engines. The business of Cummins India can be segregated in following segments viza- viz Industrial (15 per cent of revenues), Automotive (five per cent), Power Generation (35 per cent) and exports (30 per cent). Exports segment originally is a part of power generation segment and caters to the outsourced demand of the parent company. The first and the foremost factor is the better expected demand from the industrial segment. In the industrial segment, demand from the mining, construction, infrastructure, railways and manufacturing is gathering some momentum and going ahead, it is expected to drive the growth. The management in the recent conference call stated that it expects the trend to continue in FY13 also. The management also expects the power generation segment (including exports) to grow at a CAGR of 17-20 per cent over the next five years. The growth will be driven by export opportunity in Low Horse Power (LHP) engine segment and also better penetration in the domestic market. Further the parent company is planning to make India as a hub for LHP and MHP segment. In fact the parent company is planning to increase the revenue target of Cummins India to USD 7 billion from the current levels of USD 2.3 billion in FY11. To cater the growth, the company has also planned a capex of Rs 1250 crore till 2015. It will be funded through internal accruals. It also includes Rs 228 crore for the mega-site, which will add another LHP and MHP Capacity of 51000 units by 2015.

On the financial front the performance has been strong. In FY11 the topline stood at Rs 4061 crore and bottomline of Rs 590.99 crore as against Rs 2899 crore and Rs 443.87 crore in FY10. On the valuation front CMP of Rs 473 discounts its trailing four quarter earnings by 22x. In 9MFY12, while the topline witnessed some growth, the bottomline remained stagnant. Margin pressure on account of higher raw material prices was the reason. However with interest rates peaking out, we expect the capex cycle to revive and recommend the scrip with a perspective of three years.

HDFC BANK
CMP: Rs 509

HERE IS WHY:

• Robust business growth coupled with maintenance of asset quality and Net interest margin
• With interest rate soon expected to reverse, HDFC bank will benefit going ahead
• High creditability of management and good dividend paying, which creates investor confidence

HDFC Bank is one such scrip, which has almost everything to attract investors, including high creditability of the management, better growth prospects, high dividend paying stock and healthy financial performance. For most of the time HDFC Bank has outperformed the markets, which clearly shows the Investor confidence in the scrip. Also the bank is consistently paying dividends to their shareholders.

HDFC Bank has consistently grown and posted robust financial performance over the past years. This is evident from the fact that in the previous nine years, the bank’s bottomline has consistently grown above 30 per cent. Further average Net Interest Margin (NIM) over the past nine years is also above four per cent. This makes the bank to command premium over its peers. This truly reflects that HDFC Bank is generating quality wealth for its stake holders over the years. It is well versed with the Macroeconomic environment and has consistently performed well even during 2003 and 2008, when the sentiments were weak.

The bank at present also holds second best place when we compare industry’s two major parameters i.e. NIM and the Net Non Performing Assets (NPA). Even in the rising interest rate environment, bank’s NIM remained stable and above four per cent. In the past couple of quarters’ asset quality of most banks deteriorated. However this is not the case with HDFC Bank. Its Net NPA has almost remained stable at 0.2 per cent since past five quarters. Further with the bank having less exposure to stressful sectors like Power, Textile and Telecom Industry coupled with higher Provision Coverage Ratio which stands at 80.3 per cent, we believe the bank will maintain its asset quality going ahead. HDFC Bank also recorded healthy growth in its books which is way above forecasted by RBI. As on 31st December 2011, Total deposits and Advances of the bank grew by 21 per cent and 21.9 per cent respectively.

Going forward with interest rates soon expected to reverse, the bank's NIM will improve. On a valuation front the bank is available at Price to Earnings of 24 times and Price to Book value of four times which could be considered decent as being the major player it will command some premium. We recommend our Investor to buy the scrip to garner better returns over long run.

SWARAJ ENGINES
CMP: Rs 406

HERE IS WHY:

• Good growth prospects
• New capacity addition to drive growth
• Government initiative to increase farm output

Strong fundamentals, good growth opportunity, better financials and lower valuations are some of the major factors that have compelled us to recommend Swaraj Engines as one of the companies for the portfolio. Swaraj Engines is a manufacturer of diesel engines and diesel engine components for tractors and commercial vehicles. Major factors such as higher agricultural spending by the government, strong balance sheet and the recent capacity addition will drive the company's growth in future.

The growth in the agriculture sector for FY12 has been pegged around 2.5 per cent and the government’s thrust on investing in technology to increase farm produce with aims to grow at 3.28 per cent in next five year plan will create more demand for tractors in the coming years.

Mahindra & Mahindra owns 33 per cent in Swaraj and is expanding its tractors’ capacity. The decision was taken by M&M as it is struggling to meet the domestic demand due to the existing production lines, which are running at full capacities. Therefore company has laid out the plan to increase Swaraj’s capacity from 60,000 to 100000 units per annum. This will create ample demand for the diesel engines of Swaraj. To absorb and deliver this kind of demand, M&M is also expanding Swaraj’s engine capacity from 39,000 to 60,000 units by the end of FY12. Swaraj has a strong balance sheet and is debt-free since the last five years. It has a cash bank balance of Rs 76 crore. This not only gives good room for funding their expansion plans through debt if required but also helps in keeping its margins healthy with zero interest outgo.

Last but not the least, on the valuation front the scrip is currently trading at a PE and EV/EBITDA multiple of 9.99x and 7.15x respectively. With the EPS at Rs 40 the valuation looks quite attractive at these levels. The company has been growing at a five-year CAGR of 23 per cent in topline and 25 per cent in bottomline. Further with new capacity addition and increasing demand due to higher agricultural spending, we expect the company to experience similar kind of growth in future. This company is certainly placed to provide decent growth opportunity from a long term.

PAGE INDUSTRIES
CMP: Rs 2605

HERE IS WHY:

• Robust growth in its Top brand ‘Jockey’
• New brand ‘Speedo’ to open new segments
• Volume growth to continue after capacity expansion

‘Jockey’, the licensed brand of Page Industries is the top brand in innerwear industries. This brand has now spread even in the tier II cities and in rural areas as well. Current demography of India with higher younger population is the major driving factor for the company. Page’s business model is fairly simple to understand and its brand ‘Jockey’ is flying high in an Rs 14000 crore domestic markets. This gives us a comfort to recommend this CMP (Rs) (20/03/2012) 260 scrip. The brand Jockey has a robust demand across all the categories and is growing by the rate of over 40 per cent per annum. The Company has renewed its license with Jockey international USA for a period of 20 years i.e., up to 2030, which indicate confidence of the promoters. The Company is also consistent in paying dividend and has not pledged a single share as of December 2011.

Page has total 67 exclusive outlets, which sell its flagship licensed brand Jockey. It has a good product mix in men as well as women category which is showing volume led growth. In the year FY11, its total volumes increased by 41 per cent with over 50 per cent growth in Women’s and Sports items. The growth in all other items was over 30 per cent, which is also very high.

Another compelling factor about the scrip is that the company has increased all its installed capacities in last two years, which indicates that going ahead high volumes will continue driving its growth. In July 2011, Page entered into an exclusive licensing agreement with Speedo International to manufacture, market and distribute Speedo products in India (swim wear, apparel, equipment and foot wear). With the success of ‘Jockey’ and well established outlets, we believe Speedo would further drive its growth and will also improve its EBITDA margins.

On the financial front, the company reported 39 per cent growth in its top line to Rs 529 crore while 60 per cent growth in the net profit to Rs 72 crore. On the valuation front the scrip may look little expensive with a PE of 33.6x (trailing 12 months). However being the top company in Under-garments segment, we believe it is quite justified. We advice our readers to enter the counter, which will give some flare to the portfolio.

INFOSYS
CMP: Rs 2825

HERE IS WHY:

• Gartner expects global IT services to spend USD983 billion by 2015 (CAGR 4.40 per cent). With incremental share of 25 per cent, top Indian IT companies stand to benefit
• Strong management bandwidth with highest level of transparency
• Edge over TCS in terms of pricing power and margin front

Infosys, which is the second largest software exporter in India, is a pioneer in highest transparency levels in terms of balance sheet disclosures. Rather it has played a bigger role in taking India to the international canvas. It was Infosys, which started to provide financial guidance for the next fiscal and the best part is that it has managed to meet the guidance majority of the times. This clearly indicates  the ability of the management to predict the accurate market scenario. Since its listing, it has witnessed many economic cycles displaying its ability to endure even the difficult macro-economic scenario many a times.

While Infosys has displayed its ability in the past, going ahead also there are lots of opportunities. The first and the important factor is the growth in global IT spends. The recent report by Gartner suggests a 4.4 per cent CAGR in global IT services, taking the global IT spends to USD983 billion by 2015. With 25 per cent incremental share, Indian companies are expected to become major beneficiaries and with 10.50 per cent share in IT & BPO exports, even Infosys stands to gain.

Investors may ask the question if industry is growing, then why not TCS, which is the largest player. The prime reason is the quality of growth. Historically the EBITDA margins of Infosys have been better than TCS. In past three years Infosys managed to sustain the EBITDA margins above 32 per cent, while that of TCS has remained under 30 per cent. Thanks to the sustainable pricing power, the gap has only widened in the past three quarters. In case of Infosys, change in business mix (inclined towards the Consulting segment) and marginal up-tick in pricing for new contracts has helped them deliver superior pricing. In the past also (Issue No 6 Dated Feb 27-March 11, 2012), we have gone on records saying that despite not providing a rosy guidance Infosys will out-perform TCS. On the valuation front also, the scrip is placed well against the peers. The CMP of Rs 2825 discounts its FY12E earnings by 19x (EPS Guidance of Rs 147 provided by the management for FY12) as compared to 22x of TCS. Considering all these factors, we recommend a buy with a perspective of three years.

MARICO
CMP: Rs 160

HERE IS WHY:

• With Increasing health awareness, Marico’s strategy to focus on health products to pay off
• Strong financial performance, majorly driven by volume growth
• Market leadership in most of the segments coupled with strong management will further drive growth

FMCG stocks usually are considered as defensive bets as they protect the wealth of the Investors in uncertain environment. Marico not only plays the role of protecting the investor’s wealth but also is a wealth creator for the Investors. If we look at Marico’s historical financial performance, we come to know that the company has posted robust growth. Average growth in topline and bottomline of the company for the past nine years is around 18 and 22 per cent respectively per year. Strong financial performance is bound to be reflected in the stock performance. Investment done on 1st January 2002 in the company till date, have generated returns of 3290 per cent (excluding dividend) and Adjusted to split and Bonus i.e. the value of Rs 1000 invested is around Rs 32900.

Marico is one of the FMCG Company, which is well placed when compared to its peers. The products of the companies have majority of the market share, the growth is majorly volume driven, further softening of its key input prices will improve margin going ahead and lastly, it is available at a fair valuation when compared to its peers.

In the third quarter of FY12, the company’s topline grew by 29 per cent (20 per cent volume driven) while Net profit increased by 21 per cent on YoY basis. We believe Marico will continue enjoying volume driven growth going ahead. The raw material prices of the company have cooled down, which will further help the margin to expand. The copra prices (accounts for 40 per cent of the Raw material cost) have fallen by 32 per cent from February 2011 to February 2012. With strong brand portfolio like Parachute and Saffola, Marico seems to be better placed then its peers in domestic market and is expected to see a good growth going ahead. In Coconut Oil segment and in Saffola, the company is a market leader having share of 54 per cent and 57 per cent respectively. We believe that the company may further take inorganic route for growth in different geographies if it finds the right opportunity. Kaya skin clinic though currently is facing headwinds, but with the lifestyle of the consumer changing this segment may also see good growth going ahead.

Further the company is consistently innovative and is offering various products. It focuses on the health oriented segments and has products like Saffola oil, oats, Arise. With consumer getting more health conscious, the company will be poised with good growth going ahead. With the scrip currently available at Price to earnings multiple of 30.5 times it seems to be fairly priced when compared to Hindustan Unilever (available at 32.21) and Dabur India (available at 29.15 times). We believe one should park a portion of their portfolio in the scrip to garner better returns over a longer horizon.

KANSAI NEROLAC
CMP: Rs 906

HERE IS WHY:

• Huge capacity expansion in auto industry should benefit the company
• Consistent dividend paying history and robust return ratios
• Potential de-listing candidate in the future

True to its famous ad-line jingle “Jab Ghar Ki Ronak Badhani Hoon, Diwaron Ko Jab Sajaana Hoon – Nerolac, Nerolac”, the company Kansai Nerolac Paints (KNPL) has not only managed to bring cheer to its consumers but also improved the sheen of its investors portfolio.

With a total shareholders return of 2072 per cent (adjusting for bonus and excluding dividends) since the year 2000 implies that an investment of Rs 100 in its shares then would have yielded Rs 2172 as on date, KNPL has been amongst the top companies in creating value for its shareholders. KNPL is the second largest coating company in India and a market leader in automotive coatings. Having completed 90 years of existence, the company backed by its pan-India presence of 74 sales locations and five factories has established itself as a well known brand with strong recall proposition.

Despite the recent downturn seen in the auto industry, we expect the company to do well in the long run owing to its numero uno position in the eyes of most car manufactures like Toyota, Maruti Suzuki, Tata Motors, Mahindra & Mahindra and Hero Honda to name a few. Any upswing in demand for automobiles would prove to be a direct trigger for the company’s products. The company has also been undertaking capacity expansions to meet the growing demand for its products at the Hosur, Bawal and Janipur facilities, which are expected to go live over the next year.

Another interesting factor that could work as a potential trigger for its shares on the bourses is the likelihood of KNPL’s promoter Kansai Paints Company making an open offer for the company down the road.

On the financial front, the company’s topline and bottomline have registered a five year CAGR of 15 per cent and 18 per cent respectively, showcasing decent growth. On a nine month basis, the company faced some pressure due to slowdown in auto industry but a pickup in decorative paints segment where it recently undertook price hikes saw robust performance led by good volume growth and higher realizations.

At a PE of 21.4x its annualized EPS of Rs 42.32, the company looks attractive compared to its peers including Asian Paints (30.4x) and Berger Paints (23.2x). Owing to its strong return ratios, constant dividend paying track record, aspirations to tap the European auto giants and expectations of a pickup in the domestic auto industry, we recommend KNPL at current levels for significant capital appreciation.

GIC HOUSING FINANCE
CMP: Rs 88

HERE IS WHY:

• Good growth prospects in housing space from Tier II and Tier III cities
• Government thrust on affordable housing
• Well capitalized with CAR of 15.24 per cent above the stipulated 12 per cent mark
• Consistent high dividend paying company

A consistent high dividend paying company along with a decent capital appreciation on the bourses is always preferred by any investors. One such company GIC Housing Finance (GICHFL) has maintained its dividend paying history over the years. This year too, the company has paid higher dividend of Rs 5.5 as compare to that of Rs four in FY10 giving a dividend yield of 6.2 per cent based on the current share price of Rs 88. Other compelling factors include strong disbursement growth, improved asset quality, better capital adequacy, focus on the Tier II and III cities to drive the company’s growth in coming years. Besides GICHFL is backed by the government owned companies, which means better governance.

On the operational front, the company has performed well over the years. It has been growing well in terms of disbursements and better asset quality. The Net Non Performing Assets as on 31st March, 2011 is 0.41 per cent as against 1.47 per cent for the previous year. The major portion of the loan is given in a smaller ticket sizes to the salaried class segment where the probability of default is minimal. Also the company has continuously maintained a Capital adequacy ratio of 15 per cent as against the minimum requirement of 12 per cent.

GIC has strong presence into housing finance business, mainly focusing on Tier II and tier III cities. The realty markets in these regions are still at a nascent stage and offers huge growth opportunity in coming years. Further government is giving more thrust on increasing the affordable housing. The government for this year budget has provided various sops such as withholding tax on ECB for affordable housing from 20 per cent to 5 per cent for three years. The government has extended the scheme of interest subvention of one per cent on housing loan up to Rs 15 lakh where the cost of the house does not exceed Rs 25 lakh for another year. This will boost the housing sector in the Tier III cities and rural areas. All this augurs well and will push GIC growth to another trajectory altogether.

On the valuation front also, the scrip is well-placed with its FY11 earnings discounting its CMP of Rs 88 by 8.50x and the price to adjusted book value  ratio stands at an attractive 1.05x. This is much better than the P/E of 10.21x commanded by LIC Housing Finance. Attractive valuations and the growth opportunity in the Tier II and Tier III cities with government’s thrust on affordable housing, we expect the company to witness strong growth in topline and bottomline in coming years. Given the above factors, we recommend to buy the stock with the target price of Rs 125.