Indian stock markets ended 2012 on a
strong note with the BSE Sensex gaining
over 25 per cent. The year 2013 has
started on an auspicious note with the
benchmark Nifty hitting a two-year high.
Domestic brokerage IIFL says the current
situation presents a tactical opportunity
for equities on the back of continued
foreign investments and the likely cut in
interest rates. Earnings downgrade
momentum is waning, so the opportunity
to buy growth stories should not be
missed, IIFL adds.
Here are 13 stocks to look out for in
2013:
ACC: Buy for an 18 month target of Rs.
1,755.
Why: Utilization rate is expected to
recover to 81 85pc levels by FY15 as
supply surplus declines. Earnings are set
for an 18.5pc Compound Annual Growth
Rate (CAGR) over CY1114 as against 4.4pc
CAGR in CY08 11. Despite a strong
balance sheet, the stock trades at a 20%
discount compared to its peers like
UltraTech on EV/ton basis.
Key risks: Fall in cement prices,
government policies in the form of price
caps, hike in duties etc. and drought like
situation leading to subdued demand.
Den Networks: Buy for an 18-month
target of Rs. 290.
Why: Multi System Operators are
better placed than Direct to Home players
to reap digitization. Full impact of Phase I
implementation, commencement of Phase
II, significant demand for Set Top Boxes
and margin improvement would drive
exceptional earnings growth over FY12
15.
Key risks: Revenue loss if digitization
does not progresses as expected, fierce
competition from DTH players.
Dr. Reddy's Laboratories: Buy for an 18
month target of Rs. 2,358.
Why: One of the best bet to play on US
business. Robust domestic and
international generic market growth along
with improving outlook of PSAI
(Pharmaceuticals Services and Active
Ingredients) provides comfort. Expect
revenue and PAT to witness a CAGR of
17% and 21% over FY12 15E,
respectively.
Key risks: Forex risk, legal risks
associated with patent challenges and
delay in product approval, risk associated
with policy changes in domestic and
international market.
Financial Technologies: Buy for an 18-
month target of Rs. 1,510.
Why: A diversified business model with
established exchanges, improving
profitability and investment monetization
opportunity make FTIL an attractive play.
Key risks: Failure to garner volumes,
inability to monetize investments and
adverse regulatory ruling for any of the
exchange ventures.
HDFC Bank: Buy for an 18-month
target of Rs. 850.
Why: HDFC Bank is estimated to deliver
24% earnings CAGR over FY12 15,
valuation would continue to command
premium both on absolute and relative
basis. There is high probability of the
bank outperforming equity market return
over the next couple of years.
Key risks: Sharp slowdown in the
consumption momentum, onset of an
adverse retail non-performing loan cycle
could affect the asset quality.
ICICI Bank: Buy for an 18-month target
of Rs. 1,500.
Why: ICICI Bank's core return on
assets (excluding subsidiary dividends)
has seen structural improvement of 15 20
basis points. Expect core RoA to remain
above 1.5% and RoE to improve on the
back of increasing leverage. Healthy asset
quality performance would dispel
exaggerated fears around the bank and
drive a steep valuation rerating.
Key risks: Persistent weakness in
corporate loan demand, increase in
wholesale rates, sharp deterioration in
asset quality.
ITC: Buy for an 18-month target of Rs.
353.
Why: The ban on gutka and paan
masala by 13 states will shift demand
from these tobacco products to
cigarettes, which will partly help ITC
improve cigarette volume growth. Risks
from plain packaging norms unlikely as
India is primarily a single stick / loose
cigarette market. ITC is gaining traction in
non-cigarette businesses as well.
Key risks: Disruptive change in cigarette
taxation structure, significant decline in
cigarette volumes, delay in FMCG
breakeven or rise in losses due to
gestation for new ventures.
LIC Housing Finance: Buy for an 18-
month target of Rs. 390.
Why: Aided by margin recovery, the
housing finance major would revert back
to high earnings growth trajectory over
FY1315 (estimated 30% CAGR). This along
with improving return ratios should drive
a structural valuation rerating over the
medium term. The stock trades at
attractive discount to its larger peer
HDFC.
Key risks: Intensified competition in
the home loan market, slower than
anticipated decline in interest rates.
Petronet LNG: Buy for an 18-month
target of Rs. 208.
Why: FY15E earnings are expected to
jump 29.4% (following a flattish FY14). On
FY15E earnings per share of Rs. 19.8, the
stock trades at an attractive P/E (price/
earnings) multiple of 8-times. Earnings
growth is robust, balance sheet healthy
and return ratios are likely to be over
20%.
Key risks: Regulations over marketing
margins could dent profitability,
incapability of increasing gas tariffs at
Dahej, Higher than expected domestic gas
production.
Shriram Transport Finance Co: Buy for
an 18-month target of Rs. 950.
Why: Robust lending yields, strong
credit rating and brand equity underpin
STFC's attractive net interest margin in
the range of 7 9%. NIM is expected to
inch up aided by loan mix shift towards
used commercial vehicles and lower re
pricing of bank loans. STFC has
traditionally seen moderate delinquencies
across CV/rate cycles.
Key risks: Elongation of CV recovery
cycle and rate down cycle, NPLs could
increase higher than estimated if
company fails to respond effectively to
new recognition norms.
United Spirits: Buy for an 18 month
target of Rs. 2,400.
Why: The Diageo deal can result in a
25â € �30% upgrade of FY14 EPS due
to savings on interest expenses.
Unmatched distribution strength and high
entry barriers means USL can be the
biggest beneficiary of the secular demand
in spirits market. It may see nearly 2.6
times jump in PAT driven by margin
uptick and interest cost reduction over
FY13 15.
Key risks: Higher than estimated rise in
ENA (Extra Neutral Alcohol) costs and
working capital expenses could lead to
margin pressures and rise in leverage.
Wipro: Buy for an 18-month target of
Rs. 495.
Why: Business momentum has been
tepid. Valuations have remained
relatively cheap at nearly 20% discount to
TCS. Headroom for surprise exists as
Wipro's IT services growth differential
with peers is expected to narrow.
Valuation for the standalone IT business
would gradually improve with the de
merger.
Key risks: Significant slowdown in
demand from key geographies of US and
Europe, sharp appreciation in rupee,
adverse regulation on offshoring in key
markets.
Wockhardt: Buy for an 18-month target
of Rs. 2,089.
Why: Its debt to equity ratio as on Q2
FY13 stands at 0.5% compared to 5.5-
times in FY10. Wockhardt has also beaten
the street expectations consequently for
four quarter by delivering strong sales
growth and margin expansion. With
better operating cash flows and balance
sheet, Wockhardt is expected to witness a
gradual valuation re rating henceforth
Key risks: Sharp price erosion in Toprol
XL and other key molecules, unexpected
competition in the key drugs and delay in
launches and approvals in the US,
amortisation of EU assets and
unfavourable currency.
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