Article

5 Evergreen Stocks for Investment

15 Dec 2017 Nikita Bhoota

Indian stock market is in a volatile phase. Adding to woes, weak domestic numbers such as GDP and inflation, rising crude oil prices, and uncertainty on upcoming elections have hurt the investors’ confidence. Globally, trade tensions between the US-China and geopolitical issues between North Korea and South Korea adversely affected the market movements. Finding out good quality stocks from a long-term investment point of view in an expensive and volatile market is a real challenge. Based on fundamentals, management history, and business prospects, here are some of the cherry picks that can give consistent returns in the long run.

Pidilite

Pidilite is the largest adhesive player in India, with its iconic brand 'Fevicol'.  The company is expected to benefit from considerable pricing power in consumer & bazaar segment coupled with initiatives to increase its geographic reach. Pidilite’s collaboration with Germany based Jowat SE for sales and distribution of the entire range of Jowat adhesives in India and other neighboring countries augurs well for the company. Owing to its ongoing effort to boost reach, product innovations and pricing power coupled with stabilization of wholesale channel, we expect the C&B products segment to drive overall revenue CAGR of 15% over FY18-20E. Recent hike in VAM prices (vinyl acetate monomer), EBITDA margin remain sustained around 23.25% over FY18-20E. We expect PAT to grow at 16% CAGR over FY18-20E.

Year

Net Sales (Rscr)

OPM (%)

Net Profit (Rscr)

EPS (Rs)

PE (x)

FY18

6,219

24.0%

966

19.0

56.8

FY19E

7,089

23.3%

1,113

21.9

49.3

FY20E

8,224

23.3%

1,299

25.6

42.2

Source: 5paisa research

Hero Motocorp Ltd (HMCL)

Hero MotoCorp (HMCL), world’s largest motorcycle manufacturer. HMCL enjoys 52% market share (Q4FY18) in motorcycles and 14% in scooters in India. It closed FY18 with highest ever annual volume numbers (75,82,857, up 14% yoy) and the momentum continued in FY19 with 16.5% yoy volume growth in April 2018. The planned launch of motorcycles Xpulse 200 and Xtreme 200 in FY19 will mark HMCL’s entry into premium motorcycles. This will provide additional triggers for growth while retaining leadership in entry level motorcycle segment. It also plans to launch 125cc version of scooters Duet and Maestro Edge in FY19. We expect HMCL to be a key beneficiary of Government’s pro-rural stance in FY19 Budget (MSP hike, doubling rural income by CY2022). HMCL plans to double the number of export countries from 20 to 40 over next few years. Ather Energy, in which HMCL invested Rs201cr will soon launch its first smart EV scooter. We project revenue, EBITDA and PAT CAGR of 11.5%, 11.4% and 11.6% respectively over FY18-20E.

Year

Net Sales (Rscr)

OPM (%)

Net Profit (Rscr)

EPS (Rs)

PE (x)

P/BV (x)

FY18

32,230

18.0%

3,697

185.1

18.8

5.9

FY19E

35,454

18.0%

4,077

204.2

17.1

5.2

FY20E

40,062

18.0%

4,607

230.7

15.1

4.4

Source: 5paisa research

ICICI Prudential Life Insurance (IPru Life)

IPru Life has consistently been the market leader among private sector life insurance companies in India on a Retail Weighted Received Premium (RWRP) basis. IPru Life’s product mix majorly consists of ULIPs (~82% FY18 APE), par life savings (~11%) and protection product (~6%). It has a strong capital position with a solvency ratio of 2.52x (March 31, 2018). ICICI Prudential Life Insurance (IPru Life) is well positioned to capture growth opportunities arising from increase in penetration of life insurance and strong brand identity. It sources its business through the large network of ICICI Bank under bancassurance channel (~52% of FY18 annual premium equivalent). IPru Life’s 13th month persistency ratio of ~86.9% in FY18 is one of the best in the industry. We expect VNB (value for new business premium) margin to be around 20% in FY20E. We expect new business premium and PAT CAGR of 23% and 22% respectively over FY18-20E.  The embedded value of the company was ~Rs18,788cr (March 31, 2018).

Year

NBP (Rscr)

APE (Rscr)

VNB margin (%)

 

Net Profit (Rscr)

P/EV (x)

FY18

8,402

7,792

16.5

1,620

3.2

FY19E

10,503

9,767

18.0

2,127

2.6

FY20E

12,813

11,660

20.0

2,403

2.2

Source: 5paisa research

HDFC Bank

HDFC Bank is the largest private sector bank in India in terms of loan book.  HDFC Bank has ~4.5% market share in loan book terms. Its loan book for FY18 end stood at Rs6.58 lakh cr. For FY18, HDFC Bank's retail and wholesale loan mix was 54:46, while cost-to-income ratio was 41%, GNPA/NNPA ratio was 1.3%/0.44% respectively, NIMs at 4.4%, and CASA ratio is at 44%. We expect judicious mix of wholesale and retail loan assets coupled with robust CASA growth to improve margins. We estimate revenue CAGR of 20% over FY18-20E owing to acceleration in retail loans and fee income. We believe the bank to deliver loan book CAGR of ~22% over FY18-20E augmented by its strong branch network and capital position. NIMs are expected to be stable at ~4.5% over FY18-20E due to higher credit/deposit ratio and high yield retail segment. Considering the superior growth in advances and better loan mix, and 110bps ROE expansion over FY18-20E. A sharp reduction in cost-to-income (240bps over FY18-20E) accruing from the bank’s digital initiatives, market share gains and significant improvement in the bank’s operating efficiency would aid in earnings growth. 

Year

Net profit (Rscr)

BVPS (Rs)

P/BV (x)

ROE (%)

FY18

17,490

414.9

4.8

16.3

FY19E

22,890

503.3

3.9

17.6

FY20E

27,250

608.5

3.3

17.3

Source: 5paisa research

Larsen & Toubro Ltd (L&T)

Larsen & Toubro Ltd (L&T) is India’s largest and diversified engineering & construction company. The company’s business mix spans a large spectrum—from complex engineering, procurement and construction (EPC) contracts in the hydrocarbon, process, metals and cement sectors to development of infrastructure projects in sectors like ports, roads, metro rail and airports. L&T’s order book as of 3QFY18 stood at Rs2,710bn. The order inflow grew by 38% yoy to Rs48,130cr during Q3FY18 led by recovery in economy. Capital expenditure is expected to pick-up in India led by resolution of bad debt, pick-up in capacity utilisation and recovery in demand. We expect L&T’s order book to report CAGR of 10% over FY18-20E. We estimate revenue CAGR of 25% over FY18-20E. We believe that L&T’s focus on improving profitability will lead to PAT CAGR of 12% over FY18-20E.

Year

Net Sales

(Rscr)

OPM (%)

Net Profit (Rscr)

EPS (Rs)

PE (x)

FY18E

121,729

11.0%

7,364

52.6

25.4

FY19E

135,891

10.8%

7,825

55.9

23.9

FY20E

152,477

11.1%

9,260

66.2

20.2

Source: 5paisa research

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5 Evergreen Stocks for Investment

15 Dec 2017 Nikita Bhoota

Indian stock market is in a volatile phase. Adding to woes, weak domestic numbers such as GDP and inflation, rising crude oil prices, and uncertainty on upcoming elections have hurt the investors’ confidence. Globally, trade tensions between the US-China and geopolitical issues between North Korea and South Korea adversely affected the market movements. Finding out good quality stocks from a long-term investment point of view in an expensive and volatile market is a real challenge. Based on fundamentals, management history, and business prospects, here are some of the cherry picks that can give consistent returns in the long run.

Pidilite

Pidilite is the largest adhesive player in India, with its iconic brand 'Fevicol'.  The company is expected to benefit from considerable pricing power in consumer & bazaar segment coupled with initiatives to increase its geographic reach. Pidilite’s collaboration with Germany based Jowat SE for sales and distribution of the entire range of Jowat adhesives in India and other neighboring countries augurs well for the company. Owing to its ongoing effort to boost reach, product innovations and pricing power coupled with stabilization of wholesale channel, we expect the C&B products segment to drive overall revenue CAGR of 15% over FY18-20E. Recent hike in VAM prices (vinyl acetate monomer), EBITDA margin remain sustained around 23.25% over FY18-20E. We expect PAT to grow at 16% CAGR over FY18-20E.

Year

Net Sales (Rscr)

OPM (%)

Net Profit (Rscr)

EPS (Rs)

PE (x)

FY18

6,219

24.0%

966

19.0

56.8

FY19E

7,089

23.3%

1,113

21.9

49.3

FY20E

8,224

23.3%

1,299

25.6

42.2

Source: 5paisa research

Hero Motocorp Ltd (HMCL)

Hero MotoCorp (HMCL), world’s largest motorcycle manufacturer. HMCL enjoys 52% market share (Q4FY18) in motorcycles and 14% in scooters in India. It closed FY18 with highest ever annual volume numbers (75,82,857, up 14% yoy) and the momentum continued in FY19 with 16.5% yoy volume growth in April 2018. The planned launch of motorcycles Xpulse 200 and Xtreme 200 in FY19 will mark HMCL’s entry into premium motorcycles. This will provide additional triggers for growth while retaining leadership in entry level motorcycle segment. It also plans to launch 125cc version of scooters Duet and Maestro Edge in FY19. We expect HMCL to be a key beneficiary of Government’s pro-rural stance in FY19 Budget (MSP hike, doubling rural income by CY2022). HMCL plans to double the number of export countries from 20 to 40 over next few years. Ather Energy, in which HMCL invested Rs201cr will soon launch its first smart EV scooter. We project revenue, EBITDA and PAT CAGR of 11.5%, 11.4% and 11.6% respectively over FY18-20E.

Year

Net Sales (Rscr)

OPM (%)

Net Profit (Rscr)

EPS (Rs)

PE (x)

P/BV (x)

FY18

32,230

18.0%

3,697

185.1

18.8

5.9

FY19E

35,454

18.0%

4,077

204.2

17.1

5.2

FY20E

40,062

18.0%

4,607

230.7

15.1

4.4

Source: 5paisa research

ICICI Prudential Life Insurance (IPru Life)

IPru Life has consistently been the market leader among private sector life insurance companies in India on a Retail Weighted Received Premium (RWRP) basis. IPru Life’s product mix majorly consists of ULIPs (~82% FY18 APE), par life savings (~11%) and protection product (~6%). It has a strong capital position with a solvency ratio of 2.52x (March 31, 2018). ICICI Prudential Life Insurance (IPru Life) is well positioned to capture growth opportunities arising from increase in penetration of life insurance and strong brand identity. It sources its business through the large network of ICICI Bank under bancassurance channel (~52% of FY18 annual premium equivalent). IPru Life’s 13th month persistency ratio of ~86.9% in FY18 is one of the best in the industry. We expect VNB (value for new business premium) margin to be around 20% in FY20E. We expect new business premium and PAT CAGR of 23% and 22% respectively over FY18-20E.  The embedded value of the company was ~Rs18,788cr (March 31, 2018).

Year

NBP (Rscr)

APE (Rscr)

VNB margin (%)

 

Net Profit (Rscr)

P/EV (x)

FY18

8,402

7,792

16.5

1,620

3.2

FY19E

10,503

9,767

18.0

2,127

2.6

FY20E

12,813

11,660

20.0

2,403

2.2

Source: 5paisa research

HDFC Bank

HDFC Bank is the largest private sector bank in India in terms of loan book.  HDFC Bank has ~4.5% market share in loan book terms. Its loan book for FY18 end stood at Rs6.58 lakh cr. For FY18, HDFC Bank's retail and wholesale loan mix was 54:46, while cost-to-income ratio was 41%, GNPA/NNPA ratio was 1.3%/0.44% respectively, NIMs at 4.4%, and CASA ratio is at 44%. We expect judicious mix of wholesale and retail loan assets coupled with robust CASA growth to improve margins. We estimate revenue CAGR of 20% over FY18-20E owing to acceleration in retail loans and fee income. We believe the bank to deliver loan book CAGR of ~22% over FY18-20E augmented by its strong branch network and capital position. NIMs are expected to be stable at ~4.5% over FY18-20E due to higher credit/deposit ratio and high yield retail segment. Considering the superior growth in advances and better loan mix, and 110bps ROE expansion over FY18-20E. A sharp reduction in cost-to-income (240bps over FY18-20E) accruing from the bank’s digital initiatives, market share gains and significant improvement in the bank’s operating efficiency would aid in earnings growth. 

Year

Net profit (Rscr)

BVPS (Rs)

P/BV (x)

ROE (%)

FY18

17,490

414.9

4.8

16.3

FY19E

22,890

503.3

3.9

17.6

FY20E

27,250

608.5

3.3

17.3

Source: 5paisa research

Larsen & Toubro Ltd (L&T)

Larsen & Toubro Ltd (L&T) is India’s largest and diversified engineering & construction company. The company’s business mix spans a large spectrum—from complex engineering, procurement and construction (EPC) contracts in the hydrocarbon, process, metals and cement sectors to development of infrastructure projects in sectors like ports, roads, metro rail and airports. L&T’s order book as of 3QFY18 stood at Rs2,710bn. The order inflow grew by 38% yoy to Rs48,130cr during Q3FY18 led by recovery in economy. Capital expenditure is expected to pick-up in India led by resolution of bad debt, pick-up in capacity utilisation and recovery in demand. We expect L&T’s order book to report CAGR of 10% over FY18-20E. We estimate revenue CAGR of 25% over FY18-20E. We believe that L&T’s focus on improving profitability will lead to PAT CAGR of 12% over FY18-20E.

Year

Net Sales

(Rscr)

OPM (%)

Net Profit (Rscr)

EPS (Rs)

PE (x)

FY18E

121,729

11.0%

7,364

52.6

25.4

FY19E

135,891

10.8%

7,825

55.9

23.9

FY20E

152,477

11.1%

9,260

66.2

20.2

Source: 5paisa research

Research Disclaimer