1o stocks to watch out for in 2010

1o stocks to watch out for in 2010

Markets have run up a lot over the last couple of months and valuations are also looking a bit on the higher side. However, boom or bust notwithstanding, there are always some stocks with high potential for growth accompanied by moderate risk. We just need to keep our eyes open to track the good ones and stay invested patiently till we get a good return. For, patience is needed to last out, particularly in a market where the excitement quotient is lacking.

There are also many other stocks which might be trading at discounted valuations compared to their peers, and show the potential of a lot of upside from the current level. Some of such stocks also look lucrative for a longer period of time. Based on the recommendations of some of the nation’s top stock analysts, we take a look at 12 high-potential stocks which may be good investment bets for 2010.

1) SBI

State Bank of India (SBI) is one of the best proxies to play the beginning of a new growth cycle in the Indian economy. Loan growth for banking system is currently at a multi-year low. We expect growth to recover from 4QFY10. As GDP growth remains strong at ~7% and is likely to accelerate towards 2HFY11, demand for bank credit will increase. The next 3-5 years will mark a period of high loan growth for banks, with stable interest rates post 2HFY11. SBI is well poised to benefit from this due to its huge network, adequate capitalization and strong balance sheet. SBI has huge liquidity in its balance sheet, deployed at low rates. In a period of high loan growth, therefore, its earnings will be higher. We believe yields on loans have bottomed out in 2QFY10, but the benefits of deposit re-pricing would continue through FY11. Operating leverage will give a significant boost to RoE, as costs will grow slower than income.

Over the last six years, SBI’s cost to average assets has declined from 2.4% to 1.9%. Over the last 12 months, asset quality concerns have risen due to restructured assets. We believe these concerns will diminish, going forward. In 4QFY10, concerns on inflation and the resultant reaction from RBI would be a key risk to SBI’s near-term stock performance. We are building in an increase of 100bp in CRR through FY11. On a consolidated basis, we expect earnings CAGR of 22% over FY09-11. We expect consolidated RoE to be 17-18%. We believe that the long-term positives far outweigh the near-term concerns of slow growth and tight monetary policy. We rate SBI as one of the best bets in Indian markets over the next 1-3 years.

(Recommended by Rajat Rajgarhia, Head–Research, Motilal Oswal Securities Ltd)

2) Cadila Healthcare

Cadila Healthcare is one of the top 5 pharma companies in India and has transformed itself from a pure domestic play to a global generic company with presence in the US, France, Brazil and Japan, among others. 37% (16% in FY05) of its income is from international market.

Domestic business: The group has workforce of 2,700 in India with focus on cardiovascular, GI and woman’s healthcare. It has 16 brands amongst the top 300 pharma brands in India. The company is now aggressively moving from acute therapy management to lifestyle management. We expect the domestic business to grow at 13%.

International business: Going forward, international business will be the key growth driver. We expect the international business to grow at a CAGR of 28% in FY08-10 with the US growing at 30% while France and Brazil at 22% each. We expect the US operations alone to contribute $125m to the revenue in FY10.

Financials: We expect sales to improve from Rs 2862 cr in FY09 to Rs 4106 cr in FY11. We expect the EBITDA to improve from Rs 540 cr to Rs 820 cr in FY11. The EBITDA margins will improve from 18.9% to 20% during the same period. We expect PAT to move up from Rs 303 cr to Rs 573 cr in FY11. We expect EPS for FY11 to be Rs 51 and the ROE and ROCE ratios at 30% and 27%, respectively. We are extremely confident on Cadila’s quality of management, its domestic and international marketing strategy and see a lot of upside in the stock from the current level.

(Recommended by Ajay Parmar, Head–Institutional Equities, Emkay Global Financial Services)

3) Lupin

Target Price Rs 1,863

Lupin is one of the best plays in the generic space given its strong execution capabilities, improving financial performance and diversified business model. The high-margin branded generic business has been the key differentiator for Lupin in the Indian pharma space. The company has also cemented its position in this segment by acquiring rights for two products viz: Allernaze and Antara in last 6 months. Further, Lupin has been among the few Indian companies which have built a formidable presence in the second largest pharmaceutical market in the world – Japan - with Kyowa’s acquisition in FY2008.

On valuation front, the stock is trading at a discount of 10-25% to its larger peers, which we believe is unwarranted given the scale achieved by the company in the last few years.

(Recommended by Sarabjit Kour Nangra, VP-Research, Angel Broking. The Price Target is for 15 months.)

4) Axis Bank

Target Price Rs 1,454

Axis Bank’s Rs 3,800cr QIP strongly positions it for market share gains as GDP and capital market activity revives, with at least 500bp higher growth than the industry over FY2010-12E (23% vs. 18% CAGR), especially as network expansion (200+ additions, about 20-25% yoy) remains strong. Fee income contribution has been a meaningful 1.7% of assets (almost twice the level in PSBs) over FY2007-09 and is expected to gain traction again going forward (29% CAGR over FY2009-12E). The stock is also trading at attractive valuations -- almost 35% discount to HDFC Bank -- despite similar earnings quality, profitability and growth expectations.

(Recommended by Sarabjit Kour Nangra, VP-Research, Angel Broking. The Price Target is for 15 months.)

5) M&M

A strong management, diversified product portfolio, fair debt-equity position and robust balance sheet make M&M one of the best stocks in the automobile sector. Its strategic diversification in the lucrative aerospace and defence sectors are likely to benefit it significantly in the long run. With the revival in global auto sector, the core business continues to remain on a strong footing. The tractor business is likely to continue its strong growth into H2FY10.

The stock still trades at discounted valuations compared to its peers. Further, its investments in others group companies provide decent upside potential to its valuations.

(Recommended by Ashish Kapur, CEO, Invest Shoppe India Ltd)

6) Tata Steel

The metal sector has shown surprising rally and we believe this to continue in 2010 as well. Tata Steel remains one of the best stocks to bet in the steel sector. The company has already announced aggressive capex plans of Rs 1500 crore in H2FY10 and around Rs 4500 crore in FY11 mainly for expansion in Jamshedpur.

It maintains volume guidance of 20-25% growth. Corus is likely to operate at 100% capacity by March 2010 which will further boost the sentiments for the stock.

(Recommended by Ashish Kapur, CEO, Invest Shoppe India Ltd)

7) Rallis India

Target Price Rs 1,401

Rallis India is the second largest player in the domestic pesticide market. Going ahead, we expect contract manufacturing to drive the company's next level of growth particularly with its new plant coming on stream by June 2010. We expect PAT to register a CAGR of 29.6% over FY2009-12E. RoCE and RoE are expected to touch level of 26.6% and 22.9% in FY2011E. Thus, on account of improving Return Ratios and higher Net Profit growth, we expect the stock to trade at higher valuations.

(Recommended by Sarabjit Kour Nangra, VP-Research, Angel Broking. The Price Target is for 15 months.)

8) Yes Bank

The bank has shown tremendous performance in terms of growth in advances. The core fee income has also increased on the back of healthy growth in transaction banking and financial advisory segment. There are healthy signs of growth in this segment as a result of improvement in capital markets. Further, improved cost ratios and stabilised asset quality augurs well for the bank.

Yes Bank’s aggressive target to double the branches by 2011 and proposed entry into asset management and broking business make it a good investment bet for 2010.

(Recommended by Ashish Kapur, CEO, Invest Shoppe India Ltd)

9) Sun Pharma

Sun Pharma has exhibited one of the strongest business fundamentals in a difficult sector over the past few years. Also, the completion of Taro acquisition is likely to boost its geographical presence and revenues. Buying Taro would help Sun Pharma expand its market reach in the US, where demand for generics will grow as healthcare costs surge and more blockbuster drugs lose patent protection. Its healthy balance sheet and robust product pipeline with 108 ANDA pending approval are positive triggers for the company.

In the high value generic market of the US, the company is expected to become a respected generic company with a portfolio comprising both of complex and simple-to-file generics, building an edge with technology and the cost advantage of vertical integration.

(Recommended by Ashish Kapur, CEO, Invest Shoppe India Ltd)

10) IVRCL Infra

Target Price Rs 439

IVRCL Infra, one of the key beneficiaries of infra boom in the country, is well poised to tap opportunities in growing segments of infra space (read road). Further, we are expecting huge order inflows for IVRCL going ahead on account of its change in corporate structure leading to its renewed focus on BOT space. We prefer IVRCL Infra as compared to its peers owing to its sound order book (>Rs20,000cr or 3.1x FY2010E revenues), superior execution track record (CAGR of 45% over FY2004-09) and attractive valuations (trading at 11x after adjusting for its investments).

Recommended by Sarabjit Kour Nangra, VP-Research, Angel Broking. The Price Target is for 12 months.)

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