Coal India, ACC among 6 ‘pigs’ that CLSA feels can expand your piggy bank

The market overall has been rangebound for past few months, though it has been trying hard to move towards its previous highs. After all events pricing in including the December quarter earnings which were mixed, the market awaits for general elections 2019 which is likely to take place between April-May.

Globally uncertainty over trade war talks between US and China, and the likely growth slowdown could cap the market upside, experts said.

“We continue to maintain a cautious stance in the near term with lack of any major positive triggers and uncertain global cues,” Jayant Manglik, President at Religare Broking told Moneycontrol.

He said investors would keep an eye on the progress of trade talks between US-China, the behaviour of crude oil prices and fluctuation in currency.

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He advised investors to focus on fundamentally sound companies with strong financials and healthy prospects.

Global brokerage house CLSA came out with its report – pigs that might fly – on 31 stocks globally, including 6 in India, which could give fabulous return going ahead.

Of these six stocks, some have beaten up by the street due to their corporate governance issue, sector market conditions, competition etc, though these stocks are fundamentally strong and some are even leaders in their own segments.

CLSA highlighted a bunch of stocks that have been performance pigs.

“They have typically experienced falling share prices and valuations due to some fundamental concern and are now wallowing around in the mud. But that is not to say their past piggish performance will not reverse,” the research house said.

Of the 32 ‘BIG PIG’ and ‘piglet’ stocks, 31 now have positive recommendations with significant upside to analysts’ targets as well as to their average PER (price earnings ratio) and PB (price to book value) of recent years, it added.

According to the research house, if analyst outlooks prove to be correct, or there is a reversion to the mean, these pigs might fly.

“Indeed some are already showing signs of levitation. While some will no doubt prove to be the financial equivalent of putting lipstick on a pig (ie they will still be a pig) others stand a reasonable chance of expanding your piggy bank,” it said.

According to CLSA, pigs are one of the smartest animals on the planet, ranking higher than 3 year old kids, dogs and some primates.

Let’s check out those six stocks, which have strong fundamentals and could return 30-70 percent:

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Zee Entertainment Enterprises: Buy | Target: Rs 670 | Return: 55%

Zee’s business operations remain on a strong growth trajectory (operations are all good) with 19 percent YoY increase in revenues for 9-month of FY19 and we forecast 19 percent earnings CAGR over FY19-21CL. (CL – calendar year).

A stake sale in Zee5 may also take place, however, stake sale in Zee is imperative to lower promoters’ debt.  The April deadline for the stake sale has been self-imposed by promoters. Promoters expect offers from at least two players.

ONGC: Buy | Target: Rs 225 | Return: 70%

The government has kept the FY19 oil subsidy estimate unchanged, but released its FY20 oil subsidy budget of Rs 33,700 crore or a 62 percent YoY hike.

Even a pessimistic reading, assuming no upward revisions, indicates that this will ensure a minimum post-subsidy realisation of $55-60 per barrel for ONGC.

Bear-case value using $55 per barrel post-subsidy realisation implies 41/49 percent upside as they are pricing in only $44/47 per barrel post-subsidy realisation.

Trading at record low valuations on most parameters and among the cheapest exploration and production in the world, we find deep value and reiterate buy on ONGC.

The postponement of oil subsidy payments to FY20 will raise debt and interest costs for IOC/BP/HP and is a slight negative.

Coal India: Buy | Target: Rs 310 | Return: 43%

Coal India offers a sustainable dividend yield of nine percent, the third highest among the CLSA’s Asia Ex-Japan large-cap coverage. Earnings growth is weak but is constrained by production.

The demand outlook remains strong and the stocs offers value at 9x FY20CL earnings with a 70 percent plus return on equity (ROE) .

Bharti Airtel: Buy | Target: Rs 425 | Return: 41%

Bharti’s top focus remains to gain share in 4G, backed by network, distribution, bundles and content partnerships. Bharti’s 52 percent QoQ  run in 4G additions bodes well since upgrades to 4G will drive revenue growth.

We forecast Bharti’s 4G subs to grow from 77 million to 146 million by FY21; however, with low visibility on tariff hikes, we cut FY20-21CL lndia-mobile revenue by 3-6 percent, but still forecast 8-20 percent CAGR in Bharti’s consolidated revenue and EBITDA over FY19-21CL.

The management is also focussed on deleveraging a planned Africa IPO, with a planned Infratel stake sale can lower consolidated debt by 24 percent. Retain buy with a price target at Rs 410 (earlier it was Rs 425).

ACC: Buy | Target: Rs 1,800 | Return: 32%

ACC’s operating performance was just in-line, as adjusted EBITDA rose 10 percent YoY to Rs 400 crore. Cement volumes were a bit higher, realisations were inline and cost was also higher due to higher cost of manufacture.

Adjusted unit EBITDA declined six percent QoQ, but rose YoY to Rs 538 per tonne. With operating rate already at 86 percent in CY18, ACC will likely lag the industry in its volume growth in the near term, although 5.9 million tonne capacity adds in the attractive central market should help in the medium term.

We slightly tweak estimates and retain buy.

ICICI Prudential Life Insurance: Buy | Target: Rs 450 | Return: 49%

For Q3FY19, ICICI Pru Life’s value of new business (VNB) declined nine percent YoY (below expectations) due to a weak premium growth (annualised) and lower margins.

A slower premium growth reflects weak capital market sentiment (given a
high share of ULIPs) and ICICI Bank’s shift away from PAR products. Its
persistency ratio (13m) was down 110bps (8MFY19 versus 6MFY19) and will

need to be watched for margin trends. The key positive was the strong growth of its high-margin protection business.

Insurers’ business models will be tested in 2019. We lower VNB forecast for FY20-21CL which also drives a target price cut, from Rs 450 to Rs 430. Its valuation is at a 40 percent discount to HDFC Life and we maintain buy rating.

Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
First Published on Feb 16, 2019 12:21 pm

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