High‐five stocks 

 
Our Recommendations 
 
Price Target (Rs.)/ 
Scrip Name  Upside (%) 
ITC  325 
HINDUNILVR  1,990 
MARICO  425 
HDFCLIFE  585 
MGL  942 
BAJAJFINSERV  8,000 
TCS  2,300 
HCL TECH  1,250 
HDFCBANK  2,750 
ICICI BANK  550 
L&T  1,765 
RELIANCE IND  1,630 
NTPC  18‐20% 
RAMCO CEM  870 
ULTRATECH CEMENT  5,000 
 
ITC: (Reco. – Buy, PT – Rs. 325)
 ITC is de-risking its business model by increasing investments into its non-cigarette
FMCG business. The company has a strong presence in the snacks category (that
contributes close to Rs. 2,500 crore), biscuit category (that contributes ~Rs. 3,800 crore)
and branded atta (that contributes ~Rs. 4,500 crore). It has recently entered into
categories such as branded coffee, juices and premium chocolates to enhance its
product portfolio. The well-placed distribution reach of the core cigarette business would
help enhance presence of non-cigarette FMCG products in the domestic market. Non-
cigarette FMCG business currently contributes 26% to ITC’s revenues and has seen a
consistent improvement in the profitability. The increase in scale of business will improve
profitability and reduce dependence on the cigarette business in long run.
 Cigarette sales volumes are expected to grow in mid-single digits in FY2020 as there is
no material increase in the taxes on cigarettes and hence the company has not hiked
cigarette prices. The cigarette business is a cash cow business and contributes more
than 80% to its profitability.
 ITC is trading at a discounted valuation of ~21x its FY2021E earnings as compared to
some of the large peers trading above 40x, which it makes it one of the better picks in
the FMCG space.

HUL: (Reco. – Buy, PT – Rs. 1,990)

 HUL is the domestic market leader in matured product categories such as personal
wash and detergents. Sustain product innovation, which straddles the pyramid has
helped the company maintain double-digit volume growth in the detergent category for
past several quarters.
 Acquisition of GSK Consumers will make it one of the large players in the packaged
foods space. The company can utilise it strong distribution reach to enhance the visibility
of GSK products. Overall business margins will improve as GSK Consumer has margins
of more than 20%.
 HUL has excellent mix of 50:50 between rural and urban which de-risk its business
model in the backdrop of subdued demand environment in one of the key markets. The
company has maintained its thrust on premiumisation which along with stable volume
growth in the key categories would help to post better profitability in the coming years.

Marico: (Reco. – Buy, PT – Rs. 425)

 A ~30% fall in domestic copra prices by ~30% from its highs would help Marico post
better operating margins in the near term. Also some of the raw material cost savings
can be utilised to improve growth prospects of existing categories (including coconut oil
and edible oil) by providing price off/promotional add-ons to improve the sales in the
coming quarters.
 Marico is the leading player in the domestic branded coconut oil and value-added hair oil
market in India. The company has a scope to further gain market share from small
players or regional brands in the backdrop of large customer shift happening from the
non-branded to branded space.
  Along with personal care, the company entered into urban-growth categories such as
health foods under the Saffola brand and the male grooming space, which have a huge
scope of growth due to strong demand. We believe these categories would be key
revenue drivers in long run.

TCS: (Reco. - Buy, PT – Rs. 2,300)

 TCS is one of global companies with a broad-range of capabilities, strong digital
competencies, robust platform bets and consistency in strategy with stable
management. Further, TCS continues to gain market share in the digital segment versus
its large peers given its superior execution capabilities on this front.
 The company has the ability to attain double-digit growth in FY2020, but now hinges on
earnings performance in Q2FY2020E. TCS is well-placed to grow faster than peers on
account of its ability to stitch together large multi-service deals, prudent client mining
strategy and large deal wins.
 We believe that strong free cash flow (FCF) generation, efficient pay-out policy and
expectation of an impending corporate action (buybacks) should provide downside
support for the stock.

HCL Tech: (Reco. - Buy, PT – Rs. 1,250)

 HCL Tech has a leadership position in the information management services (IMS),
Engineering and R&D space. Rising adoption of hybrid cloud services provides good
opportunities in IMS and has helped company gain market share.
 Strong organic growth in the past three quarters was led by ramp-up of mega deals with
Nokia, Broadcom and Xerox. The company is confident of its ability to continue winning
mega deals on a regular basis. Despite delay in closure of IBM deals, the company has
maintained its revenue growth guidance and expect an acceleration in organic revenue
growth to 8-10% from 7-9% earlier on account of strong organic growth in Q1FY2020.
 Despite a soft start for margins in Q1FY2020, the management has retained its margin
guidance (18.5-19.5%) and remains confident on strong back-ended margin
improvement.

HDFC Bank (Reco – Buy, PT – Rs. 2,750)

 HDFC Bank is among the top performing banks in the country with a strong presence in
the retail segment. Despite the general slowdown in credit growth, the bank continues to
report strong growth in advances from retail products.
 Over the years, under different credit / interest rate cycles, HDFC Bank has been able to
not only sustain its business growth, but also been able to maintain asset quality along
with improving margins, which is indicative of the strong business franchise strength and
leadership qualities.
 We believe that relatively high margins (compared with its peers), a strong branch
network and better asset quality make HDFC Bank an attractive business with a scope
for expansion in its valuations bolstered by its consistency and strong balance sheet
quality.
ICICI Bank (Reco – Buy, PT – Rs. 550)
 ICICI Bank has built an attractive franchise consisting of Banking, Insurance, Securities
business built into attractive franchises over the years. We believe for the bank, the NPA
cycle has peaked and going forward, we expect to see improved RoE/RoA by virtue of
faster growth (easing competition, adequate capital etc) as well as better profitability
(lower slippages, lesser drag of provisions, resolutions/ recovery).
 It has continued to improve its portfolio mix towards retail (granular) and higher-rated
corporate loans, and hence, in the last four years, ICICI Bank has considerably de-risked
its balance sheet.
 The bank is well-capitalised to benefit from easing competitive intensity from NBFCs and
recoveries/ resolutions from NCLT etc, which will further help RoE/RoA expand.

HDFC Life (Reco – Positive, PT – Rs. 585)

 HDFC Life Insurance Company (HLIC) stands out among peers with its strong parent,
robust brand recall along with sister concerns which have a deep retail penetration and
are arguably the best means to channelize growth for the insurance business.
 We believe HDFC Life’s sustained product leadership will help it sustain superior VNB
margins and operating Return on Embedded Value (RoEV), relative to peers, which
supports valuations.
 We believe that the Indian insurance market has significant growth opportunities and
HLIC is well placed to capture them. It is among India’s top private insurers and has
been steadily building upon and enjoys a strong market share in total new business. Its
high margins in the protection business, improving persistency etc, will help sustain
premium valuations.

Mahanagar Gas Limited (View – Positive, PT – Rs. 942)

 Mahanagar Gas is trading at a near trough valuation of 12.3x FY2021E EPS (28%
discount to average historical one-year forward PE multiple of 17.1x), which makes it the
cheapest stock in the domestic CGD space. Hence, we have a Positive view on MGL.
 Volume growth outlook is decent with our expectation of a 6% CAGR over FY2019-
FY2021E (in line with management guidance), which would result in a healthy 8%
earnings CAGR over the same period. Further, the company has industry-leading
EBITDA margin of ~Rs. 8/scm and a superior RoE of 22-23%.
 Any regulatory push to use CNG in public transport services and ramp-up of CGD
business in Raigad district could act as key catalysts for long-term volume growth.
Bajaj Finserv (Reco – BUY, PT – Rs. 8,000)
 Bajaj Finserv is a financial conglomerate having presence in the financing business
(vehicle finance, consumer finance and distribution) via Bajaj Finance (BFL) and in the
life insurance (BALIC) and general insurance (BAGIC) segments.
 We expect BFL to maintain its loan book trajectory, profitability and margins, augmented
by its unique business model, strong infrastructure which will be the key support for
present valuations of Bajaj Finserv.
 We find that healthy operating metrics and profitability are positive indicators for BAGIC
and BALIC. The insurance arms are focusing well on strengthening their distribution
channels and profitability and are set to emerge as attractive businesses and leaders in
their respective segments over time.

Larsen & Toubro: (Reco. – Buy, PT – Rs. 1,765)

 Larsen & Toubro (L&T) is India’s largest engineering and construction company and is a
direct beneficiary of the domestic infrastructure capex cycle. Amid the current tight
liquidity scenario, L&T is possibly the only domestic player to execute the government’s
big ticket-size projects in the Metro Rail, Airport and Railways, segment, etc
 L&T’s strong order backlog and healthy order intake visibility of 10-12%, backed by a
sound execution track record is expected to lead to robust growth in net earnings over
FY2019-FY2021E.
 Further, a manageable debt/equity ratio, strong operating cash flow generation
capabilities and non-core asset divestments are likely to aid in achieving management’s
target RoE of 18% over the next 2-3 years.

Reliance Industries: (Reco. – Buy, PT – Rs. 1,630)

 Reliance Industries Limited’s (RIL) gross refining margin (GRM) is expected to recover in
FY2020E and FY2021E, given the benefit from the gradual ramp-up of petcoke
gasification plant and likely increase in the diesel cracks post implementation of revised
International Maritime Organization (IMO) regulations from January 2020. Furthermore,
feedstock advantage from the ethane import project would help the company sustain
petrochemical margins.
 Robust subscriber additions, revenue market share gain and launch of broadband
services are expected to result in a sustained improvement in financials of its digital
services business in the next couple of years. Moreover, RIL’s unique online-offline
retailing strategy would aid business growth and margin expansion for its retail business.
 We believe that a sustained growth in the retail and telecom businesses, boost to
refining margins from implementation of IMO regulations, efforts to deleverage
consolidated balance sheet and likely value-unlocking in consumer businesses would be
key positive catalysts for RIL in the near to medium term.
NTPC Limited: (View – Positive, Upside Potential – 18-20%)
 NTPC is India’s largest power generation company with an installed capacity of
55,126MW as on March 31, 2019. NTPC is expected to commercialise new capacities of
3,700 MW in FY2020E at standalone level. Hence, we expect strong 16% y-o-y growth
in its regulated equity to ~Rs. 62,488 crore as of FY2020 end.
 With improvement in PAF of coal-based power plants, NTPC’s management does not
expect any fixed-cost under-recoveries in FY2020 as compared to Rs. 799 crore in
Q4FY2019.
 NTPC’s earnings outlook has improved significantly (we expect 13% earnings CAGR
over FY19-FY21E for standalone business) and the stock is trading at an attractive
valuation of 1x its FY2021E P/BV. NTPC also offers a healthy dividend yield of 4-5%.

Ramco Cement: (Reco. – Buy, PT – Rs. 870)

 Ramco is expanding capacity in phases to reach a level of 20 MTPA by 2020-end. The
expansion will be majorly financed through internal accruals. The capacity expansion will
help it sustain a higher volume growth trajectory during FY2019-FY2021E.
 Pan-India cement prices and especially prices in South India, have risen since February
2019. However, they slipped marginally during the monsoon as per seasonal trends. A
favourable pricing environment and a benign cost environment led by petcoke and diesel
prices is expected to sustain increased profitability going ahead as witnessed in
Q1FY2020.
 Ramco being one of the most efficient regional players has undertaken expansion plan
at an apt time without leveraging the balance sheet which and operating leverage is
expected to translate in 22% CAGR in net earnings during FY2019-FY2020E.

Ultratech Cement: (Reco. – Buy, PT – Rs. 5,000)

 Ultratech witnessed a strong rise in profitability in Q1FY2020 led by a material increase
in realization and a decline in key costs such as power & fuel and freight costs. Going
ahead, the strong profitability is likely to sustain due to expectations of demand revival
post monsoon and a favourable pricing and cost environment.
 Ultratech has been able to achieve a profit before tax (PBT) breakeven of recently-
acquired units in the shortest possible time. Going ahead, the focus of the management
would be on deleveraging along with consolidation of Century’s assets.
 Ultratech is one of the key beneficiaries of the government’s focus on infrastructure and
affordable housing segments. Timely capacity expansion would help company receive
the benefits of demand revival along with taking advantage of benign cost environment,
leading to strong net earnings growth over FY2019-FY2021E.

 
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