ACC: Buy for an 18-month target of Rs 1,755.
Why: Utilization rate is expected to recover to 81-85% levels by FY15 as supply surplus declines. Earnings are set for an 18.5% Compound Annual Growth Rate (CAGR) over CY11-14 as against 4.4% 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 re-rating.
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 FY13-15 (estimated 30% CAGR). This along with improving return ratios should drive a structural valuation re-rating 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 25-30% 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.
Disclaimer: The story is based on a special theme report titled 'The Lucky 13' by IIFL. Investors are advised to make their own assessment before acting on the information.