Unicon Investment recommends 8 stocks for long term investment

Corporate India is facing challenges in maintaining their growth momentum in adverse macro economic environment. High interest cost has severely impacted the bottomline of the companies and delayed their capital expenditure plans. We expect this high interest rate regime to continue going forward and hence believe the companies with strong financials and low Debt-to-Equity would capitalize on the growth opportunity in the constrained environment.

We have selected BSE 100 (excluding banking and finance) companies for this query and have shortlisted companies with robust business models. We have identified 8 companies with strong growth trajectories and DER less than or equal to one. We recommend BUYACCUMULATE rating on these stocks in the uncertain macro environment.

Tata Consultancy Services (TCS): Macro economic conditions will continue to be a concern for TCS as substantial part of their revenue is generated from the US and Europe. Strong volume growth and management confidence in offshore IT service demand in an uncertain economic environment strengthens our confidence in this stock. Good double digit growth in service verticals like BFSI, Retail & Distribution, etc. as well as expansion in emerging markets could improve bottom-line margins going forward. At CMP INR 1064, the stock is trading at 17.2x its FY13E earnings estimate. We recommend ACCUMULATE rating on this stock and maintain our price target of INR 1200.

BHEL : At the end of Q2 FY12, BHEL's order book stood at INR 1,610bn i.e. 3.2x FY12E revenue. 80% of the total order book (INR 1280bn) is exposed to slow growing power sector which is facing various challenges like high raw material prices, high interest rate and execution and policy implementation delays. BHEL is expected to register ~15% and ~12% CAGR growth in topline and bottomline till FY13. ROE is estimated to be 28.3% and 25.2% for FY12 and FY13 respectively. Hence, considering healthy order book, strong execution capabilities and expectation of policy reforms in power sector, we recommend BUY rating on the stock with a price target of INR 347. Currently, the stock is trading at 2.2x FY13E PBV and 9.2x FY13E PER.

NMDC : The management is planning to ramp up its production capacity to 50mn tonnes by FY2014–15E through increased exploration of its existing mines and development of new mines. In addition to this company's initiation to move ahead in the value chain with production steel would further drive the growth of the company. The company has announced that it had signed a joint venture (JV) with OJSC Severstal (a vertically integrated steel maker from Russia) to build an integrated 2mn tonne steel plant in Karnataka. During September 2011, NMDC purchased a 50% stake in Australia-based Legacy Iron Ore (Legacy) as a cornerstone investor for INR 920mn. Also, the company is currently prospecting various mining assets, including a phosphate mine in Australia, an iron ore mine in Brazil and a coking coal asset in Russia. The company has a strong balance sheet with a cash reserve of INR 207 bn which provides opportunity for future.

At CMP of INR 187, the stock is available at EV/EBITDA of 4.3x its FY13E. Considering the forward integration along with expected volume expansion in the existing business, we recommend BUY on the stock and maintain our price target of INR 260.

Sun Pharma has significant FTF (First to file) opportunities lined up which can generate a meaningful contribution to the revenue. The company is as well increasing its concentration in emerging market which could lead to a healthy growth. However, resolutions of USFDA issues with Caraco remain the key concerns. On Taro front: On 22nd September, 2011, Sun acquired a controlling stake in Taro (economic interest of 48.7% and voting rights of 65.8%) at a price of $7.75 per share totaling $37mn for the stake. Before this acquisition, Sun held 36% in Taro which it had acquired for $105mn. Sun has Cash and Bank Balance of Rs. 23,112 mn as of 30th September 2011 which when converted to dollar terms amounts to $444mn. If Sun plans to fund the acquisition out of its own cash balance, it can sustain a maximum price of $29.6 per share for Taro which is a premium of 21% to the offer made by Sun. It also has an extremely low debt/equity ratio of 0.04 as of 30th September, 2011. Hence, it could also leverage its balance sheet to fund entire or part of the acquisition. Currently the stock is trading at 19.8x FY13E earnings. We recommend ACCUMULATE rating on the stock with a price target of INR 576.

HCL Technologies (HCLT): The macro economic environment will have a significant impact on the future revenue of IT services companies in the medium term. HCLT has adopted a fairly aggressive strategy in increasing its market share and thus has been able to show greater volume growth as compared to its peer. They are in the best position to benefit from the depreciation of the INR v/s USD due to their low forex hedged position (~ USD 390 mn) as compared to their peers. At CMP of INR 387, the stock is trading at P/E of 10.5x FY13E earnings which is at a discount as compared to its peers. We believe the stock has a potential upside of 27% and hence recommend a BUY on the stock and maintain our price target of INR 492.

Bajaj Auto : Company's major concentration at the premium segment along with high export sales (CAGR of 38%) and significant exposure to the three wheeler segment makes its attractive compared to its peers. Recent strong export volume with further expansion to the new geographies would help the company overcome the strong domestic competition and maintain the over all volume growth. In addition to this the recent price hike its product line would compensate for the reduction in the DEPB rates. We expect the company to maintain its operating margin at ~19% going forward which seems to be attractive amongst peers. The company has strong balance sheet with cash reserve of INR 570 cr and debt to equity of 0.1x. Considering all this fact we believe company's earning to grow above 17%. At CMP the stock is trading at PER of 14x of its FY13E. We recommend BUY on the stock with a TP of INR 1800.

Divis Laboratories : Divi's laboratories is expected to maintain the strong revenue growth trend going forward in H2FY12, with expected increase in revenue from Carotenoids business and optimum utilization of Vizag manufacturing unit. Currently the stock is trading at 14.7x its FY13E earnings. Considering the robust performance of the company and stability in margins we recommend BUY rating at the CMP of INR 735 valuing the stock at 15.8x its FY13E earnings with the target price of INR 910.

United Phosphorus (UNTP): UNTP would continue to benefit from healthy growth of agrochemical industry in FY12 and integration of subsidiaries- DVA, Sipcam Isagro Brazil and Cerexagri. The management has increased its revenue guidance to 30-35% sales growth vs. 25-30% stated previously for FY12. Growth in sales would be driven by increase in volume in present business and acquisitions. EBITDA margin (including other income) is expected to drop to18-20% from the previous expectation of ~21% level. Lower EBITDA in newly acquired units resulted in reduction of FY12 margin expectation. UNTP continues to maintain high level of cash for suitable acquisition in its portfolio. Stock is currently trading at 6.8x its FY13E earnings. We recommend BUY with a long price target of INR 180.

Source : Equity Bulls

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