Hold Your Nerves

The equity market is a very dynamic place and the way Indian equity markets are behaving it vindicates the same. We are saying that it is a dynamic place as sentiments in the markets change very fast and so do the views on the markets. While a few weeks back leading indices were soaring and everyone on the street was harbouring an optimistic view about the markets, a lot has changed in the preceding week. Owing to some global factors, the benchmark indices witnessed some decline after touching a new all-time high level in the first week of September. If we take a look at the movement of the indices and the reaction of market participants in the preceding week, it seems that in just few days of profi t booking (or we can say consolidation) there seems to be a lot of cautiousness coming to the fore. This caution in the market is clearly visible from the fact that the Indian markets that were ignoring negative kind of news and were only reacting to positive news have suddenly started analysing even the negative side. As a result, the volumes have already dried up. The irony here is that when Indian equities were blossoming retail investors could only look at them sitting on the fence as many of them had burnt their fingers badly when the markets touched a new high earlier in 2008. The scenario was so bad for retail investors that the portfolios of many investors did not recover despite the benchmark indices touching record high levels. And then when the markets entered a new orbit and retail investors started coming back into the action mode, the situation on the global canvas has suddenly turned cautious. However, amid this cautiousness, broader market indices like mid-cap and small-cap indices have witnessed a strong up-move outperforming the benchmark indices. Rather, the scenario is such that the mid-cap and small-cap indices have constantly provided positive returns over the past one week when Sensex and Nifty witnessed a southward movement. Investors are now finding themselves in a very confusing situation as the leading benchmark indices are very range-bound and the mid-cap and small-cap space does not provide any comfort. The simple reason here is that while large-cap companies provide a lot of liquidity while it is even moving southwards, that liberty is hardly seen in the mid-cap and small-cap stocks.

In the past we have seen many investors getting stuck into stocks with hardly any liquidity when the scrip has been witnessing a decline.

Hence the dilemma here is that the large-cap space is already full and retail investors are skeptical about mid-cap and small-cap stocks. An important question every retail investor facing now is: Is this the right time to enter the equity market or will they once again get stuck after entering at higher levels? Is there still some steam left? And naturally an extension to the questions would be which stocks to invest at this level. We at Dalal Street Investment Journal have always understood the requirements of investors and in the past have guided them though such confusing times. Going ahead in the story we try to find the best possible answer for our readers.

CURRENT MARKET SITUATION

If we take a look at the Indian equity markets, in the past few months they have witnessed a good up-move on the back of factors like strong FII inflows, stable government at the Centre which has been pro-reforms, support from global markets, and finally the improvement in macroeconomic fundamentals like bottoming out of GDP growth, declining CAD as well as fiscal deficit, stable currency and revival of the monsoon. The optimism was such that the Indian benchmark indices outperformed the emerging market peers significantly in the past few months and also on a YTD basis. Just to quantify, while the Sensex is up by 27.80 per cent on a YTD basis, China has provided returns of only 10.20 per cent with Brazil returns standing at 10.50 per cent on a YTD basis. The story is no different for Russia which also provided single digit returns. Even other Asian equity indices could provide only single digit returns.

Hence when we look at the Indian markets in comparison with other emerging markets, the Indian markets certainly seem to be a bit over-valued. Even the FII inflows at Rs.  87,000 crore on a YTD basis towards the Indian equities were much higher than what the other emerging economies received. Hence many on the street believe that the valuations of the Indian markets have run up ahead of the earnings, making the Indian equities a bit costlier. What has added to the worries is the earlier than expected increase in interest rates by US Federal. Along with the taper in QE which is estimated to be taken out fully by October 2014 and the revival in the job markets, the US Fed is likely to go ahead with a hike in interest rates. This would result in lower amount of easy money flowing into risky assets.

However we are of the opinion that investors need to understand that liquidity is not the only factor driving the markets. There is inherent strength in the Indian equities which is not only driving GDP growth revival but also the earning visibility of India Inc. Agrees S Krishna Kumar, Head-Equity, Sundaram AMC), “We believe that the economy could move into a 7 per cent growth trajectory in a couple of years with significant demand traction in core industries like materials, construction and industrials. The capacity utilisation levels in corporate India are broadly around 70-75 per cent and are ideally placed to capture the growth.”

Another factor is that we need not compare Indian equities with other emerging markets. While Brazil is commodity driven and is still struggling for revival, even China is facing problems on the growth revival front. The latest China manufacturing data disappointed the Chinese markets. The worst hit, in our opinion, would be Russia which has geo-political worries at the Ukraine border. Hence Indian equities would be a preferred place to park money as compared to other markets. Additionally, on a three-year basis, the Indian equities are still behind the other markets, thus providing some cushion. One may ask though if there will be guaranteed and consistent FII inflow when the US quantitative easing is done away with.

FII INFLOW TO CONTINUE

We in our one of preceding cover stories had categorically stated that the FIIs would continue to flock to the Indian markets, taking them to new orbits. We reiterate our stance. The first and the foremost factors driving the FII inflows would be revival of GDP growth. We are of the opinion that the GDP growth has bottomed out and we expect revival in the quarters going ahead. While for FY15 it is estimated at 5.5-6 per cent, estimates for FY16 and FY16 are in the range of 6 and 7 per cent trajectory respectively. We have already spoken about the relative advantages over other markets and the higher earning visibility of India Inc. has been discussed in detail later in the story. A stable INR against USD is another added advantage. Higher volatility in the INR kept the FIIs at bay as the depreciating INR used to reduce the returns.

As about the expected tapering of the QE and reversal of funds after October 2014, we feel it would not be major problem for the Indian markets. There was life for Indian markets before the start of a QE and hence there would be a life without QE also. Further while the US may change its QE the other economies may bring money for the Indian equities. Mario Draghi is expected to come out with an easing for the European markets and a huge inflow may come up from the Japanese markets also. Says Ramasamy, CIO, LIC Nomura MF, “The inflow has given a base for confidence of the FIIs in the Indian economy. Domestic institutions have just started looking at the fundamental change in economy. Hence the FII money will be there for some time to benefit from the Indian growth story and retail investors will let the flow continue.” 

V Balasubramaian, VP and Head-Equities, IDBI Mutual, agrees and says, “There is a possibility that the inflows will come from Japan as well as the European nations because they are in plans to pump around 1 trillion for the Europe liquidity programme. So it is possible that the flow may come from other places too. Also, the interest rates have not been reduced in a big way and the interest rate differential is still intact. Another thing is the currency stability, which has been stable all along.”

INDIAN MACROECONOMIC FACTORS - GREEN SHOOTS VISIBLE

If we are talking about the expected growth factors in the market, a lot of green shoots are clearly visible. Let’s take a look at the different parameters. We have already discussed the economic growth sticky the RBI is not yet in a position to cut repo rates but we feel there is no expectation of any rate hike.

Further data on the inflation front is also quite soothing as for the month of August the CPI was at 7.80 per cent as against 7.96 per cent in July 2014. So the inflation is moderating and with the monsoon reviving towards the end of the season food and vegetable prices are also likely to witness some cool-off. However, a sudden and sharp drop is not expected on the inflation front. We do believe that the RBI will continue to keep rates on hold till the CPI trajectory moves into its comfort zone. Opines S Krishna Kumar, “On the inflation trajectory, our view is that with crude coming to below USD 100 per barrel, the positive rub-off impact across the value chain could be quite strong. Also, the food inflation basket is moving into a period where the base effect could work in its favour. This could lead to a sharper leg down in inflation and thereby set the tone for an easing cycle.”

The Index of Industrial Production (IIP) numbers have also been indicating toward some recovery since the past few months. Gradual revival was visible in June 2014 but there was marginal growth of 0.50 per cent in July. However we feel it is a temporary blip and with the government focusing on infrastructure, improvement is expected going ahead. The liquidity situation is also quite comfortable at the current levels. The RBI may not have cut the repo rate but has provided good liquidity in the way if cut in the CRR and SLR requirements.

One major worry for India was the increasing current account deficit. With corrective actions from the government in sync with the RBI, the strategy has paid off with the CAD declining under the tolerance levels. It is at just 1.70 per cent in FY14. Even the fiscal deficit is lower at 4.50 per cent in FY14. With prudent strategies implemented by the government, we do not expect any threat in the near to medium term. In addition, the fiscal consolidation road map is already laid down and fiscal deficit is estimated at 3.6 per cent in FY16 and just 3 per cent in FY17.

With improvement in fiscal deficit the outlook is quite stable on the sovereign ratings’ front also. This bodes well for the Indian companies planning to raise funds and also in terms of attracting foreign fund flows. With increased fund flows even the investment cycle is catching up at a reasonable pace. Our discussions with some of the leading managements from the large-cap as well as mid-cap companies have revealed that they are going ahead with their capex plans. It is true that the effect of the same would be visible in H2FY15 only.

The only concern which remains is higher NPAs in banking. We feel that until and unless the banks are comfortable in lending, actual growth would not happen. But the RBI is coming out with strict norms on payment defaults. This is likely to the improve situation on the NPA front. Adds Ramasamy, “The new government’s priorities in infrastructure spending, achieving the disinvestment target quickly, the creation of ‘feel good’ factor in the economy, impending diesel de-regulation, the implementation of GST at the earliest and stability in rupee-dollar will all propel the index to a new level.”

GOVERNMENT EFFORTS TO START YIELDING RESULTS

A stable Government by the BJP was a prime factor behind the markets rallying ahead of polls and the momentum sustaining even after that. However the overall feeling is that the reforms’ process is yet to catch pace and hardly anything concrete is being provided by the government. But we are of the opinion that the seeds sown now would be yielding results soon. Agrees K R Choksey, “Yes, things have started looking up but the real effect would be visible from the second half of this fiscal.” Whatever clearances are to be made are already being done and the investment cycle will improve soon. Therefore from the second half things will improve. A few indications are already there with the automobile industry having improved in the last three months. Even the commercial vehicle industry is on a revival path. The government is trying to add growth to the manufacturing sector. If that happens then things would be going much faster.

CRUDE PRICE DECLINE –BIGGEST ADVANTAGE

One of the advantageous factors for Indian equities is the declining crude prices along with a stable currency. In the preceding week the Brent crude prices declined below USD 100 per barrel to touch the USD 97 per barrel mark. On technical parameters, crude has broken the crucial support level of 200-day moving average. There are again two views regarding the event. One indicates that there is some weakness in global growth and hence crude prices are on decline and hence it may be good news. However, we feel that with India being a net importer of crude there are a lot of advantages. Further, the decline in crude price would eventually result in lower prices for petrol and diesel. This may come as a help for reducing inflation.

GLOBAL MARKETS – WHAT TO EXPECT

While there is inherent strength in Indian equities, there is a lot of linkage with global equity indices. And hence a lot is dependent on how the global markets behave going ahead. As discussed earlier, the biggest worry at present is about what stance the US Fed takes as their economy is slowly on a revival path. With most of the QE already being taken out of the system and the remaining expected to be taken out by end of this year, there is fear of the FIIs taking a flight back to safe havens. Further, if along with that the interest rates are increased, the issue may worsen further. Says Choksey, “I think the money fl owing into the Indian markets will remain, provided the progress and confidence we have targeted remains in the country.” Further, we feel that the market has already factored in the unwinding of QE by the US Fed. Now the market is slowly factoring in the expected rate hike in the US. As regards the other economies, we feel weakness in those countries bodes well for Indian equities as it provides a comparative advantage. There are a few geo-political risks associated with countries like Russia, Ukraine, Syria and Iran. However, it has historically been observed that these issues affect only in short-term and eventually could be taken as buying opportunities.

EARNINGS & VALUATIONS

We are of the opinion that with green shoots visible the performance of India Inc. is expected to be better in the coming quarters. While the September quarter might be a muted one, H2FY15 would see some real fireworks. Opines Ramasamy: “The performance of India Inc. will be normal growth of 10 per cent in H2FY15 and we expect the growth in FY16 to be upbeat.”

As for the impact of the June 2014 quarter’s performance on Sensex EPS estimates, there are not very significant changes in the expected EPS numbers. To put figures in perspective, while the FY15 EPS has increased by 0.50 per cent to Rs.  1,532, the FY16 EPS has increased by 1 per cent to Rs.  1,854. This clearly results into a growth of 14 per cent for FY15 and 21 per cent growth for FY16. As regards the drivers of EPS growth, Tata Motors, SBI, ICICI Bank, HDFC and Reliance Industries are expected to be major growth drivers. On the sector front, financial services, capital goods and energy are likely to be the performers.

On the valuation front, the Sensex is trading at 17.30x of its FY15E EPS and this provides some scope for upward movement as it is lower than the long period average. Even if we consider the forward valuation of 19.50x, the target of 29,900 -30,000 is achievable in the next one year. Considering these factors, we are of the opinion that in the short term issues like geo-political factors, QE taper and hike in interest rates by the US Fed may take the markets southwards. However, this should be taken as an opportunity to invest for long term. Going ahead in the story we are recommending a portfolio of seven stocks to our readers. We advise to buy the same in a staggering manner. We believe the portfolio would be able to generate better than market returns.

Ahluwalia Contracts

Ahluwalia Contracts India (ACIL), which is an integrated construction company and offers turnkey solutions in engineering and design, witnessed a great amount of troubles in the preceding two fiscals. In a rising interest rate scenario when the order inflow for construction companies was drying, ACIL bid aggressively for projects that impacted its margins severely. The company had faced issues related to fixed price contracts that it had entered into with private sector clients. With the increase in input prices these contracts became unviable and thus the company faced significant losses.

However, the management has already taken a few corrective steps which we feel makes the company a good buy at its current levels. Our discussion with Shobhit Uppal, Deputy Managing Director, ACIL, provided a good insight on how the management is focusing more on public orders unlike higher dependency on private orders in the earlier days. Of its total order book of Rs.  3,313.90 crore, around 51 per cent are government related and 49 per cent private. There are two advantages of focusing on government orders. The first is that the current government is focusing in a major way on infrastructure development and hence the order inflow would be healthy. Secondly, the margins in government projects are higher than private ones. With more government orders to follow, we expect good revival in the margins going ahead. Further, the margins have increased in the preceding two quarters. Here Uppal clarified that the June 2014 quarter’s EBITDA margins of 13.50 per cent were an aberration on account of certain payments being received and the company is aiming to sustain its EBITDA margins at 12 per cent. We are of the opinion that with legacy orders remaining at Rs.  600 crore in the overall order book, the margins look sustainable. In addition, the company is looking to retire its debt and has already infused Rs.  50 crore by way of preferential allotment. We feel this would help the company in improving its working capital cycle efficiently. On the financial front its performance has improved in the June 2014 quarter where it posted a topline of Rs.  238.88 crore and bottomline of Rs.  16.89 crore as against Rs.  220.21 crore and Rs.  0.86 crore posted in the June 2013 quarter.

Bajaj Finance

Non-banking finance companies continued to play a critical role in making financial services accessible to a wider set of India’s population. Bajaj Finance is one company which has unique business models diversified into five areas: consumer lending, small and medium sized enterprises (SME) lending, commercial lending, rural lending and wealth management and fee based product distribution. BFL is the largest two-wheeler lender with 18 per cent market share of Rs.  18300 crore industry and it is also the largest consumer electronics lender in India with market share of over 15 per cent, where as the size of the entire industry is estimated at Rs.  45500 crore. BFL has a dominant 8 per cent market share in SME lending business, estimated at Rs.  23400 crore. BFL has market share of 15 per cent in LAP Business which is estimated at Rs.  29500 crore.

BFL has been consistently adding new products in both the consumer and SME segments since FY09. The products include: 1) Launching Doctor & Salaried loans in FY12, 2) Launching lifestyle financing in FY13 as a new segment, 3) Rural lending, which focuses on higher ticket gold loans and mobile asset refinance, 4) newly launched housing finance arm. BFL has shown unbelievable growth in last six years. Deployments have grown from Rs.  2451 crore in FY09 to Rs.  26024 crore in FY14. Profits have grown from Rs.  34 crore in FY09 to Rs.  719 crore in FY14 with CAGR of impressive 84 per cent. Value Trigger’s: 1) BFL plans to add 21 new branches & 100 spokes in rural Maharashtra & Gujarat in FY15, (2) BFL has Rs.  24061 crore of AUM with a net NPA of 0.28 per cent, one of the lowest in the Industry and capital adequacy of 19.13 per cent, (3) In slowing economy, BFL delivered 22 per cent earnings growth in FY14 with disbursements touching over Rs.  40000 crore, (4) Rs.  200 crore was raised in no time from 7300 customers for the New Fixed Deposit Program.

BFL will be the first to benefit from economic revival. It is estimated that loan growth will be more than 25 per cent for next two years. BFL has a highly experienced management team with scalable business and a healthy ROA of 3.6 per cent and ROE of 19.6 per cent. NII is estimated to touch Rs.  3300 crore, net profit of Rs.  900 crore and earnings of Rs.  180 per share in FY16. With strong fundamentals, the stock of the company is trading at a price to earnings of 17x. We recommend our readers to take an exposure in the stock as a long term investment.

Finolex Cables

With the new government focusing on infrastructure development there are various allied sectors that are likely to gain traction. Here we are of the opinion that Finolex Cables (FCL) stands to benefit from the expected revival in user industries such as construction, power, telecom, and automobile. It does look that with a dominant position in its sector FCL has got strong growth prospects going ahead. If we take a look at the various factors that support our ‘buy’ call, FCL’s dominant position in the cable industry can be attributed to its inherent advantages such as high brand recognition, strong goodwill, sound financial backing, and experienced management team. The strength of the management is also visible from the fact that the management has diversified its business. As a part of its diversification strategy, FCL has ventured into switchgears, electric motors and transformers.

One of the parameters that provide solace is its strong balance-sheet, positive free cash flows owing to better working capital management, higher profitability, low capex and debt along with robust return on equity. Apart from this, the declining crude price is also expected to bode well for the company as a majority of its raw materials are derivatives of crude. Hence we expect expansion of margin going ahead. As stated earlier, we believe that with the new government’s focus on reviving economic activity, the company’s revenue growth will be led by robust construction activity, significant infrastructure improvement in power and telecom industries, and strong automobile production.

While the construction segment is driving growth, a positive outlook for the automotive industry also bodes well for automotive wires and cables. Currently the company’s electrical and communication data wire and cable contribute 94 per cent of the revenues. What will also add to the company’s growth is the government’s ambitious project to connect 2.5 lakh gram panchayats across the country with optical fiber cable network under the National Optic Fiber Network (NOFN) project. This has significantly increased the demand for optical fiber cables. While FCL is a frontrunner to win many contracts in this segment, the rollout of 4G services will also provide ample opportunities for FCL’s communication wires and cables business. All this will create a very positive environment for the company owing to factors like expectation of robust growth in traditional user industries, diversification into non-cable products and last but not the least the retaining market share.

While these are positives on the operational front, we expect a good amount of improvement on the financial front as well. With the end of derivative contract losses we expect more stability in the financial performance of the company. The company has managed to post a good performance for FY14 wherein its topline stood at Rs.  2,359.04 crore and bottomline at Rs.  207.68 crore as against Rs.  2,270.68 crore and Rs.  145.27 crore posted in FY13. For the quarter ended June 2014 it posted topline of Rs.  572 crore and PAT of Rs.  34.68 crore as against Rs.  553.76 crore and Rs.  33.92 crore respectively for the June 2013 quarter. However, as suggested earlier, with the end of derivative contract losses there may be more rational results on a quarterly basis also. On the valuation front its CMP discounts its trailing four-quarter earnings by 16x. We recommend readers to buy with a target price of Rs.  300.

Greaves Cotton

The Indian economy is showing green shoots of growth and this is reflected in the GDP number for the first quarter of FY15, wherein the economy grew by 5.7 per cent – the fastest in the last two years. Although this pick up in the economy is going to help all the sectors in general, there are in particular a few sectors such as automotive, power and infrastructure that will benefit more. Greaves Cotton (GCL), which is engaged in the production of diesel, petrol and kerosene-based engines for automobiles, farm and agricultural equipments, power gensets, and other industrial and construction equipment, will be a key beneficiary of this revival in economy.

GCL primarily operates in three segments: engines, infrastructure equipment, and others. Through these segments GCL serves five sectors namely automotive, industrial, auxiliary power, farming and construction. The engine segment that contributes more than 90 per cent of its total revenue will be a key driver for the company’s growth. Within the engine segment is the automotive segment that contributes a majority of the revenue - around 70 per cent. GCL is a dominant player in the domestic three-wheeler (3W) market with market share of around 35 per cent, up from 20 per cent in FY02. This was on the back of diversification of its client base, currently to more than six SIAM registered OEMs compared to only Piaggio in 2002.

Some of the prominent clients of GCL are Tata Motors, Atul Auto, M&M and Piaggio. The company has inked long-term agreements with these players, thus providing good earning visibility. Besides, GCL has made significant inroads into the emerging four-wheeler (4W) small commercial vehicle (SCV) segment as well. After witnessing muted demand in the past three years, signs of pick up in industrial activity and infrastructure activity will be a key trigger and drive demand in the next two years. This is also evident from the capacity expansion plans some of these players are now mulling. For example, Tata Motors is planning to increase its capacity by 100 per cent while Atul Auto by 25 per cent.

In addition to the automotive segment engines, agriculture engines will also drive the growth of the company’s revenue, currently contributing around 25 per cent of its total engine business. The increasing need for mechanisation, strong improvement in minimum support price (MSP) and schemes like MNEREGA will help to drive demand in this sector. GCL has even launched products such as Ustad, a mini-tractor, to exploit the opportunity. The construction equipment business that contributes around 7 per cent of the total revenue of GCL has been loss-making for the last five years. However, it is likely to turn around by the next financial year as the company has taken various steps of cost reduction and has also launched a few new products to expand its current offerings in order to target institutional clients in the construction space.

GCL’s revenue and profit has grown at CAGR of 10 per cent and 18 per cent respectively for the ten years ending FY14. We believe that with the revival in the commercial vehicle segment and investment cycle the company is likely to exceed its earlier growth rate. The overall revenue growth will further be aided by the agriculture equipment business, which is expected to surge by healthy traction of its new product, Ustad tractor. The shares of GCL are currently trading at a price to earnings ratio of 27x which might look expensive but looking at the strong balance-sheet with zero debt on its books and assurance of growth momentum in the future makes the valuation attractive. Readers are hence advised to take exposure in the counter. Moreover, the company has consistently been paying dividend since 2005.

JK Lakshmi Cement

Rajasthan-based JK Lakshmi Cement is one of the prominent names in the northern part of the country and one of the lowest cost producers of cement in India. It has an installed capacity of 5.60 million tonnes (mt) per annum and is planning an expansion of its Greenfield project having an installed capacity of 2.70 million tonnes in Durg, Chattisgarh which is to be commissioned in October-December 2014. It has over 2200 dealers across the country and also offers construction solutions to its customers through its technical service cell. Its product range comprises of JK Lakshmi cement, JK Lakshmi powermix (ready mix concrete), JK Lakshmi plast (plaster of paris), and JK Lakshmi Smart Blox (Autoclaved Aerated Concrete blocks).

On the financial front the company has been posting good set of numbers. The net profit stood at Rs.  40.46 crore in June’2014 quarter as against Rs.  15.70 crore in corresponding quarter of the last year mainly because of increase in net sales which grew by 31 per cent to Rs.  600.42 crore in June’2014 quarter as compared to Rs.  457.04 crore in June’2013 quarter. The operational profit of the company grew by 58 per cent to Rs.  115.98 crore in June’2014 quarter as compared to Rs.  73.24 crore in June’2013 quarter. The cement volume grew by 18 per cent to1.44 mt in June’2014 quarter as compared to 1.22 mt in June’2013 quarter. The profit margins stood at 6.73 per cent in June’2014 quarter as compared to 3.43 per cent in June’2013 quarter. EBITDA margins also improved to 18.9 per cent in June’2014 quarter as against 15.4 per cent in June’2013 quarter. The company is currently trading at a price to earnings ratio (p/e) of 31.83x in June’2014 quarter as compared to 40.33x in March’2014, indicating a healthy p/e ratio. This is very positive for the company on the valuation front.

The company has been successful in increasing its operational efficiency which is evident from the fact that it has been continuously reducing its fuel consumption which reduced to 715 K.Cal/kg of clinker in June’2014 quarter as against 735 K.Cal/kg in June’2013 quarter.

One of the growth drivers of the company will be the Modi-led BJP government’s emphasis on improving the infrastructure facility, especially the roads and transportation facilities, which will be a boon to the cement sector as well as the company. Also, with company’s strong brand presence, healthy financials and a large network of dealers, going forward, the company’s prospects look bright in the future.

Repco Home Finance

The ignorance of one is oft en an opportunity for someone who is ingenious and one such example is that of Repco Home Finance (RHFL) promoted by Repco Bank, which has been exploiting the opportunity created by the ignorance of other larger home finance companies. RHFL focuses primarily on the self-employed and lower income segment in the under-served Tier-2 and Tier-3 centres and the peripheries of Tier-1 centers. This segment is highly under-penetrated and offers better yield on advances than borrowers in the salaried class. At the end of FY14, RHFL’s loan to non-salaried constituted 55 per cent of the total loan book, up from 53.5 per cent at the end of FY12. What is more important is that there is a huge market for this segment that will drive the future growth of the company. Self employed and casual labour constitutes 85 per cent of the total workforce and are mostly neglected by the bigger housing finance companies due to difficulties in their credit appraisal. Over the last decade RHFL has built up expertise in serving this segment and is well-positioned to exploit this opportunity.

According to one estimate, shortage of housing is expected to be around 44 million units; nearly 90 per cent of this shortage will be in the affordable segment. This will help the company to maintain its loan book growth rate of around 25-30 per cent as against 39 per cent CAGR exhibited in the previous seven years (FY09-14). To fund such growth the company is well-capitalised (Tier-I capital of 25 per cent) as it raised Rs.  2,700 crore in the fourth quarter of FY13 through public offer. Moreover, strong profit growth will support its progress over the next couple of years. Despite providing loans to this perceived vulnerable class, RHFL has maintained healthy asset quality. At the end of FY14, the gross and net NPAs of the company remained at 1.47 per cent and 0.72 per cent respectively, down from 1.48 per cent and 0.99 per cent a year ago (FY13). The NPA levels remained lower due to robust two-tier credit appraisal and risk management process. For the three year ending FY14, RHFL’s income from operations and net profit has increased at a CAGR of 30 per cent and 33 per cent respectively and stood at Rs.  534.2 crore and Rs.  110.1 crore for FY14. The share of the company is currently trading at Rs.  439, which discounts its book value by 3.8 times. Although it looks expensive, considering the higher loan book growth, superior asset quality and higher return ratios (return on net worth of 16.4 per cent and return on asset of 2.7 per cent) makes its attractive buy.

Wabco India

Wabco India (WIL) is a market leader in medium and heavy commercial vehicle (MHCV) air brakes with an 85 per cent market share in the original equipment manufacturer (OEM) segment. Due to its market dominant position, WIL is able to maintain its gross margins on the one hand and grow faster than the industry on the other due to rising content per vehicle. What is an added advantage is its strong product portfolio. The company is well-positioned to leverage the rising content per vehicle in the domestic MHCV market (growing faster than the MHCV industry growth) due to its strong parentage which provides a lot of support on the technology front also. What would add to the growth prospects is that ABS (anti-lock braking system) has been made mandatory for heavy commercial vehicles from October 2015 onwards. With a larger market share, WIL will surely stand to benefit. Further, with the second plant of the company at Mahindra World City already operational, we feel the rising demand would be catered for. WIL will also be able to capitalise on the global outsourcing opportunity to Wabco Holding (parent company) due to its cost-efficient India operations. Another factor is that WIL has a debt-free balancesheet with ROCE of 40 per cent plus. The new government has rejuvenated a positive sentiment toward macro improvements in the domestic market. As such, we feel that a strong government will provide a facilitating environment for the M&HCV OEM segment to grow at a CAGR of 12-13 per cent. WIL is a market leader in the CV air braking systems in the Indian HCV space and provides a unique proxy to the recovery, which would receive earnings  fillip going ahead, armed with a clean balance-sheet and operating performance. The technology available to WIL has helped it establish an exclusive relationship with its large customers in India with easier product penetration. On top of this, India is turning into a low-cost manufacturing hub aided by a depreciated currency. On the financial front the company posted a strong financial performance for the quarter ended June 2014 with topline of Rs.  323.59 crore and bottomline of Rs.  30.66 crore as compared to Rs.  315.61 crore and Rs.  32.78 crore posted in March 2014. The best part is that the operating margins have consistently improved on a sequential basis over the past three quarters. We recommend readers to buy the scrip at its current levels with an expected appreciation of more than 25 per cent in the next 12-18 months.