News / SPA's top ten Diwali Stock Picks
Nov 04, 2012

The Lamp is Still Glowing... 

So far, so good but there is still a long way to go! There is a sudden upsurge in sentiments on the back of an expected uptick in economic activities, which is been reflected in the surge in stock markets. This emanated from the concerted efforts made by the policy makers all over the world and subsequent reforms initiated by the GOI to take the economies back on their path to recovery. 

SPA Securities believe that most of the concerns that India has been sharing for a while now are near to its peak. The recent policy measures taken on FDI and subsidy front re-assure GOI’s commitment on containing the fiscal deficit. With global commodity prices cooling off and peaking of interest rates, RBI’s tight monetary stance should ease with ~75 bps reduction in repo rates by H1CY13. GOI is now left with very little time and some of the long pending reforms are expected to see the light of the day. Off late the ministry has gone pro-active - expedited environmental clearances (from a low of nine clearances in Q2CY11 to an avg of 20 now), doubling investments in XII plan to $1tn and fast track infrastructure projects. Divestments of quality public sector companies at attractive levels will further boost sentiments. 

The market has most probably witnessed the end of the earnings downgrade cycle. The quarterly results gone by clearly indicate bottoming out of margins. Global jitters withstanding, Nifty at 5700 levels is trading at 18x its TTM EPS, which is at a discount to its long-term average. Earnings are expected to grow at ~15% CAGR over the next two years. 

SPA Securities strongly believe that despite all the hiccups, India will continue to remain a favoured investment destination due to its sheer potential. The recent US presidential election anointing second term for Obama bodes well for the global economies, as it will ensure continuation of US policy measures taken in wake of global economic turmoil to ensure smooth recovery process. This also strengthens the hope of avoiding US economy going off the fiscal cliff due to rising debt burden. That should uplift the sentiments across the globe and in the process should benefit the Indian economy as well. 

While the market may correct in the short-term, outlook for the long term continues to remain optimistic. In this report, SPA Securities have presented a bouquet of ten stocks with an investment horizon of 1-2 year, which will reap good results going forward. 

The companies covered are - 

1) Axis Bank CMP: Rs 1233 Target: Rs 1555 

Axis bank remains SPA Securities' best play on private banking sector given its healthy NII, sustainable fee income growth coupled with attractive CASA franchise, superlative NIMs & return ratios and stable cost to income ratio. With each successive quarter of reasonable asset quality, SPA Securities are getting closer to the bottom of the current cycle. 

SPA Securities recommend a “BUY” on stock with a target of Rs 1555 based on 2.1x FY14E BV of Rs 741. 

2) Blue Star CMP: Rs 192 Target: Rs 240 

Blue Star is a play on massive opportunities lined up in air conditioning segment on the back of higher disposable incomes and rising wages, coupled with low penetration of ACs. BSL’s strategy of increasing the distribution reach in tier three, four and five markets will enable it tomeet the untapped demand. 

SPA Securities recommend a “Buy” on the stock with a target of Rs 233 based on 15x FY14E EPS of Rs 16. 

3) Engineers India Ltd CMP: Rs 229 Target: Rs 315 

SPA Securities remain positive on EIL due to its dominant position in the Indian hydrocarbon sector (business opportunities of Rs 100 bn in next few years), foray into newer segments, decent order book and strong unleveraged balance sheet with superlative return ratios. 

SPA Securities recommend a “Buy” on the stock with a target of Rs 317 based on 12x FY14E EPS of Rs 26. 

4) Hero MotoCorp CMP: Rs 1901 Target: Rs 2347 

While current volumes might not provide too much to cheer about, SPA Securities believe that they are nearing the fag-end of the pain. Going into an easing rate cycle, they expect HMCL to witness a gradual uptick in volumes and consequently margins. 

SPA Securities recommend a “Buy” on the stock with a target of Rs 2347 based on 18x FY14E EPS of Rs 130. 

5) Infinite Computer CMP: Rs 151 Target: Rs 209 

Infinite remains SPA Securities' best play among the mid-sized Indian IT stock due to its presence in niche segments, excellent execution track record, strong debt free balance sheet with surplus cash of Rs 1.8 bn (43/share) and sound dividend pay-out policy of 30% resulting in healthy dividend yield (4.6% on FY14E dividend). 

On the back of strong deal flow led revenue growth and IP led margin expansion, SPA Securities recommend a “BUY” on the stock with a target of Rs 209 based on 5.5x FY14E EPS of Rs 38. 

6) Lupin CMP: Rs 583 Target: Rs 640 

SPA Securities remain positive on Lupin on the back of exclusive product launches lined up (expect to launch 120 products over next 3-4 years) and increased traction in India formulations & emerging markets. Its regulated branded formulation play reduces volatility in US operations while Kyowa acquisition provides it a strategic foothold in crucial Japanese market. 

SPA Securities recommend a “Buy” on the stock with a target of Rs 670 based on 20x FY14E EPS of Rs 34. 

7) Punjab National Bank CMP: Rs 770 Target: Rs 1151 

SPA Securities believe the macro outlook for India is improving and PSBs (with a market share of more than 70%) are best placed to benefit from the same. PNB being one of India's largest government-owned banks (GoI stake 56%) is well positioned to capture the up-tick in credit growth on the back of its strong fundamentals including good profitability (ROEs of 18-20%) and relatively high net interest margins. 

SPA Securities recommend a buy on the stock with target of Rs 1151 based on 1.4x FY14E ABV. 

8) Pratibha Industries CMP: Rs 50 Target: Rs 68 

SPA Securities remain positive on the infrastructure sector and PIL with proven track record & efficient project delivery mechanisms is expected to be one of the prime beneficiaries of emerging opportunities in the sector. Order book to bill ratio of 3.1x coupled with superior execution track record and continued preference for pure contracting space will lead to sustainable growth.


SPA Securities recommend a BUY on the stock using three stage DCF valuation method, to arrive at a target price of Rs 68, implying 5.5x FY14E EPS.


9) Supreme Infrastructure CMP: Rs 280 Target: Rs 370


SPA Securities remain positive on SIL given superior margins, healthy order backlog, robust return ratios and well funded current portfolio of BOT projects. The company has robust execution track record with revenue CAGR of 68% over the last couple of years.


SPA Securities recommend a “Buy” on the stock with a target of Rs 370 based on 5.5x FY14E EPS of Rs 67.


10) Wipro Ltd. CMP: Rs 371 Target: Rs 405


SPA Securities consider Wipro having all the ingredients to be a dark horse and surprise with a revenue growth on the upside due to long standing exposure to growth verticals and now a stable strategy.


SPA Securities recommend “BUY” on the stock with a target of Rs 405 based on 13.5x FY14E EPS of Rs 30.

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