Budget 2014 No Cakewalk For Government, Says Expert; Top Ten Stocks To Buy

NEW DELHI: As we inch closer to the Budget 2014, Dalal Street is abuzz with expectations of strong pro-growth reforms from Finance Minister Arun Jaitley.

Given high expectations from the government, all attempts are expected to be made to present a comprehensive Union budget. However, the residual period until the next Budget to be presented is relatively small.

Experts feel that the focus of the new government would be more on creating opportunities for retail investors in financial markets. But it is definitely not going to be a cakewalk for them.

“The budget itself is not going to be a cakewalk. In fact, it is going to be a tight rope walk for the government,” said Killol Pandya, Senior Fund Manager-Debt, LIC Nomura MF.

“The economy has certain structural and macro issues which it is facing and the government will be at pains to balance putting our growth story back on track while battling the inflation bugbear,” he added.


The fact is that most of the steps which the government can take to promote growth and kick start the economy will have short-term inflationary ramifications. However, in terms of market performance, analysts see the markets rallying nearly 5-6 per cent in the run-up to the event.

Traders carried forward bullish futures bets to the July series on the expiry of the June contracts on Monday on expectations the market could rebound in the run-up to the Union Budget on July 10.

Fresh build-up of positions in Nifty options suggests the benchmark index could gain about 5-6% by the Budget day from the current levels, said an ET report.

Most analysts are of the view that despite escalating tensions in Iraq and depreciating rupee, Indian markets should be able to scale higher from the current levels, supported by strong FII flows and as most of the oil, which is imported, comes from the southern region, which remains unaffected.

“The overweight by international investors in India will be highest in the whole emerging market space and we think it will continue. We think there is a re-rating going on in India,” said Hans Goetti, Head of Investment Asia, BIL.

“We think if there is a new earning cycle start on the back of a stronger economy, then it can grow at about 6.5 per cent for several years, accompanied by higher prices in the equity markets,” he added.

History suggests that the Union Budget’s influence on the market’s short-term performance is declining, but the next budget could still leave a trail of impact.

The upcoming budget could be important because of where India is placed cyclically, what the mandate for the government implies and because this is the first non-Congress government in a decade, say experts.

“Though history suggests that the budget’s influence on short-term performance is declining, expectations (measured by pre-budget performance) are still important in deciding what the market does after the budget,” said Ridham Desai, India Strategist at Morgan Stanley, in a report.
“If the pre-budget returns are positive, there is a 90% chance that the post-budget returns are negative,” he added.

We have collated a list of ten stocks which investors can look at ‘buying’ ahead of the Budget 2014, for the next 12 months:

Brokerage Firm: BofA-ML

Titan Company Ltd: Target price set at Rs 406

Titan Industries, a Tata Group company, is India’s leading watch and jewelry retailer. Titan’s growth can pick up in FY15/16E as SSSG in jewelry bottoms out. This can be led by a favorable macro: easing inflation, possible pick-up in the urban job scenario and wage hikes.

While resumption of the sale of gold coins can improve operating leverage, possible margin benefits due to focus on premiumization in jewelry as well as watches can boost earnings.

ICICI Bank Ltd: Target price set at Rs 1,850

The global investment bank is bullish on ICICI Bank as it has built a strong retail franchise to complement its corporate banking activities and capitalize on the fast-growing retail market. ICICI Bank has expanded distribution to 3,500 branches, allowing it to acquire customers at a very rapid pace and also gain share.

The bank enjoys a strong capital position (Tier 1 at 12.8%), and is well placed to manage credit cycle/regulatory changes and deliver earnings growth of 16-22% through FY15/16. Outperformance should be driven by: 1) Op. efficiency (CI ratio improving to lesser than 38-39% in FY15/16 vs 41% in FY13); and 2) Credit cost at 80bps.

Maruti Suzuki Ltd: Target price set at Rs 2900

Maruti Suzuki (MSIL) is a subsidiary of Suzuki Motor Corp, Japan. Set up in 1983, MSIL is presently India’s largest passenger car company which primarily sells compact hatchbacks (65% of volumes), vans and upper sedans.

MSIL is our top pick in the Indian autos space, being best positioned to ride the country’s consumption recovery theme due to its rich product pipeline over the next three years.

The stock deserves a valuation premium due to superior growth prospects (31% EPS CAGR over the forecast period) and also because it is the sole listed proxy in the domestic car industry.

Oil India Ltd: Target price set at Rs 694

Oil India (OIL) is a state-owned (67.6% stake) E&P company with only onshore production and exploration mainly in north-east India. This region accounts for its entire crude oil and most of its gas production and reserves.

Gas price hike drives a 41-59% YoY rise in FY15E EPS at a gas price of US$6.8-9.0/mmbtu. A rise in oil price net of subsidy drives 34-70% YoY growth in FY15E EPS. FY15E EPS would rise by 60-114% YoY if the prices of both oil & gas increase.

Risk-reward ratio is evenly balanced with the worst-case fair value implying around 30% potential downside, and the best-case fair value implying a potential upside of 16-39%.

Voltas Ltd: Target price set at Rs 282

Voltas, a Tata Group company, is India’s leading air conditioning and engineering services company. It operates in India through an extensive dealer and service network. Cyclical recovery in macro will drive stronger consumer discretionary sales, ie AC.
There will better construction demand as well. Sharp expansion of margin led by favourable product mix change will be drive 80% of the 27% earnings CAGR in FY14-17. The stock is cheaper relative to peers and is likely to rerate along with stronger growth.

Analyst: S Ranganathan of LKP

Dishman Pharma: Target price set at Rs 160

Dishman Pharma is an integrated global outsourcing partner in CRAMS for innovator drug companies and derives close to 65 percent of its 1400cr revenues from CRAMS with marketable molecules forming the balance 35 percent of its revenues.

With all its capital expenditure behind, the company has forward integrated its Vitamin-D facility and with a 24 percent sustainable EBIDTA margin we believe that it is now focused on de-leveraging its balance sheet having a debt of 850 cr.

We recommend a BUY on the stock trading at 8x the current year's expected earnings with a price objective of 160.

Zensar Technologies Ltd: Target price set at Rs 500

Zensar Technologies is a Rs 2300-cr software company of the RPG group, which derives two-third of its revenues from ETS (enterprise transmission solutions) and one-third of its revenues from IM (infrastructure management). Zensar has the largest Oracle practice business in India and has a strong focus on digital transformation, which is primarily a consulting-oriented business.

The company has consistently grown at a CAGR of more than 20 percent over the past 5 years both on top-line and bottom-line. Zensar (a debt-free entity) with a sustainable EBIDTA margin of more than 30 percent is well on its way to post a net profit of close to Rs 300 cr this fiscal. BUY with a price objective of Rs 500.

ITNL: Target price set at Rs 250

ILFS Transportation Network Ltd is a leading surface transportation infrastructure company belonging to the ILFS group. We believe that ITNL is the best proxy to play this theme not only in India, but also outside India and could be a prime beneficiary of the road development projects.

This business is highly capital intensive and hence the high debt equity of 3x. ITNL with its 6500cr revenues is well placed to capitalize on the large addressable opportunity as it has attractive EBIDTA margins of 30 percent. Buy ITNL with a price objective of Rs 250.

Escorts Ltd: Target price set at Rs 160

Escorts with business interests in agricultural equipment, construction and railway equipment is the third largest player in tractors and is now launching new products in the mid to heavy segment of tractors and is aggressively foraying into the southern parts of the country where it lacks presence.

The monsoon, although delayed, is expected to gather momentum in the next 3 months, which would also act as a positive trigger for the stock in the coming quarter. ESCORTS trading at 6.5x historical earnings should be bought with a price objective of 160.

Federal Bank: Target price set at Rs 160

Federal Bank was punished rather unjustly for its aggressive lending to the SME sector where it has seen fast traction and we believe that the markets have now factoring in the fact that its asset quality continues to be good with net NPA at 0.74% and provision coverage at a very healthy 84%.
The bank has a very healthy CASA of more than 30% and net interest margins are at a healthy 3.3% with branch expansion happening at a faster clip ( it now has 1175 branches)

A quality private sector bank with an able leader available at a compelling price to book of 1.5x should be bought for a price objective of Rs 160.

(Views and recommendations expressed in this section are the analysts’ own and do not represent those of EconomicTimes.com. Please consult your financial advisor before taking any position in the stocks mentioned.)