5 picks for Samvat 2075

Infosys: IT’s poster boy

K Venkatasubramanian

After a period of continuous disruptions, with several senior management changes over the last three to four years, Infosys (₹662) is set for a reasonably smooth digital ride. With a new CEO, the focus on growth seems to have returned for Infosys.

A rapidly expanding digital services business, healthy large-sized deal wins and solid traction in key verticals are positives for the company.

At the current price, the stock trades at a reasonable 16 times its likely per share earnings for FY20. The company’s PE multiples have hovered around 18-19 times over the past three years. Despite rallying more than 40 per cent over the past one year, the shares of Infosys still appear to be attractive for investors with a two-to three-year horizon.

There is considerable valuation comfort, with underlying earnings growth likely to take an upward trajectory over the next few years, more so as the rupee remains weak against the dollar.

In the first half of FY19, Infosys’ revenues grew by 14.7 per cent to ₹39,737 crore, while net profits rose by 7.1 per cent to ₹7,721 crore. The company’s revenues have grown at a compounded annual rate of 9.8 per cent between FY15 and FY18.

As clients increasingly demand automation of normal application services and look at increasing spends on advanced technologies, Infosys upped the focus on its digital offerings significantly. The digital business accounted for 31 per cent of the company’s revenues in the September quarter, up from 25 per cent in the same period last year. In fact, revenues from digital services have been growing in double-digits even on a sequential basis for the past four to six quarters.

The financial services vertical has picked up pace in the last few quarters, while retail and manufacturing have steadily increased contribution to revenues over the past one year.

Thanks to elevated oil prices, and the resultant increase in capex spends of clients in the space, the energy and utilities vertical has rebounded well too. These segments together contribute more than 70 per cent of Infosys’ revenues, indicating broad-based growth for the company. Over the last one year, the company has added four new clients in the $100-million bucket; three in the $50-million category and as many as 19 customers in the $10-million bracket.

In fact, in the recent September quarter, the company signed $2-billion of large-deals.

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Hindustan Unilever: Premium play

Parvatha Vardhini C

Hindustan Unilever has lost 12 per cent so far from its one-year high of ₹1,808 touched in end-August 2018. While it may still look a bit pricey trading at 60 times its trailing 12-month earnings, a solid recovery in consumption, post-demonetisation and GST move, a stronghold in the rural market (40 per cent of sales) — which is growing faster than the urban segment — and a diversified product portfolio with market leadership in several categories make HUL (₹1,633) a good long-term bet. Investors can take exposure to the stock now and also accumulate on any further dips due to market volatility.

Consumption has po s ted a convincing comeback after derailing due to demonetisation and GST. After recording a flat (year-on-year) growth in domestic volumes in the June 2017 quarter due to the GST transition, HUL’s volumes have gained traction, growing 10-12 per cent in each of the quarters beginning October to December 2017.

Superior product mix, as well as price increases to pass on rise in input prices, have helped the company record a price/mix led growth of 4-6 per cent over the last few quarters. Profit growth in these periods has also been strong, at 14-27 per cent in each of the last four quarters. All segments of the company — be it home care, beauty and personal care or food and refreshments — have more or less been contributing equally to the strong show.

In the near to medium term, while rising interest rates and a tight liquidity situation among lenders may dampen discretionary consumption to an extent, consumer non-durables may continue to do well.

HUL, with its wide reach as well as differentiated products across price points will be a beneficiary. Going forward, increasing consumer preference for premium products as well as the company’s pricing power to pass on any cost increases will drive improvement in realisations and margins. For the next leg of growth, HUL is focusing on widening the reach of products in under-penetrated categories in hair/personal care.

Towards expanding the market for its ‘naturals’ portfolio, the company is following a three-pronged strategy of introducing natural variants in its existing brands, building a bouquet of natural products under the ‘Lever Ayush’ brand and also building specialist natural brands such as Indulekha.

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Titan: Good times

Rajalakshmi Nirmal

The stock of Titan Company (₹871) , is a good long-term buy for your portfolio. Continued growth in market share in the jewellery segment, launches across product segments and the success of its gold savings and gold exchange schemes that bring new customers, are reasons behind the stronger-than-industry-average growth.

While the last few years have been challenging for the gems and jewellery industry with new regulations and higher import duty on gold which hit consumer sentiments, Titan has managed a decent show. Between 2013-14 and 2017-18, the company recorded revenue growth of 9 per cent and net profit growth of 12 per cent (CAGR). Operating margins of the jewellery and watches segments have improved, thanks to better product mix and cost-cutting. In the jewellery segment, EBIT margins were 9-10 per cent in 2015-16; they now stand at 11-13 per cent.

Revenue growth is likely to be higher over the next five years, given the GST-led push to shift in consumer demand from the unorganised to branded jewellers,

Higher import duties, if any, may not significantly impact Titan, as its gold exchange scheme is working well. The company sources a chunk of its requirement from old gold that customers bring for exchange.

While the Q1 2018-19 performance was not good , stronger-than-expected revenue growth is expected in Q2. The company, in its Q2 preview, reported that growth in the jewellery segment was good, despite headwinds, including higher gold prices, weak consumer sentiment and fewer wedding dates. Higher sales of diamond jewellery and launch of new collections in studded gold jewellery and silver were reasons for the healthy growth. The watches segment continued to see good momentum in the quarter, led by new products across affordable, work and fashion categories.

The stock has corrected from ₹1,000 in April. At current levels, the stock discounts its estimated earnings for 2019-20 by 40 times. It was trading at 53 times, its one-year forward earnings, a year back.

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Reliance Industries: Thinking big

Anand Kalyanaraman

The Reliance Industries (₹1,074) juggernaut seems set to roll on, with the company firing on multiple cylinders. Its financial performance has been consistently healthy with profit growth of 19 per cent in 2016-17, 20 per cent in 2017-18 and 18 per cent Y-o-Y in the half-year ended September 2018. This has been driven by the massive investments made by the company in its mainstay hydrocarbon businesses — refining and petrochemicals — and in its new-age consumer businesses – digital (RJio) and retail. Strong growth in these segments has more than offset the decline in fortunes in the oil and gas exploration business that has shrunk sharply due to declining volumes.

RIL should continue to do well in the years ahead, thanks to its deep coffers and execution capabilities that allow it to invest big, achieve massive scale, and dominate industries. A diversified presence across businesses hedges risk. The mega investment phase in its hydrocarbon segments seems to be plateauing, for now. But growth in these cyclical businesses should remain healthy with the commissioning of some new facilities in the quarters ahead and also due to regulatory benefits such as fuel specification changes by the International Maritime Organisation (IMO).

Meanwhile, RIL continues to invest aggressively in the retail and digital businesses, which are likely to keep growing rapidly. This is in line with the company’s plan to grow the profits of the consumer businesses to the extent of the hydrocarbon businesses; currently, the consumer businesses contribute about a quarter of total operating profits. Addition of retail stores and telecom subscribers are likely to continue at a brisk pace. Organic growth is being supplemented through strategic acquisitions. Listing of the digital and retail businesses sometime in the future could mean significant value unlocking for RIL shareholders. Investors with a long-term perspective can buy the stock.

The RIL stock made a roaring comeback from February 2017, more than doubling until August this year. But since then, the stock has lost about 20 per cent, largely due to the ongoing market weakness. This provides an entry point for long-term investors. The stock now trades at about 16.5 times the trailing 12-month earnings, lower than the average 17 times over the past year.

HDFC Bank: Take note

Radhika Merwin

Amid the persisting challenges in the banking sector, HDFC Bank (₹1,947) has managed to put up a good show over the past few years, even as its peers have been weighed down by asset quality issues.

Strong loan growth, steady net interest margin and a stable asset quality have kept the private lender’s earnings in good stead.

HDFC Bank, the largest private bank, has been steadily growing its loan book by about 20-25 per cent (year-on-year) on an average over the last seven to eight quarters. It has been gaining market share, as public sector banks continue to consolidate their loan books. HDFC Bank has also retained its top slot within the private bank space over the past three years.

At the current price, the stock trades at about 3.1 times its one-year forward book value, lower than its three-year average of 3.4 times.

This offers long-term investors a good opportunity to buy the stock at the current levels, given that the bank’s earnings are likely to grow by 18-20 per cent over the next two years. The bank’s recent September quarter performance has also been noteworthy.

It delivered 24 per cent Y-o-Y growth in domestic loans in the September quarter, led by good traction in both retail and corporate loans. Notably, the pace of growth in the bank’s core net interest income that had moderated in the past two quarters, has witnessed a pick up in the latest September quarter.

From 17.7 per cent Y-o-Y growth in the March quarter, net interest income grew by a slower 15.4 per cent in the June quarter.

However, in the latest September quarter, HDFC Bank’s net interest income grew by a higher 20.6 per cent. Overall, the bank’s net profit for the quarter has grown by 20.6 per cent Y-o-Y, a healthy performance, given the ongoing challenges within the sector.

HDFC Bank’s GNPAs that had been hovering around the 1 per cent mark in the past, has inched up slightly over the past one year. In the latest September quarter, the bank’s GNPA stood at 1.33 per cent of loans.

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