New Year Picks - 2018

05-01-2018
New Year Picks - 2018
05-01-2018
 India, gearing up for a new dawn - a prolonged
phase of mild goldilock scenario

2017 has drawn to an end with ~28% gain for Nifty – BEST since 2013 – and a closing lifetime high for the benchmarks. However the rally would at best be termed as a „reluctant rally‟ as many
investors have been wary of participation owing to valuation concerns.
Given this backdrop, a common Q that investors are pondering upon is, “whether a significant correction is in sight”.
ABM Take :
GLOBAL FINANCIAL & ECONOMIC CONDITIONS:
Record equity index levels are not good enough reasons to be on the sidelines. Outlook for the riskier assets remains constructive and we maintain risk-on stance going into 2018. Global synchronized
economic growth (seen for the first time in many years), steady earnings growth, decent liquidity (as global central banks adopt „go slow” approach in withdrawing record monetary stimulus), continues
to support risk-on assets. The Goldilocks witnessed in 2017, (characterised by stronger than expected demand across China and G3, little inflation, and ever rising asset markets), will be a hard act to
follow – The tide may rise slowly in 2018 as compared to 2017. China‟s 5Y plan – focused on level and quality of growth should act as an anchor of economic growth and investment confidence in the
region. This coincides with Japanese growth supported by Abenomics and gradual return of growth momentum in India. Sentiment towards GEM more broadly should also lead to increased fund
allocation towards EMs. While the returns are likely to moderate (as compared to 2017) risks too have come off somewhat as 2018 take off, with geo-political tensions between NK and US somewhat
receding. However, it remains a key monitorable.
DOMESTIC FINANCIAL & ECONOMIC CONDITIONS:
India is entering into a prolonged phase of Mild Goldilock scenario with the return of growth momentum amidst stable interest rates and only moderate inflation.
Cyclical forces (twin balance-sheet stress and weak external trade) and structural changes (expedited formalisation) have hurt India‟s growth over the past few quarters. Real GDP growth has slowed
from 7.9% in Q1FY17 to a multi-year low of 5.7% in Q1 FY18. With businesses still adjusting to the GST adoption, slow progress in corporate deleveraging, and slightly reduced room for fiscal support,
we expect FY18 GDP growth @ 6.6% in FY18 as compared to 7.1% in FY17. However H2FY18 growth is estimated @ 7.2% vs 6.0% for H1FY18. We expect the economy to recover to 7.3% YoY in
FY19. Consumption is expected to drive this revival through moderation in GST rates and trade channels normalising. Lead indicators, including auto sales and personal credit growth (for urban
spending), as well as non-durables output (rural demand) are fast improving.
The private capex cycle is expected to recover (One of India‟s largest steel company recently announced a big ticket ~25k crore, 5MT capacity expansion) from the trough due to deleveraging efforts,
institutional reforms, benign interest rates and increasing capacity utilization in select industries. Government expenditure is likely to rise on account of 2018 being a pre-election year, albeit focused
on fixing supply gaps rural stress and infrastructure bottlenecks rather than boosting low quality demand through subsidies, handouts etc. Hence, we expect the govt to resist giving in to outright
populism and remain on the path of fiscal consolidation, even if the glide path is more gradual than anticipated earlier.
The recent rating upgrade from Moody‟s was a big boost to sentiment and is likely to lower offshore borrowing costs for large Indian companies. It would also support robust inflow of FDI, FPI flows as
we progress through 2018.

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 India, gearing up for a new dawn - a prolonged
phase of mild goldilock scenario

THE REFORMS PUSH & STRUCTURAL CHANGES:

India has undertaken path breaking structural reforms (GST, BANKRUPTCY CODE, ETC.) in recent times, which will help improve its economic productivity in the medium to long term, besides improving
the ways and means of doing business and increasing regulatory compliance. Therefore, while the cyclical recovery continues to gain traction, structural improvement is becoming increasingly evident.
The political narrative before the general election in May 19 is likely to emphasise its fight against corruption/black money, efforts to ease the GST-driven bottlenecks (to assuage the concerns in the
business/traders‟ community), whilst supporting the farm and rural sector with more focused reforms.
Insolvency & Bankruptcy code is fast evolving. Roadblocks are gradually clearing & progress thus far is satisfactory given the political will. With resolution cycle in offing, it will help the corporate sector
and especially the corporate focused banks. Thus corporate India will continue to enjoy their moment in the sun in 2018.
The structural trend of Equities becoming part of core savings for Investors (still <4% as a % of Household financial savings) will continue into 2018 as advisors and investors experience and weigh the
pros and cons of investing in market linked instruments. Relative underperformance of Real Estate, Gold, FD has and will accelerated this trend going forward.
The implementation of One Nation One Tax was never anticipated to be smooth with GST collections having come down on a sequential basis since July 2017. The entire process is evolving and our
sense is that this is something which is transient, given the scale and entities involved. With E-way bill becoming mandatory in February & June it will definitely improve the overall compliance and
efficacy of the system leading to higher collection.
RISKS TO THE EQUITY MARKETS
Risks to India‟s macroeconomic environment have risen slightly as compared to the past 3 years. Inflation is momentarily rearing its head on higher commodity prices and stronger demand momentum,
whilst the current account and fiscal deficits run the risk of re-widening due to recent rise in crude oil prices (which we believe is likely to be transient). These will test the economy‟s resilience against
any unexpected event shocks, at a time when global tailwinds (oil and liquidity) look set to reverse. However, an imminent shift by RBI towards a tighter policy is unlikely, but the inflationary impact of
high oil prices, bank recapitalisation measures and fiscal slippage risks are under watch.
CONSLUSION
Clearly India is entering a MINOR GOLDILOCK scenario in 2018 characterized by improving growth momentum (supported by structural reforms), gradual pickup in the Capex cycle (Infra led), moderate
inflation and return to profitability for Corporate India. Given rich valuations not only in India but globally, there will be need to keep an eye on geopolitics (Europe, ME, N Korea & The US), bond and
credit markets (where compressed spreads look unsustainable), energy (oil could make or break the inflation outlook), commodities (a slowing China could undermine the recovery). Volatility could rise,
but it will take several risk events to undermine the broadening momentum in the world economy.
Valuations in India looks optically high but they are higher on cyclically low earnings and sharply lower interest rates. The earnings will improve with further formalisation of the economy and new Capex,
fuelling the bull market further.

4
 Piramal Enterprises Ltd CMP ` 2854

Investment Arguments: Financial Snapshot

 Financial Services Business: PEL has carved a niche for itself in wholesale lending and is now one of the dominant players (In ` bn) FY17 FY18E FY19E
in most of the segments in which it operates. The company has recorded robust loan book growth rate of 69.4% to Rs
Revenue 85.5 122.0 152.3
332.6 bn as on Q2FY18. PEL is in the process of lowering the risk of its loan portfolio as it has been shifting focus from
special situation lending (Mezzanine lending) to construction finance (started in Jan 2015), commercial real estate(started EBITDA 22.5 34.4 45.5
in Jan 2016), LRD, affordable housing finance, etc. PEL has been able to maintain stable asset quality with GNPA ratio of
PAT 12.5 15.6 22.6
0.4% and Nil NNPA. Stable asset quality to be maintained on the back of stringent credit monitoring mechanism, strong
management pedigree and shift to relatively lower risky assets. Expect Profit CAGR of ~25% over FY18-20E. RoE (%) 9.0 11.7 15.3

 Pharma Business: PEL is the third-largest player (with ~12% market share) in the global inhalation anesthesia space. The P/E (x) 39.3 31.5 21.8

company ranks among the top-7 players in the OTC space (ranked 40th in 2007). PEL has expanded its distribution reach Source: Bloomberg Consensus, ABML Research
to 1,500 towns (~480 towns in FY15), with a field force of ~2,000 (~800 in FY15). We expect margins in this business to
expand (achieved breakeven in FY16) on positive operating leverage and sales force automation. The company has
invested ~Rs 30bn in the past two years to acquire seven assets. We expect PEL to achieve pharma revenue and EBITDA
CAGR of ~16-18% and 30-35% over FY17-20, largely driven by recent acquisitions, ADC manufacturing capacity,
debottlenecking at other facilities and expansion into new areas.
 Information Management Business: PEL‟s information management business originated from the acquisition of Decision
Resources Group, a decision-support platform in the healthcare information services space. It intends to scale up via
product innovation and geographical expansion, with active thrust on the inorganic route.

5
 RBL Bank Limited CMP ` 540

Investment Arguments: Financial Snapshot

 Fastest growing bank: RBL Bank is the fastest growing private sector bank with loan book mounting by 30-35% alongwith (In ` bn) FY17 FY18E FY19E
strong profit growth trajectory of ~40%. It has a well-diversified exposure with corporate & institutional banking
NII 12.2 17.0 21.8
constituting 41.4% of credit, Commercial banking – 18.2%, Branch & Business banking – 20.6%, Development banking &
Financial inclusion – 13.7% and Agri banking – 6.1%. Management targets to grow credit by 30-35% till FY20 which shall PPP 9.2 13.2 17.8
support healthy NII and PAT growth.
PAT 4.5 6.3 8.8
 CASA ratio to improve which shall keep NIM in northward trajectory: RBL has low CASA ratio of 23.7% which is expected
RoA (%) 1.1 1.2 1.3
to improve significantly going ahead. The bank is offering high saving rate and taking various other measures to support
CASA growth. Faster growth in CASA and retail term deposits shall provide more granularity to bank‟s borrowing base and P/ABV (x) 5.3 3.5 3.2

keep its CoF under check. NIM has improved from 3.4% in Q2FY17 to 3.7% in Q2FY18. We expect NIM improvement Source: Bloomberg Consensus, ABML Research
trajectory to continue going ahead.
 Operating leverage to kick in: RBL has made significant investment in past few years with respect to human capital,
technology, service offering, customer acquisition, brand building, etc. We expect all these investments to fructify which
shall led to lower cost to income ratio going ahead, thereby supporting profitability.
 Valuation: We believe RBL to continue to command premium valuation on account of superior credit growth and strong
earnings growth as operating leverage kicks in. Also, strong management pedigree provides comfort to us. Return ratios
are set to improve from 1.2% now to 1.5% by FY20 owing to i) NIM improvement, ii) rising share of fee income and iii)
expected fall in C/I ratio. Profit is expected to grow by ~40% CAGR over FY17-20E.
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 Balaji Amines Limited CMP ` 660

Investment Arguments: Financial Snapshot

 Balaji Amines Ltd. has established a leadership position in aliphatic amines manufacturing with in-house developed (In ` bn) FY17 FY18E FY19E
research and chemistry science. It has steadily built up capacity in methylamines, its derivatives and other specialty
Sales 7.3 8.4 10.5
chemicals over past 2-3 years. Its methylamines and derivatives capacities are operating at a blended utilization levels of
~80% and the specialty chemicals capacity is operating at 60-70% levels. Recent capacity additions (company invested EBITDA 1.5 1.8 2.2
~60 crore) into expansion of amines derivatives (DMA HCL) and specialty chemicals (Morpholine & Acetonitrile) to boost
PAT 0.8 1.0 1.3
top line to the tune of 150 crore by FY19 and up to 270 crore in the following years on optimum utilization levels.
ROE (%) 25.9 25.4 22.7
 The company has been awarded a land parcel of 90 acres with "mega project" status, for a consideration of 15 crore.
Company has applied for the environmental clearances and announced a capex of ~300 crore for this project. Balaji is P/E (x) 24.4 20.6 16.3

expected to get massive cost advantage under this project on account lower power costs, tax rebates and other benefits. Source: Bloomberg Consensus, ABML Research

 Hotel business has also started showing cash profit. The current occupancy rate is at 70%. As on September 2017, debt
on the books was at Rs 27 crore. As per management, it shall reduce to Rs 15 crore by March 2018. Balaji has
consistently worked on efficiency and cost reduction measures in the past 24-30 months. As a result, it has the lowest
fixed costs ratio among its peers.
 We expect revenues of ~1050 crore by FY19 as against 670 crore in FY17, and PAT should grow at a CAGR of 27-30%
over FY17-FY19. At CMP, the stock is trading at 16x of FY19 earnings.

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 PSP Projects Limited CMP ` 547

Investment Arguments: Financial Snapshot

 PSP Projects Ltd. is a Gujarat based construction company offering wide range of construction and allied services since (In ` bn) FY17 FY18E FY19E
past over 10 years. Incorporated in August 2008, PSP has emerged has a major and preferred construction partner in
Sales 4.0 6.5 9.9
Gujarat region (80%+ revenue from Gujarat).
 Business segments: Company operates across 5 construction business segment – Institutional, Industrial, Government, EBITDA 0.7 0.8 1.3

Residential and Government Residential (Institutional + Industrial which accounts for 80%+). PAT 0.4 0.5 0.8

 Strong Execution track record make it qualified to bag large products in future too: PSP Projects has a successful track ROE (%) 47.5 27.0 32.2
record of delivering quality building services & completing the projects before time due to active involvement of
P/E (x) 47.0 34.5 23.5
management in execution of projects & their thorough understanding of the business. It was selected as a preferred
construction company for GIFT City, Gandhinagar. Its other marquee projects/clients include Sabarmati Riverfront Source: Bloomberg Consensus, ABML Research

Development Corp, Cadila Healthcare, Zydus Hospital, Amul Dairy etc. Because of its exceptional execution capability, it
recently bagged marquee project of Surat Diamond Bourse of Rs.1575cr, its largest contract so far. Its total order book
stands at Rs.~2700cr in Dec 2017 & ~Rs300cr orders in pipeline.
 Financials and Valuation: PSP Projects‟ revenue has grown at a CAGR of 21% over FY12-FY17, while its Operating profit
and PAT has grown at a CAGR of 34% and 38% over the same period. It operates under Asset Light Model and enjoys a
Debt Free status. This has led to high ROE of 43%+ over past five years. Company is currently valued at 35x and 24x
FY18E and FY19E PE. Huge order books provide revenue visibility for next 3yrs and looking at the prospects of the
company, it is well poised to bag orders in future too. We expect the stock to deliver 30% returns over 12M.
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 Century Plyboards (I) Ltd CMP ` 344

Investment Arguments: Financial Snapshot

 Century Plyboards Ltd. is an innovation led diversified plywood player present across plywood, MDF, particleboard, (In ` bn) FY17 FY18E FY19E
laminates, veneers, etc. It was incorporated in 1986 by two visionaries of the industries –Mr. Sajjan Bhajanka & Mr. Sanjay
Sales 18.2 20.9 25.7
Agarwal. Over the years it has emerged as most trusted and preferred brand in plywood industry. Century Plyboards‟
revenue has grown at a CAGR of 12% over FY14-17 and its profit has grown at a CAGR of 40% over the same period. It EBITDA 3.1 3.4 4.7
also has the highest ROE in the sector of ~36% for the previous three year.
PAT 1.9 1.8 2.6
 Major beneficiary of shift from unorganized to organized channels: The drive to formalize the economy and to bring the
ROE (%) 30.6 23.5 27.4
unorganized channels under tax regim which has taken pace post demonetization and GST will lead to reduction in price
gap of the organized players and unorganized players. This been done, there should be gradual shift to the organized P/E (x) 40.4 41.8 29.1

channel where there are established Brands which will be available at relatively competitive prices. Players like Century Source: Bloomberg Consensus, ABML Research

Plyboards are well placed to encash on such drive and emerge as one of the bigger beneficiary.
 Push for Housing For All: With government‟s goal of constructing 10mn houses every year for pushing affordable housing,
there will be increased demand for building products like plywood. Century Plyboards has at the right time augmented its
capacity which included expanding plyboard capacity by 12%, laminate capacity by 50% and adding new 1,98,000 CBM
MDF capacity. This makes it ready to contend larger share in the incremental demand from housing segment.
 Valuation wise, Century Plyboards is trading at 42x & 29x FY18E & FY19E PE. Considering the prospects of the industry
and the leadership position of Century Plyboard, it is well poised to en-cash on the large opportunity in organized space.
We expect the stock to deliver 25-30% returns over 12M.
. 9
 The Phoenix Mills Ltd CMP ` 575

Investment Arguments: Financial Snapshot

 Strong Brand, diversified portfolio and one of the finest occupancy: Phoenix is a name of repute and a strong brand across (In ` bn) FY17 FY18E FY19E
its diversified portfolio. It has a portfolio of 8 malls, 5 office spaces and 2 hotels. PML‟s HSP in Mumbai is awarded as
Sales 18.3 19.5 21.4
India‟s one of the top malls with respect to sales per sft. (~2900/sft) with annual retail spends of Rs. 16000 mn+.
 Organised retail is expected to grow @almost double the speed of the total Retail Industry, courtesy Government EBITDA 8.5 8.8 9.0

policies: India‟s retail industry grew by 11% in FY2017 and is expected to grow by 14-15% for next five years (as per PAT 1.7 2.5 3.3
crisilresearch). Increase in overall retail consumption along with shift towards organized retail has created huge demand
ROE (%) 8.3 11.8 13.0
for quality space in the retail industry. Phoenix is quality player in the space.
P/E (x) 51.9 35.3 26.7
 Huge demand for quality Branded Retail Space: Top Global Brands Queue-up; PML commands decent premium: During the
first six months of 2017, India has topped the Global Retail Development Index overtaking China. PML has emerged as Source: Bloomberg Consensus, ABML Research

India‟s one of the most premium mall owner and manager. This helps it to command multi-fold premium from the high
end brands and shortage of quality space only adds to its position.
 Outlook & Valuation: We believe PML is one of the best proxy to participate in the growing retail consumption in India,
benign interest rates & increasing disposable income. PML‟s steady revenue coupled with improving margins has led to
multifold profit growth for past three years. Its Net D/E is at 1.5x which should gradually come down as company intends
to maintain its current absolute debt. Its rental business has grown at a CAGR of 16% over FY13-17. It is currently valued
at 13x and 11.5x FY18E & FY19E EV/EBITDA and at 3.5x FY18E P/B. Given its strong position in the industry & proven
capabilities and interest rates trending lower, we believe PML should deliver 30% returns over 12M.
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Research Team
Vivek Mahajan Hemant Thukral
Head of Research Head – Derivatives Desk
022-6225 7220 022-6225 7230
vivek.mahajan@adityabirlacapital.com hemant.thukral@adityabirlacapital.com

Fundamental Team
Avinash Nahata Head Equity Analyst 022-6225 7208 avinash.nahata@adityabirlacapital.com
Jaymin Trivedi Banking & Finance 022-6225 7275 jaymin.trivedi@adityabirlacapital.com
Naveen Baid IT 022-6225 7274 naveen.baid@adityabirlacapital.com
Suresh Gardas Pharma & Chemicals 022-6225 7271 suresh.gardas@adityabirlacapital.com
Mahavir Jain Mid - Cap 022-6225 7270 mahavir.jain@adityabirlacapital.com
Mohan Jaiswal Technical Analyst 022-6225 7273 mohan.jaiswal@adityabirlacapital.com
Salim Hajiani Equity Advisor 022-6225 7277 salim.hajiani@adityabirlacapital.com
Pradeep Parkar Equity Advisor 022-6225 7272 pradeep.parkar@adityabirlacapital.com

Quantitative Team
Sudeep Shah Sr.Technical Analyst 022-6225 7265 sudeep.shah@adityabirlacapital.com
Rahil Vora Technical Analyst 022-6225 7266 rahil.vora@adityabirlacapital.com
Smita Dhale Sr.Executive –Derivative Desk 022-6225 7269 smita.dhale@adityabirlacapital.com
ABML research is also accessible in Bloomberg at ABMR
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