gladiator stocks capital goods thematic: performance...
TRANSCRIPT
July 14, 2017
Research Analysts
Dharmesh Shah [email protected] Pabitro Mukherjee [email protected]
Nitin Kunte, CMT [email protected] Vinayak Parmar [email protected]
Dipesh Dagha [email protected]
Gladiator Stocks – Capital Goods Thematic: Performance
to rev up...
Scrip I-Direct Code Action Target Stoploss Upside
ABB ABB Buy in the range of | 1445-1480 | 1720 | 1320 17%
VA Tech Wabag VATWAB Buy in the range of | 655-675 | 795 | 592 20%
Time Frame: 6 Months
2
Deal Team – At Your Service
After a dull period of financial performance in FY11-16, we expect companies in the capital goods space
to exhibit a strong recovery in earnings backed by a pick-up in order inflows across key segments,
improved execution and better working capital management. In terms of order inflows, government
backed segments like roads, power T&D, railways, urban infra & transportation and defence have led to a
surge in order inflows. The same is expected to continue in FY18E as well. In such a scenario, we would
prefer diversified capital goods players, which are present across the above segments, have strong
execution skills and command relatively robust cash flow and leverage profile.
To capitalise on this emerging theme we have identified actionable opportunities based on our technical
screener model, which focuses on identifying the following three broad categories of stocks:
Relative outperformers with robust price structure
Major turnaround in price structure
Underperformers that are poised at an attractive value area
In this edition of our Capital Goods Thematic series, we are looking at ABB and VA Tech Wabag .
Capital Goods Thematic: Performance to rev up...
Technical View
ABB is a global leader in industrial technology operating in ~100 countries. The stock witnessed a multi-fold rally in
September 2013-February 2015 (| 446-1526). Thereafter, it remained in a secondary corrective consolidation phase
over 26 months in the broader range of | 1430 to | 950. In the first five months of CY17, the stock has seen a sharp
up move from near the lower band of the major consolidation and recently registered a resolute breakout above the
upper band of the consolidation range signalling continuation of uptrend and offers a fresh entry opportunity for
medium term investors.
Bullish consolidation above major breakout area suggests accumulation by stronger hands...
The stock had registered a strong volume led breakout from 26 month consolidation above | 1430 in May 2017. After
the strong breakout rally from | 1029 to | 1620 in just five months, the stock entered a sideways consolidation mode
and oscillated between the broad range of | 1620 and | 1400 in the last nine weeks. The consolidation over the last
nine weeks occurred mostly above the breakout level of | 1430 highlighting the change of polarity principle as per
which a significant resistance once taken out reverses its role and acts as support for future price movement. We
believe the nine weeks consolidation above the previous breakout area has laid the platform for the next up move.
The short-term support for the stock is placed around | 1350-1400 as it is the 50% retracement of the March-May
2017 rally from | 1180 to | 1620, which also coincides with the lower band of the recent consolidation.
Faster retracement of major declining segment augurs well…..
The sharp rebound from the January 2017 low of | 1029 has seen the stock completely retraced its preceding nine
months fall (| 1434 to | 1029) in less than 50% of the time (four months), thus confirming a faster retracement. Faster
retracement of the last major falling segment highlights the strong demand emerging at the major value area and
confirms the bullish turnaround in price structure.
Volume expansion in direction of trend indicates growing appetite for stock…
The volume behaviour also supports the bullish structural turnaround in the stock as the breakout from the long term
consolidation was accompanied by strong volumes of more than eight times the 50 weeks average volume of 3.8 lakh
share per week highlighting larger participation in the direction of primary trend and augurs well for the stock.
Momentum oscillators supports positive price bias.....
Among oscillators, the weekly 14 period’s RSI is in strong uptrend and is seen rebounding from its own breakout area
signalling underlying strength in the trend and supports the continuance of upward momentum, going forward.
Conclusion
Based on the aforementioned technical observations, we expect the stock to continue with its uptrend post the recent
consolidation and head towards | 1720 as it is the 138.2% extension of the previous decline (| 1620 -1376) over the
medium term.
ABB (ABB): Consolidation above major breakout area......
Stock Data
Source: Bloomberg, BSE, ICICIdirect.com Research
CMP: | 1480.00 Buying Range: | 1445.00-1480.00 Target: | 1720.00 Stop loss: | 1320.00 Upside: 17%
Stock price vs. BSE Capital Goods
Price performance in last five years
3
*Recommendation given on i-click to gain on July 13,
2017 at 12:53 hrs
13,200
14,200
15,200
16,200
17,200
18,200
850
950
1,050
1,150
1,250
1,350
1,450
1,550
Jul-
16
Aug-16
Sep-16
Oct-16
Nov-16
Dec-16
Jan-17
Feb-17
Mar-17
Apr-17
May-17
Jun-17
Jul-
17
ABB BSE Capitl goods
20%
-1%
86%
-13% -6%
-40%
0%
40%
80%
2012 2013 2014 2015 2016
Year
52 Week High / Low 1620/931.35
50 days EMA 1446
200 days EMA 1308
52 Week EMA 1294
Face Value (|) 2
Market Capitallisation (| Cr.) 31328
ABB (ABB): Weekly Bar Chart
Source: Bloomberg, ICICIdirect.com Research
4
Weekly 14 period’s RSI is seen rebounding from the previous
breakout area of its own thus supports the positive bias in price
138.2% external retracement of
the previous decline @ 1720
1029
Consolidation above the 26 months range breakout suggests
accumulation and thus offers fresh entry opportunity1620
1526
955
446
1434
Strong weekly volume at the major breakout level
indicating larger participation in the direction of trend
200 Weeks EMA
Technical View
VA Tech Wabag is engaged in the water treatment field. The company's principal activities include design, supply,
installation, construction and operational management of drinking water, waste water treatment, industrial water
treatment and desalination plants. The stock witnessed a major turnaround in price structure towards late March 2017
after posting a resolute breakout above key hurdle of | 645. We believe the ongoing consolidation over the last four
months above the breakout area of | 645 presents an attractive buying opportunity from a medium-term perspective.
Breakout from bullish Double Bottom pattern signals structural turnaround...
The price correction since hitting a life-time high of | 972 anchored upon the major value area of | 450 is the 61.8%
Fibonacci retracement of the major bull run from an all-time low of | 142 in 2011 to the life-time high of | 972 hit in
March 2015. The stock attracted strong demand upon testing the key value area of | 450 initially during February 2016
and again in December 2016. Pictorially, the identical bottoms formed in February and December 2016 represent a
bullish Double bottom pattern with the neckline placed at | 645 levels.
The strong up move in the first quarter of CY17 saw the stock register a resolute breakout past the neckline of bullish
double bottom reversal pattern thereby signalling end of the two year corrective phase and beginning of the fresh
uptrend. The key time wise observation during the breakout rally was that the stock overhauled its preceding six
month decline (| 645 to | 450) in just three months. Faster retracement of a major down move coupled with breakout
from bullish reversal pattern highlights a structural turnaround in favour of the bulls.
After the strong breakout rally in first quarter of CY17, the stock has entered into consolidation mode and is between
the broad range of | 650 to | 750 over the last four months. Price wise, the stock has not even retraced 38.2% of the
three month up move from December 2016 to March 2017 (| 450 to | 736) while time wise it has consolidated for
nearly four months. It highlights a healthy consolidation after a strong up move that will act as a platform for the next
up move, going forward. We believe the rising 52 week EMA and 50% retracement of the up move from December
2016 to March 2017 (| 450 to | 736) placed around | 592 region will act as a major base for the stock.
Momentum oscillators support positive price bias…
Among oscillators, the monthly MACD (E-12,26,9) generated a bullish crossover above its nine period average and
ventured into positive territory above its trigger line implying strength in the price breakout and supports the
continuance of upward momentum over the coming months.
Conclusion
Based on the aforementioned technical observations, we believe the stock is attractively poised above the major
breakout area and provides a good buying opportunity from a medium term perspective. We expect the stock to head
towards our target of | 795 being the congestion area of June-July 2015 and price wise equality with March 2017 up
move (555 to 736 = 181 points) measured from recent higher bottom of | 637 projects upsides towards | 800 zone.
VA Tech Wabag (VATWAB): Bullish consolidation above major breakout area…
Stock Data
Source: Bloomberg, BSE, ICICIdirect.com Research
CMP: | 675.00 Buying Range: | 655.00-675.00 Target: | 795.00 Stop loss: | 592.00 Upside: 20%
Stock price vs. BSE Capital Goods
Price performance in last five years
5
*Recommendation given on i-click to gain on July 13,
2017 at 12:55 hrs
13,200
14,200
15,200
16,200
17,200
18,200
400
450
500
550
600
650
700
750
800
Jul-16
Aug-1
6
Sep-1
6
Oct-
16
Nov-1
6
Dec-1
6
Jan-1
7
Feb-1
7
Mar-
17
Apr-
17
May-1
7
Jun-1
7
Jul-17
VA Tech Wabag BSE Capital goods
66%
0%
165%
-7%
-32%
-40%
0%
40%
80%
120%
160%
2012 2013 2014 2015 2016
Year
52 Week High / Low 749.9/449.95
50 days EMA 677
200 days EMA 615
52 Week EMA 610
Face Value (|) 2
Market Capitallisation (| Cr.) 3706
Va Tech Wabag (VATWAB): Monthly Bar Chart
Source: Bloomberg, ICICIdirect.com Research
6
Monthly MACD in buy mode after generating positive
crossover above its nine period average and trigger line
Equality with March 2017 up
move and previous congestion
area @|800 zone
736
Faster retracement
1468
555
Bullish Double Bottom at 61.8%
of 2011-2015 bull-run
Record high volumes accompanying the price breakout
from double bottom pattern validate the bullish turnaround
Gladiator Stocks: VA Tech Wabag (VATWAB)
Fundamental View
Healthy order inflows, improved execution in overseas projects
Wabag now has an order backlog of | 8100 crore, including a framework order of ~| 870 crore. Order intake for
Q4FY17 was at ~| 868 crore. Execution in the overseas segment witnessed health pick-up. The same contributed
~64% to the topline in FY17. The management indicated that all overseas projects are now progressing as per
schedule. In the overseas market, the management is seeing good traction from Southeast Asia, Latin America,
Middle East regions and Sub-Saharan regions.
Positive outlook, Orders win from Namami Gange pose upside risks
The company may witness large order inflows from ‘Namami Gange’, the tendering process for which has already
started. The management has pegged this opportunity to be | 4000-5000 crore over the next two to three years.
Large order wins from this segment pose upside risk to our target price. The company has also planned fund raising
up to | 400 crore for meeting equity contribution criteria in any such large project. All such projects are likely to be
centrally funded to the tune of 40%. The rest 60% is to be funded via debt and equity. Of the 60%, 26% equity to be
held by the key technology partner with a three year lock-in and 15 years O&M contract. Apart from this
opportunity, Wabag is likely to participate in large upcoming orders from Maharashtra (~| 8000 crore) for mega
sewage treatment plants, Tamil Nadu (~| 5000 crore) for desalination plants, Delhi (~| 2500 crore) & Karnataka
(~| 2500 crore) for water treatment.
Realignment/liquidation to bring-in efficiencies, remain positive on efficient working capital management
The management has realigned its business in four key clusters and liquidated unwanted subsidiaries in different
regions. Separate teams have been formed to monitor project closures, receivables and make centralised
procurements. These initiatives are expected to have a positive impact on the margins by reduce leakages. We
believe timely execution of overseas order and higher contribution from domestic orders is likely to ease working
capital concerns. With improving outlook, we have pencilled in new order wins of | 4,500 crore and | 5000 crore for
FY18E and FY19E, respectively.
Key Financials
Key Metrics
Source: Company, ICICIdriect.com Research
Stock Data
7
Particular (| crore) Amount
Market Capitalization 3,692
Total Debt (FY17) 229.0
Cash and Investments (FY17) 376.2
EV 3,544.8
52 week H/L (|) 749 / 450
Equity capital 10.9
Face value | 2
DII Holding (%) 21.3
FII Holding (%) 26.1
| Crore FY16 FY17 FY18E FY19E
Revenue 2,549 3,219 3,865 4,594
EBITDA 225 308 398 479
EBITDA (%) 8.8 9.6 10.3 10.4
Net Profit 93 170 215 262
EPS (|) 16.9 18.8 39.4 48.0
FY16 FY17 FY18E FY19E
P/E 40.2 36.2 17.3 14.2
Target P/E 44.9 24.6 19.4 15.9
EV / EBITDA 16.9 11.8 9.1 7.5
P/BV 3.8 3.4 2.9 2.5
RoNW (%) 9.8 10.0 18.4 19.1
RoCE (%) 17.3 22.1 24.3 24.8
Strategy Follow up
8
Open Recommendations:
Date Scrip Name Rec Price Target Stoploss CMPReturn till date
(%)
21-Apr-17 Cera Sanitaryware 2934 3680 2520 2978 1.5%
27-Apr-17 Nestle India 6520 7750 5875 6775 3.9%
9-May-17 Larsen & Toubro 1136 1356 1026 1176 3.5%
11-May-17 Rallis India 244.5 295 215 250 2.2%
30-May-17 Zee Entertainment 510 595 472 515 1.0%
31-May-17 Mahindra CIE 240 290 212 244 1.7%
8-Jun-17 Hindalco 197 238 177 205 4.1%
12-Jun-17 ABFRL 185 231 156 177 -4.3%
13-Jun-17 Info edge 1000 1210 895 1053 5.3%
6-Jul-17 Gateway Distriparks 284 338 257 268 -5.6%
6-Jul-17 State Bank of India 280 325 248 288 2.9%
7-Jul-17 Reliance Inds 1487 1648 1375 1518 2.1%
Summary Performance - Recommendations till date Open Recommendations 12
Total Recommendations 175 Yield on Positive recommendations 19.0%
Closed Recommendations 163 Yield on Negative recommendations -8.0%
Positive Recommendations 123
Strike Rate 75%
9
Notes…
• It is recommended to enter in a staggered manner within the prescribed range provided in
the report
• Once the recommendation is executed, it is advisable to keep strict stop loss as provided in
the report on closing basis.
• The recommendations are valid for six months and in case we intend to carry forward the
position, it will be communicated through separate mail.
Trading portfolio allocation
• It is recommended to spread out the trading corpus in a proportionate manner between the
various technical research products
• Please avoid allocating the entire trading corpus to a single stock or a single product
segment
• Within each product segment it is advisable to allocate equal amount to each
recommendation
• For example: The ‘Daily Calls’ product carries 3 to 4 intraday recommendations. It is
advisable to allocate equal amount to each recommendation
10
Recommended product wise trading portfolio allocation
Duration
Daily Calls 8% 2-3% 3-4 Stocks 0.5-1% 2-3% Intraday
Stocks on the Move 6% 3-5% 7-10 Per Months 7-10% 10-15% 3 Months
Weekly Calls 8% 3-5% 1-2 Stocks 5-7% 7-10% 1 Week
Weekly Technicals 8% 3-5% 1-2 Stocks 5-7% 7-10% 1 Week
Monthly Call 15% 5% 2-3 Stocks 7-10% 10-15% 1 Month
Monthly Technical 15% 2-4% 5-8 Stocks 7-10% 10-15% 1 Month
Techno Funda 15% 5-10% 1-2 Stocks 10% and above 15% and above 6 Months
Gladiator Stocks 15% 5-10% 1-2 Stocks 15% and above 20% and above 6 Months
Cash 10% -
100%
Number of Calls
Return Objective
Frontline Stocks Mid Cap StocksProduct Product wise
allocation
Allocations
Max allocation in
1 Stock
Pankaj Pandey Head – Research [email protected]
ICICIdirect.com Research Desk,
ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No 7, MIDC
Andheri (East)
Mumbai – 400 093
11
12
Disclaimer
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