Credit Suisse’s top investment ideas from smallcap space

MUMBAI: The risk-reward ratio for smallcap companies is getting favourable, after having corrected over 20 per cent in the last one year, says Credit Suisse report.

The brokerage is of the view that the investment cycle in India is likely to stay broken for the next two to three years. The middle-income consumption will remain under pressure as inflation and stagnant wages mar consumption sentiment.

However, “low-income consumption should stay strong, given robust productivity-driven wage growth, we like the niche consumption-driven stories focused on the 'bottom of the pyramid' or niche longer term structural growth stories in the Indian small-cap space,” the report said.

Following are top investment ideas by the brokerage in smallcap space:

Emami:

Rating: Outperform

Target price: Rs 580

Emami has a unique portfolio of products operating with high market shares in niche segments, thus largely side-stepping intense competition.

Emami’s management has the best track record of innovation, with the company drawing more than 40 per cent of its revenues from products launched post 2005. We are excited over the potential of the current pipeline of ramp-ups such as pain ointments, OTC products and skin care extensions.

Among its mid-cap consumer staple peers, Emami has one of the highest net cash positions, dividend payout ratios and ROE. With growth momentum coming back, we expect the stock to at least trade in line with its larger mid-cap peers.

We value the stock at ~25x one-year forward earnings, in line with our target multiple for its mid-cap peers. The stock is the cheapest on a P/E and PEG basis among our consumer staple coverage universe.



Jammu and Kashmir Bank:

Rating: Outperform

Target price: Rs 1,700

The economic growth outlook for its home state, J&K, continues to be healthy despite a broader economic slowdown. As a result, management expects loan growth within the state to be strong at 25 per cent+ in FY14, helping to get overall loan growth of ~20 per cent. Investment activity and tourism are both on an upswing in the state.

The bank has witnessed a strong ROA improvement to 1.8% in the past few quarters on the back of rising NIMs (4.3 per cent in 2Q). Management is confident of sustaining it at 3.9-4 per cent with an increase in the share of the higher-margin business from J&K. It is also focusing on improving fee contribution driven from insurance, MF distribution.

We expect loan growth (+20 per cent) for the bank to outpace peers. With strong deposit franchise (40 per cent CASA), healthy margins (4 per cent +), high NPL cover (90 per cent) and comfortable tier I (11.7 per cent), it is the most attractively valued small cap bank at 0.9x book and 5x earnings.