Bears continued to be in a dominant position at Dalal Street for last two months, though bulls tried intermittently to get charged. Negative sentiment on account of many reasons – global trade war, banking fraud, LTCG risk, political uncertainty etc – pulled down the Nifty around 1,200 points from record high touched just before the Budget.
Not only India but also global markets corrected during the same period but the correction in India is more than global counterparts. The major reasons apart from listed above are rising capital cost, likely NPA problems in PSU banks etc but investors should not worry as experts feel whenever economic growth happens, interest rates always go up.
According to them, the volatility is here to stay for some more time and another 4-5 percent correction can’t be ruled out. But that should be offering a big buying opportunity for investors who missed the bus earlier.
“Indian equity markets reacted negatively today, in-line with global markets. With US imposing fresh tariff targeted China, there is an increasing fear of a trade war which could impact economic growth,” Siddhartha Khemka,VP – Head of Research (Retail), MOFSL said.
According to him, markets are expected to remain volatile ahead of F&O expiry next week, as well as end of Indian financial year (last week before the LTCG tax kicks in).
Deven Choksey of KR Choksey Securities said as far as long term trade is concerned, technically in the market anything can be possible, capitulation with multiple headwinds can pull the market down to 9,750 on the Nifty but fundamentals are not supporting the fall now.
He further said while the negative sentiment is refraining retail investors from participating in the market, for long term investors opportunities are plenty in the market, given the strong earnings visibility for next 6-8 quarters.
Kemka also said while traders should remain cautious, decline in good fundamental stocks would offer buying opportunities for long term investors.
Here is the list of top 10 picks that can give up to 50 percent return:-
Brokerage: Kotak Securities
Talbros Automotive Components | Rating – Buy | Target – Rs 389 | Return – 45%
Company continues to stay on a strong growth trajectory. We expect TBA to benefit from expected healthy automobile demand over FY18-FY20E.
Addition of new customers and new orders gives visibility to robust revenue growth in FY19/FY20. Company is also working on new products which are expected to gain acceptance with BSVI implementation.
On the EBITDA margin, the company expects to witness improvement through cost reduction, import substitution of raw material, operating leverage and turnaround in one of joint ventures. In the forging business, the company recently announced an order of Rs 35 crore per annum from Dana Spicer India Pvt Ltd.
We expect the company to post robust revenue growth across divisions. We expect TBA’s earnings to grow at 30 percent CAGR over FY17-FY20E. We retain Buy on the stock with an unchanged price target of Rs 389.
Brokerage: Elara Capital
Tata Metaliks | Rating – Accumulate | Target – Rs 838 | Return – 14%
Tata Metaliks has evolved from a pig iron manufacturer into a significant player in ductile iron (DI) pipes in the past six years. The recent uptrend in DI pipes and higher margin have prompted management to increase DI pipes revenue share from 35 percent in FY14 to around 60 percent in FY17.
As it is a part of Tata Steel, the company has access to good quality (low phosphorous) iron ore and produces 40 percent of its coke requirements via its coke oven plant.
We expect EBITDA margin to expand by around 300bp over FY17 to around 20 percent by FY20E, driven by higher operating leverage, improved cost efficiency and expected stability in raw material prices. Better operational performance is likely to lead to a 24 percent net profit CAGR over FY17-120.
We initiate coverage of Tata Metaliks with Accumulate rating and a target of Rs 838, implying 14 percent upside.
Superior management and prudent capital allocation has led to its shift from a loss-making, indebted company to a financially sound & cost-efficient firm and emerge as a large player in the DI pipes segment. Given significant improvement in profitability, we assign a higher multiple than its historical five-year average of 4.0x.
Key downside risks include volatility in raw material prices, an inability to pass on price hikes and a decline in demand for DI pipes.
Brokerage: Choice Broking
Hikal | Rating – Buy | Target – Rs 250-260 | Return – 20-25%
Hikal Limited is headquartered in Mumbai, and operates in crop protection and pharmaceuticals space. It is an associate of Kalyani Investment Company Limited, which owns 31 percent shares in the company. The company has strong Japanese presence.
With strong product profile including pending new launches for both proprietary as well as contract manufacturing molecules, entrenched relationship with leading pharmaceutical (pharmaceutical segment) and agro-chemical (crop protection segment) companies in the world, and strong market position for the Gabapentin business.
We believe going forward, the margins are expected to remain stable supported by new as well as pipeline products coupled with moderate CAPEX plans supporting liquidity profile.
At CMP of Rs 208, Hikal is trading at a P/E multiple of 21.6(x) compared to the industry peer of 36.5(x). The company has an upside potential of 20 percent to 25 percent in the next 12 to 18 months. We arrive at a target price in range of Rs 250 to Rs 260. Thus we assign a Buy rating on the stock.
GIC Housing Finance | Rating – Buy | Target – Rs 500 | Return – 36%
GIC Housing Finance, incorporated in December 1989, is one of the old housing finance companies in India. Loan book of the company has been growing at significant at around 20 percent over the past few quarters, NIM was maintained at around 3.8 percent.
While competitive lending rate and rising yield can put pressure on margins, the company is moving into a ambit of strong growth and profitability which would provide support to sustain NIM atcomfortable level.
Gross non-performing assets at 3.3 percent by Q3FY18 was on higher side compared to peers, efforts related to R&U of NPAs and reducing
exposure to loan against property portfolio are the key GICHF’s initiatives towards improving assets quality going forward.
Given the strong presence in low income segment of housing, GICHF is also expected to remain one the major beneficiary of rising opportunities in affordable housing. Current fundamental strength of the business indicates a rerating of valuation multiple.
Management has planned to double the loan book by the next three years through focusing more on branch expansion model and in-house loan origination model rather than emphasizing of DSA model. Further, around 40 percent correction in stock price from recent higher level indicates a strong entry point for investment over the medium to long term period.
At recommended potential price of Rs 500, GICHF’s share is available at P/ABV of 2.5(x) to FY19 adjusted BVPS of Rs 199.7.
Transport Corporation | Rating – Buy | Target – Rs 340 | Return – 31%
TCI Seaways, a business division of Transport Corporation of India (TCI), has acquired a ship with dead-weight tonnage (DWT) of 26262 (holding capacity of 766 containers). Total investment for the same was Rs 48.8 crore that would be funded partly from internal accruals & partly from additional borrowings. The ship is expected to serve the west-south coast of India.
Post addition of the ship, TCI Seaways would manage six ships (three on eastern coast and three on western coasts) with total capacity of 63622 DWT and a fleet of 5500 containers. As incremental capacity is nearly 70 percent of existing capacity, revenues from seaways division would realise a sharp surge over FY19.
We increase our revenue forecasts for seaways division by 15-25 percent in FY18-20 with revenue of Rs 347 crore (versus earlier Rs 278 crore) by FY20. FY20 implied EPS for seaways division was at Rs 8.5 versus Rs 6.9 earlier. Given synergies derived from shipping business, TCI would further strengthen its competitive positioning offering its clientele cost effective multi-modal logistics solutions.
We believe that with multi-modal capabilities TCI is poised to leverage benefits from GST-era thereby delivering sustainable growth rates.
We maintain SOTP based valuation ascribe a multiple of 10x FY20E EPS for freight, supply chain at 23x FY20E P/E and shipping 10x FY20E P/E, respectively, to arrive at a revised target price of Rs 340 (versus Rs 330 earlier). We believe low valuations compared to its peers will re-rate the stock.
IRB InvIT | Rating – Buy | Target – Rs 94 | Return – 25%
The sharp correction in IRB InvIT unit prices presents an attractive opportunity to lock in healthy 12.53 percent pre-tax internal rate of return (IRR) (at CMP of Rs 75.25) at a reasonable 8 percent toll revenue growth assumption. This jumps to 13.6 percent at 9 percent revenue growth and to 15.3 percent at 10 percent.
Historically, NHAI’s 12 NH stretches have seen 6.9 percent CAGR for commercial tonnage over FY12-17 and recent TOT tendering recommended aroud 4.5 percent average traffic growth for 30 years.
In terms of right metric to follow, given that underlying assets have finite life, are linked to economic growth and have no return of capital on closure, IRR is the more relevant metric than annual yields.
We see minimal risk of expensive acquisition given every transaction needs approval by voting (with sponsor not voting in related party transactions). Key risk from hardening interest rates has played out in our view.
Brokerage: Reliance Securities
Majesco | Rating – Buy | Target – Rs 730 | Return – 50%
The company reported strong Q3FY18 results, with revenue rising 4.7 percent QoQ in USD terms, led by strong order book growth seen in FY18 YTD; cloud revenue rose 5.1 percent QoQ, aided by investments made, while License revenue grew by a massive 127 percent QoQ led by new deal wins.
Good revenue growth drove a 345bps QoQ rise in EBITDA margin to 4.5 percent.
Industry fundamentals and the key IBM partnership will enable Majesco to boost revenue growth going forward.
Cloud offering – ‘Trump Card’: 60-70 percent of the deal pipeline in the past few months has been for cloud services.
Of the addressable market of USD 25 billion for Majesco, around USD 15-16 billion relates to the L&A market, while USD 9.25 billion relates to the US P&C market.
We currently have a target price of Rs 730 on the stock.
Brokerage: Dolat Capital
Inox Leisure | Rating – Accumulate | Target – Rs 300 | Return – 16%
We continue to prefer Inox in the exhibition segment due to traction in the advertising and food & beverages segment which will drive profitability. Inox has underperformed in the last three months and share price has declined 12 percent; valuations at 11.5x/9.3x based in
FY19/FY20 EV/EBITDA appear fair.
We upgrade FY19/FY20 EBITDA estimates by 1/4 percent factoring lower distributor share and positive impact of capital subsidy which will further enhance profitability.
We maintain underweight stance on the exhibition segment due to the following concerns – 1) converging growth in ATP; 2) weak Hindi Box Office revenue growth in FY19 which will have a negative impact on footfalls; 3) threat from VoD and consumption of small/medium movies on digital platform; and 4) limited screen addition due to scalability issues.
As per conversation with movie distributors and based on the current content pipeline, Hindi Box Office collection is estimated to report flat growth YoY in first half of FY19; we may revisit stance on the exhibition segment in second half of FY19 based on the content pipeline visibility for Hindi movies; we believe faster execution of screen addition as per guidance in second half of FY19 and a better performance in Hollywood Box Office collection may drive upgrades for the stock in medium term.
We maintain Accumulate rating with a Mar’19 target price of Rs 300 (Rs 290 earlier) based on 10.5x EV/EBITDA one year forward.
Brokerage: CESC Research
Gabriel’s India | Rating – Buy | Target – Rs 188 | Return – 36%
We believe GIL will continue to gain share of business from its key customers as most of its key customers are outperforming the industry.
Aftermarket and exports are expected to recover after a slowdown. We are positive on the growth and profitability prospects of the company.
GIL registered robust growth in Q3FY18 led by around 20 percent growth in two wheelers & 3 Wheelers, 12 percent in Passenger vehicle and nearly 49 percent in commercial vehicle (including Railways business).
We expect auto industry to grow at a healthy pace due to by higher rural income and recovery in export and aftermarket sales. In FY19, passenger vehicle industry is likely to grow by 9-10 percent, 2-wheelers: 10-11 percent and commercial vehicle 11-12 percent.
We maintain a Buy rating on the stock with revised target price of Rs per share, valuing at a P/E x of 20X on FY20EPS.
Risk: Increase in raw material cost; unfavourable currency movement; a slowdown in the automobile industry and slowdown in export markets.
Brokerage: Axis Direct
Central Depository Services | Rating – Buy | Target – Rs 370 | Return – 24%
CDSL is a story of two halves – an existing granular revenue stream and a growing optionality from digitisation. A deeper look at CDSL’s revenue reveals even the sub heads (transaction income, IPO corporate charges) emanate from diverse set of small fees that CDSL charges.
Along with that, the metaphorical ‘quiver’ includes unchartered streams (academic records, warehouse receipts, GST Suvidha etc) which lend immense scalability to CDSL’s business model.
Granularity of revenue streams is a key attribute as even the largest revenue contributor, ie. annual issuer charges, contributes only 32 percent. CDSL revenue pool is hence de-risked and well diversified.
Understanding revenue growth is key to CDSL due to (1) a fixed cost business (for most revenue streams) locking in EBITDA margin at over 60 percent, (2) virtually no capex resulting in a minimal depreciation charge, and (3) debt-free status.
Hence improvements in revenue growth would flow down to PAT and generate FcFF (free cash flow to the firm).
Globally, most countries have only one depository though some like India have a maximum of 2 depositories. Apart from CDSL, only one other depository (Peru – Cavali) is listed. Need to access capital markets does not arise as business generates high cash and has minimal capex requirements
We like CDSL due its diverse revenue streams, largely fixed cost model and most of the capital employed being cash and investments, thus generating high (ex-cash) RoCE. Initiate with Buy (Target price Rs 370, 24 percent upside).
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