Moneycontrol
Oct 09, 2017 08:48 PM IST | Source: Moneycontrol.com

Earnings may come back in next 1-2 qtrs; 5 stocks that could be multibaggers: Geojit

We expect Q2 to be better than Q1, which would give relief to the market as the trend is likely to improve on a QoQ basis, Vinod Nair, Head of Research at Geojit Financial Services said in an exclusive interview with Kshitij Anand of Moneycontrol.

Earnings may come back in next 1-2 qtrs; 5 stocks that could be multibaggers: Geojit

We expect Q2 to be better than Q1, which would give relief to the market as the trend is likely to improve on a QoQ basis, Vinod Nair, Head of Research at Geojit Financial Services said in an exclusive interview with Kshitij Anand of Moneycontrol.

The H1FY18 is over and the S&P BSE Sensex rose just over 6 percent and for the year it has gained a little over 18 percent. Where do you see markets headed in the next 6 months of FY18?

We had cut our target for Sensex by 5 percent last quarter to 31,000, post poor Q1FY18 results. This was due to lower results than expectation and premium valuation which was increasing despite lack of earnings growth.

We continue to have a cautions view in the near-term due to a slowdown in economic activities and liquidity from FIIs and non-MF institutions.

At the same time, we also feel that the trend of this consolidation will be limited since earnings are likely to come back over the next 1-2 quarters as economic activities resume post the stabilisation of GST procedures.

Slipping macros is something which is troubling market participants at the current juncture. Do you think this will cap the upside for Indian markets or are such fears unfounded?

It is already impacting the performance of the market in the last 2-3 months and we feel that it could continue in the near-term due to the risk of a further downgrade in earnings.

At the same time, another factor which will increase the impact is a change in global liquidity. Though QE is likely to be reduced over the long-term it may have a conflict in the near-term due to a change in global investors’ perception.

What is your call on the rupee? Do you see it heading towards Rs 70/USD in the near-term?

Recently, the rupee had started to depreciate due to selling in India by FIIs within the EM basket. We feel it was largely in anticipation of breaching the fiscal deficit, a slowdown in economy growth and premium valuations compared to other EMs.

Currently, the rupee is under relief as FIIsd selling has stabilized, but this trend can continue as per the outcome of Q2 results and pace of reducing in QE by US Fed & ECB.

September quarter earnings will kick off from next month. Do you expect a recovery in earnings in this quarter?

We expect Q2 to be better than Q1 as mentioned by the uptick in WPI and IIP numbers. This will give a relief to the market as the trend is likely to improve on a QoQ basis.

But, on a YoY basis, the economy stance is likely to be subdued hence downgrade in earnings may continue depending on the sector-wise performance.

What is pushing foreign investors away from Indian markets? They sold about Rs 11000 crore from Indian equity markets in September.

It is largely due to India's premium valuation within the EM basket. This premium is expanding as earnings growth is reducing due to the double whammy of demonetisation and GST.

For example, Sensex's PAT growth in Q1FY18 was -6 percent. As a result, the confidence of the market is also coming down. We feel earning growth will resume over the next 2 quarters but by that time what will be the view of FIIs on the EM will depend on the change in Quantitative Easing policy.

The US Fed is planning to reduce QE over the long-term in a structured manner.

Your list of top five stocks which could turn multibaggers in the next 2-3 years?

Here is a list of top 5 stocks which could give superior returns:

Bharat Electronics

BEL will emerge as a key beneficiary from the on-going defence modernisation programmes & GoI focus on indigenisation. The current order backlog of Rs 40,000 crore is 5.3x FY17 sales, which has significantly improved the earnings outlook.

We factor order book to grow at 15 percent CAGR; consequently, earnings is expected to grow by 14 percent CAGR over FY17-FY19E. We value BEL at P/E of 22x on FY19E on improved order inflow outlook.

Symphony

Symphony is the largest air cooler manufacturer with a market share of ~50 percent in the organised market in India. Led by strong R&D, launched more than 40 new products in the last six years.

Its asset-light business model has enabled the company to sustain its EBITDA margin level above 20 percent and ROCE above 40 percent over the years. Introduction of a new premium range of air coolers will prove to be margin-accretive in the long run.

We expect earnings to grow at 22 percent CAGR over FY17-19E led by volume growth.

Mahindra CIE Automotive

Diversified product portfolio, broad-based customer profile and strong geographical presence establish MCIE a preferred choice for the OEMs. Scaling up the new product line to drive growth in two-wheeler business will paint a positive outlook to the company.

We expect EBITDA margin to improve by 350 bps over CY16-18E led by cost control initiatives and capitalizing the OEM mix. Consolidated Revenue/PAT to grow at 14 percent/57 percent CAGR over CY16-18E led by increase in order book from OEMs & recent acquisition (BFPL).

TCI

Transport Corporation of India (TCI) is one of the largest well-integrated players in the organised logistics industry providing freight, supply chain, warehousing solutions & shipping services. Has a fleet of 9000 trucks, 5 ships & 11mn sq ft of warehousing space.

TCI will emerge as a key beneficiary from the implementation of GST, which is expected to boost third-party logistic players (3PL) business. With the improvement in scale, free movement of goods and lower transit time is expected to bring overall efficiency thereby improvement in margin profile.

Aarti Industries

AARTI Industries (ARTO) is a global leader in Benzene-based derivative products. Has a diversified product portfolio with end-users in pharma, agrochemicals, specialty polymers, paints & pigments.

Recently, bagged contract worth Rs 4,000 crore for the supply of high-value agro chemical intermediary from a global chemical supplier. Management’s focus on high margin products, forward and backward integration is expected to provide higher growth opportunities.

We expect PAT to grow at 22 percent CAGR over FY17-FY19E. Given strong earnings outlook, we continue to remain positive on the stock.

Top sectors which will lead the next leg of the rally on India markets?

As per our coverage, these are the sectors on which we are positive...

NBFC

The rural economy is improving on the back of two consecutive normal monsoons which enhances the outlook and bodes well for NBFCs across consumer durables, SME and auto financing.

Further, reducing the cost of funds, re-monetisation and new avenues of growth will continue to drive strong performance for NBFCs. We also like the housing finance space which will see large benefits flowing from government’s push for affordable housing.

We, therefore, expect the sector to continue its outperformance and prefer NBFCs with stable operating performance with steady asset quality.

Cement

The industry had been in a stage of high capacity additions during the last one decade (increased from 157MT in FY06 to current ~421MT) which has come down subsequently due to subdued demand growth owing to slower progress in infrastructure projects, low off-take from the housing sector and excess capacities in various industrial sectors.

We forecast low additions in new capacity over the next 2 years at ~25MT which coupled with a revival in demand on account of enhanced focus of GoI on housing and infra will lead cement demand & supply gap to narrow in the coming years.

Infrastructure

Increase in government spending on infra space will create a positive sentiment to the sector, which was in doldrums for a period of time. Further, road sector is the bright spot in the infrastructure space.

The government continued to focus on road infrastructure with an ambitious target to build 41 km per day in FY18 has kept the sector on a sound wicket.

On the other hand, increased capex of Rs 1.31 lakh crore for constructing new railway tracks, doubling, electrification, gauge conversion will give ample opportunities for railway EPC players.

Moving swiftly in the pursuit of affordable ‘Power for All’, the power sector is likely to witness major changes in a budgeted allocation to Rs 106 billion for integrated power Development and Deen Dayal Upadhyaya Gram Jyoti Yojana.

Chemicals

Till recently, major global chemical giants met their sourcing requirements from China due to lower cost and favorable currency.

However, during recent times, there is a higher regulatory compliance requirement in China which has led MNCs to diversify their RM sourcing arrangement from China and adding India as an additional sourcing destination.

Govt. initiatives in the form of port-based Chemical Parks in SEZ, improvement in infrastructure, tax concessions; rationalization of duty structure, FDI relaxation, etc. would facilitate further growth of Indian chemical industry into a major chemical hub.

Defence

There is a major push from the government to reduce the import dependence to 30 percent from current 60 percent-70 percent. In line with this objective, high priority is given to defence under “Make in India” initiative.

As a result of this, we are witnessing a higher order flows towards domestic companies and improved traction in terms of government intent towards finalizing delayed large orders.

Pharma

During the last 1-2 months, we have slowly shifted our view on pharma sector from neutral to positive. This is due to the recent positive regulatory responses received from US FDA for certain pharma companies.

The valuations of those companies are very attractive in that it is almost impossible to avoid such businesses from a long-term perspective. The pharma sector is most likely to stabilise over the next 1 to 2 years.
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