Moneycontrol
Apr 10, 2017 12:33 PM IST | Source: Moneycontrol.com

India Inc set for strong earnings growth in FY18; Here are top 6 investment ideas

GST implementation, more government reforms, revival in earnings and consistent inflow of foreign money are key drivers going ahead.

India Inc set for strong earnings growth in FY18; Here are top 6 investment ideas

Moneycontrol News

The market rallied 12 percent in the current calendar year and took two years to cross the psychological 30,000-mark, backed by strong inflows of foreign money and domestic liquidity. Experts expect the market to sustain its uptrend and to clock more than 15 percent returns in 2017.

GST implementation, more government reforms, revival in earnings and consistent inflow of foreign money are key drivers going ahead.

Pramod Gubbi of Ambit Capital said the market was seeing a revival in India as well as on the global front. The research firm placed Sensex’s target at 31,000 for March 2018.

Gubbi expects 10 percent earnings per share (EPS) growth for Sensex in FY18 but he says consensus on earnings expectations is much higher.

Enam Holdings believes earnings will grow 20 percent in current financial year as interest rate transmission will help. In fact, earnings will surprise the Street.

“There are good times ahead…the market will continue to climb the walls of worry,” he told the channel.

The tide has finally turned in favour of emerging markets (EMs) as investors are now diversifying their money from developed markets such as the US to EMs, market guru Mark Mobius said in an interview with CNBC-TV18. The MSCI Emerging Markets Index was up 11.2 percent, while the MSCI World Index was up 7.5 percent.

Sunil Subramaniam of Sundaram Mutual Fund said the first leg of the market cycle will be driven by consumption, and then 12-18 months from now, the infrastructure segment will come to support. So for 3-5 years, we are in a bullish trend for growths. The fund has a hefty target for Sensex in the next three years at 40,000.

Here are top six investment ideas:

Motilal Oswal

Yes Bank

Motilal Oswal has reiterated its buy rating on the stock with a target price of Rs 2,110 (implying 35 percent upside), citing Robust book value CAGR of 23 percent (highest in the system), superior return on equities, strong asset quality and increased balance sheet granularity (higher share of retail loans + CASA roll out).

It says Yes Bank is available at around 30 percent discount to private banks like HDFC Bank, IndusInd Bank and Kotak Mahindra Bank. It expects the bank to bridge the valuation gap against peers.

"Robust loan growth, net interest margin expansion (around 20bp led by higher CASA and share of retail loans) and rising fee income contribution are expected to drive a 27 percent PAT CAGR through FY20. This will see return on assets improving to around 2 percent (against 1.8 percent currently) and return on equity being maintained at more than 20 percent," Motilal Oswal says.

With an incremental market share of more than 3.5 percent, aggressive roll-out of retail/SME products and strong corporate relationships, Yes Bank is expected to register loan CAGR (FY17-20) of 28 percent – at least 2x of system loan growth, the research firm feels.

Info Edge

Motilal Oswal has a buy rating on the stock with a target price of around Rs 1,000, implying around 20 percent upside.

Amid growth pressure on standalone operations, robust execution in Zomato will help provide a base for the stock, and continued scale may make a case for capital raise at higher valuation, the brokerage house says.

It further says the sharp reduction in Zomato's burn is a significant positive, and if revenue growth momentum continues on this base, the concerns on USD 1 billion valuation will be abated, particularly considering multiple valuation write-downs and business shutdowns over past 12 months in the sector.

Zomato reported revenue growth of 80 percent YoY to USD 49 million in FY17, contributed by advertising sales (USD 38 million; 78 percent of total) and the newly launched food ordering service. 44 percent of incremental revenue was driven by food ordering. Exit revenue in March 2017 was USD 5 million, implying annualised revenue rate of USD 60 million.

HDFC Securities

West Coast Paper Mills

Paper manufacturer West Coast Paper Mills has been able to maintain its utilisation at around 96 percent over the last 5 years in paper business and expects to see growth in utilisation while exercising efficient production practices.

Rise in paper prices over the past two quarters augurs well for margins till it decides on expansion plans. West Coast plans to expand value added products could also result in better realisation and margins going forward. It also plans to reduce its debt burden in next 1-2 years, which could add to its net margins. It has recently firmed up plans for capex which once implemented could result in better visibility for growth, HDFC Securities says.

The brokerage house feels investors could buy the stock at the current market price and add on dips to Rs 170-174 band for sequential targets of Rs 215 and Rs 237.

Credit Suisse

Welspun India

Credit Suisse has initiated coverage on Welspun India with an outperform rating and target price of Rs 115.

The global home textile market size is USD 45 billion, expected to post an 8 percent CAGR. India has advantage in cotton home textiles, given excess cotton supply and competitive production costs. Welspun is a leading player in cotton towels and cotton bed sheets, with a continuously growing market share.

Provenance issues of Egyptian cotton sheets led to 13 percent revenue loss. However, Welspun handled the situation well, and this should be out of the base in second half of FY18, the brokerge house says. It expects 15 percent revenue growth in FY19 and more than 20 percent EPS growth. The new flooring capacity will also be operational in FY20, and can add 8-9 percent to FY20 revenue growth.

Any global trade barriers, high customer concentration, and volatility in cotton prices/currency are key risks, Credit Suisse says.

Edelweiss Financial

Tata Steel & JSPL

Edelweiss Financial says in the past 1 week, sea-borne coking coal spot price has surged by 55 percent to USD 241 per tonne due to cyclone Debbie related disruptions in Australia and subsequent force majeure declaration by BHP Billiton, Jellinbah, Rio Tinto, Peabody Energy and Glencore.

However, the surge appears temporary and impact on Indian companies would only be apparent in Q2FY18, it feels.

The brokerage house believes the Indian steel companies, as in the past, should be able to maintain the spreads through price hikes. "Our channel checks indicate that pig iron producers in East India have already increased prices by Rs 1,000-1,500 per tonne in a week. We expect other Indian steel makers to follow suit," it says.

Hence, the research firm maintains a buy call on Taat Steel and Jindal Steel & Power.

"Tata Steel is expected to be best insulated due to partial domestic self sufficiency in coking coal. The impact on JSPL is likely to be limited to the extent of blast furnace route for steel making," it reasons.

Posted by Sunil Shankar Matkar
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