Markets witnessed huge bouts of volatility last week owing to uncertainty as who would form the government in Karnataka. India’s volatility index (India VIX) was up 1.2 percent last week. Rising crude oil prices, US-China trade negotiations and rupee depreciation against the dollar also played spoilsport. Brent crude is hovering around $80 a barrel owing to geopolitical tensions and instability in the Middle East.
Shares of public sector banks (PSBs) are trading lower for the fourth straight trading day with Nifty PSU Bank index hitting fresh 52-week lows on Friday. Punjab National Bank, the biggest loser, tanked 62 percent from its four-month high of Rs 197 per share to close at Rs 74.75 per share. It had posted a record net loss of Rs 13,400 crore in Q4 FY18 as against a net profit of Rs 262 crore year-on-year.
Shares of Bank of Baroda (BoB) fell to Rs 126, touching its lowest level since February 15, 2016. The stock plunged 30 percent from its four-month high of Rs 180 recorded on January 24. State Bank of India (SBI) and BoB will declare its March quarter result on Tuesday and Friday, respectively.
However, with Tata Steel successfully acquiring ailing Bhushan Steel through the insolvency process for Rs 35,200 crore (nearly two-thirds of the loan amount the bankrupt steelmaker owed to lenders), which will boost the recovery prospects of PSBs. Banks, which have taken more than a 37 percent haircut on their outstanding loans of Rs 56,079 crore to Bhushan Steel, can now classify the assets as standard, reducing their bad loan burden. They are likely to reverse provisions they had made against the account, significantly boosting their Q1 FY19 result.
We suggest investors favourably consider select PSBs especially SBI and few others.
In the global markets, Asian stocks were steady on Friday amid caution over developments in US-China trade negotiations. The dollar is perched near a five-month peak after benchmark US Treasury yields hit its highest in seven years.
Going forward, benchmark indices would take a cue from the floor test on May 19 as directed by the Supreme Court with regards to Karnataka government formation matter and ongoing Q4 FY18 earnings. Fall in crude prices and rupee versus the dollar would bring some respite to investors.
Here is the list of three stocks that can offer up to 36 percent return:
Bajaj Auto: Buy | Target - Rs 3,135 | Return - 13%
The Company is a strong play in on India’s two wheeler and three wheeler industry and is on the right track to tap the opportunity in a competitive market. We were happy with Bajaj Auto’s Q4FY18 performance which was marginally ahead of street estimates. On a low base and more than doubling of commercial vehicle volumes, the company posted a 38 per cent growth in revenues for Q4. While overall volumes were up 33 per cent, realisations were up over 4 per cent, given the higher three-wheeler mix.
While domestic motorcycle sales were up over 20 per cent, growth was a stronger 25 per cent on the exports front. Recovery in African markets on the back of rising crude oil prices has helped improve the economy and demand in those countries. Among its motorcycles, CT and Platina models continued to do well during the quarter, while the recently launched Pulsar has shown good traction. The management has not given any guidance for the next year (FY19) owing to volatile macro-economic conditions.
The Pune-based company clocked total sales (both two wheelers and three wheelers) of 1.04 million units during the quarter ended March, 33 percent higher than the 787,468 units sold in the same quarter in 2016-17, according to data from the Society of Indian Automobile Manufacturers. Domestic sales of two-wheelers grew 20 percent on year to 497,587 units, while two-wheeler exports rose 25 percent over the same period to 358,802 units. The share of two-wheeler exports in Bajaj Auto's total sales declined marginally to 34.3 percent in the quarter, as against 36.5 percent at the end of the corresponding quarter last year. "We are expecting another 150 bps gain in market share in Q1 over and above the 150 bps we gained during Q4. We would like to end FY19 with a share of 26 percent. We are getting our act nice and firm in the motorcycle segment," S Ravikumar, Head - Business Development, Bajaj Auto
We believe the Company led by product innovations, sustained growth in exports, three wheelers doing well and a revival in demand for motorcycles in the domestic market, the Company would witness good growth in the near future. At CMP of Rs. 2,777 (Face Value: 10), the sock is valued at a P/E of 19x on FY18 EPS. We expect an upside of 13 percent with a target of Rs 3,135 by FY19 end (19x on FY19 EPS of Rs. 165).
Future Retail: Buy | Target - Rs 736 | Return - 36%
Future Retail is the flagship company of Future Group, India’s retail pioneer catering to the entire Indian consumption space. Through multiple retail formats, the Company connects to Indian buyers, sellers and businesses. The collective impact on business is staggering: Over 500 million customers walk into its stores each year and choose products and services supplied by over 30,000 small, medium and large entrepreneurs and manufacturers from across India. This number is set to grow. The Company enjoys market leadership in the food and grocery retail market (market share of 13% in 2016).
The Company has a total retail space of 13.8mn sq ft with presence in 26 states and 240 cities with a total network of 901 stores at the end of FY17. A major realignment and consolidation exercise was undertaken to make FRL a asset light and a pure play retail company with strong presence in multiple formats – hypermarket and supermarket. In May 2015, the company acquired the supermarket format, Easy Day, from Bharti Group and enhanced its overall presence across the country. Recently it also acquired the retail operations of Heritage foods and expanded into Southern India. After the major restructuring, Future Retail is asset light Company and generates free cash flow.
The company today operates multiple retail formats in both the hypermarket, supermarket and home segments of the Indian consumer market including:
a) Big bazaar
b) Easy day
d) Heritage Fresh
FBB stores are on rise which focuses on fashion side of the business. The company will be more aggressive in expansion of EasyDay and FBB as compared to Big Bazaar as these both segments have a vast opportunity and still has a large population to target.
The Company has successfully realigned itself to have in place an asset-light model with better return ratios. The Company is one of the few players to have successfully cracked this model along with being profitable. Increasing competition from both brick and mortar and online players could impact overall SSSG of FRL. Competition from online delivery players, such as, bigbasket.com. grofers.com, Amazon etc., remains a key threat.
The Future Group’s target now is to become $1 trillion Company by 2047 by blending online and offline retail to provide seamless experience to consumers. Its strategy is to address the issue of high logistics cost and prohibitive acquisition cost in e-commerce via proximity of physical stores to customers (within 2km radius) and loyalty programmes (10% discount on all products). The company has tied up with best technology provider in the world (google and Facebook) to leverage consumer data to enhance customer experiences. At CMP of Rs. 560 (Face Value: Rs. 2), the stock is valued at a P/E of 46x which is at a significant discount to its immediate listed peer. We expect a target of Rs. 736 by FY19 end (46x on FY19 EPS) which implies an upside of 31 percent.
Mahindra and Mahindra Financial Services (MMFSL): Buy | Target - Rs 544 | Return - 17.5%
MMFSL is one of India’s leading non-banking finance companies focused in the rural and semi – urban sector is the largest Indian tractor financier. Primarily in the business of financing purchase of new and pre-owned auto and utility vehicles, tractors, cars, commercial vehicles, construction equipments and SME Financing.
At CMP of Rs. 463 (Face value: Rs.2), the stock trades at a P/BV of 3.2x which we believe is cheap as compared to other listed NBFCs. In Q4FY18, the Company witnessed strong 17.8% yoy growth in AuM and a sharp 22% qoq decline in GNPA. The company's Q4FY18 consolidated net profit rose 79.4 percent at Rs 513.1 crore against Rs 286 crore, in the same quarter last year. The Company improved its Return on Assets significantly from 1 percent in FY17 to 1.9 percent in FY18. With improving rural cashflows, recovery from NPAs would help the Company to improve its ROA of 2.6-2.8% by FY20.
The Management is optimistic on improving rural cash flow which should lead to growth of 18-20% in FY19 across segments. Yields were comfortable and no pressure is seen by the Management in medium term. Management expects yield range to remain between 15-17%, however company hinted of some funding cost pressure and can be passed to selective geography and selective product segments on keeping spreads stable. NPAs in the rural housing is expected to reduce in coming quarters as Maharashtra has improved in cash flow and which will translate towards recoveries. PCR stood at 58.1 percent in FY18.
We expect a target of Rs. 544 by FY19 end (P/BV of 3.2x on estimated FY19E Book Value of Rs. 170) implying an upside of 17.5 percent.
Disclaimer: The author is Vice President - Equity Research, Ajcon Global. The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.