5 GST-related stocks that could return 18-21%

In spite of all the criticism of the implementation of the new tax regime, the government has remained highly receptive to feedback. The total number of the indirect taxpayers has increased from 66.17 lakh to 1.12 crore. At the same time, there has been a large increase in voluntary registrations. More than 54.3 percent of those eligible under the composition scheme have instead chosen to be regular filers.

In the run-up to the implementation of GST, there was anxiety among the manufacturing states that the switch to a destination and consumption-based tax would transfer the tax base toward consuming states. But things have gone very smooth here. GST collection has not picked up as expected but that is understandable as the GST council itself has said that collections are based on 'unilateral declaration'. Once 'anti-evasion' and e-way bill is effectively implemented, GST revenue collection will improve.

Formal businesses, defined as firms that are part of the formal tax net and/or that provide its employees EPFO/ ESIC benefits, employ only 57 percent of the non-agricultural workforce (240 million) in the country. Formalisation would change the social fabric of these large working masses, in turn creating huge consumption as well as demand for credit.

Along with GST, rising urbanisation and premiumisation by an aspiring middle-class will move the balance of power firmly in favour of professionalised formal businesses.

The major beneficiary of this trend on the product side would be manufacturers of jewellery, plywood, apparel, dairy, luggage, air coolers and confectionery. On the services side, hospitals, diagnostic centres, contract staffers, retailers, hotels, microfinance companies and logistics providers will be key beneficiaries.

Twenty-seven years ago, in 1991, the Indian economy had witnessed a massive structural shift when the country had adopted a new economic policy marked by liberalisation and privatisation. GST will have a similarly strong impact on our economy going forward.

5 stocks to buy on this theme:

Quess Corp: Buy | Target - Rs 1,350 | Return - 18 percent

While manpower outsourcing/ Business Services (manpower outsourcing + facility management+ maintenance services) is a mature business in the developed world, such business is still in nascent stage in India.

During 1990-2000, Serco leading player in this space in UK in its early growth phase reported revenue CAGR of 23 percent and market cap went up at CAGR of 44 percent. Quess has created a great platform in the large business services space.

Management is confident of 50 percent+ YoY growth for the foreseeable future: 20 percent organic and 30 percent from acquisitions. Operating cashflow to EBITDA is set to increase going forward. Our DCF based near term target is Rs 1,350.

Trent: Buy | Target - Rs 355 | Return - 18 percent

Organised retail industry in India constitutes over 10 percent of the total retail sector whereas the same is 20 percent in China and above 80 percent in US. Demonetisation and GST along with changing lifestyle has triggered large value migration from unorganised retail to organized retail.

We believe retail sector is poised to grow with 20 percent CAGR over next 5 years. Trent's strong balance sheet, strong business positioning and stores expansion plan make it attractive for long term investment. Target of Rs 355 implies 4x EV/Sales on FY20.

Century Plyboard: Buy | Target - Rs 305 | Return - 21 percent

MDF businesses of organised players are replacing the lowest end plywood business of unorganised players.

Though in the recent quarters competition have intensified among organised players in MDF but huge potential of the shift from the unorganised segment (constitutes more than 2/3rd of the market) particularly post strict implementation of E-way bill gives confidence that management would deliver on its promise of 25 percent revenue growth in FY19. Target of Rs 305 implies 2.5 EV/Sales on FY20.

TCI Express: Buy | Target - Rs 700| Return - 21 percent 

GST and e-way bill would result in a shift of market share in favour of organised players in logistics.

Express delivery is premium and a significant segment of the Logistics Industry. The segment is expected to grow by over 17 percent YoY in next 3 years.

TCI Express is focused primarily on the most profitable segment of B2B space. It has ROCE of 40 percent.

Management expects 2.5x volume growth over next 5 years also EBITDA margin is expected to rise from 11 percent to over 15 percent in next 2 years. Target of Rs 700 implies 23 P/E on FY20.

Titan Company: Buy | Target - Rs 1,050 | Return - 19%

Market share of organised players in jewellery space is minuscule and that suggest the opportunity for growth once GST stabilizes by FY20.

Titan aspires to grow jewellery sales by 150 percent cumulative between FY2018-23E. Growth will trigger further margin expansion led by operating leverage.

High-value diamond jewellery sales proportion is likely to increase from 30 percent of diamond jewellery sales in FY18 to 50 percent in FY23.

The contribution of exchange sales segment is set to reach 50 percent by FY23. A higher proportion of exchange sales reduce the vulnerability to import curbs on gold. The target of Rs 1050 implies 10x P/B on FY20.

Disclaimer: The author is Chief Investment Officer, Narnolia Financial Advisors Ltd. The views and investment tips expressed by investment experts 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.