6 hot stock picks from Anand Rathi Share and Stock Brokers

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Anand Rathi Share & Stock Brokers recommends the following stocks:

FUNDAMENTAL PICKS

Bharat Forge Limited

 CMP   1170                Target   1500

• Domestic business grew by 17 percent led by increase in MHCV demand on account of pre-buying before BS-4 transition and stronger defense revenue. Revenue from the defense sector grew from Rs 100cr to Rs 175cr.
• BHFC expects US Class 8 truck to witness 15-20 percent y-o-y growth in FY18 on back of present trend of order book growth of ~40 percent Latest news- North America Class 8 truck sales for July at 18,255 units, up 78 percent year on year and up 4 percent quarter on quarter.
• Management expects its global Industrial segment to outperform. FY19, domestic CV is also expected to turn positive, therefore company indicates healthy outlook for FY18 & FY19.
• Management expects its new business/products (railways, aerospace and defence), currently ~5 percent of revenues, to grow to ~15percent of revenues over the next few years

 Sonata Software

CMP 158                              Target  220

• Primarily IT service-centred (32 percent of revenue, 75 percent of EBITDA) focuses on three key verticals: OPD (29 percent of revenue), travel/tourism (27 percent) and retail & distribution (26 percent).
• Sonata’s key differentiator is a laser-sharp focus on RoE (averaging 35 percent in the last 3 years) and cash generation (paying 44percent of profits).
• With only ~2 percent of its US population on an H1-B visa, Sonata has limited exposure to such a visa program. Therefore, any changes in these regulations would not expand or shrink the company’s margin
• With no pricing pressure due to high digital exposure, Sonata expects margins to hold, supported by greater offshoring, including digital projects
• Sonata (consolidated) would grow 14 percent over FY17-19 and IT services would bring 30percent to revenue in FY19 (FY17e: 32 percent, FY16: 36 percent). We expect a 7.5 percent EBITDA margin in FY19 vs. 7.6percent in FY17
• It expects its domestic business to enjoy a steady margin (3 percent+) steady RoE(30 percent, FY17 was 27 percent on investing in cloud) with limited investments.
• Our 12x target PE takes into account the proportions of both businesses. We initiate coverage, with a Buy target price of Rs 220

CMP 415                              Target  605

•  KSL is a leading manufacturer of forging and engineering quality carbon and alloy steels using the blast furnace route.
• During FY17, the company has reported a YOY growth of 20.5percent in its sales Its EBITDA margins improved by 30 basis points to 20.2percent while its PAT margins stood at 11percent. The improvements in margins were mainly due to increase in operational efficiencies.
• 65percent sales are outside the group and 35percent from group companies. Exports is less than 5percent of total revenues.
• It is also a certified supplier to the Indian Defence and supplies steel for bomb shells and barrel applications & components for heavy vehicles. KSL has earned the status of preferred steel supplier for engineering, automotive, seamless tube and primary aluminium industry.
• The company has national and international clients like Alcan Iceland, Caterpillar Inc, Ford, Volvo, Indian Railway and Tata Motors. Major clients are Maruti Suzuki, Hyundai, M&M etc.
• Going ahead we expect the company to grow its revenues at 10percent CAGR on back of revival in industry it works and demand for steel. We expect KSL to maintain its margins in the range of 20-22percent
• Currently, the stock is trading at PE of 10.4x its FY18E EPS & 8.7x its FY19E EPS. We are initiating our coverage on Kalyani Steel Limited with “BUY” recommendation and target price of Rs.605 per share.