The recent decline in the stock market has opened up many opportunities, say experts, though there are still headwinds such as high oil prices, margin pressure for companies, the Ukraine-Russia war, global inflation, rising Covid cases in some parts and expectations of policy tightening.
Experts say these are short-term headwinds and they remain positive on the market, given the expected growth in earnings and the economy in the medium to long term. However, things could change if there is a prolonged war between Ukraine and Russia.
India’s key stock indices fell almost 16 percent to hit a seven-month low recently, but rebounded 10 percent from those lows and then started consolidating. Experts said consolidation and volatility will continue in the short term unless there is a resolution to the Ukraine-Russia war. The indices are still 7.5 percent away from their record highs.
Most key sectors, barring metals, gained between 5 and 10 percent from March 7, when the recent bottom was forming, to March 22. Among them were IT, auto, pharma, bank, consumer durables, finance and FMCG. But these sectors are still off the record highs they touched in 2021.
Benjamin Graham, the father of value investing, once said: “In the short run, the market is like a voting machine – tallying up which firms are popular and unpopular. But in the long run, the market is like a weighing machine – assessing the substance of a company.”
“The factors i.e., the risk of inflation, geopolitical tensions, spiking oil prices, and rising interest rates, have impacted markets and led to a decent correction. However, it is important to understand that their impact is transient in nature,” said Mrinal Singh, CEO at InCred Asset Management.
As highlighted in Graham’s quote, Singh said in the near term, the markets act like a voting machine, and hence these factors lead to a correction in the stock market. However, “this also presents us with an opportunity to buy good quality businesses at a discount to an intrinsic value which acts as a margin of safety.”
Here are five stocks on which coverage was initiated with a ‘buy’ rating:
Star Health and Allied Insurance
Star Health is the largest standalone health insurance company with a relatively superior market share and operating performance. It leads in retail health insurance, with a market share of 31.3 percent in retail gross direct premium income (GDPI).
ICICI Direct expects Star Health to maintain its leadership in the retail health segment with sustainable long-term opportunities.
“Premium growth at 23-24 percent CAGR and focus on underwriting profit is expected to keep RoE (return on equity) ahead of peers,” said the brokerage, which initiated coverage on the stock with a ‘buy’ rating and a target price of Rs 800, implying a 22 percent potential upside from the March 21 closing.
“We value Star Health at ~2.6x FY24E GDPI (49x FY24E EPS) at Rs 800, considering two metrics – price to premium (GWP) and price to float,” the brokerage said.
Data Patterns is among the few vertically integrated defence and aerospace electronics solutions providers with design capabilities across the entire spectrum (air, land and sea). Its capabilities span avionics, missile systems, radars, electronic warfare, satellites and communications.
“Its strength lies in designing complex products with reusable building blocks (military grade COTS), which allows the company to keep low development costs and win a large number of orders on single vendor basis, thus raising entry barriers for competitors,” said JM Financial.
Over FY18-21, its order book posted a 41 percent CAGR, reaching Rs 490 crore (2.2x sales) and it is poised for robust growth by 18 percent CAGR in the next three years, led by the scale-up of business to subsystems integration, expansion in its manufacturing base, an experienced management team (average experience of 20+ years) and skilled employee base of 500+ engineers (of 818 total employees), said the brokerage, which initiated coverage on Data Patterns with a ‘buy’ rating and a target price of Rs 800, implying a potential upside of 18 percent from the closing price on March 21.
Axis Securities initiated coverage on Cipla with a ‘buy’ rating and a target price of Rs 1,200, implying an upside of 14 percent from March 21 closing levels.
“Cipla continues to focus on the demand levers in the chronic and acute therapies and complex products in its existing as well as pipeline portfolio (for the branded and generic markets of India and South Africa). The company’s active advancement of innovative consumer-centric products is expected to accelerate the augmentation of the global consumer wellness franchise across both India and South Africa,” the brokerage said.
It said the Mumbai-based pharma company continues to lead and grow respiratory categories such as gAlbuterol and gAfrometrol and other complex products in the pipeline as the US generic market may offer a stable revenue growth trajectory over FY21-24. Axis said the buildout of the respiratory portfolio would drive strong operating leverage for Cipla in the US business.
“This, coupled with a sustained high single-digit growth in the India business along with further cost optimisation measures undertaken, would aid the company in expanding its RoIC by around 200 bps over FY21-FY24 to around 18 percent,” Axis said.
Centrum Broking initiated coverage on Aditya Birla Capital with a ‘buy’ and a SOTP-based target price of Rs 150 (implying a potential upside of 39 percent from March 21 closing levels) since it offers a good value proposition in the diversified financials space.
The brokerage said the asset management company could be a key beneficiary of the expanding AMC space as it is the fourth-largest player with a strong debt franchise.
“Focus on cost control and capital management led to attractive returns, with FY22 core RoE (return on equity) and RoA (return on assets) being 39 percent and 20 bp respectively. ABFL (Aditya Birla Finance Ltd.) has built a sizable franchise with the better yielding retail segment seeing robust growth over FY20-22, driving the consistent increase in risk-adjusted NIM (net interest margin),” Centrum said.
Led by deeper penetration in tier-3/4 cities, Centrum expects growth of 15-18 percent in assets under management over FY23-24E. Hence, RoE could enhance over FY21-24 from 9 percent to 15 percent, according to the brokerage.
Aditya Birla Housing Finance (ABHFL) has turned the tide with the share of the affordable segment rising to 35 percent from 14 percent over FY20-22, which led to the NIM improving to 3.9 percent from 3.1 percent.
“This gives ABHFL material headroom for growth and we expect an AuM CAGR of 17.5 percent over FY22-24,” the brokerage said.
KPIT Technologies is a consulting and software integration company that provides solutions to more than 150 companies and enterprises in the field of CASE (connected – autonomous – shared and electric) mobility.
Unlike its peers, KPIT Technologies works in the high entry barrier segment which include ADAS (advanced driver-assistance systems), level 3-5 autonomous driving and connectivity, electric vehicle powertrains and infotainment.
The company works with the top 10 of 15 original equipment manufacturers globally. Most of its revenue comes from the top 25 customers, which account for about $10 billion in R&D spending.
“The revenue largely derives from software integration. However, scalability in the industry is huge and currently electronics accounts for 30 percent and is poised to reach 50 percent by 2030,” said Geojit Research, which expects revenue and net profit to grow by 19 percent and 22 percent CAGR over FY22E-24E owing to a superior product mix and robust order book.
Given the strong fundamentals and strategic change adopted in the company’s segment mix, the brokerage valued KPIT at 45x FY24E EPS and recommended a ‘buy’ rating with a target price of Rs 680, implying a 15 percent potential upside from March 21 closing levels.
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