The market continues to gradually move northward, amid consolidation, after touching its 2018 lows in March (Nifty fell below the 10,000 mark). It took into its strides all negatives: US-China trade tensions, crude oil volatility, rupee depreciation versus the dollar and rising inflationary concerns.
The key factors that are driving the market higher and propelling it towards its earlier record high of 11,171 (touched on January 29) on the Nifty are hopes of a recovery in earnings and economic growth, and continuous support from domestic institutional investors (despite outflows from foreign institutional investors).
Domestic investors are still hoping for a continuity in economy policies, though there is political risk emerging, which may cap the upside.
Given the challenges on the macro front and increasing political headwinds faced by the Bharatiya Janata Party heading into the 2019 general elections, Prabhudas Lilladher expects traders to remain cautious. In this uncertainty, the research house does not expect valuations to expand. On the contrary, it sees valuations remaining closer to the 10 year average of 17.1 times.
Although 2018 would be a year of consolidation after the extraordinary gains in 2017, market veteran Rakesh Jhunjhunwala said, "I don't think political uncertainty is going to let this market go down beyond a point."
Benchmark indices rallied around 2.5 percent but the midcap index lost more than 11 percent in 2018 so far.
Jhunjhunwala believes that bull markets cannot end at these levels of profit-to-gross domestic product (GDP). "The capital investment cycle has just begun. In 2002-03, investment-to-GDP was about 27 percent and savings were around 28-29 percent. By 2008, both were about 37-38 percent. So, you have a level where percentage of profits-to-GDP is at one of the lowest levels. The effects of the Insolvency and Bankruptcy Code, the Goods and Services Tax, the aim to construct toilets, the Jan Dhan Scheme, opening of bank accounts, digitalisation of the economy is all a process. I think with each passing day, the benefits of these things to the Indian economy will go up."
Prabhudas Lilladher too sees India ending the year with a strong GDP growth of 7.4 percent. "We expect to see a better FY19 performance with the growth estimated around 7.4 percent.”
In FY18, the earnings per share for the Nifty was Rs 450.9, much lower than initial estimates. This reduction was mainly due to increased losses in state-run banks, with a contraction in earnings in the banking, financial service and insurance space. For FY19, the brokerage expects a 17.3 percent growth in earnings, with the BFSI space expected to contribute significantly.
Jhunjhunwala said flow of local inflows into Indian markets is just beginning and is not going to stop. "The flow of the local money first of all will be far better than foreign outflow. At the moment, India’s macros are much better than other emerging markets."
Here is the list of 25 stocks by Prabhudas Lilladher, which could offer up to 54 percent return:
Large Caps
HDFC Bank | Target - Rs 2,251 | Return - 9.4%
HDFC Bank has continued to maintain at +20 percent PPOP (pre-provision operating profit) growth in-line with balance sheet growth.
It remains dominant in most of its product segments like Government business flow, transactions market shares on retail & corporate, loan & liabilities market share and product cross sell.
Asset quality ratios remained stable, but PCR improving around 350bps QoQ touching around 70 percent.
ITC | Target - Rs 346 | Return - 32.8%
With GST on cigarettes being 33 percent of ad-valorem tax, any sharp increase in GST compensation cess on cigarettesis unlikely. Relatively stable taxation regime can re-rate ITC.
We estimate 3 percent volume increase in FY19 (v/s 3 percent decline in FY18).
We expect low double digit EBIT (earnings before interest and tax) growth in FY19 given 6.6 percent growth in FY18, a high taxation increase year.
We expect FMCG business led by processed foods to show steady increase in profitability.
Maruti Suzuki | Target - Rs 10,706 | Return - 20.7%
MSIL continues to consistently gain market share and has gained 260bps over FY18 to around 50 percent in the domestic market.
It has significantly strengthened its product portfolio and we expect the company to fill the remaining minimal gaps in its portfolio over the next 12-18 months.
Despite managements stated production constraints, we expect MSIL not to miss out on demand due to supply constraints and reach optimum capacity utilization from its stated production capacity (as achieved historically) on back of operational efficiency.
State Bank of India | Target - Rs 349 | Return - 29.9%
SBI is our only preferred pick among PSBs as it will dominate market share on both loans & liabilities with strong low cost deposits mix helping it keep cost of funds lower.
We believe resolutions of bad assets should play out well in the next 1-2 years and most provisioning on these are upfronted helping faster recovery/upgrades with positive flow on P&L. Subsidiaries like insurance and asset management is also a value add.
ICICI Bank | Target - Rs 348 | Return - 17%
Going ahead, bank targets to improve consolidated ROE (return on equity) of 15 percent with steady loan growth, bringing down NNPL (net non-performing loans) to less than 1.5 percent with PCR (provision coverage ratio) of 70 percent as NPAs (non-performing assets) have been recognised.
The bank expects lower slippages compared to FY18 and high recoveries & upgrades on account of resolutions. Credit cost to remain high in H1FY19 and then likely to normalize to 80-100bps in FY20 helping improve return ratios.
Larsen & Toubro | Target - Rs 1,566 | Return - 21.4%
L&T will continue to focus on improving capital efficiency by selling non-core business to make balance sheet light and help improve RoE for the business.
The company continues to focus on its strategic plan of achieving profitable growth and improving RoE in medium term and improving capital allocation. We maintain Buy given its strong business model, diverse skill sets, strong execution capabilities and relatively healthy/large balance
sheet and being the go to company in the Indian infrastructure space.
Indian Oil Corporation | Target - Rs 257 | Return - 51%
IOCL's earnings are to grow at a steady pace (adjusted for the inventory gain of Rs 6,700 crore in FY18) led by 1) improved refining profitability post stabilisation of highly complex Paradip refinery 2) healthy marketing margins 3) firm petrochem earnings and 4) zero subsidy losses.
Refining margins are likely to remain firm as demand outstrips capacity addition. Also, higher share of complex Paradip refinery will support margins.
IOCL, with a well-diversified business portfolio, is attractively valued at current prices. Buy with a price target of Rs 272, valuing the stock at a PER of 12x FY19E.
HCL Technologies | Target - Rs 1,100 | Return - 21.7%
HCL Tech delivered 12.4 percent USD revenue growth for FY18 (7.5 percent organic and rest owing to full impact of acquisitions and IBM IP deals). For FY19, HCL Tech guided for 9.5-11.5 percent constant currency revenue growth (10.5-12.5 percent USD revenue growth).
Building in recent acquisitions, we expect HCL Tech to deliver 12.5 percent USD revenue growth for FY19E. This implies organic USD revenue growth of
8 percent for FY19 and rest owing to acquisitions.
We believe that weak organic growth assumptions are already priced in. HCL Tech valuations are reasonable and we see favorable risk return.
IndusInd Bank | Target - Rs 2,075 | Return - 6.2%
Loan growth was strong at 28 percent YoY mainly led by corporate which grew around 30 percent YoY.
Bank gave credit cost guidance of 50-55bps for FY19 with better prospects of recovery from NCLT (National Company Law Tribunal) assets, which we believe could improve asset quality with lower worries in most segments of retail as well.
Merger with Bharat Financial Inclusion should conclude by June/July’18 and now requires NCLT & Shareholder approval, post which bank’s MFI book will be 7-8 percent of overall book and would see benefits flow though on return ratios with ROA (return on assets) of 2.0 percent, margin accretion of 30-40bps, improvement of Tier-I by 20bps and would add 15-20 percent to profitability.
Mahindra & Mahindra | Target - Rs 1,041 | Return - 17.8%
Increasing mechanisation in India is leading to a structural shift towards the higher HP segment (as was seen in higher tonnage M&HCVs), where M&M is ahead of the curve with the presence of 2 products already. Mechanisation will hence accelerate growth and enhance profitability for M&M.
Cyclical recovery in LCVs, shift towards lower tonnage segment (less than 2 tonne) and success of M&M’s recent launches in the segment (Jeeto) would boost volume growth for the company.
We expect M&M to record an EPS CAGR of around 25 percent over FY18-20E.
Titan Company | Target - Rs 1,114 | Return - 28.3%
Creating building blocks to achieve Vision 2023 of Rs 50,000 crore sales (consumer prices level) and having 50 million consumers with focus on factors like 1) Digital 2) Youth and GEN-A 3) Omni channel 4) Rural India 5) Premiumisation and rising affluence and 6) emerging women power.
Jewellery growth will be driven by accelerated addition of 40 stores in FY19 and 2.5x sales by 2023 and rising focus on adornment rather than investment.
Watch business is on steady recovery led by 1) increased focus on tech centric watches 2) cost rationalisation 3) increase in import duty from 10 percent to 20 percent and 4) reduction in GST from 28 percent to 18 percent.
With the expectations of 26.7 percent PAT CAGR over FY18-20, we value the stock at 45xSept20 EPS and arrive at a target price of Rs 1115 given the
confident growth outlook and strong tailwinds.
YES Bank | Target - Rs 438 | Return - 31.6%
Operating performance in FY18 has been led by strong NII growth (31 percent YoY in Q4FY18) on the back of strong loan book growth. Bank is confident of moving towards 4.0 percent NIMs by FY20 (3.5 percent in FY19) on tailwinds from CASA growth and with further room for maneuvering in the SA rate.
Bank targets CASA ratio to be 40 percent by FY19 with +40 percent growth targeted in FY19 and also focus on growing the retail granular deposits which was difficult in FY18.
Overall stressed assets including SRs & RBI dispensations were down to 1.73 percent of assets versus 2.41 percent in Q3FY18.
Britannia Industries | Target - Rs 6,170 | Return - 3.4%
Britannia remains in sweet spot given 1) leadership in largest segment of processed foods which has size of Rs 30,000 crore 2) Good day, Treat and Bourbon have emerged as mass brands, more so in small packs and 3) BRIT is only national player in cake, rusk and bread 4) Strong product pipeline of premium products priced at Rs 10, 15 and 20 which will increase sales and improve mix.
We strongly believe in Britannia achieving double digit sales growth and sustained margin expansion which will enable 21 percent PAT CAGR over FY17-20.
SBI Life Insurance Company | Target - Rs 860 | Return - 27.5%
SBI Life has grown by around 27 percent on APE basis in FY18 and expects to grow at 30 percent CAGR for next 3-4 years led by both banca and agency channel. Growth will be driven by ULIPs on individual segment and protection products, however it will restrict ULIPs at 70 percent of individual APE mix (73 percent in FY18).
In line with other SBI subsidiaries, SBI Life is also going to start giving ESOPs as part of compensation and the same is likely to get implemented by first half of FY19 which can provide huge boost in driving the business by the top management.
Tata Steel | Target - Rs 830 | Return - 48.7%
Curtailing exposure to Europe and sharp increase in domestic market share through organic and inorganic route makes TATA one of the best candidate to play the strength in steel sector.
We remain extremely positive on the sector given the structural supply controls imposed by Chinese authorities and firm global demand. Backed by strong outlook on domestic and synergy benefits in Europe operations, we reiterate Buy with target price of Rs 830, EV/EBITDA 7x FY20E.
Petronet LNG | Target - Rs 300 | Return - 43%
Petronet LNG remains a bright spot in the natural gas sector as they benefitted from rising gas demand in the country even as domestic gas supplies remain anaemic.
With demand growth from user industries likely to remain robust in light of benign spot LNG prices, Indian LNG imports will continue to grow.
Kochi LNG terminal capacity utilisation is likely to increase to 40 percent post completion of pipeline to Mangalore. This will give another leg up to PLNG earnings.
Mid Caps
Jindal Steel & Power | Target - Rs 330 | Return - 46.6%
Led by strong outlook on steel prices and continued improvement in operations coupled with high scale benefits, we remain positive on JSPL and are confident of our EBITDA estimates of Rs 9,000/9,800 crore in FY19e/FY20e.
Strong earnings coupled with reduction in debt and low capex would warrant rerating of valuations by 1x notch from current 6.5x to 7.5x (on FY20e) basis. We reiterate Buy with TP of Rs 330, EV/EBITDA of 7.4x FY20e.
Indraprastha Gas | Target - Rs 344 | Return - 34.8%
CGDs (city gas distribution) earnings growth is to ride on 1) healthy margins supported by affordable gas and 2) robust volume growth. Benign
domestic gas prices along with soft spot LNG prices are to support volume growth over the medium term.
IGL is expected to report healthy volume growth over the medium term supported by steady private vehicle and taxi conversion.
Crompton Greaves Consumer Electricals | Target - Rs 299 | Return - 34.2%
CGCEL continues to gain healthy market share in core categories of fans and the lighting (LED) segment. While the Fan market has been flat (against historical growth rate of 7-8 percent), CGCEL continues to grow in double-digits led by premium fans and have a 27 percent market share in the segment (300bps market share gain in last 2-3 years).
While the company has successfully executed the first leg of strategy of setting Fan/Lighting/Agro pump on a strong growth footing, maintenance of the growth and successful scale up in other categories will be the key monitorables.
We expect sales to grow at a CAGR of 12 percent and earnings CAGR of 20 percent over FY17-20E. We maintain Buy with a target price of Rs 299.
Eris Lifesciences | Target - Rs 885 | Return - 25.9%
Eris presents a strong growth opportunity, given its urban centric focus and a portfolio comprising high margin drugs that treat chronic lifestyle
ailments prevalent in India’s cities.
Eris maintains healthy profitability with short portfolio of tail (legacy) products (unlike its peers) as it commenced its operation in CY07.
With its formulation plant in Guwahati at only 22 percent utilisation rate, Eris has begun tapping in to operating leverage, which is likely to improve gross margin to 84-86 percent, while higher MR productivity is expected to expand EBITDA margin to 40 percent in FY20E.
The company’s revenues, EBITDA and PAT are expected to grow at 27 percent, 32 percent and 29 percent CAGR in FY17-20E, respectively.
Strong cash flows and zero debt coupled with high capital return ratios will lead to high PERs for the company. We maintain Accumulate with target price of Rs 885.
Small Caps
Ipca Laboratories | Target - Rs 837 | Return - 24.4%
Ipca is beginning to see a recovery in all their key business verticals to be reflected across the, namely: a) US generics b)International tenders in non-WHO markets c) India formulations and d) API.
IPCA’s key fundamentals continue to improve despite unfavourable seasonal sales in India formulations in Q4FY18. The quality of earnings is set for bigger upward momentum once FDA issues are resolved and the Global Fund business gets restarted.
Gross under utilisation of facilities related to US and anti-malarial drugs sets up opportunity for operating leverage, which will lead to faster growth of margins, EBITDA and PAT.
With conservative earnings assumptions, the large orders from the private funds or faster FDA resolution to be catalysts for upgrade of earnings.
Sadbhav Engineering | Target - Rs 456 | Return - 54%
Order book at the end of Q4FY18 stood at Rs 13,250 crore, up 72.4% YoY. Order inflow for the year was around Rs 8,600 crore. Bid pipeline in Roads are a) 26 EPC projects worth Rs 18,000 crore where bids are to be submitted by July 2018 b) 47 HAM projects worth Rs 44,600 crore where bids are to be submitted by July 2018.
We continue to believe SEL will be the key beneficiary of strong outlook in Road sector and improving outlook in mining and irrigation sector notwithstanding the underperformance that it had in the short term. Focus on balance sheet improvement and pick-up in execution will be the key trigger, going forward.
Rallis India | Target - Rs 262 | Return - 30.8%
FY18 has been a mixed bag for Rallis with pricing pressure, pre-GST hiccups, strong volume growth both in domestic & export, product launches of past 2-3 seasons starting to contribute etc.
We believe operating leverage in seed, pick-up in B2B exports and some ramp-up in CRAM are positives for Rallis. While we like Ralles due to its conservative approach, cash rich Balance sheet, stable margin profile & healthy RoE, challenges on pricing in agrochemical segment may continue for some time if monsoon isn’t favourable.
With diversification across agri value chain, Rallis is expected to deliver 17.7 percent earnings CAGR over FY18-FY20E, stable margins at around 15 percent and high RoE in the range of 17 percent.
Heidelberg Cement India | Target - Rs 194 | Return - 44.7%
Heidelberg Cement (HEIM), one of the largest players in the Central region, has witnessed a significant improvement in its operations over the last couple of years with the completion of its expansion-cummodernisation program.
Despite continued shortage of sand in UP and Bihar, HEIM registered growth of 6.5 percent YoY in volumes on the back of strong retail network and movement to far markets.
Demand is expected to rebound strongly in its key markets like UP in coming months as shortage of sand has started easing with the auction and resumption of mining licenses. We continue to maintain that Central region holds the best outlook among the regions on the back of strong demand outlook and limited capacity addition.
Our Buy rating on HEIM remains intact given the strong outlook on region and attractive valuations. Reiterate BUY with target price of Rs 195, EV/EBITDA of 10x FY20e.
Navneet Education | Target - Rs 161 | Return - 29.1%
NELI enjoys a strong foothold in the publication industry with a market share of around 65-70 percent in both Gujarat & Maharashtra. NELI’s stint of more than five decades in the publication segment has not only enabled strong relationships with educational institutions, but has also created a strong brand recall & trust factor with teachers, parents and retailers.
NELI is well placed for future growth opportunities considering EBI acquisition opening up CBSE textbook market, impending syllabus changes in key
markets of Gujarat & Maharashtra and pick up in stationery segment post GST.
Strong Balance Sheet with negligible debt, superior return ratios upwards of 20 percent, strong generation of cash profits (average Rs 200 crore for
FY18-FY20E) and management bandwidth with proven track record give further comfort.
NELI has been a value stock over the years with a payout ratio of around 50 percent. We continue to remain optimistic on long term growth of
the company. Accumulate with target price of Rs 161 (20x FY20E).
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