With an improvement in sentiment along with the earnings, the outlook for the mid and smallcaps looks positive, says Pankaj Bobade of Axis Securities.
The market has been rangebound after pricing in the Budget 2020 and the December earnings season but continues to watch the impact of coronavirus on the global economy.
The government prepared the Budget with a long-term view that saw the market to recover all losses seen on Budget Day, while the earnings season was more or less in line with Street expectations. The Reserve Bank of India also acted in tandem with the Budget, announcing measures for MSMEs, housing sectors, etc.
China's coronavirus outbreak has killed more than 1,700 people and infected over 70,000, until February 16. The outbreak has also hit manufacturing in world's second largest economy. China is the largest consumer of a range of products and services including base metals, chemicals, hardware etc.
At home, the Supreme Court insisting on telecom operators to pay adjusted gross revenue (AGR) dues by March 17 is likely to hit banks as well.
Considering these reasons and no upcoming major event, the market is expected to remain rangebound. Stock-specific action, however, is likely to continue with major buying demand in attractively valued midcaps and smallcaps, which are likely to outperform largecaps in coming year, experts say.
" … Global liquidity conditions remain favourable boosted by the latest infusion by the Chinese Central Bank. Interest rates globally remain stable at low levels. Hence from a fund flow perspective, India could expect flows coming in at regular intervals till the easy money policy followed globally is reversed," Deepak Jasani, Head Retail Research, HDFC Securities, told Moneycontrol.
Jasani sees midcaps doing well over the next few months on valuation and ownership basis. "If SEBI relaxes the classification norms then the process could gather pace even earlier," he said.
Pankaj Bobade, Head- Fundamental Research, Axis Securities, also said with improvement in sentiment along with the earnings, the outlook for the mid and smallcaps looks positive.
"Those companies which are showing remarkable growth in profitability and are trading at relatively cheaper valuations are likely to gain prominence in rerating. Overall, the largecaps are likely to continue being expensive, while the valuation gap between the large caps and mid & smallcaps would be bridged over time," he added.
Moneycontrol has collated a list of stocks that brokerages have initiated “buy” call on and expect 23-73 percent return in the next one year:Prince Pipes: Buy | Target: Rs 240 | Return: 26.3 percent
Brokerage: JM Financial
Prince Pipes and Fittings is sixth-largest player in India in the plastic pipes industry with market size of Rs 29,500 crore.
Unlike other building product categories, the plastic pipes industry is a) led by multiple demand drivers such as agriculture (48 percent), plumbing (38 percent), and sewerage (18 percent) and b) undergoing significant consolidation (scale-down by large/small players). Prince–with its diversified portfolio and pan-India distribution network (similar to the market leader) – would be one of the largest beneficiaries of these structural changes.
Prince has one of the highest fittings mixes (36-37 percent of revenue) and has been free cash flow positive, with robust return ratios since FY15 (RoE over 20 percent) on strong profitability and working capital improvement (from 104 days in FY14 to 55 in FY19). After its IPO, Prince is now cash surplus and is investing in new capacities in South and North India to cater to growth.
JM Financial has initiated coverage with a buy rating and Mar’21TP of Rs 240 (18x FY22E EPS). It expects Prince to report 22 percent CAGR in EPS (FY19-22). The stock currently trades at a discount of 67 percent/50 percent to Astral/Supreme (FY21PE). It is expected to re-rate in the medium term as concerns abate over a) promoters’ pledge (revoked fully after IPO) and b) the impact of the imposition of Anti-dumping Duty (on CPVC resin imports from China and Korea) on profitability. Lower-than-expected volume growth/operating margins are key risks to call.Cholamandalam Investment: Buy | Target: Rs 411 | Return: 23.5 percent
Brokerage: Axis Securities
Cholamandalam Investment and Finance Company (CIFC) is a well-diversified player in secured asset segments such as vehicle finance and home equity (loan against property).
Diversification across segments/geographies and better access to funds (via parentage and strong credit practices) is enabling CIFC to withstand sectoral headwinds. We initiate coverage with a buy rating from a 12-18 months perspective.
We feel diversified portfolio mix will drive AUM at 15 percent CAGR over FY19-22E amidst sectoral headwinds.
Fixed rate assets (vehicle finance book around 74 percent) and wholesale liabilities (bank borrowings around 50 percent) are expected to aid NIM improvement in a benign interest-rate environment. Largely stable asset quality will keep credit costs low vis-a-vis peers.
Operating leverage is expected to kick-in as new initiatives gain traction and ROAA improvement (+2.5 percent) will be driven by cost efficiencies and range-bound credit costs.Ujjivan Financial Services: Buy | Target: Rs 490 | Return: 27.1 percent
Brokerage: Kotak Institutional Equities
We re-initiated coverage on Ujjivan Financial Services with a buy. We expect a discount of the holding company to its subsidiary-- Ujjivan Small Finance Bank-- to narrow, driving our view on both the stocks.
Ujjivan Small Finance Bank is showing promising trends led by a high-yielding asset mix, steadily improving liability profile and RoEs moving closer to around 15 percent driven by strong operating leverage.
We value the holding company’s stake of 83 percent in the bank for Ujjivan at Rs 490. The holding company is trading at a discount of around 45 percent of current market price (around 25 percent to our fair value).
The listing of the bank has addressed one of the key concerns leading to re-rating of the parent and we expect this to improve as clarity emerges over the next few years on consolidating the shareholding between the two companies.
We believe that the leakage in value is not as high (ascribe ~10 percent holding company discount in our valuation) as anticipated by investors, which should result in better returns by owning the parent as compared to the bank.HG Infra Engineering: Buy | Target: Rs 405 | Return: 62.78 percent
Brokerage: Centrum Broking
HG Infra Engineering has a strong order backlog of Rs 6,200 crore (2.9x TTM revenue), which will drive 16.5 percent revenue CAGR over FY20E-22E.
With 62 percent of the order backlog immediately executable (to rise to 75 percent by February 20), we see a relatively low risk to our revenue estimates. While we estimate EBITDA margin to dip slightly (50bps) to 14.5 percent due to increased share of subcontracted orders, they yield better cash flows as there is no need for equity investment.
Aided by operating leverage from improving asset utilisation, we expect EPS growth of 14.7 percent CAGR in FY20E-22E. We estimate working capital levels to moderate from Mar-19 levels led by the recovery of delayed receivables with leverage remaining low at net D/E at 0.1x in FY22E. Valuations (adjusted for value of assets) at 6.7x/5.8x FY21E/FY22E EPS are attractive. We initiate coverage with a buy rating and a 12-month price target of Rs 405.Kaveri Seed Company: Buy | Target: Rs 627 | Return: 34.2 percent
Kaveri Seed's growth is contingent on stability in the cotton business and strides in the high margin non-cotton business.
The company has shown robust performance in the non-cotton business in 9MFY20, outpacing industry growth. There have been market share gains in Maharashtra, Bihar and parts of Uttar Pradesh for maize. Its share in the key hybrid rice markets of UP, Jharkhand and Chhattisgarh, too, has remained robust.We expect the company to post revenue/PAT CAGR of 10 percent/9 percent over FY19-21E. The stock has traded at 15x 1 year forward EPS over the last three years, and we value it at 14x FY22E EPS,
which implies a target price of INR627 (29.8 percent upside). We find comfort in the valuations at 11.7x/10.8x FY21E/22E EPS, and initiate coverage on KSCL with a buy rating.Federal Bank: Buy | Target: Rs 120 | Return: 37.7 percent
Brokerage: Haitong Securities
We initiate coverage on Federal Bank with a buy rating and a target price of Rs 120.
The bank's retail deposit share (as percent overall deposits) is one of the best in the industry and it is the market leader in non-resident (NR) deposits within Kerala, which are its key strengths.
While the bank has been able to reduce its cost of funds, its net interest margins (NIMs) have come down structurally as it has tried to reduce the risk (and credit cost) in its portfolio.
From being a regional bank, Federal Bank has successfully expanded its presence to other states while maintaining its market leadership in Kerala.
In the last 24 months, an increase in credit costs due to slippages in its wholesale book has adversely impacted stock performance. We expect normalisation of credit cost, improvement in NIMs and improvement in efficiency due to digital push to help Federal Bank deliver a return on assets (RoA) of 1.0 percent/1.1 percent and return on equity (RoE) 13 percent/14 percent in FY21/FY22, respectively.Varroc Engineering: Buy | Target: Rs 615 | Return: 44.9 percent
Brokerage: Stewart and Mackertich
Varroc Engineering is world's sixth-largest external automotive lighting company and among the top five diversified Indian auto ancillary. It is on the cusp of strong double-digit sales growth over the next two or three years supported by operationalisation of its six manufacturing facilities in its international lighting business and introduction of BS-VI related products in the Indian market.
It is expected to add around 29 percent incremental sales over FY20-22E. This is likely to lead to robust operating and financial leverage resulting in 51.4 percent PAT CAGR over FY20-22E. We find valuations attractive. We initiate coverage with a buy rating and target price of Rs 615.NOCIL: Buy | Target: Rs 155 | Return: 72.89 percent
Brokerage: East India Securities
NOCIL has positioned itself as the market leader in rubber chemical space, capturing 40-45 percent domestic market share.
Our faith in the company stems from the fact that domestic rubber chemicals demand is set to grow at 7-8 percent annually, doubling capacity will boost the volume growth and focus on specialised products in exports will improve the product mix and margins.
NOCIL’s business is governed by strong R&D and it enjoys a strong relationship with tyre companies, major consumers of rubber chemicals.
Both these facts create a huge entry barrier for new players. 9MFY20 NOCIL’s performance was hit by a slowdown in the auto and tyre sector and marginally impacted by removal on anti-dumping duties on its products.
We believe the current valuations already discount these negatives. Considering the growth visibility of this net- cash company with a strong dividend history, we assign a buy rating, with a target price of Rs 155 per share.Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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