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Consolidation to continue but steep correction unlikely; top 10 stocks that can return up to 49%

Overall benchmark indices have been in a tight range and that rangebound or consolidation is expected to continue in short term, experts suggest.

February 19, 2018 / 12:01 PM IST
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The market corrected sharply from the start of February, with the benchmark indices losing around 6 percent from their record highs hit on January 29. The Mid-Smallcap indices also fell around 8 percent each.

The market has not seen any major recovery since then as every rally has been sold into due to weak sentiment on the domestic front especially after PNB fraud case. On the other side, it has been getting support from positive global cues, wherein global peers recovered sharply after recent steep fall.

Overall benchmark indices have been in a tight range and that rangebound or consolidation is expected to continue in short term, experts suggest.

They don't see major fall from here on, citing likely robust recovery in earnings globally as well as domestically. If the market corrects sharply by any reason (mostly global cues), then that fall has to be bought into, experts advised as they are not worried.

Pratik Gupta, Head of Equities, Deutsche Bank India is not worried for market due to recent correction of 5-6 percent driven largely by rising US bond yield, which he thinks was actually was good. The market will see such correction intermittently going ahead.


Ratnesh Kumar, MD & CEO of BOBCAPS also said, “I don’t think we are at the cusp of a big correction. We have seen double digit earnings growth after many years and the momentum will only get better."

Gupta also said underlying corporate earnings recovery not only looks robust in India but also globally, and he is still constructive on equities saying it will continue to be the preferred asset class in current year.

Kumar believes the current momentum is a case of risk aversion coming off globally due to rate hike and oil price fears. “Naturally, there will be a laggard performance in such cases among emerging markets,” he told the channel, adding, the blip could be a temporary thing.

He feels the market is good for investment at this stage. Aggressive returns of 2017 may not be repeated, but on a 2-year basis, investors can expect positive returns, he said.

Here are 10 top stocks that can give up to 49% return over next 12 months:

Brokerage: Emkay

Varun Beverages | Rating - Buy | Target - Rs 902 | Return - 37%

We maintain Buy on Varun Beverages with new street-high target price of Rs 902. The 2017 profit increased 31 percent backed by strong international business performance and margin expansion.

We expect this momentum to continue with earnings growth of 32 percent in 2018 and 30 percent in 2019. This will be on the back of recovery in India business.

The India business revenue would rise 18 percent in 2018 supported by recovery in sales volume (post GST shock) and benefits from recently acquired new territories (inorganic growth).

Current valuations (PER of 33.2x and EV/EBITDA of 12.9x CY19E) are attractive given strong EPS growth and ROE expansion. Target price of Rs 902 is based on EV/EBITDA of 17x CY19E (much lower than peer average).

Brokerage: Prabhudas Lilladher

RPP Infra Projects | Rating - Buy | Target - Rs 385 | Return - 34%

RPP Infra (RPP) reported strong execution with stable margins in Q3FY18. It has guided for revenues of around Rs 650 crore with around 14-15 percent EBITDA margins in FY19.

Order book at the end of Q3FY18 stood at Rs 895 crore, with 27 percent from buildings, 32 percent from Water Management and Irrigation and 41 percent from infrastructure and is expected to end the year with a book of Rs 1,200 crore.

Concall Highlights: 1) Seeing great traction in Orders due to the Central Government’s focus on Infrastructure Building especially in Rural Infrastructure Development. 2) Main focus for the company is Water Management Segment due to better margins and expertise 3) Bid Pipeline of Rs 1,500 crore - Rs 5 crore from Concrete Roads, Rs2.75bn from Affordable housing. 4) Aim to reduce Working Capital by 10-15 days from 160 days at the end of Q3FY18. 5) No more tax liability pending. Expecting Rs 2-3 crore write back 6) Not looking at bidding for HAM project now.

We expect RPP to deliver Sales and PAT CAGR of 28 percent/34 percent, respectively, over FY17-20E. We believe the company is a good play on government’s increasing focus on improving rural infrastructure. We maintain a BUY with a target price of Rs 385.

Brokerage: ICICIdirect

PNC Infratech | Rating - Buy | Target - Rs 215 | Return - 26%

We like PNC given its robust order book, strong execution capabilities and lean balance sheet with better working capitalWC management. Furthermore, we believe the company is well poised to capture huge opportunities ahead.

We expect revenues and earnings to grow at CAGR of 40.1 percent, 22.6 percent, respectively, in FY18-20E given the significant ramp up in execution from Q4FY18 onwards with receipt of appointed dates.

Hence, we maintain our Buy recommendation on the stock with a target price of Rs 215. We value its construction business at Rs 182 per share and BOT & HAM projects at Rs 53 per share.

Brokerage: Edelweiss Financial

Welspun India | Rating - Buy | Target - Rs 84 | Return - 27%

Welspun India’s Q3FY18 revenue, at Rs 1,400 crore (4 percent above estimate), fell 7 percent YoY impacted by customer destocking and reduced incentives post GST implementation. While lower cotton prices supported gross margins, EBITDA margin improved a mere 40bps QoQ to 18.1 percent (estimated 20.5 percent) impacted by operating deleverage.

Management mentioned over long term EBITDA margin of 20 percent is sustainable. As we introduce FY20E, we build in 6 percent/10 percent improvement in revenue/PAT and believe all concerns about growth and margins are factored in our expectations.

Rolling forward, we maintain our target EV/EBITDA multiple of 7.0x, giving a target price of Rs 84 (Rs 83 earlier). Maintain ‘Buy’.

Simplex Infrastructure | Rating - Buy | Target - Rs 826 | Return - 43%

Simplex Infrastructure’s Q3FY18 revenue fell 2 percent YoY due to GST impact and client-related issues. However, better cost control led to PAT surging 69 percent YoY.

Improving business prospects (reflected in healthy order inflow) has led to management now shifting focus from consolidation to growth—targeting 20 percent top-line growth going ahead.

Moreover, green shoots are emerging on the working capital cycle front—an elongated cycle had led to higher leverage and constrained growth over the past couple of years.

We believe, a diversified segmental presence and robust execution capabilities will drive around 40 percent PAT CAGR over FY18-20. Maintain Buy with SOTP-based target price of Rs 826 as we roll over to FY20.

Carborundum Universal | Rating - Buy | Target - Rs 426 | Return - 21%

Carborundum Universal’s Q3FY18 consolidated revenue grew 16 percent YoY led by volume growth across segments. While abrasives’ sales grew at 15 percent YoY, electrominerals’ sales growth sustained at 17 percent YoY (around 20 percent YoY in Q2FY18).

Ceramics recovered strongly with sales growing 18 percent YoY, driven by industrial segment. CUMI expects to add around Rs 1,000 crore over next two-three years by ramping up capacities relocated from its South African entities (Bubble Zirconia and Thukela Refractories are operating at less than 25 percent utilisation) and NTK Cylinders (Metz Cylinders) from Japan and growing existing business.

We believe Carborundum is well positioned to ride the demand recovery across segments by scaling up the value chain with advanced products and working towards specialised ceramics and composite-based electrominerals for EVs. Hence, we estimate PAT CAGR of 24 percent over FY17-20.

While stock has underperformed since our downgrade (Hold) in Q1FY18, we upgrade to Buy, led by improving visibility domestically and globally, with target price of Rs 426.

Texmaco Rail | Rating - Buy | Target - Rs 140 | Return - 49%

Texmaco Rail & Engineering’s Q3FY18 topline declined 14 percent YoY as insufficient wagon orders led to wagon revenue plummeting 73 percent YoY. EBITDA margin fell 20bps YoY to 4.1 percent due to operating de-leverage.

Texmaco group is witnessing significant growth across verticals – wagons, coaches, locomotives and rail EPC, leading to overall order book rising to Rs 4,450 crore (around Rs 3,620 crore in Q2FY18). The company’s rich experience places it in ideal position to seize the burgeoning opportunities arising from overhaul of the Indian Railway (IR) network.

Maintain Buy with SoTP-based target price of Rs 140 as we roll over to FY20E.

J Kumar Infraprojects | Rating - Buy | Target - Rs 474 | Return - 39%

J Kumar Infraprojects posted healthy revenue growth (up 24 percent YoY and 44 percent QoQ) in Q3FY18. With operating costs under control, PAT also jumped 24 percent YoY, in line with revenue.

Healthy execution was a result of traction achieved on Mumbai Metro and JNPT projects. With tunneling expected to gather pace in Mumbai Metro Line 3 project, we expect revenue to remain strong.

Robust order book (book-to-bill at 5.5x), lean balance sheet (net debt<0.1x) and ample opportunities in the Metro space render us bullish on the company. Maintain Buy with target price of Rs 474 as we roll over to FY20E.

Brokerage: Motilal Oswal

MCX | Rating - Buy | Target - Rs 1,100 | Return - 48%

Overall volumes for MCX have been soft because of multiple issues (demonetisation, GST, PMLA) reducing Bullion volume to nearly a half in a span of a year. Over first nine-month of FY18, while volume in Bullion declined by 30 percent YoY, that in base metals increased by 17 percent, thereby stemming the overall volume decline to 8 percent. The contribution of Bullion to overall volume has now come down to 23 percent (from 30 percent last year), whereas that of base metals has moved to 43 percent (from 34 percent).

Now that specific issues are behind and regulatory drive has only picked up over the last year, volumes should start seeing growth on a normalised base. To a large extent, this has panned out in the first 1.5-month of 2018 – where ADT has been Rs 23,500 crore versus Rs 20,300 crore in 9MFY18 (and Rs 21,000 crore in 9MFY17).

Over the past year, several regulatory steps have supported a case for volumes uptick. The SEBI allowed trading of Options, with Gold being launched and the full suite expected to be running by 2HFY19. MCX expects Options to add 15 percent to its revenue pool once it starts monetising the product.

While the SEBI allowed Alternative Investment Funds (AIFs) to take commodity exposure, a change in the regulation of custodians was necessary for them to begin. Along with this change, allowing MFs and PMS would further boost institutional participation.

Bank subsidiaries being allowed to distribute commodities opens up large untapped retail participation. While the process is of long gestation, it should result in a meaningful increase over the long term.

With growth returning on the exchange, new products getting launched and steps being taken toward an increase in participation (both retail and institutional), mid-teen growth in ADT over the next few years can be expected. The cost structure for MCX would largely remain stable (with an increase of 3-5 percent expected in non-variable expenses).

Prime Focus | Rating - Buy | Target - Rs 130 | Return - 27%

Revenue grew 20 percent YoY (+11.4 percent QoQ) to Rs 610 crore (in-line), led by robust growth in the Creative business. Yet, EBITDA (pre-ESOP) grew by a meager 4 percent YoY (+6 percent QoQ) to Rs 130 crore (8 percent miss) due to a 25 percent YoY rise in operating expenses. EBITDA margin contracted 320bp YoY (-120bp QoQ) to 20.9 percent (180bp). However, adjusted for one-offs (Rs 10 crore of forex translation accounting, and Rs 10 crore of Montreal set-up cost), EBITDA margin stood at 24.2 percent. Higher finance cost and depreciation led to a loss of Rs 8.7 crore (estimated of profit of Rs 25.8 crore; Rs 22.7 crore profit in the year-ago period).

Creative segment (around 78 percent of revenue) rose 25 percent YoY to Rs 480 crore, led by growing offerings to movie content. Adjusted EBITDA margin grew 230bp YoY to 26 percent. Also, Tech business reversed the previous quarter’s negative trend, growing by 3 percent YoY to Rs 80 crore. However, higher SGA expenses led to a 360bp Tech margin contraction to 23.6 percent.

Prime Focus has a strong order book of more than USD 250 million for the creative segment. This, coupled with the gradual shifting of operations to low-cost centres, is likely to drive strong growth in the creative segment. Furthermore, a steady around USD 200 million pipeline in the Tech business augurs well. We cut FY19/20E revenue/EBITDA by 2-3 percent, and expect consolidated revenue/EBITDA CAGR of 15 percent/19 percent over FY18-20, led by a 21 percent EBITDA CAGR in Creative.
first published: Feb 19, 2018 12:01 pm

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