The novel coronavirus has now spread to 178 countries. This black swan event has caused serious disruptions and brokerages and experts say the impact of the outbreak on the economy can't be measured precisely at this juncture.
Brokerages and analysts are of the view that the pain caused by the coronavirus may linger and the market is factoring in the hit on earnings and its economic fallout.
The coming few months are expected to be difficult, as global trade has dwindled and all financial markets have witnessed a meltdown.
Nobody knows when the pandemic will subside, what will be the magnitude of demand destruction and the extent to which asset prices will get reset across financial markets.
However, history show that financial markets discount such events at a rapid pace, sometimes overshooting on the downside.
At present, some of the best managed companies are available at attractive valuations. Brokerages advise one should accumulate companies (depending on their risk appetite and time horizon) which have gone through such challenging cycles and have come out much stronger.
Here are 10 stocks that look attractive to brokerages from long-term perspective:
Brokerage: ICICI Securities
The company has consistently reported strong growth with incremental free cash flows in the normal course of business.
ICICI Sec said it was positive on the long-term outlook, considering the company’s strong brand franchise with sustainable growth, expansion potential, healthy FCFF generation and strong return ratios.
"We expect Dr Lal to outperform the industry growth and register revenue, EBITDA and PAT growth at CAGRs of 13.4 percent, 14.8 percent and 17.7 percent, respectively, over FY20-FY22E. We expect free cash flow generation of nearly Rs 780 crore over the next two years," ICICI Securities said.
"RoE and RoCE would remain strong at 24.3 percent and 22.9 percent, respectively, in FY22E whereas RoIC would move to 95.3 percent," it said.
HDFC Bank has efficiently focused on retail business and has garnered strong liability franchise to yield superior profitability over the years, said the brokerage.
Seasoned portfolio and management experience led to higher than industry advances growth at nearly 24 percent CAGR in FY08-19.
Enriched customer experience, a strong network of 5,345 branches and focus on digitisation has enabled the bank to build a strong liability franchise, with CASA comprising nearly 40 percent of deposits. Such high CASA limits cost of funds and thereby, enable to report superior NIM above 4 percent consistently, said the brokerage.
"Prudent asset quality has been core to the bank. The same has safeguarded the bank from NPA issues faced by the industry in recent fiscals. RoA at about 1.5 percent and RoE at 15-18 percent remain consistent for the bank with valuations expected to remain at a premium," ICICI Sec said.
Kotak Mahindra Bank has built a network of 1,539 branches. Increased focus on retailisation of loans has enabled the bank to earn the best NIM in industry at 4.7 percent.
The savings rate was hiked by the bank to 6 percent in 2011, boosting savings deposits growth to Rs 2,39,354 crore by December 2019.
CASA ratio improved from 50.7 percent in December 2018 to 53.7 percent in December 19, which is the best in industry.
"Overall asset quality remained resilient with GNPA ratio at 2.46 percent in Q3FY20. The bank has no major exposure to IL&FS & other stressed assets. Going ahead, healthy business growth coupled with stable margins is expected to augur well for the bank," said ICICI Securities.
Titan Company is the market leader in the Indian jewellery market through its flagship brand Tanishq. The company also has a presence in watches and eyewear segments.
The company has also entered the online jewellery market by acquiring caratlane.com.
Volatility in gold prices, impact of coronavirus outbreak (closure of retail outlets due to a national lockdown) and reduced demand in discretionary spending are expected to impair consumer demand in the near term. However, the company is likely to recoup lost sales owing to pent up demand from H2FY21, ICICI Sec said.
The company has consistently exhibited ability to gain market share on a sustained basis amid a tough industry scenario. Robust balance sheet (more than 30 percent RoCE and virtually debt-free status) and asset-light distribution model have enabled it to outpace peers in terms of store addition.
It added 34 Tanishq stores for the nine months ended December 2019, which is equivalent to FY19 store addition, ICICI Sec said.
"Over the longer term, we expect Titan to be a key beneficiary as India’s gold market continues to strive towards regulation and standardisation," ICICI Sec said.
Dabur India with a turnover of more than Rs 8,500 crore and earnings of more than Rs 1,400 crore has a strong portfolio of brands (Dabur Chyawanprash, Real, Hajmola, Vatika, Amla, Fem, Honey, Meswak, Dabur Red) with a focus largely on ayurvedic and healthcare offerings.
"With a wave of demand for the ayurvedic & natural products in addition to Coronavirus outbreak globally, staples segment including Dabur has been gaining significance especially its healthcare and home care categories such as Chyawanprash, honey, glucose, toothpaste, shampoos and hair oil," ICICI Sec said.
Dabur’s broad product portfolio provides a good play on Indian consumer goods spend by its strong presence in less-penetrated and high-growth categories.
The rural segment contributes around 45 percent of its sales, so it is well-placed to take advantage of the rural recovery.
Brokerage: Kotak Institutional Equities
Petronet LNG’s volumes have remained well above contracted levels historically and are expected to increase further with commissioning of Kochi pipeline post- lockdown and further expansion of Dahej.
"Our reverse valuation for Petronet LNG suggests the stock is trading at about 10 percent discount to NPV of long-term contracts, thereby pricing in materially lower off-take of volumes in the long run," said Kotak.
Kotak expects the company to continue paying higher dividends, pending investment in proposed overseas projects.
"At this point, we see limited impact from COVID-19, with the lockdown impact on manufacturing and logistics likely to be smoothened out over the coming few weeks, though, we do see US FDA inspections for Somerset, Goa and Indore getting pushed back to H2FY21," Kotak said.
"We expect only a transient impact on domestic market performance with performance likely to be normalized from Q2FY21. However, we do expect a negative hit on EM sales given cross-currency exposure to South Africa (about Rs 600 crore revenues), as well as Brazil/Mexico (about Rs 600 crore revenues)."
However, the brokerage sees several levers to drive the EBITDA growth from FY2021, including market share gains in levothyroxine, gradual loss reduction in Solosec, as well as ProAir approval, with significant room to drive margin expansion through operating leverage.
The stock's valuation has also made it attractive at this juncture.
"Valuations remain compelling with the stock now trading at nearly 5 times FY2022 EV/EBITDA. At 15 times EBITDA multiple on FY2022, domestic segment accounts for entire market cap, with no value ascribed to the US. Nepexto approval underscores the significant optionality in the pipeline, including the inhalation basket (Fostair in the EU, Spiriva in the US) as well as biosimilars (Neulasta filing in FY2021)," Kotak said.
"We upgrade Kansai Nerolac to buy; even as short-term demand collapses due to COVID-19, fundamentals of the company and the category are notably intact. Volume-led growth potential and stable/improving margin profile arising from rational competition," Kotak said.
Kotak cut FY2020-22E forecasts to factor in coronavirus impact, lower crude prices and weaker macros. The stock has corrected 35 percent in the past month notwithstanding significant RM tailwinds and it is trading at 24 times FY2022E PE, implying 40 percent valuation discount to APNT versus 15-20 percent historically.
Brokerage: Motilal Oswal Financial Services
In the current environment, more tech-savvy data subscribers with higher ARPUs and longer-term recharges of 90 days may see a lower impact, Motilal Oswal said.
However, the rest of feature phone subscribers doing monthly recharges (one-third the ARPU of data subscribers), could see some marginal impact.
To protect these low income subscribers (80m), BHARTI has extended free incoming calls until April 17, 2020, with an additional Rs 10 talk-time.
"This could impact Q1FY21 revenue and EBITDA by Rs 220 crore and Rs 180 crore, respectively, which is equivalent to meager 1-2 percent. Against this, increased data consumption should see upgrades in recharge values, thus, mitigating the impact. In Q4FY20/Q1FY21, we currently estimate 13 percent/19 percent revenue growth on a QoQ basis," Motilal said.
With the situation on account of the coronavirus outbreak intensifying, there has been a higher off-take of chronic set of medicines.
Further, with rising cases of cough/cold and respiratory illnesses, there is an increased requirement of antibiotics in the case of Alkem.
With the situation in China easing to some extent with reduced impact of COVID-19, manufacturing of KSM (key starting materials) and intermediates has resumed and moved toward normalcy.
"Alkem is one of the companies with higher exposure (two-thirds of the business) to the domestic formulation, which is a strong industry outperformer. It has lower exposure to US generics (nearly 25 percent), which is driven by new launches," Motilal said.
Motilal is positive on Alkem on the back of its industry outperformance track record in domestic formulation and better traction with minimal regulatory risk in US generics.
Disclaimer: The views and investment tips expressed by 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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