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Aarti Industries, Reliance, Mindtree and Mphasis are among 8 names that IIFL has chosen as its Diwali picks for this year. In their report, analysts have highlighted the challenges faced by the economy and what lies ahead for the market.
The market returned just 4 percent in the past one year, while mid and smallcap indices plummeted 10 and 15 percent, respectively. Positive returns on the Nifty were largely due to names such as Infosys, TCS, Reliance, ICICI Bank and HDFC Bank.
“The carnage in mid and small-cap stocks was caused by selling by mutual funds owing to new categorisation of MF schemes, GSM/ASM circular of SEBI, change in equity taxation, etc. In addition, liquidity crisis led by IL&FS default, was extended to other NBFCs, which were already reeling under increasing interest rate environment,” analysts at the firm wrote in their report.
Among factors to look forward to, it listed crude oil prices, widening spread between bond and earnings yields and recent correction in equity valuations.
Here are its top picks for Diwali of 2018.
Aarti Industries | Rating: Buy | Target: Rs 1,517 | Upside: 19.9 percent
Aarti’s business model is backed by presence across the value chain (final & intermediate products) and strong base in export markets (48% of FY18 revenue). We expect volume growth of 12-15% over FY18-20E.
The company’s multi-year project (10-years and 20-years supply contract) wins worth Rs 14,000 crore provides long-term visibility to generate robust earnings
Also, Aarti being a net exporter (26% of FY18 revenue), is a beneficiary in the rupee depreciation scenario. However, benefits of rupee weakness will flow through in FY20E, after the existing hedges roll off. We expect revenue CAGR of 18% with EBITDA margin expansion by 140bps and PAT CAGR of 24% over FY18-20E.
Biocon | Rating: Buy | Target: Rs 768 | Upside: 19.3 percent.
It said that Biocon/Mylan had received USFDA approvals for Trastuzumab (Ogivri)/Pegfilgrastim (Fulphila) in US and Insulin Glargine (Semglee) in Europe. Ogivri and Fulphila are expected to be launched in Europe over next few months following recent positive CHMP opinion. Fulphila has been launched in US in Q2FY19, while Ogivri launch is expected in H2FY19E
“Biocon’s research subsidiary, Syngene, has tailwinds like rupee depreciation and rising penetration of R&D outsourcing in pharmaceutical R&D spend. Syngene’s revenue/PAT is expected to grow at 27%/30% CAGR over FY18-20E on the back of new client additions, foray in API manufacturing and strong outlook on biologics,” analysts wrote in the report.
Kotak Mahindra Bank | Rating: Buy | Target: Rs 1,380 | Upside: 17.2 percent
The lender continues to be at the forefront of gaining market share in its key businesses. Subsidiaries’ contribution could increase to 40% of consolidated net profit by FY20 (36% in Q1FY19).
The bank would continue to benefit from market share gains and superior profitability & capitalisation against its peers, the brokerage house said.
MindTree | Rating: Buy | Target: Rs 1,081 | Upside: 34.2 percent
In its view, the correction has factored in concerns related to recent softness/macros and reckon that Mindtree is likely to outperform peers like L&T Infotech, Mphasis and Hexaware. Our belief is based on the company’s strong digital capabilities, which resonates well with clients, resulting in higher digital deal sizes
The view is also based on the fact that its large client (in Top 10) issues have bottomed out. Its Top, Top-5 and Top-10 clients have added 50% of the incremental revenues over the past eight quarters. “Led by high growth in top clients, we expect overall revenue CAGR of 23% and EBITDA margin improvement of 300 bps (FY18-20).”
Mphasis | Rating: Buy | Target: Rs 1,328 | Upside: 29.8 percent
The brokerage house said that significant deal wins in new-gen services (across accounts and new clients) provide good revenue visibility and hence, it expects direct core USD revenue CAGR of 14% over FY18-20.
“We project overall revenue and PAT CAGR of 17% and 23% respectively with margins improving by 200 bps over FY18-20 to 18.3%,” the report further added.
Motherson Sumi Systems | Rating: Buy | Target: Rs 293 | Upside: 20 percent
The brokerage is set to achieve FY20 revenue target of USD 18 billion (USD 10 billion FY18) via combination of organic (USD 12-13 billion revenues) and inorganic (USD 5-6 billion) initiatives. At the current market price, the stock trades at 15x FY20E EPS (35% discount to average 10-yr forward PE).
“We believe the recent correction is overdone (30% over past 6 months). We expect consolidated revenue, EBITDA and PAT to register 16%, 29% and 47% CAGR respectively over FY18-20.”
Petronet LNG | Rating: Buy | Target: Rs 256 | Upside: 20 percent
Petronet LNG is set to benefit from 17% capacity expansion at Dahej terminal to 17.5 MMT by FY19 from current 15 MMT. It expects this to aid incremental Dahej volumes of 48 TBTU to 864 TBTU by FY20.
Company does not face the risk of upcoming competition as almost 100% of PLNG’s capacity has use-or-pay contracts along with the competitive tariffs. We expect revenue and PAT CAGR of 16% and 19% over FY18-20 respectively
Reliance Industries | Rating: Buy | Target: 1,310 | Upside: 25 percent
Reliance Industries is expected to witness improvement in petrochemicals segment with refinery off-gas cracker (ROGC) being commissioned and strong polyester & fiber intermediates demand.
The company’s largest petcoke gasification unit at Jamnagar is under commissioning, which is expected to bring full benefit of bottom-of-the-barrel conversion to its refining business. This is likely to improve GRM by up to $2/bbl gradually over FY19E-21E.
JIO continues to surprise with robust subscriber additions and steady improvement in profitability. We estimate steady state revenue market share (RMS) of 43% for Jio.
Disclaimer: Reliance Industries Ltd. is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments Ltd.
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