Market ripe for consolidation! Brokerages pick 10 high-quality stocks with 1-year horizon

"Among the sectoral pack, we feel banking holds the key and that looks overbought too. We suggest keeping a balanced approach in trading – by maintaining long and short on the stock-specific front. Also, advise keeping a close watch on global developments for cues," Mishra added.

While the market looks ripe for further consolidation, brokerages advise a prudent, stock-specific approach at this juncture.

We have collated a list of 10 stocks, across sectors, that brokerages say can give healthy returns in a one-year timeframe. Take a look.

Brokerage: ICICI Direct

Bharti Airtel | Buy | LTP: Rs 455.50 | Target price: Rs 550 | Upside: 21%

The recent tariff hike has been a shot in the arm for the telecom industry, which was operating at sub-optimal average revenue per user (ARPU) after the new player’s entry three years back.

We highlight that Airtel has raised tariffs by nearly 15-47 percent across packs from December 2019. The hike in tariff is likely to translate into FY21E revenue and EBITDA upgrade of about 9 percent and 17 percent, respectively," said ICICI Direct.

The brokerage expects the price hike to result in increasing the monthly ARPU to Rs 155 against the current levels of Rs 127.

The company has also announced plans to raise about $3 billion through a mix of debt and equity, which, the brokerage believes, is to meet the AGR dues demand within the stipulated time in case there is no relief from the Supreme Court or the government.

"The fundraising intention assures that Bharti will survive given the availability of funds coupled with a price hike," said ICICI Direct.

IDFC First Bank | Buy | LTP: Rs 46.15 | Target price: Rs 54 | Upside: 17%

The bank is the eighth largest private bank on the basis of advances. As of September 30, 2019, funded assets are at Rs 1,07,656 crore with retail contributing 45 percent of the book and share of corporate at 55 percent.

As per ICICI Direct, the bank's management aims to build a retail franchise with a focus on SME and consumer financing. The bank aims to open 500-600 branches in the next five to six years with a target CASA ratio of 30 percent.

Return on assets (RoA) and return on equity (RoE) is targeted to inch up to 1.4-1.6 percent and 13-15 percent, respectively, by FY25E, said ICICI Direct.

Going ahead, exposure to telecom may impact asset quality. Restructuring of balance sheet is seen improving margins and return ratios.

KNR Constructions | Buy | LTP: Rs 262.90 | Target price: Rs 300 | Upside: 14%

As of Q2FY20, KNR’s order book (OB) was at a strong Rs 6,681.8 crore, implying order book-to-bill ratio of 3.1 times on TTM basis.

On the front of the new orders, it secured order inflows (OI) worth Rs 1,800 crore. KNR is targeting incremental OI worth Rs 1,000-1,500 crore in the second half of FY20.

On the execution front, execution in three out of five HAM projects is in full swing. Overall, with execution expected to remain strong, ICICI Direct expects revenues to grow at 19.1 percent CAGR to Rs 3,031.1 crore in FY19-21E.

"Going ahead, we expect EBITDA margin of 18.3 percent, 18 percent (higher band of guidance of 17-18 percent) in FY20E, FY21E, respectively, on the back of higher execution of high margin irrigation projects, lower level of subcontracting expenses and receipts of some portion favorable claims," ICICI Direct said.

Mahanagar Gas | Buy | LTP: Rs 1,064.85 | Target price: Rs 1,230 | Upside: 16%

ICICI Direct believes the government’s priority allocation of domestic natural gas to the CGD sector, robust pipeline infrastructure and strong pricing power will enable MGL to report long-term steady growth.

Mahanagar Gas (MGL) is one of India’s largest players in the city gas distribution (CGD) business. It is currently the sole authorised distributor of compressed natural gas (CNG) and piped natural gas (PNG) in Mumbai, its adjoining areas and Raigad district, Maharashtra.

Additionally, MGL’s planned Capex in Pen, Uran and Karjat areas provide visibility for volume growth in the medium to long-term.

In the CNG segment, MGL plans to add 25 CNG stations per year for the next three years to the existing network of 244 CNG stations.

Going forward, ICICI Direct estimates sales volumes at 3.1 mmscmd and 3.2 mmscmd in FY20E and FY21E, respectively.

"We expect MGL to report healthy gross margins of Rs 14.6/scm and Rs 14.4/scm for FY20E and FY21E, respectively. Given the healthy margins and discount in valuation compared to its peers, we value MGL at 16 times P/E multiple," ICICI Direct said.

PVR | Buy | LTP: Rs 1,879.15 | Target price: Rs 2,200 | Upside: 17%

The company’s growth has been driven by strong content as well as additional monetisation through F&B and ad revenues, which are margin accretive.

For FY20 so far, the movie slate has performed exceptionally well and the content slate, going forward in the first half of the calendar year 2020, is also encouraging which should drive healthy box office collections ahead, said ICICI Direct.

"We have built in healthy footfall growth of 11.8 percent CAGR in FY19-21E to 124 million screens and flattish ATP, which will lead to 15.6 percent FY19-21E CAGR in the net box office revenues to Rs 2,185 crore," said ICICI Direct.

"The F&B tracking strong footfall and improving SPH is likely to clock 16.3 percent CAGR in FY19-21E. We bake in a conservative 14 percent CAGR in ad revenues over FY19-21E, on a decent base. EBITDA (ex- Ind AS) CAGR is expected at about 17.7 percent over FY19-21E," ICICI Direct said.

Brokerage: Globe Capital Market

Bharat Dynamics | Buy | LTP: Rs 305.75 | Target price: Rs 340 | Upside: 11%

The company is the exclusive service provider for indigenously developed guided missiles such as Akash surface-to-air missiles and Konkur anti-tank guided missiles.

It also benefits from the government's thrust on indigenous guided weapon systems production, leading to healthy order flow, and the strong financial support from the government in the form of healthy advances for all its orders.

"Strong order book is a major positive for the stock. The order book position of the company as on April 1, 2019, is around Rs 7,258 crore. Bharat Dynamics expects Akash-II missile order worth about Rs 14,000 crore in the next couple of years from the central government," said Globe Capital.

Opening up foreign direct investment, allowing single vendor participation for tenders, initiating a strategic
partner model and revenue concentration are major risks for the stock.

DCB Bank | Buy | LTP: Rs 183.55 | Target price: Rs 210 | Upside: 14%

As per Globe Capital, the bank's management expects some kind off stability and recovery in portfolio other than the CV and some large ticket accounts.

The management expects to open around 15 new branches in the next two quarters. The Bank is also positive on recoveries and upgrades happening in line with present data.

"Stable margins, improving operating leverage and improved asset quality are the positives for the bank. We believe DCB Bank has the potential to grow at faster rates," said the brokerage.

HCL Technologies | Buy | LTP: 574.30 | Target price: Rs 725 | Upside: 26%

The company has raised its revenue growth outlook to 15-17 percent in constant currency for the financial year 2019-20, from its previous forecast of 14-16 percent growth.

As per Globe Capital, the operating margin (EBIT) range is expected to be between 18.5-19.5 percent.

It added 3,223 jobs during the July-September period, taking the total headcount to 1,47,123, from 1,43,900 at the end of June quarter. The attrition rate declined to 16.9 percent as compared to 17.3 percent.

The stock is trading at ttm P/E multiple of 15 times which is lower than its historical average.

Larsen & Toubro | Buy | LTP: Rs 1,345 | Target price: Rs 1,595 | Upside: 19%

L&T won new orders worth Rs 48,292 crore at the group level during the quarter ended September 30, 2019, registering a growth of 20 percent YoY.

International orders during the quarter stood at Rs 16,675 crore and constituted 35 percent of the total order inflows.

With the surge in order intake, the company crossed Rs 3 lakh crore order book milestone with the consolidated order book at Rs 3,03,222 crore as of September 30, 2019, and with international orders constituting 22 percent of the total order book.

As per the management, the company is on track to meet order inflow guidance of 10-12 percent and revenue guidance of 12-15 percent for FY20.

"A robust order book, strong balance sheet, diversified business portfolio and proven execution capabilities are acting as an economic moat for the company in the current volatile and challenging economic environment," said Globe Capital.

Mahindra & Mahindra | Buy | LTP: Rs 539.90 | Target price: Rs 750 | Upside: 39%

The company is the market leader in tractors and has a market share of over 41 percent. Its leadership is primarily attributed to its continuous product innovations.

The segment has been facing challenges due to a slowdown in rural demand and the management expects it to decline 7-8 percent in FY20 as they are forecasting Q4FY20 to be relatively better.

As per Globe Capital, the management believes that the company would be able to do better than the industry growth on the back of its large exposure in rural and semi-urban areas.

"We believe the industry slowdown is cyclical in nature and the long-term potential for automotive segment in India is huge and strong demand is expected to come from both urban and rural areas because of very low penetration and rising disposable income," said Globe Capital.

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