FY20 bets: 10 stocks that offer strong fundamentals with reasonable valuations

To factor in the impact of a possible slowdown in the global economy, analysts advise investors to reduce exposure to exports-driven sectors and global commodities (oil & gas, metals). On the other hand, it would be wise to increase exposure to domestic growth stories.

“Interestingly, the global slowdown related concerns have cropped up in each of the last five years. And, in all the cases the correction turned out to be an opportunity to buy,” Gaurav Dua, Head of Research, Sharekhan by BNP Paribas told Moneycontrol.

Here is a list of 10 value picks for FY20 that promise strong fundamentals and reasonable valuations:

Analyst: Ritesh Ashar, CSO, KIFS Trade Capital

ITC

Consumption sector has been a key driver for the market growth and there is a lot of potentials when we look at the overall sector. Various government schemes and low penetration in the rural market given immense opportunity and room to the segment for growth.

Rising incomes and growing youth population have been crucial progression drivers of the sector. Brand perception has also supported demand. In this category, ITC and Bata India and can be strong bets

ITC gave a strong earnings growth where it reported net revenue growth of 15 percent on a YoY basis, with 7 percent volume growth and ~9 percent EBIT in core cigarette business Other businesses segments (ex-Agri) like Hotels, FMCG (profitability improvement continued) and paperboard performed well. Currently, it is quoting near 292 and has the potential to reach up to 340.

Bata India:

Bata India is the largest retailer and leading manufacturer of footwear in India with ~1300 retail stores as on Dec 2018. It continued to report strong growth in earnings for the December quarter. Bata India reported 51 percent YoY growth in revenues.

They plan to add ~300-350 stores via franchise route in next couple of years.

Company’s focus on premiumisation will lead to the continuation in their growth story which will also be supported by the low GST rate of 5 percent on footwear products below Rs1,000 which can give market share gains from unorganized players.

Currently, Bata is quoting near Rs 1345 and has the potential to reach up to Rs 1600.

Pidilite Industries:

Pidilite Industries is a dominant player in the Indian market as it has a market share of ~70 percent in its leading brand categories. Pidilite recorded a good set of numbers where the consolidated revenue growth was of ~20 percent which was led by standalone revenue growth of 16 percent on a YoY basis.

The company’s two major segments, consumer and bazaar which includes products like Fevicol and M-seal and specialty industrial chemical recorded sales CAGR of ~14%, ~8% respectively, in FY11-18.

The momentum is expected to continue at a faster pace and one can bet under this script for the target of 1500.

Asian Paints:

Asian Paints in one of the leaders in the market share in the paint industry with strong industrial and international business share.

The company delivered a strong set of number where the volume growth was seen up by 24 percent on a YoY basis which was supported by the low base, festive timing shift, and GST-cut.

The growth momentum is expected to sustain and we can maintain a target of 1650-1700 for next one year.

Also, there are major steps taken by the government towards the defense sector by allocating funds and emphasizing on pay service and other schemes for the soldiers.

This initiatives by the government will demonstrate to be productive of the segment. Investors can take a bet on Ashok Leyland and Bharat Electronics Ltd under this segment.

Bharat Electronics:

BEL has a 37 percent market share in Indian Defence Electronics. Its core capabilities are in radar and weapons systems, defence communication & electronic warfare.

BEL gave a decent set of earnings where PAT grew by 68 percent on a YoY basis despite lower than expected revenue growth.

EBITDA grew by a robust 72 percent YoY and margin improved by 1060bps YoY due to the execution of high margin orders & cost rationalization.

The current order backlog is Rs 48,000 cr (5x FY18 sales) provides strong earnings visibility for the next 3 years. The 9MFY19 order inflow was up by 145% to Rs 16,500 cr. We have a target of 120 for the next year.

Analyst: DK Aggarwal, Chairman & Managing Director of SMC Investments & Advisors

ICICI Bank

Business performance of the bank such as domestic loan growth, overall corporate advances, retail loan growth, CASA ratio is continuously improving.

On the development front, it is increasing its presence across the country and working on fully leveraging existing resources and infrastructure. Further, it would also look at implementing additional cost optimization measures during the year, while growing its retail franchise.

The domestic advance book grew by 14 percent on a YoY basis to Rs 4,97,143 crore, while the overseas advance book declined by 5 percent at Rs 67164 crore at end December 2018.

Growth in the domestic advance book was led by SME loan book rising 13 percent on a YoY basis at Rs 27,788 crore, while retail loan book surged 22 percent YoY to Rs 3,33,208 crore at end December 2018.

Marico:

Over the last three years, the company has systematically invested in the core international markets to strengthen both the brands and the organizational capability to handle growth.

The company is confident that each of these markets is well-poised to capitalize on market opportunities. The company aims for volume growth of 8-10 percent and a topline growth of 13-15 percent, going forward.

The company has guided that it will focus on volume growth and market share gains to drive profitability.

Coromandel International:

The company continues to invest in infrastructure augmentation and capability development to offer a differentiated solution to the farming community.

Government’s ambitious plan to double the farm income by 2022 and fixation of the minimum support prices for crops at 1.5 times the cost of production brings out a sizeable opportunity for the company.

Also, the increase in prices of higher-fertilizer consuming crops such as paddy, soybean and sugarcane augur well for the company. We believe that the company is well-positioned for holistic growth, led by an increase in volumes and higher realizations.

EIH:

The company business strategy moves for continued emphasis on high-end, upscale accommodation through the existing ‘The Oberoi and Trident Hotels’, as well as selective expansion in both the five star deluxe and five star segments of the Indian hotel industry by participating in the development and management of new hotel properties in destinations where it sees significant opportunities.

Hotel Industry reported an overall improvement in financial performance, supported by favourable overall demand and supply situation in the hotel industry in India and internal efficiencies.

With limited rooms entering the system and rapid uptick in demand, room rates saw an improvement, translating in an improvement in revenue per available room (RevPAR).

With the expectation of an improvement in occupancies, this uptick is expected to continue in coming quarters.

City Union Bank:

The bank enjoys a healthy balance sheet with a very good capital adequacy ratio and well-maintained asset quality. Also, superior margins paint a positive outlook for the bank.

The Bank is poised to record a better performance going forward, with a focus on efficiency, quality growth, profitability and building capital strengths.

Hence the bank is expected to do well in the near future. The bank has posted a healthy 15 percent growth in net interest income (NII), while the core fee income of the bank also improved 16 percent in Q3FY2019.

The Net Interest Margin (NIM) of the bank improved to 4.41 percent in Q3FY2019 compared to 4.32 percent in the previous quarter.

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