HDFC Securities
An old axiom of investing has prevailed over the trailing year: ‘Equity is a volatile asset class.’
Frankly, the more things change, the more they remain the same. What could be said in 2013 during the taper tantrum can perhaps be said once again? Indian stock market sentiment has cracked in the face of persistently rising crude prices and the prospect of a bloated current account deficit.
The fiscal deficit worry has also resurfaced with government spend running well ahead of income to make the 3.3 percent promise look infeasible, especially as an election year approaches.
In response, the rupee has cracked 13 percent so far in FY19. The Nifty is still almost flat for FY19 to date, but the pain in the mid-caps has been terrible. The Nifty Midcap 100 is down 10 percent, while Nifty Smallcap 100 is down 25 percent so far in FY19.
Even within the Nifty, the skew is very high with respectable companies such as Tata Motors, BPCL, Bharti Infratel, Hero Motocorp, Bajaj Auto, etc. falling 20-50 percent.
The latest crisis to hit markets has been in the form of the liquidity crunch for NBFCs in the wake of the IL&FS crisis. Many NBFC stocks have fallen as much as 40-50 percent since then.
Our stock selection for this Diwali is based on two criteria – capital preservation (for now) and alpha generation (for later).
Firstly, they will be perceived as relatively stable in the face of further market weakness, should it play out.
Secondly, they are fundamentally strong businesses with the enduring franchise, large addressable opportunity in their respective sectors and are run by capable management. We think this will help them deliver significant outperformance when broader markets recover.
Here is a list of top 10 stocks which could give 20-30 percent return by Diwali 2019:
Apollo Hospital Enterprise: Buy| LTP: Rs 1,143| Target: Rs 1,368| Return: 20 percent
The company maintains a leadership position and multi-pronged healthcare delivery model make Apollo one of the stronger healthcare stocks. The new hospital cluster has begun to contribute positively, led by an improvement in the Navi Mumbai unit.
Post a phase of weak earnings, consolidated profitability could improve led by (a) continuing growth in existing hospitals, (b) contribution from new hospitals, (c) continuing growth in ASAP, and (d) reduction in AHLL’s operating losses.
HDFC Securities feel that investors could buy the stock at the LTP, and add on dips to Rs 974 – 982 (14.0x FY20E EV/EBITDA) for a target of Rs 1,368 (18.5x FY20E EV/EBITDA).
Cummins India: Buy| LTP: Rs 678.1| Target: Rs 817| Return: 20 percent
Cummins India (CIL) is well placed to capture the broad revival in industrial and infrastructure capex in India, with its best-in-class product portfolio, wide distribution reach, and technological leadership.
Despite a 7 percent decline witnessed in domestic revenues in Q1FY19, the company maintains a domestic sales growth target of 8-10 percent, indicating a 13-14 percent growth in the remaining part of the current fiscal in domestic business.
With the kind of technological leadership CIL has in the Indian market, along with a healthy balance sheet and strong parentage, it deserves a premium over its peers in terms of valuation.
Dr Reddy’s Laboratories: Buy| LTP: Rs 2534.75| Target: Rs 2,952| Return: 16 percent
Dr Reddy’s Laboratories (DRL) has a promising complex generics pipeline. Key factors for this are the resolution of the Duvvada plant and approvals of generics of Suboxone, Nuvaring, and Copaxone.
The management indicated FY19 as a challenging year, with price erosion prevailing in the US generic business. Strong growth in the domestic market and other non-US markets should lend support to revenue growth.
The company plans to capitalise on the first-mover advantage in China, increase the filing tempo, and break into the Top-10 (from No 16) in the Indian branded market. The stock price could reverse the underperformance witnessed in the last three years.
ICICI Bank: Buy| LTP: Rs 349| Target: Rs 411| Return: 17 percent
The pressure regarding leadership has now mitigated, asset quality concerns are being addressed, various measures to improve retail asset growth and return ratios are being taken, and the stock looks attractive.
With the return of long-term visibility, the bank, with its segment-leading subsidiaries may undergo a gradual rerating. Return ratios could witness an improvement over the next two years (mainly led by falling credit costs), pushing analysts/investors to take a relook at the stock.
Cyient: Buy| LTP: Rs 624.7| Target: Rs 748| Return: 20 percent
Cyient’s niche engineering services, strong client relationships, timely acquisitions to support its product solutions profile, strong financial profile with minimal debt, and healthy debt protection metrics and liquidity make a case for investment in its stock.
It has some deals in the negotiation phase, and the overall deal pipeline remains good. HDFC Securities feel that investors could buy the stock at the LTP and add on dips to Rs 545 – 555 (11x FY20E EPS) for a target of Rs 748 (15x FY20E EPS).
Sun Pharmaceuticals: Buy| LTP: Rs 572| Target: Rs 690| Return: 20 percent
HDFC Securities believe FY19 may witness a gradual comeback for largecap pharma companies, driven by (1) actual and likely regulatory resolutions, (2) moderating price erosion and (3) several product launches across generic and speciality categories in the medium term.
Sun Pharma trades at 22x FY20E earnings, which is compelling given strong earnings growth of 84 percent expected over the next two years.
The domestic brokerage firm estimates 15.5 percent revenue CAGR and 39 percent PAT CAGR over FY18-20E.
Parag Milk Foods: Buy| LTP: Rs 257.8| Target: Rs 329| Return: 28 percent
In FY18, PMF registered 12.9 percent revenue growth. Consumer products revenues registered 15.7 percent growth. Value-added products comprised the maximum share with 65.6 percent, followed by fresh milk at 19.9 percent.
EBITDA margin stood at 9.9 percent, while PAT margin at 4.5 percent. PMF has a vast range of value-added products, which constituted ~66 percent to its sales. Parag Milk is popular in the branded dairy theme. We expect robust growth from value-added products in the coming years.
HDFC Securities estimate 19 percent revenue CAGR, led by 18 percent growth from value-added products. Strong revenues and better operating profit would lead to ~33 percent PAT CAGR over the same period.
Exide Industries: Buy| LTP: Rs 254| Target: Rs 304| Return: 20 percent
HDFC Securities have valued Exide on a SOTP basis. Standalone EPS for FY20E is Rs 13. Giving 20x multiple the value per share is at Rs 267, and valuing the insurance business at 2 times the book value at Rs 37 per share.
The brokerage firm recommends a buy for Exide Industries at LTP of Rs 254, and add on dips to Rs 228 for the target price of Rs 304 till next Diwali.
Everest Industries: Buy| LTP: Rs 464| Target: Rs 558| Return: 20 percent
Everest offers a complete range of roofing, ceiling, wall, flooring, and cladding products distributed through a large network, as well as EPC of pre-engineered steel buildings for industrial, commercial, and residential applications.
Over the time frame of FY18-20E, sale for the company is expected to grow at 12 percent CAGR, while PAT is expected to grow at 24 percent CAGR. Currently, the stock is trading at the 8.6x P/E of FY20.
Hindustan Oil Exploration: Buy| LTP: Rs 130| Target: Rs 177| Return: 36 percent
The company is debt free, with net cash balances of Rs 35 crore and Rs 53 crore invested in its subsidiary. Over the next two years, the company expects a significant ramp-up in volumes which would ensure growth visibility going ahead.
The company had a capex of Rs 60 crore last year. In the current year, it is expected to be ~Rs 60-70 crore. In H1FY19, company has posted stellar numbers, with ~Rs 99 crore revenues and PAT at ~Rs 66 crore.
In FY18, revenues were at Rs 49 crore and PAT at ~Rs 38 crore. HDFC Securities expect the growth momentum to continue in the second half of FY19 as well. The company could post Rs 208 crore revenues and Rs 133 crore PAT in FY20. HOEC trades at ~12.5x FY20 earnings and ~10x EV/EBITDA.
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