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Last Updated : Dec 31, 2018 01:59 PM IST | Source: Moneycontrol.com

Investors to track earnings, global cues; expect Q3 to be better than Q2: Ajcon Global

Investors can have a stock specific approach in midcaps and smallcaps as there are many companies that are trading at a discount of 50-70 percent to their peak price

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Akash Jain

Ajcon Global

In the last week, the Sensex and Nifty were up nearly 1 percent. The rupee appreciated 1.70 percent (Rs 1.21) against the dollar as it ended at 69.94 on December 29.

Foreign portfolio investors (FPIs) bought net shares worth Rs 1,731.91 crore on Thursday. On the other hand, for the first time in two decades, India witnessed higher foreign investment than China.

In 2018, India saw more than $38 billion of inbound deals compared with China’s $32 billion, buoyed by stable fundamentals, a bankruptcy code and fresh opportunities in sunrise sectors.

In a key domestic development, the Finance Ministry will be infusing Rs 28,615 crore in seven state-run banks by December-end to help meet the regulatory norms on maintaining adequate capital buffers.

The government last week sought parliament's approval for infusion of additional Rs 41,000 crore in state-owned banks through the second batch of supplementary demands for grants. That takes total recapitalisation for 2018-19 to Rs 1.06 lakh crore.

Outlook

As the state election results and uncertainty at RBI are over, the market would now track global cues and Q3FY19 earnings season. We believe Q2FY19 earnings season was a mixed bag but Q3FY19 could be much better.

All eyes will also be on the last budget of the current government to be presented before the general elections. We do expect volatility as the central government may resort to populist measures to gain back popularity amongst the rural community especially farmers after its loss in key states like Madhya Pradesh, Rajasthan and Chhattisgarh, which street participants may not prefer.

As crucial assembly elections results are out, the question that comes to our mind is which party will win the general elections. It may be difficult for both major parties BJP and Congress to get a majority. Street participants would not prefer a coalition government as decision making and execution becomes difficult in coalition regime for obvious reasons.

The strategy at present should be to invest in a phased manner only in companies which are not connected to any political party, have a robust business model, strong earnings and cash flow visibility, low debt and backed by quality management especially on the corporate governance front. Considering the above factors, investors can have a stock specific approach in midcaps and smallcaps as there are many companies that are trading at a discount of 50-70 percent to their peak price.

On a safer side, we would suggest investors to look at pharma MNCs, consumption stocks, PSU banks, which even after recent rally are trading at depressed valuations (looking better after the cleanup of NPA mess, progress made under the NPA resolution framework under IBC, faster resolutions under NCLT and proposed recapitalisation), IT sector and private insurance companies at the current moment.

Here is the list of top 2 stocks which could give 10% return in next 6-9 months:

Pidilite Industries: Buy | Target price: Rs 1,211 | Upside: 10%

We like this company in the consumption space owing to its stable business model. The company enjoys strong brand recall and its brand 'Fevicol' has high appeal among masses.

The Company is a dominant player in adhesive and sealants segment with significant market share. The company has been major beneficiary of GST due shift from unorganised to organised trade which has resulted in good volume growth for the company in last 4-5 quarters.

In Q2FY19, net sales witnessed a YoY growth of 11.9 percent to Rs 1,509 crore with an underlying volume and mix growth of 9.6 percent. This was driven by 10.7 percent growth in sales volume and mix of consumer & bazaar products and 4.8 percent growth in sales volume and mix of industrial products. Gross margin during the quarter was impacted by a challenging cost environment and saw 360 basis points contraction versus the corresponding quarter of the previous year. Profit after tax during the current quarter at Rs 245 crore declined by 6.3 percent over the same quarter last year.

For the half year ended September 2018 on a standalone basis, comparable net sales grew by 16.8 percent adjusting for GST impact over the same period last year. Profit after tax grew by 7 percent over the same period last year.

Bangladesh and Sri Lanka businesses continue to perform well and it remains focused on SAARC, Middle-East and Africa market as its growth drivers in the international business. The company has delivered another quarter and half year of double digit volume growth; however, a challenging cost environment as a result of crude oil inflations and the depreciating rupee has resulted in lower gross margins. The Company has initiated several cost reduction measures as well as taken some price increases to address this.

On trailing twelve months EPS, the stock trades at a P/E of 59x. Going forward, on estimated FY20 estimated EPS the stock trades at a P/E of 45x. We expect an upside of 10 percent from current levels for investors with a horizon of 6-9 months.

Tata Consultancy Services: Buy | Target: Rs 2,100 | Upside: 10%

We like the company as it is best suited to reap benefits of digital transformation. The company has delivered decent set of numbers in Q2FY19 and given a good guidance. Our conviction stems from the fact that the Company has strong pipeline of orderbook and the deal size is much larger than of its peers.

Higher digital spending by clients provides a strong visibility of orders in the coming future. The management has stated that its Machine first philosophy and agile delivery model is auguring well with its clients and leading to improvement in market share.

The company is confident of achieving double digit growth constant currency (CC) revenue growth over the next 3 years owing to its strong execution abilities which it has exhibited in the past as well.

The company enjoys strong return ratio with ROE in the range of 38 percent and expected to improve by around 300 bps in the next financial year. At CMP of Rs 1,912 (Re 1), the stock trades at a P/E of 25x, we recommend a buy with a target price of Rs 2,100 (Upside: 10 percent) for investors with a horizon of 6-9 months.

The author is Vice President - Equity Research at Ajcon Global.

Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
First Published on Dec 31, 2018 10:30 am
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