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Last Updated : Mar 23, 2020 01:49 PM IST | Source: Moneycontrol.com

Kotak upgrades 14 stocks to buy in March after the virus-led correction

Given the sharp fall in stock prices across sectors, most experts advised accumulating quality and fundamentally strong scrips with a long term perspective.

 
 
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The market has plunged nearly 28 percent in the last month. Investors worried the most about the global growth after the wide-spreading Covid-19 or novel coronavirus.

FIIs also sold more than $8 billion worth of shares in almost a month, followed by heavy short selling, which dragged most of the stocks to multi-year or record lows.

With the number of infected cases from the virus and the death toll on the rise, many countries in the world, including India, have gone into lockdown. This is expected to have a negative impact on the earning of companies and also the global economy.

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"The sharp correction in the stock prices of most largecap and midcap stocks suggest that the market expects sharply lower earnings (to the extent of 20-50 percent) of companies in perpetuity because of the Covid-19 situation," Kotak Institutional Equities said.

"As several events in the past have shown, the world will eventually recover from the aftermath of the ongoing COVID-19 pandemic; the pain will be extreme for affected countries and households but hopefully short-lived for most companies and individuals," said the brokerage.

Given the sharp fall in stock prices across sectors, most experts advised accumulating quality and fundamentally strong scrips with a long-term perspective as valuations turned more attractive than earlier.

Moneycontrol has collated a list of 14 stocks that were upgraded to buy by Kotak Institutional Equities. These stocks could give return in the range of 10-157 percent in next one year:

Hindustan Unilever: Buy | Target: Rs 2,250 | Return: 10 percent

Even as we do not rule out some short-term pressure on topline growth on account of the immediate and derivative impacts of COVID-19, we see little risk to the key long-term earnings growth drivers – margin expansion, portfolio premiumization, GSK Consumer Healthcare merger, and sublime execution.

In fact, raw material tailwinds have become stronger with the sharp correction in crude. We upgraded the stock to buy (from reduce) with a revised fair value of Rs 2,250/share (from Rs 1,900).

We have moved the valuation approach to an HUL + GSK Consumer Healthcare combined DCF from HUL DCF plus value creation from the acquisition approach earlier.

Infosys: Buy | Target: Rs 680 | Return: 16 percent

We cut FY2021-22E revenue by 5-7 percent and EPS by 10-11 percent as we build the impact of Covid-19 pandemic globally. We forecast revenue decline of 0.9 percent in FY2021E and expect EBIT margin to decline to 20.6 percent. We expect normalization of growth in FY2022E. Post 32 percent correction in stock price, Infosys trades at trough multiple.

We upgraded to buy from add on – (1) attractive valuations; we valued Infosys at a normalized multiple of 16X FY2022E earnings resulting in fair value of Rs 680 (Rs 810 earlier) and (2) wallet share gains and excellence in execution will ensure that it remains in the top percentile on growth.

Bharti Infratel: Buy | Target: Rs 185 | Return: 23.5 percent

The sharp recent correction has brought down Bharti Infratel's EV to 3.9X 3QFY20 annualized EBITDA. Even as we appreciate the sharp, immediate risk to this EBITDA from further consolidation in the wireless market, we believe some of the EBITDA lost will be recouped on the back of (1) higher tenancies from the surviving operators and (2) higher rental/tenant driven by the sliding rental structure.

We turned positive on the stock after a long time. We upgraded to buy (from reduce) with a revised face value of Rs 185/share. Our revised face value reflects a 2+1 wireless market structure.

Apollo Hospitals: Buy | Target: Rs 1,820 | Return: 33.4 percent

We expect Apollo Hospitals to benefit from an improving maturity profile, even as the near-term outlook is challenging given lower volume of international and domestic travel patients, as well as deferment

in OPD footfalls and elective surgeries, though, we expect a full demand recovery in 2HFY21. We cut FY2020/21 estimates, and upgrade to buy with revised fair value of Rs 1,820/share (versus Rs 1,840/share).

Endurance Technologies: Buy | Target: Rs 850 | Return: 16.5 percent

Endurance is likely to outperform the automotive industry growth in India led by new order wins in the domestic market. The near-term growth outlook for the auto industry in India and Europe is challenging but we believe Endurance will be the least impacted among Indian suppliers due to the new orders it secured over the past one year.

We have cut earnings estimates to bake in a more cautious outlook on demand, and the fair value cut to Rs 850 (from Rs 960 earlier).

United Spirits: Buy | Target: Rs 660 | Return: 27 percent

We upgraded United Spirits to buy from reduce with fair value of Rs 660. United Spirits has executed well on premiumization and non-COGS cost optimization over the past few years notwithstanding a weak demand environment and raw material headwinds. Even as demand environment remains challenging (especially ST impact of COVID-19), raw material prices have stabilized and valuations have turned attractive. We revised estimates to factor in the ST impact of COVID-19 and fair value to Rs 660 (from Rs 670).

Cummins India: Buy | Target: Rs 520 | Return: 23.5 percent

We upgraded Cummins India to a buy from reduce based on (1) our assessment of earnings downgrade cycle being largely behind us, (2) diversified mix of businesses helping chug through current uncertain times and (3) reasonable valuations at sub-17X trailing earnings. We lowered fair value to Rs 520 from Rs 590 on 11 percent cut in estimates and lower 18X multiple. Prospects from shift of business to Cummins India from China and from revision in domestic emission norms provide defence against unforeseen negatives in base business.

Tata Communications: Buy | Target: Rs 425 | Return: 80 percent

At just over 5X trailing (FY2020E) EV/EBITDA, we see a lot of value in Tata Communications even if there is some short-term business disruption on account of the Covid-19 impact on the global economy. Tata Communications' existing core business should not see much impact, anyway, barring some impact on the business from the media vertical in the short term. New business signing could get delayed on account of travel restrictions but should see quick recovery once things normalize. We cut ST forecasts, lower face value (FV) to Rs 425 (from Rs 500) and upgraded the stock to buy (from add).

PVR: Buy | Target: Rs 1,800 | Return: 37 percent

We upgraded PVR to buy from reduce with FV of Rs 1,800 (Rs 1,850) valuing it at 11X FY2022E EV/EBITDA (unchanged). While COVID-19 would significantly impact the business in the short term (say two months), we expect it to bounce back thereafter led by pent-up demand and a packed line-up of movies. We cut FY2020-21E EBITDA estimates by 10-23 percent and retain FY2022E estimates. Sharp 40 percent correction from peak presents an opportunity to buy this stock at an attractive valuation.

Just Dial: Buy | Target: Rs 460 | Return: 38 percent

Post the sharp stock price decline, Just Dial stock is available at a deep value. While challenges to the business remain and COVID-19 may result in some loss of business for Just Dial, we believe current risk-reward is extremely favorable (EV/FCF of 1.6X FY2021; market capitalisation of Rs 2,020 crore, cash on books was Rs 1,540 crore as of December 2019). We thus upgraded the stock to buy from reduce with a revised FV of Rs 460 (Rs 570 earlier).

Sobha: Buy | Target: Rs 465 | Return: 157 percent

We upgraded Sobha to buy (from add) with a revised fair value estimate of Rs 465share (from Rs 515/share). The stock has corrected sharply over the past month, allowing a sharp upside to revised fair value estimate, and trading at 0.8X P/B on FY2022E. The current market price gives near no credit to the land bank of Rs 2,600 crore that has traditionally been an area of debate for investors.

Concerns on promoter liquidity constraints are overplayed and should be seen in the context of the purchase of stock by key management personnel over the past month.

Bajaj Auto: Buy | Target: Rs 3,100 | Return: 37.7 percent

We upgraded the stock to buy (from reduce earlier) as valuations (at 11.5X on FY2022E core EPS) turn attractive given strong growth prospects in export markets. The domestic motorcycle segment forms only 10 percent of Bajaj Auto's EBITDA; hence impact on Bajaj Auto will be limited due to BS-VI transition. Export volume growth is strong currently and we built sufficient cushion in our numbers if oil prices remain depressed in the near term. FV revised to Rs 3,100 (from Rs 3,150).

Lupin: Buy | Target: Rs 840 | Return: 31 percent

The recent share price correction means that Lupin valuations reflect only domestic segment valuations, implying deep value and market’s disappointments around the regulatory actions against its facilities as well as a lack of cost cuts, and implying no value to the US despite a strong pipeline build-out. However, we expect continued strong performance in India and EMs, and see levers for operating leverage starting with levo ramp from Q1FY21. We upgraded to buy.

Dalmia Bharat: Buy | Target: Rs 1,050 | Return: 105.4 percent

Dalmia is progressing well to reach 37 mtpa capacity by FY2022E and would penetrate deeper into the West and East regions. With access to 20 states, Dalmia is no longer a regional player. Leverage is well controlled despite aggressive growth with net debt/EBITDA peaking at 1.7X in FY2020E. Concerns on the treasury appear overblown; resolution of the mutual fund case and divestment of IEX holding could trigger a re-rating. Valuations have corrected to an attractive 6X EV/EBITDA FY2022E. We upgraded to buy (from add) at an unchanged face value of Rs 1,050.

Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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First Published on Mar 23, 2020 01:49 pm
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