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Domestic market saw a good rally in July with benchmark indices trading higher by around 6 percent each. A report by Kotak Securities has named many factors for the upmove which include GST rate cut, strong quarterly results, healthy domestic fund flows at USD 1.5 billion per month, expectation of normal monsoon, correction in crude prices, base and industrial metals, and improving corporate confidence and capex.
After the recently-won trust vote by the BJP-led government at the Centre, the political uncertainties are now behind us, analysts at Kotak said in the report.
To ride the momentum, which is on the upside, the brokerage house recommends investors to add companies which are exhibiting improvement in earnings (IT and banks), showcasing strong volume growth and those which will benefit from normal monsoon (FMCG and paints).
Investors could also look at adding sectors which are defensive in nature, such as pharma. Along with it, one could look at companies which would benefit from the government spending in pre-election year (infrastructure companies), as well as export-driven sectors since rupee is weak (IT, Pharma, Textiles, and Jewellery)
Having said that, D-Street could be staring at risks such as unfavourable outcome of forthcoming state elections, additional surge in crude prices, further depreciation of rupee, widening trade deficit, increasing inflation and interest rates, and waning inflows from FIIs and domestic mutual funds.
The Nifty and Midcap index are currently trading at 18.2 times and 20.8 times one year forward earnings, respectively, which is still at a premium to historical five-year average one-year forward earnings despite falling rupee, increasing CAD, volatile commodity prices, and peaking inflation.
Here is a list of top 10 stocks which could give up to 80 percent return in the next 1 year:
Adani Port & Special Economic Zone: Buy| LTP: Rs 371| Target: Rs 485| Return 30 percent
APZ has entered into an agreement with GMB to build, operate and maintain the port for a period of 30 years till 2031 extendable by another 20 years. FY18 was healthy for APZ in terms of port volumes (+7 percent YoY), adjusted port revenues of 113.2bn (+34 percent YoY) with healthy EBIDTA margin.
The management targets 1.5x accelerated total cargo growth and 2x container volume growth of 2X versus major ports. In order to achieve the growth objective, the company is expanding operations at several locations.
The company intends to focus on container and Liquid cargo which adds value to APZ as they have higher margins, lower turnaround time and require lesser investment in terms of infrastructure.
Allcargo Logistics: Buy| LTP: Rs 122.80| Target: Rs 145| Return 19 percent
Allcargo (ALL) has a strong presence in the Multimodal Transport Operation (MTO) business through a wide network of ECU Line. It also has a strong hold on domestic MTO business and continues to perform strongly in the MTO segment despite sluggish container shipping market.
The relationship with shipping lines, vast experience in the logistics business and presence in other verticals (MTO) should help ALL to outperform most of its peers in the CFS segment.
For ALL, the brokerage house feels that expect the growth to come from the key MTO segment, new CFS in Kolkata and Logistics Park in Jhajjhar.
Arvind: Buy| LTP: Rs 404| Target: 500| Return 23 percent
Arvind has a portfolio of 15 international licensed brands and 12 in-house brands targeting different segments and are managed by qualified and experienced professionals.
Kotak Securities expect all its brands to be profitable in FY19E, resulting in 230 bps improvement in EBITDA margins the branded apparel business between FY18-20E.
Arvind being a major player in the branded apparel business and having a long history in textiles business which would be benefited by rising disposable income, growth in the retail sector and increasing preference towards branded apparels.
“We believe that the demerger of branded apparel and engineering business would unlock the value of each of the businesses post listing,” said the note.
Central Depository Services (India): Buy| Target: Rs 320| LTP: Rs 269.90| Return 19 percent
CDSL has a high stability of operating income from the fixed annual charges collected from its diversified client base. The revenue stream is diversified, with 52 percent of revenues being market-linked (transaction charges/IPO & corporate action/KYC are 21/11/13 percent of revs).
The company has clocked 21 percent CAGR top-line over the past four years. We expect revenue to grow at 11.3 percent CAGR during the FY18-FY20E period.
Despite being a late entrant in the market, CDSL has been gaining market share from NSDL. CDSL BO accounts market share stands at 46.5 percent in FY18 (almost doubled in 10 years) and market share in incremental account additions is ~60 percent.
L&T: Buy| Target: Rs 1520| LTP: Rs 1295| Return 17 percent
L&T is a diversified play on the Indian infrastructure and Industrial sector. The order backlog of Rs 2.7 trn remains strong providing visibility of 34 months of trailing four-quarter revenue.
The company has given healthy revenue growth guidance in FY19 of 12-15 percent. Order intake has grown 37 percent y-o-y in Q1FY19, ahead of our expectations. The orders are coming from government spending in Roads, Water and Urban Infrastructure etc.
The company reported good Q1FY19 earnings numbers and if this performance on execution and order intake is sustained in the coming quarters, then the stock could outperform the markets.
Maharashtra Seamless Ltd: Buy| Target: Rs 615| LTP: Rs 471.95| Return 30 percent
The anti-dumping duty levied on Chinese imports along with fading competition from other Indian players offers the advantageous position to the company.
MSL is well positioned to benefit from a recovery in increasing capex in the domestic hydrocarbon industry. The international footage offers geographical diversification to take advantage of the growing demand in Europe/US market.
"We project 25 percent CAGR between FY18-20 in consolidated revenues from Rs.21.4 Bn in FY18 to Rs 33.8 Bn in FY20E. In our projections, we build EBITDA margin at 17 percent and 17.5 percent in FY19E and FY20E respectively," said the report.
Mahindra Holidays & Resorts India Ltd: Buy| Target: Rs 390| LTP: Rs 287| Return 35 percent
Mahindra Holidays & Resorts India Ltd (MHRIL), part of Mahindra group is the market leader in the vacation ownership (VO) business in India with over 20 years of track record.
MHRIL with its robust business model, strong management, and brand image will be able to tap opportunity and beat competition from other players in the hospitality business.
MHRIL has been meeting its capex for future growth through internal accruals and maintains debt-free balance sheet. The recent corrective measures adopted by the company in terms of its focus on adding the right quality members is expected to improve profitability along with moderation in receivables.
Nagarjuna Construction Company: Buy| Target: Rs 167| LTP: Rs 94.75| Return 73 percent
Nagarjuna Construction Co Ltd, a leading player in the infrastructure segment has a strong order book of Rs 325 bn providing visibility for three years. Company’s order book is well diversified across roads, building, oil & gas, water & railways, irrigation, electrical, mining, others & Int'l.\
The Company is set to benefit from government’s continued push on infrastructure. It is quite optimistic on order inflows from AP/Telangana in water supply, irrigation, and building segment.
Healthy order book, stable margins, and reasonable leverage are likely to lead to CAGR of 26 percent on revenues and 31 percent on reported PAT over FY18-20. Kotak Securities maintains a positive bias for the stock and recommend a buy.
Persistent Systems Ltd: Buy| Target: Rs 1025| LTP: 862| Return 19 percent
Persistent specializes in software product development and technology services. It helps enterprises to transform their business into software-driven business in North America, Europe, and Asia.
It has moved away from effort based business (low growth prospects) to value-based business (high growth prospects and better margins).
Persistent expects to outperform industry-growth rates and report overall double-digit revenue growth for FY19E. Margin improvement and strong revenue visibility make us positive on its growth prospects. Additionally, cash-rich balance sheet, strong free cash flow, and healthy return ratios also provide high comfort.
Vedanta: Buy| Target: Rs 415| LTP: 226| Return 83 percent
Vedanta’s consolidated operating cash flows increased to Rs162 bn (before working capital changes) in FY2017 (Rs127 bn in FY2016) led by improvement in earnings across businesses, especially of zinc and aluminum.
The zinc, aluminum and oil & gas operations account for close to 85 percent of VEDL’s EBITDA. The brokerage firm expect strong volume growth in all three businesses: (1) the zinc-lead volumes will increase by 40 percent over the next two years led by mine expansion in Zinc India and Gamsberg project in RSA, (2) aluminum volumes will increase to 2MT in FY2019E from 1.6MT led by ramp-up of Jharsuguda-II smelters, and (3) in oil & gas, management guidance is of sharp increase in gross production volumes to 220-250 kb/d in FY2019.
The company is expected to generate strong free cash flows on the back of higher metal volumes and prices and deleveraging is expected to play out despite healthy dividend and capex.
Disclaimer: The above article is compiled from a Kotak Securities report for the month of August. The views and investment tips expressed by investment expert on moneycontrol.com are Kotak Securities’ own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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