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Last Updated : Oct 08, 2019 10:07 AM IST | Source: Moneycontrol.com

Market off to a weak start in October, 'bet on these top 11 picks for 10-57% return'

The equity market may trade with a negative bias in the short-term, but the broader market will maintain its positive bias in the long-term, Vinod Nair of Geojit Financial Services says.

Sunil Shankar Matkar
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The market started off October on a negative note, with PMC Bank-HDIL fraud heightening concerns over asset quality and the RBI sharply lowering the growth forecast.

The benchmark indices gained around 4 percent each and broader markets (midcap and smallcap) added 5 percent each in September, on the back of the corporate tax rate cut.

But, bulls were again trapped by bears with the benchmark indices losing 75 percent of their September rally in the first week of October. On top of that, the Reserve Bank of India (RBI) lowered its FY20 GDP growth forecast to 6.1 percent from 6.9 percent.

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In addition, FIIs remained net sellers for the sixth consecutive month, suggesting they were in risk-off mode on account of the global slowdown and trade concerns. They have sold Rs 44,000 crore worth of shares since May, including last week’s Rs 3,200 crore worth of selling.

Experts see worries such as weak earnings and slowdown to persist for some more months before measures taken by the government begin showing results. Volatility is expected for some more time and all eyes will be on the September quarter earnings.

"Despite cut in taxes and the government stimulus, the broad economy will take more time to gain and invest in new projects. Having said that, the worst for domestic economy may be over by Q2–Q3 FY20. We can expect a faster recovery in consumption led by stability in job market, festive seasons and reduction in interest cost. This quick benefit cannot be replicated in non-consumer segment as financial sector and new investments have a lag-effect," Vinod Nair, Head of Research at Geojit Financial Services told Moneycontrol.

Nair said the equity market may trade with a negative bias in the short-term, but expects the broad market to maintain its positive bias in the long-term.

Experts advised using buy on dips strategy and pick quality stocks, as these would benefit in the medium-to-long term from several measures announced by the government and transmission of repo rate cut, etc.

A list of 11 stocks that can deliver 10-57 percent return:

Brokerage: Motilal Oswal

Larsen & Toubro: Buy | Target: Rs 1,800 | Return: 26 percent

L&T has several levers across business/geographic segments, which provide a robust foundation to capitalise on the next leg of the investment cycle.

The management is positive on ordering environment, with total prospects across domestic and overseas market at Rs 8.4 lakh crore. It witnessed order inflows of Rs 38,700 crore (11 percent YoY) in Q1FY20, which augurs well compared to the management's guidance of 10-12 percent growth with back-ended ordering.

We forecast adjusted consolidated EPS CAGR of 23 percent over FY19-21, helped by strong execution, normalisation of margins and financial leverage. Consolidated return on equities (RoEs) should expand to 17.6 percent by FY21 from 14.6 percent in FY18.

Petronet LNG: Buy | Target: Rs 336 | Return: 31 percent

Petronet LNG owns and operates India's largest LNG terminal with 15 mmt capacity at Dahej in Gujarat and 5 mmt n Kerala’s Kochi. Higher gas adoption from industries and the power sector will likely support the volume growth for PLNG. We believe that due to the Kochi-Mangalore pipeline and Dahej expansion, PLNG's total volume could grow by around 9/7 percent in FY20/21.

Visibility on long-term earnings has improved with (a) the huge gas demand-supply gap in India, (b) volume growth, driven by gradual capacity addition and (c) earnings growth boosted by annual re-gas charge escalation to protect IRR. We estimate revenue/EBITDA/PAT CAGR of 15/22/23 percent over FY19-21.

Tech Mahindra: Buy | Target: Rs 830 | Return: 17 percent

Tech Mahindra has strong capabilities in communications (around 43 percent of current revenue) and works with most of the major global service providers. It has historically benefitted

out of upswings in capital expenditure triggered by the adoption of new technology.

Tech M has been able to see sustained growth in enterprise because of [1] success in large deal wins, [2] less baggage of traditional services, [3] small scale in most verticals and [4] sizeable engineering revenue. Margins, however, will likely remain under pressure in the initial transition phase. Over FY19-21, we expect USD revenue CAGR of 7.8 percent and earnings CAGR of 7.7 percent.

ICICI Bank: Buy | Target: Rs 520 | Return: 26 percent

ICICI Bank is progressing well in its endeavour to strengthen the balance sheet with strong focus on retail franchise. The retail business remains a key growth driver and constitutes around 61 percent of the total loan book.

It is better placed in a challenging macro-environment (economic activity is slowing down and the pace of stressed asset formation is posing an upside risk to asset quality), given that it has a limited exposure to the newly surfaced stressed names and is well on track to see earnings normalisation.

With asset quality stabilising, we expect credit cost to moderate sharply and estimate core RoA/RoE to improve to 1.5 percent/15.5 percent by FY21.

Brokerage: Karvy Stock Broking

Zee Entertainment Enterprises: Buy | Target: Rs 372 | Return: 57 percent

We have a positive outlook for the company due to strong fundamentals, domestic and international expansions, continuous growth in revenue and stable margins despite higher investment in digital business. On other side, implementation of the new tariff order and repayment of debt for the pledged shares are the main concerns for the company.

But, ongoing strategic stake sale helps to improve liquidity condition to pay off the company’s debt and this will boost the market price. We recommend a buy on the stock, with a target price of Rs 372 and an upside potential of 57 percent.

Ashok Leyland: Buy | Target: Rs 84 | Return: 23.5 percent

FY20 is expected to be a challenging year despite anticipated pre-buying of commercial vehicles in India before BS-VI implementation. The pre-buying of commercial vehicles is expected in Q3 and Q4 of FY20. The management expects to benefit from the old-vehicle scrappage policy likely to be implemented in FY21.

At CMP of Rs 68, based on its core earnings, the stock is currently quoting at 8.9xFY21E earnings. We believe current valuations ignore ALL's long-term growth prospects and its competitive strength. We retain our buy rating on the stock, with a price target of Rs 84, an upside potential of 23.5 percent.

Brokerage: Edelweiss Broking

Mahindra & Mahindra | Target: Rs 620 | Return: 10 percent

Mahindra & Mahindra's (M&M) last few quarters performance has broadly been in line with estimates despite headwinds of tighter financing impacting the auto sector.

The tractor business is in a sweet spot to benefit from robust industry demand and sustain the market share. Monsoons have recovered to be normal and this will wipe out any kharif sowing deficit, resulting in tractor sales meeting the guidance of a flat YoY growth. Also, there has been a slight drop in raw material prices of tractors.

We expect the passenger vehicle business to get back on track given the company's strong focus on addressing product gaps (a new MPV and Tivoli-based SUV), as well as launching refreshed versions and petrol variants across its portfolio.

The company recently announced a JV with Ford which will help fill capability gaps in product development and also bring cost synergies. The stock is also trading at inexpensive valuation of 16x P/E FY20E.

Brokerage: SMC Global Securities

Amara Raja Batteries: Buy | Target: Rs 822 | Return: 19 percent

Amara Raja Batteries is a manufacturer of lead-acid storage batteries for industrial and automotive applications in India.

E-rickshaws are gaining traction in last-mile rural connectivity and represent a good opportunity for lead acid players. Motive power and solar applications are new segments to drive industrial growth. Also, lithium ion battery technology promises to be a $42 billion opportunity if Niti Aayog’s target penetration by 2030 is to be met. Thus, it is expected that the stock will see a price target of Rs 822 in eight-ten months time frame on the one-year average PE multiple of 24.46 times and FY20E EPS of Rs 33.61.

KEI Industries: Buy | Target: Rs 613 | Return: 15 percent

KEI Industries manufactures a variety of cables and caters to power, industrial, infra, railways, metro rails, oil & gas, upstream, aluminium, refineries, steel and exports. It is working on increasing exports. It is exploring more business from Africa and Middle East.

KEI can be a major beneficiary of the increasing demand from power, infrastructure and real estate sectors. The company has been focusing on expanding its dealer network as this sales channel offers better margins. Institutional sale growth has been encouraging and management expects this division to grow in double digits. Thus, it is expected that the stock will see a price target of Rs 613 in eight-ten months' time frame on four year average PEx 21.29 times and FY20E earnings of Rs 28.81.

Brokerage: BP Equities

BSE Limited: Buy | Target: Rs 701 | Return: 25 percent

BSE Limited is the largest exchange by number of listed companies and India’s largest and world’s 10th largest exchange by market capitalisation. It provides advanced and integrated support services throughout entire trade life cycle and emerged as a preferred exchange in India.

With an ambition to expand cross-border reach, it has entered into various strategic alliances. We expect BSE's revenue to increase at a CAGR of 11 percent driven by its investment in future growth drivers like INX, insurance distribution, SME and StAR MF over FY19-21E and also some operating leverage to play out with growth (EBITDA margin from 6.5 percent in FY19 to 15 percent in FY21E) Further it is a debt free company and a healthy liquidity with very attractive dividend yield of around 5.4 percent.

We have valued the company based on 15x PE of FY21E and assigned a buy rating on the stock, with a target price of Rs 701 for an investment horizon of 12-15 months.

VA Tech Wabag: Buy | Target: Rs 382 | Return: 46 percent

A pure water expert company, Va Tech Wabag stands to benefit from a slew of planned capex in water infrastructure space. We are confident that the company will deliver strong growth in the coming years on the back of a strong order book of Rs 11,702 crore as in Q1FY20 and a robust industry outlook.

Va Tech Wabag is strongly positioned in the domestic water industry and looks an attractive investment bet for a longer term. On account of its healthy order book and improved execution capabilities, Va Tech Wabag is expected to report robust CAGR of 20 percent/33.5 percent/28.7 percent in Revenues/EBITDA/PAT respectively during FY19-21. Also, the revival of capex cycle and concentrated efforts by the  government to improve and conserve water will bring more business opportunities for the company.

Addressing working capital issue with payment from APGENCO and TSGENCO and execution of new projects will be key triggers for the stock.

We recommend buy rating on the stock, valuing it at PE of 12x to FY21E earnings (which is 50 percent discount to long term 10-year average of 24x) for a target price of Rs 382 for a 12-15 month investment horizon.

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.

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First Published on Oct 8, 2019 10:07 am
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