Long-term investors should pick their favourite mid and smallcap shares gradually over the next few months, experts say.
The market remained volatile in September, with the benchmark indices falling over a percent each after a 19 percent rally in the previous three months amid improving economic data, positive global cues, strong liquidity, a good monsoon, expectations of growth recovery in FY22 and an improved COVID-19 recovery rate.
The BSE Sensex and Nifty50 fell over a percent each but the broader markets outperformed the frontliners with the Nifty midcap and smallcap indices rising 2 and 4 percent in September and 26 percent and 40 percent, respectively, in the June-August period.
Experts say the benchmark indices may inch towards their previous record high by year-end but for the next few weeks, rangebound trade is likely in the run-up to the US elections. Stock-specific action is likely to continue amid the September quarter earnings season.
"Economy will gradually recover back to pre-COVID levels and start growing at a healthy clip. India's corporate profits to GDP ratio is very low and it is likely to improve gradually. Capital expenditure and corporate credit cycles will gradually pick up and that will help listed companies report superior growth," Devarsh Vakil- Deputy Head of Retail Research at HDFC Securities told Moneycontrol.
Long-term investors should pick their favourite mid and smallcap shares over the next few months.
"The US presidential elections are scheduled on November 3. We expect many participants to lighten their commitments before this big event. Once the uncertainty related to US presidential elections is over, the market is likely to trend higher and that's why we believe it is a buy-on-declines market," he said.
Here is a list of 18 stock that can return 10-37 percent in a yearBrokerage: KR Choksey
Aurobindo Pharma: We expect Aurobindo Pharma to post a CAGR of 12.1/15.8 percent in revenue/PAT over FY20-22 on the back of new launches in the US (around 50 launches per year over the next two-three years), strong growth in generic injectable sales and consolidation of the acquired portfolio of branded injectables from Spectrum Pharmaceuticals, increasing contribution from acquired businesses and territories in the EU. We maintain the target price at Rs 1,027 per share and reiterate a buy rating on the shares.
Glenmark Pharma: Glenmark is focusing on controlling operational costs in the short term to improve the margins (as evident from Q1FY21 result) and curtailing R&D/capex cost in the long term to improve profitability.
Fund-raising for innovation business ICHNOS and subsequent debt reduction will make it an attractive bet in addition to being available at a cheap valuation of 12.4x FY22 earnings. We maintain the target price at Rs 576 per share and reiterate the buy rating.
ITC: We like ITC for its diversified operations across non-cyclical sectors, strong brand leadership position in the cigarette business and focus on establishing itself as an FMCG major. Despite the COVID-19 related slowdown, we see recovery signs in recent months and the current valuation attractive. Using SOTP valuation, we arrive at a target price of Rs 228 per share and maintain a buy rating on the shares of ITC.
Britannia Industries: We expect Britannia to continue delivering strong numbers in the next few quarters, considering its strong market position, deepening of the distribution channel and efforts made for recovery in the rural segment. Assigning a P/E multiple of 55.5x to the FY22 EPS of Rs 79.5, we arrive at a target price of Rs 4,412 per share and reiterate a buy rating on the stock.
Brokerage: Angel Broking
Swaraj Engines: We expect a recovery in the tractor industry—due to robust Rabi crop production, hike in MSP and the forecast of a normal monsoon— will benefit players like Swaraj Engines. The company has a healthy balance sheet along with free cash flow and higher profitability. The company is trading at reasonably lower valuations.
Hawkins Cooker: Cooking gas (LPG) penetration has increased from 56 percent in FY2014 to 95 percent in FY2020, which will drive higher growth for cookers and cookware compared to the past. Demand for kitchen product has gone up post-COVID-19. It has a strong balance sheet along with free cash flow and higher profitability.
Hindustan Aeronautics: The company has an order backlog of Rs 52,000 crore which is expected to increase substantially over the next few years as the company is likely to get many new orders, including those for 83 Light Combat Aircraft Mark 1A worth Rs 39,000 crore, which is expected to go for cabinet approval very soon. The company also has various other projects line up, including Light Utility Helicopter and is likely to fetch some orders for the same in FY2021.
Persistent Systems: The company has posted a very strong set of numbers for Q1FY21 with the dollar revenue growth of 3.1 percent QoQ. It has won a large deal during the quarter that will ramp up over the next few quarters. The new management focus on annuity deals is expected to lead to stable growth.
We expect the company to post revenue/EBITDA/PAT growth of 11.6/21.4/19.7 percent between FY20-FY22, given the negligible impact of COVID-19 on FY21 numbers, strong deal wins and a ramp-up of existing projects along with margin expansion.
Inox Leisure: We are positive on the prospects of the company given that it has a strong balance-sheet, increasing market share of multiplexes and also increasing appetite for Hollywood and smaller budget movies which are expected to reduce volatility in earnings due to lower dependency on big Bollywood movies.
Zensar Technologies: The company has won deals worth $150 million during Q1FY21 and the management has said that the deal pipeline is very strong at $1.5 billion as compared to $1.0 billion a quarter ago. We expect the company to post revenue/EBITDA/PAT growth of 4.5/17.8/19.7 percent between FY20-FY22 given that the worst is over for the company in terms of client ramp downs.
Metropolis Healthcare: From 62.6 percent revenue de-growth (including COVID testing) YoY in April 2020, the company has registered mid-double-digit revenue growth in July 2020 as COVID revenue is making up for the losses in non-COVID revenue. We expect non-COVID business to be back to normal from Q3FY21 onwards. We are positive on the long-term prospects of the company, given expected long-term growth rates of around 15 percent CAGR, stable margins profile and moderating competitive intensity.
Cholamandalam Investment: The management has a stress-tested book and guided for lower incremental provision requirements. The final provision for FY21 would be similar to FY20. Hence, we believe the existing COVID provision is adequate. A diversified product mix will help capture growth in the LCV, tractor, and 2W segment. Adequate capital adequacy (over 20 percent) and a declining trend in the cost of funds and strong parentage provide comfort. The company will benefit significantly from stabilisation in the operating environment.
JK Lakshmi Cement: Currently, north India is a favourable location for the cement industry as it is consolidated to a large extent, as well as demand and supply outlook, is better compared to other locations. Q1FY21 numbers of the company were better compared to its peers due to a favourable regional presence. A fall in crude prices will help to reduce cost/tonne for the company. It is also trading at a significant discount compared to other north-based cement companies as well as historical valuation.
VIP Industries: Shift in trend towards the organised sector will propel growth. Substantial brand visibility with a wide distribution network. VIP has a well-diversified product bouquet, which caters to consumers from all income groups. The recent correction has given investors an opportunity to invest in a market leader with a strong brand and wide distribution network.
Reliance Industries: Telecom business will witness robust growth over the next few years due to tariff hikes and shift of subscribers from Vodafone Idea to other telecom players. We expect the retail business to be a key value driver for Reliance over the long run, though there will be some impact on business in FY21 due to the COVID-19 outbreak. It has raised Rs 1.52 lakh crore from marquee investors like Facebook, General Atlantic, KKR, Intel etc, reaffirming conviction in the company's potential transformation to a digital play from a pure brick-and-mortar company.
Endurance Technologies: Post COVID-19, evolving consumer preference for low-ticket priced means of private transport amid pressurised incomes and awareness around social distancing are expected to act as tailwind for the domestic 2-wheelers in India, 4-wheelers across developed nations. Going ahead, given the company's ability to gain new businesses and market share across categories; we recommend a buy for Endurance.
IDFC First Bank: The ability to raise sufficient liquidity at low cost would be the key criteria for banks to navigate the current situation, as asset side inflow would be limited. IDFC First Bank, after the management change, has clearly outperformed in building liability franchise and retail lending. We believe efforts to build a liability franchise, fresh capital infusion and the provision taken on the wholesale books will help to tide over this difficult time. The IDFC First Bank is trading (1.0x FY22ABV) at a significant discount to historical average valuations.
Brokerage: Prabhudas Lilladher
Kansai Nerolac Paints: KNPL stands to gain from strong wholesale demand for auto led by MSIL in Q2 after seven quarters of decline in industrial paints volumes. We believe a low base in auto paints and gradual recovery in other industrials led by consumer durables will result in positive momentum. Decorative paints are on a solid wicket given strong post unlock demand from tier 2 and 3 cities and low base for Kansai in J&K where it has 60-70 percent market share. Kansai is diversifying its presence in emerging segments like coil coatings, rebar, pipe coatings, floor and infra coatings. It has entered high growth segments like adhesives, construction chemicals and wood coatings, which will diversify sales and boost growth.
Disclosure: Reliance Industries Ltd. is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments Ltd which publishes Moneycontrol.Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.