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Last Updated : Jan 17, 2020 10:26 AM IST | Source: Moneycontrol.com

Quality mid, smallcaps to outperform Nifty; these 10 stocks can return 10-35%

Analysts feel investors will still focus on quality stocks only in 2020

Sunil Shankar Matkar
 
 
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The underperformance of Nifty Midcap (down 4 percent) and Smallcap (down 9 percent) to the benchmark Nifty50 for the second consecutive year in 2019 is unlikely to continue in 2020 given the recovery seen from August 2019 lows, analysts feel.

The Nifty Midcap 100 index gained more than 12 percent from August lows till December-end and has so far rallied 17 percent. But that does not mean the rally would be broad-based in 2020. Analysts feel investors will still focus on quality stocks only.

"The year 2020, in our opinion, will be yet another year in which select large and midcaps will outperform the Nifty," IIFL Finance said.

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Morgan Stanley has also said in a note titled India Equity Strategy, that, "the trend could reverse in favour of midcaps" after the underperformance seen in last two years.

“We opine that growth is likely to improve and that dislocations in price/valuation across sectors, style baskets and market cap cohorts will likely reverse in 2020 since these gaps were created by sluggish growth in the first place,” the global brokerage said.

Morgan Stanley is of the view that the growth is likely to recover in 2020, and the style bias in India could shift towards value and growth stocks.

Based on the 12-month trailing price-to-book, the Midcap index is now trading at a discount of 25 percent to the Nifty50, compared to a discount of lower single digits in early 2018 and an average discount of 30 percent. The Smallcap index, meanwhile, is trading at a discount of 60 percent to Nifty 50.

As per JM Financial, the drivers for midcap rally continue to be a) momentum on domestic flows (mutual fund and portfolio management services (PMS)) where the momentum has been weak in the last 12 months, and b) earnings outlook.

Moneycontrol collated 10 stocks where brokerages have a bullish bias, and which could return 10-35 percent in 2020:

Brokerage: JM Financial

Alembic Pharma: Buy | Target: Rs 760 | Return: 30 percent

Alembic continues to benefit from the churn in the US sartan market. With strong beats in US revenues and overall margins in the last 5 quarters being attributed to opportunities in US which might be non-recurring in nature, the stock is yet to price in the earnings impact of Alembic’s ability to consistently exploit such opportunities. Even with modest assumptions of growth in the base US and domestic businesses, at 15x FY21E EPS, the stock is now trading at 25 percent discount to its 5-year average trading range. Valuations are now compelling with the domestic formulations business about to turn the corner.

Can Fin Homes: Buy | Target: Rs 465 | Return: 21 percent

Given its negligible exposure to risky developer loans and LAP, its credit quality remains unscathed. We like its conservative business model and believe it has the right ingredients to prevail, with lot of competitors vacating space from the market. We forecast a PAT CAGR of 27 percent during FY19-21 with our FY21 ROE forecast being 20 percent, we maintain buy with target of Rs 465 per share valuing Can Fin Homes at 2.4x FY21E BVPS.

Chalet Hotels: Buy | Target: Rs 400 | Return: 19 percent

Chalet's EBITDA margin of 32 percent and occupancy of 76 percent is superior to the industry and is a testimony of success of its asset management strategy. Further, Chalet, with its high-end hotels across key geographies is well placed to benefit from the imminent up-cycle in the industry. In addition, its upcoming 588 keys and 1.12 msf of commercial space will help drive growth going forward. We are factoring in an ARR growth of 7-8 percent for hotel operations and exit cap rate of 8 percent for commercial assets. We expect Chalet to report an EBITDA CAGR of 31 percent over FY19-21.

 

VIP Industries: Buy | Target: Rs 520 | Return: 13 percent

We believe VIP, with strong brand recall, enriched product mix along with captive manufacturing set-up in Bangladesh (for soft luggage) is well placed to benefit from resilient industry tailwinds mainly for organised players, that has emerged post GST. Going forward, we expect overall revenues & PAT to grow at a CAGR 11 percent & 18 percent FY18-22.

Brokerage: IIFL Finance

Bharti Airtel: Buy | Target: Rs 520 | Return: 10 percent

If industry revenue growth were to be robust for the next 3 years, Bharti stands to benefit. Even if industry revenue growth beyond FY21 came off, Bharti would see higher RMS, as it would gain at the expense of Vodafone Idea. Bharti is well placed in either case.

SBI Life: Buy | Target: Rs 1,180 | Return: 18 percent

We believe SBI Life is a proxy for LIC due to its image among the masses and could continue seizing market share from LIC. Study of insurance share of wallet w.r.t. per-capita GDP is significantly favourable, driving the long term growth trajectory.

We forecast SBI Life to deliver a robust 27 percent VNB (Value of New Business) CAGR over FY20-22E. Despite re-rating in 2019, valuations remain attractive compared to HDFC Life.

Larsen & Toubro: Buy | Target: Rs 1,778 | Return: 35 percent

L&T is well placed to navigate the weak investment environment, backed by a healthy balance sheet and strong technical execution capabilities. Core debt has risen by Rs 9,300 crore post the Mindtree acquisition, but should normalise post the sale of E&A (Rs 11,000 crore of cash inflow).

Core E&C earnings are expected to see a robust 30 percent earnings CAGR over FY19-21E, supported by an orderbook of Rs 3,03,200 crore (2.8x TTM sales), providing strong revenue visibility and stable EBITDA margins at 10.5 percent.

Maruti Suzuki: Buy | Target: Rs 9,000 | Return: 21 percent

We expect passenger volume (PV) volumes to clock 11 percent CAGR over FY20-23E, after a 12 percent drop in FY20E. With around 50 percent share in PVs, Maruti would be the best play on recovery.

Earnings growth in the recovery phase will be magnified by margin expansion, as discounts come off and operating leverage kicks in. We forecast 23 percent EPS growth over the next two years.

Sudarshan Chemicals: Buy | Target: Rs 500 | Return: 12 percent

Having steadily gained market share to be come the world's 4th-largest color pigment producer, Sudarshan Chemicals (SCIL) is well-placed to continue rapid growth in the context of the imminent exit of its two largest global competitors (BASFandClariant).

The company's low-cost manufacturing advantage, technical capabilities, wide product portfolio, growing client relationships, and environmental compliance are its key strengths. Input cost pressures, which impacted FY19 financials, are now fading.

SCIL has a capex plan worth Rs 1,000 crore for the next few years, which is expected to drive incremental revenues of around Rs 4,000 crore and RoCE of around 30 percent.

Anand Rathi

Amber Enterprises: Buy | Target: Rs 1,631 | Return: 24 percent

After becoming a prime demand aggregator for leading OEMs (Voltas, Panasonic, LG, Blue Star and the Q2 FY20-added Samsung), Amber continues its dominance in room-ACs in India. We believe it can grow 33 percent in H2 FY20, outperforming the average industry growth by 10–15 percentage points.

Amber Enterprises is our top pick in air-conditioners because of - a) High growth expectations regarding room ACs in FY20 (we expect industry-wide room-AC growth to average ~20 percent in FY20), b) Increasing export potential through Japanese/Korean customers (with India gradually becoming the manufacturing hub for consumer durables) and c) Robust order inflows for Sidwal, and growth potential in the Railways and metro-rail categories.

Its sound H1 FY20 results and robust outlook for H2 FY20, driven by a favourable macro-economy scenario and growth levers being seeded by Amber, lead us to retain our Buy rating on the stock, with a sum-of-parts based higher target of 1,631.

We expect 18 percent and 23 percent CAGRs over FY20-22 in respectively revenue and PAT.

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 Jan 16, 2020 02:04 pm
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