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Last Updated : Feb 22, 2019 01:47 PM IST | Source: Moneycontrol.com

Risk reward has improved, good time to buy quality stocks: Anand Rathi

Investors should look for the companies having sustainable earnings with robust business outlook and quality management.

Moneycontrol Contributor @moneycontrolcom
 
 
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Siddharth Sedani

The week passed by witnessed a heavy sell-off driven by India-Pakistan tensions along with high global crude oil prices. The Nifty index has corrected from the levels of 11,000 to 10,600 in the past two weeks.

However, global rally has provided little support to the Indian markets. But, once again waning trade deficit, fumbling fiscal revenues and tight liquidity are rising concerns. The current volatility in the market to is expected to remain.

One positive trigger for the Indian market was the third-quarter numbers, which turned out to be better than anticipated. As per the data by markets mojo more than 76 percent of the company’s data were in the range of positive to flat.

Global cues like the US-China trade talks, declaration of a national emergency in the US and international macro-economic data points will further help investors in accessing the market direction. Also, the rupee's price movement against the US dollar will be crucial for the market, especially in the backdrop of a continuous outflow of foreign funds.

History teaches us that the best times to invest is when there is fear and despair in the streets. While we may never be able to catch the bottom, the current market structure has improved the risk reward in our favour and this should be a good time to start looking at some allocations in quality stocks.

Pidilite Industries | Rating: Buy | Target: Rs 1,345

Pidilite Industries Limited have a leadership status in adhesives and sealants market with products like ‘Fevicol’, ‘FeviKwik’, ‘M-Seal’, etc. is now eying the similar position in waterproofing & Flooring business which is currently very small (approx. 5 percent of revenues) as compared to its traditional business. Its key brands in this segment includes Dr.Fixit and Roff.

It reported a growth of 19.8 percent in its consolidated revenues to Rs 18,483 million in Q3-FY19.

The operating performance of the company declined primarily due to higher raw material inflation and increased advertising & sales promotion expenses. The profit after tax (PAT) margins of the company stood 11.8 percent in Q3- FY19 as against 15.4 percent in same quarter previous year at Rs 2,370.

On segment basis, net sales of Consumer & Bazaar segment grew by 17.3 percent in Q3-FY19. Profit before interest and tax margin stood 22.4 percent in Q3-FY19 while net sales of Industrial Products segment grew by 5.8 percent and PBIT margins stood 16.5 percent for the quarter.

On subsidiaries front, the company’s domestic subsidiaries recorded a growth of 88.6 percent in sales, the waterproofing business grew 36.6 percent while other businesses (excluding CIPY) grew 66.3 percent. CIPY Polyurethane reported revenues of Rs 403 million.

The international subsidiaries grew at 1 percent during the current quarter. The company’s Sri Lanka business continues to perform well and reported a growth of 14.9 percent however company witnessed decline in EBITDA due to higher costs.

Overall, the company continues to report higher than market volume growth and in turn gaining market share in its key product categories like adhesives & Sealants and Construction chemicals. However, on margins front, we continue to watch volatility in key raw material prices. The recent decline in oil prices and moderation in volatility going ahead should add positively to the company in near term as compared to current quarter.

We continue to remain positive on the company and maintain our BUY rating on the stock with a target price of Rs 1,345 per share.

HCL Technologies | Rating: Buy | Target: Rs 1182

The company reported good set of numbers for the quarter under review. Revenue from operations improved by 22.6 percent year-on- mainly led by better performance in Europe followed by North America (geographically).

Among verticals, Telecommunications & Media (35.4 percent QoQ and 40.3 percent YoY) and Retail & CPG (8.4 percent QoQ and 21.5 percent YoY) led the growth.

On profitability front, the EBITDA from operations for the quarter improved by 30.2 percent year-on-year at Rs 36,320 million with a margin of 23.1 percent. The company achieved the reported PAT of Rs 26,050 million, a growth of 25.5 percent year-on-year with a net margin of 16.6 percent translating into EPS of Rs.19.1 per share.

The company signed 17 transformational deals during the quarter for another straight quarter driven by financial services, technology & services and manufacturing.

The management said bookings in 9MFY19 were 40 percent higher than 9MFY18. Further, a qualified deal pipeline is very healthy and is at record level.

The management expects Q4-FY19 to be a healthy quarter on the back of healthy bookings and deal pipeline in 9MFY19.

In December 2018, the company signed a definitive agreement to acquire select IBM software products for $1.8 billion. The process is expected to be completed by mid-2019. We are not incorporating this into our estimates.

With continuity of robust growth across Mode-2 and Mode-3 business (28 percent of revenue combined) and target of 40 percent of revenue over medium-to-long term along with limited onsite risk, we expect the growth momentum to continue in the near term supported by strong deal pipeline and ramp up of large deals. We maintain our BUY rating on the stock with a target price of Rs.1182 per share.

Larsen & Toubro | Rating: Buy | Target: Rs 1,894

Larsen & Toubro Limited (LT) has reported a growth of 24.2 percent in its consolidated revenues in Q3-FY19. The growth in revenues was driven primarily by better execution in Infrastructure segment, persistent growth in Hydrocarbon segment, Realty segment and services business.

On profitability front, the company’s consolidated operating margins stood 16.7 percent in Q3-FY19 as against 16.2 percent at Rs 46,699 million in Q3-FY18, an improvement of ~50 basis points. The improvement in profitability was driven mainly by Services & Realty businesses.

In terms of order book, the company’s unexecuted order book stood at Rs 2,840 billion as of Dec-18 of which share of domestic order book stood at 79.2 percent. During the quarter LT has received orders worth Rs 422 billion, a marginal de-growth of 12 percent over same quarter previous year. The new orders continues to be predominantly led by public sector while private sector continues to remain muted.

During the quarter, LT has sustained improvement in execution pace in almost all of its segments and primarily in Infrastructure segment and currently has achieved its highest 4Q-rolling average in past 16 quarters.

In terms of growth outlook, the management has maintained its earlier guidance for a growth of 10 percent to 12 percent in orders while on revenue front it maintains a growth target of around 15 percent. In terms of profitability the management has guided for sustained improvement in margins within a range of around 50 basis points.

Going ahead, we expect the company to continue to gradually improve its performance in medium term and revenues from infrastructure segment should continue to improve on better execution pace, to witness better traction in its other key segments including Defence business segment.

We have incorporated the latest numbers to our models for the company and continue to remain positive for the company. We maintain our BUY rating on the stock with a target price of Rs 1,894 per share.

The author is Vice President - Equity Advisory, Anand Rathi Shares and Stock Brokers

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 Feb 22, 2019 12:06 pm
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