HCG, Coromandel, Kotak Mahindra Bank and M&M, among others, could have the potential to turn multibaggers.
Riding on liquidity wave, the Indian market has already rallied by about 18 percent so far in 2017 and it would be difficult for the market to repeat a similar performance in the second half of the year.
In that case, the best strategy for investors is to remain with stock specific ideas. The second half of 2017 might remain volatile and every dip should be used to buy quality stocks which can outperform benchmark indices by a wide margin in the next 2-3 years.
The small and midcap stocks have already given massive returns in the last five years and further investment should be based on fundamentals because corporate earnings will take another two quarters to bounce back amid implementation of the goods & services tax (GST).
“Given the potential teething issues, the implementation of GST could adversely impact corporate earnings in the first half of this fiscal. The consensus estimates, however, for the year remain at elevated level and suggest close to 18-20 percent surge in aggregate net profits of the Sensex companies in FY2018,” said a Sharekhan report.
Post the smart rally in H1 of year 2017, the Sensex trades at 18x one-year forward earnings estimates, which is at premium to long term average valuation multiples of close to 16x of Sensex.
“Though the macro scenario in terms of low interest rates, good monsoons and favourable global cues would support equities, we do not expect any meaningful expansion of valuation multiples from here, said the report.
Thus, the returns would have to be supported by the much awaited revival in growth of the corporate earnings. Overall, Sharekhan remains constructive on equities and investors would do better by focusing on structural growth themes along with careful chosen stocks through bottom up approach.
We have collated a list of ten stocks which can turn out to be multibaggers in the next 2-3 years:
Analyst: Dhiraj Relli, MD & CEO, HDFC Securities
Promoted by doctors: Dr B S Ajai Kumar, Chairman and Chief Executive Officer of HCG, has about 35 years of experience in the field of oncology and manages 20 cancer care centres across Asia. HCG is promoted by doctors, and they hold 25 percent stake in the company, with institutions holding 60 percent stake. Net D/E 0.4x.
Focused player: It derives 90 percent of its revenues from oncology and multispecialty hospitals, and the balance from the Milann Fertility. The key clusters for oncology are Karnataka (48 percent), Gujarat (29 percent), East India (8 percent), and others (15 percent) in India.
Asset-light model: HCG’s asset-light approach with a focus on partnering has made its business model capital-efficient and scalable. The company operates most of its comprehensive cancer centres (CCC) on a lease/rental basis, investing only in the equipment.
Coromandel is a flagship company of the Murugappa Group, and a subsidiary of E.I.D. Parry (India) Limited (EIDP), which holds 60.8 percent stake. The company's business divisions include Fertilisers, Speciality Nutrients, Crop Protection and Retail. It offers various products in the Fertiliser segment, including Nitrogen, Phosphatic and Potassic in various grades.
Coromandel is mainly into two segments - Fertilisers and Agrochemicals. The Fertiliser segment contributed 86 percent to FY17 revenues, and ~62 percent to EBITDA. Chemicals remain more profitable, with a 38 percent contribution to overall EBITDA.
Coromandel remains best placed, owing to long-term drivers such as (1) Rising share of NPK (2) Growing non-subsidy business and (3) Backwards integration of phosphoric acid. (4) Plans to increase the proportion of the high-margin agrochemicals business in the sales mix.
The company has 40 percent market share in the Tractors segment, and 30 percent in the UV segment. We expect 10 percent volume CAGR in Non-farm vehicles and 11 percent volume CAGR in Tractor sales over FY17-19E. We forecast 12 percent revenue CAGR and 17 percent PAT CAGR; and 80bps margin expansion over FY17-19E
Quess Corp is a staffing company engaged in the several business verticals i.e. People & Services, GTS, IAM and IFM. It is the third-largest general staffing company in India by a number of employees (People & Services) (56.6 percent revenue) (5 percent Margin).
It is also the largest IT staff augmentation provider in India by a number of employees (GTS) (26.8 percent revenue) (~7 percent Margin). The share of the domestic business is 85 percent, and international is 15 percent.
We expect Quess to post 23.7 percent revenue CAGR along with an 180bps margin surge to 6.8 percent. Strong revenues and operating performance would lead to 43 percent PAT CAGR over FY16-19E.
Post the ING Vysya bank integration (and demonetisation disruption), we sense KMB is at the cusp of high growth.
All levers are in place: Healthy Tier I (15 percent+, without factoring a likely fund raise), its recent mass digital thrust, wider spread and an impeccable fix on asset quality.
Consequently, RoAA will improve 22bps to 1.9 percent over FY17-19E (after the 27bps rise in FY17), led by steady NIMs, and robust fee growth.
We have a positive stance on Kotak Bank, given continued business momentum, improving CASA proportion, superior NIM, upward fee trajectory and stable asset quality performance. A clean balance sheet and strong growth prospects give confidence.
Analyst: Vinod Nair, Head of Research, Geojit Financial Services
GST is a game changer for organised logistics players as it will provide a boost to the warehousing and supply chain management business.
TCI will be a key beneficiary given its well-integrated network with a fleet of 9,000 trucks, 1.400 branch network, manages 5 ships and has warehousing space of 11mn sq ft.
BEL is the market leader in the defence electronics given its strong technological and execution capabilities. BEL will emerge as the key beneficiary due to its strong position in strategic defence electronics space and GoI focus on indigenization.
The current order backlog of Rs 40,000 crore is 5.3x FY17 sales, has significantly improved the earnings outlook.
Havells India is a leading player in electrical consumer goods and is expected to command premium valuation given strong revenue growth and healthy earnings outlook. The recent acquisition of Lloyd consumer business is expected to bring long-term scalability to its consumer business.
Ashok Leyland which is the second largest commercial vehicle (CV) manufacturer in India will be a direct beneficiary of improvement in road infrastructure projects.
The management is focused on gaining market share in LCV from 15 percent to 30 percent over the next 2-3 years by launching new models. We expect the AL's revenue to grow at 14 percent CAGR over FY17-19E supported 11 percent volume growth.
BFL is planning to scale up the new business from current 5 percent to 15 percent in the next 2 to 3 years. The orders from Boeing and new defence JV with AM General, SAAB, Rafael & IAI (Israel Aircraft Industry) will boost its presence in the field of air defence.
We expect 13 percent revenue CAGR over FY17-19E led by picking in US truck market and de-risking the utilisation in a Non-auto sector.Disclaimer: The views and investment tips expressed by the 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 decision.The Great Diwali Discount!
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