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Last Updated : Apr 23, 2018 01:07 PM IST | Source: Moneycontrol.com

Use a sharp mkt correction to buy these 3 stocks which can give up to 100% return

Here is the list of three stocks that can give up to 100% return.

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Todays L/H

Akash Jain

In the past, Sensex earnings have looked suppressed due to higher provisioning by banks, which impacted their profitability. Resolutions by the National Company Law Tribunal (NCLT) been quite encouraging as a number of cases have seen substantial interest from potential suitors. This may lead to lower-than-expected haircuts and a resultant reversal of provisions.

The recent bond yield correction and spreading of bond portfolio losses over the next four quarters will provide some cushion to banking sector earnings. A higher supply of government securities, particularly from state governments, along with a further rise in crude oil prices, is a cause for concern for markets in the near-term.


The re-rating of equity markets from this point onwards will hinge on Q4 FY18 corporate earnings. The Q3 numbers showed initial signs of corporate profitability limping back, but the next few quarter numbers shall define the market direction. Two things that should work in favour of a recovery in corporate earnings are: a) On a comparative YoY basis, they should reflect better numbers on a low base due to demonetisation and normalisation of disruptions caused by rollout of the Goods & Services Tax last fiscal; and b) Expectations of a pick-up in the reported GST numbers should have incremental flow of business to the organised sector, albeit in a gradual manner.

This should ultimately reflect in the better earnings profile of India Inc and the earnings projections of the index over the next few quarters. Our sense is that corporate earnings should compound at 13-14 percent CAGR over the next two years. That should give an impetus to forward multiples underpinning index valuations.

For 2019, equity markets could be driven by a mix of domestic and global factors. The Indian economy is likely to go through a political and structural shift in the next few months. The government may want to expand spending ahead of elections, but needs to keep its fiscal deficit and inflation expectations under control. How the government manages to balance these economic demands and the reality of politics will eventually determine how the Indian markets pan out during the year.

The result season has begun on a positive note with large companies from the information technology, cement, private banks space declaring higher than expected earnings. This week, quarterly earnings, trend in global markets, investment by foreign portfolio investors (FPIs) and domestic institutional investors (DIIs) will dictate the trend on bourses.

Any sharp correction is a good opportunity for investors with a long-term horizon to start building a portfolio of quality stocks to ride the next phase of the larger uptrend. We recommend investors to be stock specific and consider companies with good earnings visibility at decent valuations.

Here is the list of three stocks that can give up to 100% return:-

Tejas Networks

We believe Company is a strong play on Telecom ancillary space and are very excited about its prospects. It tends to be seen as a telco player, but is a made-in-India software story in the product and technology space for the telecom industry, competing with global companies globally and in India.

Tejas Networks (TJNL) is an Optical and Data Networking products company which designs, develops and sells high performance products to Telecom Service Providers. TJNL’s revenue mix consists of Optical Networking Products which contribute ~90% to its topline whereas Services contribute ~10% to topline. As far as Geographical mix is concerned TJNL derives 67% of its revenues domestically and 33% from foreign markets with a large chunk from US and Middle East. The Company boasts of impeccable R&D discipline to ensure continuous portfolio enrichment through innovations and high domestic market share. Lack of peers and infrastructure indicate huge opportunity for the Company. Tejas Networks is the 2nd largest optical network Company of the world behind Chinese Company and is competing with giants of the world.

The company is an optical and data networking products firm with customers spread over 60 nations. It designs, develops and sells software enabled networking equipment products to telecommunications service providers, internet service providers, utility companies, defence companies and government entities. To its credit, the Company has end to end data networking portfolio with 333 patents and 250+ Silicon IPs. It may be noted, that customers in telecom industry are investing significantly in optical networking. The engineering team at Tejas Networks, was developing technologies for programmable silicon chips, so that clients' hardware could be upgraded or new features built upon it, without overhauling the equipment. They call the innovation 'software-defined hardware', where the hardware itself becomes programmable. It has helped Tejas transition products and solutions as applications moved from voice to data.

The Company is a major beneficiary of BharatNet project introduced by Government of India. The government has embarked on the BharatNet project to lay optical fibre cables. It is pumping in Rs 10,000 crore in 2017-18 under this, with fibre laid out already in 1,55,000 km. If Digital India has got to be a reality, only half of India can be connected by private telcos and on data. The government has earmarked Rs 45,000-crore for BharatNet over multiple phases.

TJNL core DNA is R&D (52 percent of total employees in R&D) at a cost efficient manner as compared to US players. Like Apple, the Company outsources capital intensive manufacturing from contract manufacturers. Operating cost is mainly manpower cost.

Tejas enjoys high entry barrier against domestic competition. India’s optical capex growth rate is 2x China. Push for Make in India and Digital India will give a push to the Company. In addition, government schemenamed “Bharatnet” of connecting 2,50,000 gram panchayats using GPON technology will give push to Company’s topline.

Its products are used to build high-speed communication networks that carry voice, data and video traffic from fixed line, mobile & broadband networks over optical fibre. They also utilize programmable software-defined hardware architecture with a common software code-base that delivers an app-like ease of development and upgrades of new features and technology standards.

The Company offers a family of architecture and sell architecture of different capacities. The product lifecycle is of 7-10 years. It has IPR created over 15 years.

The company’s management is optimistic about expansion to markets that have similar eco pattern like India viz. South East Asia, Latin America, and Africa, among others.

The Company had informed stock exchanges that it's FY18 revenue is likely to dip yoy versus 5 percent growth guidance. The Company attributed the guidance change to delays in receiving certain large orders. However, it has mentioned that the order pipeline remains healthy and the Company is set to report good PAT in FY19.

For the company, India is its biggest geographical segment in terms of revenue as 65 percent of its total revenues. The company’s clientele generated 88% of FY17 revenues from repeat business. In terms of contribution of top five customers, 58% of revenues were contributed by them in FY17.

The Company’s operating revenues and EBITDA have witnessed a CAGR of 24% and 41% respectively over the period FY13-17 to Rs 878.2 crore and Rs 174.2 crore. In FY17, there was a prudent onetime writeoff of Rs. 30 crores (wireless LTE) instead of amortization. Typically, if R&D employee cost is Rs. 100 - Rs. 70 is capitalized and amortised over 10 years while balance Rs. 30 charged as expense in Profit & Loss (same year).

We believe the benefits of Asset light business model and operating leverage have started kicking in and would be reflected in coming quarters. With steep increase in topline, the company has benefited from the operating leverage while margins have expanded from 12% in FY13 to 19.8% in FY17.

However, since most of its clients are in telecom sector where payment cycle is tough, the company has an bloated working capital cycle. The company’ net working capital ex cash stood at 235 days (debtor days of 149 days and inventory of 76 days) indicates that cash generation ability is tough despite higher profitability due to nature of industry which we consider as a headwind and can affect investor's confidence.

The high concentration of clients as one of the key risks. About 58% of its revenue (FY17) is generated from top five customers who exercise substantial negotiating leverage. The loss of one or more of significant clients could have an adverse effect on the business Meanwhile, the company will have to constantly enhance products that will address technological changes.

We believe that the company will deliver high growth in an underpenetrated industry and near monopoly status in domestic status. We expect a target of Rs. 450 by FY19 end.

Sequent Scientific

It’s an interesting story in Pharma space and can become a multibagger. We expect a major upside in this Company. Its been under pressure for a quite long time and expect a revival very soon. Once the stock gets re rated after it starts reporting good set of numbers from Q4F1Y8, we expect around 100 percent upside by FY19 end.

To give a background, Sequent Scientific Limitedheadquartered in Mumbai, India with a global footprint, operates in the domains of Animal Health (Alivira) and Analytical Services. SeQuent has seven manufacturing facilities based in India, Spain, Germany, Brazil and Turkey with approvals from global regulatory bodies including USFDA, EUGMP, WHO, TGA among others. Its API facility at Vizag is India’s first and only USFDA approved facility for veterinary APIs. The human API business of Sequent was recently demerged into Solara Active Pharma Sciences Ltd. (SAPS), with an appointed date of 1st October 2017.

Sequent Scientific Limited (SeQuent) wholly owned subsidiary Alivira Animal Health Limited (“Alivira”) through Alivira Ireland, has recently signed an agreement with simultaneous closing to acquire 100 percent of Bremer Pharma, Zydus Cadila’s Animal Health Business in Germany.

Bremer Pharma, founded in 1982 is a niche veterinary health company in Germany with focus on cattle and swine segments. Bremer has a portfolio of over 400+ registered products across Europe, Far East, MENA, Russia & Africa operating in vitamins, antibiotics and hormones. Bremer registered sales of €6.7Mn ($8.3Mn) in year ending March 31, 2018 with marginal losses. Bremer comes with a EUGMP compliant injectable manufacturing facility with approval from German Competent Authority LANUV. The site was recently re-inspected and obtained a renewed GMP certificate on 12th March 2018.

This acquisition provides Alivira’s with a beta-lactam & non-beta lactam injectables facility for EU markets, which compliments its Orals & Powders beta-lactam and non-beta lactam facility based at Barcelona in Spain. EU is Alivira’s largest market accounting to 60% of revenues.

With this acquisition, Alivira is a ~$150 Mn business on annualized basis with presence in 95+ countries. Alivira has strong presence in the formulations business in key veterinary markets of Europe, LATAM, India, Turkey, Africa and South East Asian countries. Over 80% of the revenues of Alivira are generated outside India, with manufacturing operations in Spain, Germany, Brazil, India and Turkey and R&D development in India, Turkey and Spain.

In last 36 months Alivira has successfully acquired and integrated over 8 businesses globally. These successful integrations, coupled with commercialization of API’s in US and aggressive new product development program will create sustainable value and speed up the revenue and margin growths in the coming years.

Commenting on the acquisition, Manish Gupta, Managing Director said ‘We are excited with the addition of Bremer Pharma to the Alivira fold as it consolidates our position as a leading Animal Health Company in the European market. This also provides comprehensive manufacturing footprint in EU across Injectables, Orals, Solids, and Powder range and front-end presence in Top 6 of 10 EU markets. The scale up and growth momentum will further drive the next phase of value creation through accelerated revenues and margin expansion in the business.’

Gayatri Projects

Hyderabad based GPL with over 50 years presence in infrastructure and Construction primarily undertakes Road, Power and Irrigation projects across the Country and owns almost all its equipments, enabling optimal cost control. It also has Joint Ventures (JVs) in Build-Operate-Transfer (BOT) projects and executes construction contracts in partnership with Indian and overseas Companies. Over the last couple of years, the Company has relooked at its business strategy and has made significant changes in its business model. The Company has evolved from an asset heavy business model to an asset light business model (pure play EPC business). Gayatri Projects is one of the fewer pure play EPC companies in the sector with zero exposure to HAM and small residual exposure in BOT projects.

The Company has derisked and diversified its portfolio both geographically and business wise. As a pure play EPC company, the Company’s order book largely comprises of road EPC projects, irrigation projects, land development and railways. It has a pan India presence and have projects ongoing in UP, Andhra Pradesh, Bihar, Orissa, Haryana, Northeast, Karnataka and Mumbai.

During November 2017, the Company achieved a major milestone in its value creation journey restructuring and demerger of its road BOT business. This is the final approval from NCLT. Consequently the road business will be demerged and listed as a separate entity Gayatri Highways Limited. GPL shareholders will directly own 74 percent of this entity. GPL consolidated balance sheet would be recast as of March 31, 2018 to exclude the assets and liabilities of the BOT businesses. Key impact of this is that the GPL consolidated debt would reduce by more than Rs.25 billion. All of its assets on BOT portfolio are successfully commissioned and toll and annuity collections have started. In addition to distributing the assets to shareholders and separately listing as announced earlier, the Company continues to look for ways to monetize this portfolio.

GPL is financially strong EPC player with high revenue visibility. There is a strong momentum of order inflow. The order book of the company is robust and stands at Rs. 120bn, which is 5.6x of its FY2017 revenues which provides strong revenue visibility.

The Company has recently won orders worth Rs. 28 bn from NHAI which is a testament of the Company’s project execution capabilities and prudent bidding strategy. The Company has one of the largest market share of NHAI awarded projects. The Compnay has bid pipeline of Rs. 75.49 bn for next 2 months.

The Management efforts are now very much directed towards efficiently executing these projects and the Company is confident of delivering 30% revenue growth in its construction business over next 3-4 years.

At CMP of Rs. 200, the stock is valued at a P/BV (x) of 3.9x on FY17Book Value. On anualized FY18 numbers, the stock trades at a P/BV of 3.3x. With due consideration to factors like a) strong presence in high growth construction sector, b) healthy and diversified order inflows with good revenue growth visibility, c) pan India operations spread across 15 states, d) strong in-house designing and engineering capabilities complemented by state of art fleet of construction equipment, e) highly efficient operations with strong execution capabilities - completed more than 6,500 lane km of road construction over the last 25 years, f) one of the largest market share of NHAI awarded projects, g) track-record of completing ~40 projects aggregating to Rs 90 billion+ value in last 5 years, h) strong financial position with significantly improving balance sheet, j) transformed its business from asset heavy to asset light business model – pure play EPC company with strong return profile, k) significant value unlocking through business restructuring, we recommend investors to “BUY” with a target of Rs. 279 (3.9x at estimated FY19 Book Value) for investors with a horizon of 9-12 months.

Disclaimer: The author is Vice President - Equity Research. 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 Apr 23, 2018 10:56 am