Akash Jain Ajcon Global
The domestic bourses ended on a negative note last week with Nifty closing above the psychological crucial support level of 10,300, while Sensex falling more than 400 points.
Non-banking financial companies (NBFCs) and housing finance companies (HFCs) remained under pressure during the last week on the concerns over credit growth due to the liquidity crisis. Also, the stocks were down because of fears that mutual funds and other large subscribers to commercial papers issued by NBFCs and HFCs would choose to not roll-over the securities when they mature.
Foreign investors were net sellers last week, while domestic institutions remained buyers.
The rupee has been facing intense selling pressure for more than a month now. On Friday it closed at 73.32 against the dollar.
Going ahead, we believe rupee movement against the dollar, cues from ongoing global trade war especially between the US and China, volatility in oil prices, movement of bond yields, F&O expiry, festive sales, Q2FY19 earnings season, outcome from (both exit polls and actual result) of upcoming assembly elections in five states will determine the market trend.
The current panic provides investors sitting on cash a wonderful opportunity to accumulate great companies backed by strong management at cheap valuations.
Investors can gradually start building their long-term portfolio including top rung stocks of which many have come down 30-40 percent in the recent fall.
We do believe that the market seems to be in the oversold zone. However, we do not rule out a further correction and expect volatility to continue ahead of state elections.
All said and done, we still believe that equity is a great asset class. One should always remember that panic time is the best friend of a true investor. It is this time when one should put money in the market from medium to long-term perspective.
Here is the list of top two picks which could give 30 percent return each in next 12 months:
Varroc Engineering: Buy | Target: Rs 998 | Return: 30 percent | Period: 12 months
The auto ancillary company is a good play on exterior auto lighting systems. The stock has witnessed significant correction in the current mayhem from a high of Rs 1,040 after the IPO to Rs 768 currently. (IPO price was Rs 967).
After the acquisition, Visteon's business grew by an annual 17-18 percent, as against the world average of 4 percent, over the last 5 years.
The management is banking on business from two of the world's largest car manufacturers—Volkswagen and Renault-Nissan—to take its own operation to new highs.
We recommend a buy on the company due to the following factors:
a) 6th largest fastest growing among top six global exterior auto lighting suppliers,
b) strong competitive position in attractive growing markets,
c) focus on high growth markets for its global lighting business,
d) long-standing relationships with marquee clients like Ford, Jaguar Land Rover, Volkswagen, RenaultNissan-Mitsubishi, American electric car manufacturer - Tesla, Harley Davidson, Suzuki, Honda, Bajaj Auto, Yamaha, Hero, Piaggio, Eicher Motors (Royal Enfield) etc,
e) comprehensive product portfolio,
f) low cost, strategically located manufacturing and design footprint of 36 manufacturing facilities spread across seven countries, with six facilities for global lighting business, 25 for India business and five for other businesses,
g) robust in-house technology, innovation and in-house R&D capabilities in India, Czech Republic, China, USA, Mexico, Germany, Italy, Romania with 1,414 R&D engineers – 185 patents granted globally,
h) strong balance sheet with net debt: equity at 0.31x, positive operating cashflow with decent RoE of 15.94 percent.
Mahanagar Gas: Buy | Target: Rs 1,076 | Return: 30 percent | Period: 12 months
Mahanagar Gas is a structurally strong city gas distribution story. Initiative to substitute crude oil with natural gas to reduce India’s import bill also has the potential to give a boost to gas usage.
The company is the sole authorized distributor of CNG and PNG in Mumbai, its adjoining areas and Raigad with more than 22 years track record in Mumbai.
The long-term CGD business outlook looks very positive given the following factors: Favourable regulatory environment addressing previous bidding round impediments with forward-looking and investor-friendly reforms.
We expect the company to post strong volume growth going ahead led by increase in CNG consumption both in auto and PNG space. Geographical expansion to Raigad and Karjat and government’s push for PNG’s domestic connections will support volume growth.
After the correction, the company at CMP of Rs 828 (Face Value: Rs 10), is attractively valued at 17x at reported FY18 EPS of Rs 48.38.
The company witnessed strong Q1FY19 and posted decent numbers. The Company enjoys strong return ratios (ROE: 22.8 percent and ROCE of 31.9 percent) with equity capital of Rs 98.8 crore. We expect an upside of 30 percent for investors with a horizon of 12 months with a target of Rs 1,076 (18x at estimated FY20 EPS).
The author is Vice President - Equity Research at Ajcon Global.
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