Are you ignoring them? Top ten contra bets which are good long-term buys

Contrarian bets by definition are those stocks which for some reason have not performed in the near term. It involves buying into stocks that are being rejected by investors because of short-term concerns, suggest experts.

“Contrarian Investing/bets is an investment strategy that is characterised by purchasing and selling in contrast to the prevailing sentiment of the time. For example, widespread pessimism about a stock can drive a price so low that it overstates the company's risks, and understates its prospects for returning to profitability,” Sanjeev Zarbade, Vice President -PCG Research, Kotak Securities told Moneycontrol.

“Identifying and purchasing such distressed stocks, and selling them after the company recovers, can lead to above-average gains,” he said.

Widespread optimism can result in unjustifiably high valuations that will eventually lead to drops when those high expectations don't pan out,” added Zarbade.

Top 10 stocks which are contra play on D-Street:

Analyst: D K Aggarwal, Chairman, and MD, SMC Investments and Advisors Ltd

Thyrocare Technologies: YTD Return 6%

Thyrocare Technologies is one of the leading pan-India diagnostic chain operators. According to management, its preventive care segment is doing exceedingly good and also wellness segment contributes the majority of top-line growth of the company.

Moreover, according to management, there would not be any direct or evident impact of the GST regime on laboratory services.

On the financial ground, its growth almost doubled during the March quarter of 2017 to 29 percent compared to the industry average of 15 percent and according to management, it would maintain in future.

Ajanta Pharma: YTD Return -13%

Ajanta Pharma is a speciality pharmaceutical company engaged in development, manufacturing and marketing of quality finished dosages.

On a consolidated basis, net profit rose 4.6 percent to Rs114.02 crore on 7.60 percent rise in net sales to Rs 456.12 crore in Q4 March 2017 over Q4 March 2016.

According to the management, despite the demonetization impact on the Indian pharma market, its India branded generic sales showed resilient growth but rupee appreciation impacted the export sales growth and the profitability for the quarter.

On the development front, the phase 1 of its Guwahati facility was implemented in record time and it commenced commercial production during the quarter.

CRISIL: YTD return -9%

CRISIL is a global analytical company providing ratings, research, and risk and policy advisory services. According to the management, advisory business should see some better numbers in CY 2017 as compared to CY 2016.

Due to regulatory and hybrid products introduction, together with improvement in infrastructure, power and road projects going forward, the segment should do well in the coming year.

Moreover, in the research business, after performing strongly in CY 2016, the outlook for CY 2017 continues to remain optimistic.

Increasing requirements of complex research due to regulatory requirements and in-house risk assessment requirements has led to new opportunities for both existing products and newer products. Strong demand remains for benchmarking analytic tools and analysis in the international arena.

Titagarh Wagons: YTD Returns -2%

Titagarh Wagons designs and manufactures wagons such as container flats, grain hoppers, cement wagons, clinker wagons, and tank wagon under the French brand Arbel Fauvet Rail. It also manufacturers cast steel bogies and couplers for freight application.

During Q4, FY17, it has reported strong consolidated revenue at 107% YoY basis largely on account of a healthy performance of the Italian coach subsidiary Firema. However, lower other income led to muted PAT growth.

Cimmco (subsidiary) also performed well on revenue as well as profitability fronts. Recently, its wholly-owned subsidiary, Titagarh Singapore Pte (TSPL) has acquired the shares held by Adler Plastic SpA, Italy, representing 10 percent of the total paid-up share capital of Titagarh Firema Adler SpA (TFA), a subsidiary of the company.

Overall, it has diversified business model which may give multiple growth levels. While defence business has scaled up well but the major concern is its declining wagon order book.

The management expects that prospects of the coach/metro segments are bright considering that a large number of metro projects are being developed in various cities.

Analyst: Sanjeev Zarbade, Vice President -PCG Research, Kotak Securities

Infosys: YTD return -6%

The performance for FY17 has been muted because of client-specific issues and internal reorganisation. However, Infosys has taken several steps towards a holistic and organisation-wide embrace of digital platforms.

Starting from seeding innovation and design thinking at the grassroots, realigning organisation structure and setting up a team of digital strategists and specialised sales force, as well as an incentive framework to reward sales and delivery of new services is all part to revive demand.

Infosys is well-positioned to sustain digital growth even as more effort is required to improve positioning in industry analyst benchmarks. We believe that the new strategy should allow Infosys to improve growth rates over the long term with sustained margins.

The risk is in terms of a slower-than-expected recovery in major user economies and a sharp appreciation of rupee which may impact earnings growth.

ONGC: YTD return -14%

ONGC is a play on global crude prices. However, the recent weakness in crude prices despite the extension of production cuts by OPEC and select non-OPEC countries reflect a quicker-than-expected recovery in crude production from (1) Libya and Nigeria and (2) the US shale.

Libya and Nigeria, exempt from OPEC cuts, have increased production to ~2.5 mn b/d currently from 1.9 mn b/d in March-April 2017, amid resolution of internal disruptions.

On the other hand, the US shale oil production has recovered rather quickly to 5.3 mn b/d currently from 4.8 mn b/d six months ago led by continued increase in rig count and monetization of drilled but uncompleted wells.

Although ONGC is a pure play on recovery in global crude prices, we expect it to benefit from expected recovery in domestic gas price to US$3.3/mn BTU in 2HFY18 and US$3.6/mn BTU in 1HFY19 from current US$2.8/mn BTU. the possibility of policy incentives for EOR/IOR production.

Shipping Corporation of India: 1-year return 12%| YTD return 40%

We like SCI on account of shrinking global shipping order book, bottoming asset prices, lower crude prices (lower bunker) and stable shipping freight rates which bode well for shipping companies.

We infer that the freight rates to improve from here and operating cost to remain low with lower bunker cost which should translate into improvement in revenues, EBITDA margin and return ratios for SCI.

Also, the Balance Sheet (BS) of the company has improved over the last two years with debt prepayment and is expected to improve further going forward. Strategic sale by the government is expected to remove government bound constraints and improve management of SCI which should add value to the company.

Tata Power: YTD Return 8%

Tata power has underperformed in recent months on account of denial of the compensatory tariff demanded by the company. Now, it is weighing several options including legal ones.

Simultaneously, other options for loss mitigation is also being considered like 1) Sourcing competitive coal from other geographies 2) Blending of coal to optimise coal cost 3) Improve Operational efficiency 4) Sale of Power above 80% availability.

It has recently approached GUVNL for sale of 51 percent stake in Mundra UMPP for a token value of Rs 1.0. We believe the management is competent enough to turnaround operations at Mundra unit.

This apart, the stock offers value unlocking potential in its renewables power and defence business. In addition to this, the company’s Solar modules manufacturing business is also seeing traction and has reported a good leap in profits in FY17.

The defence business (Strategic Electronics Division) has significant potential due to government’s thrust on indigenization of defence equipment.

DB Corp: YTD Return 6%

DB Corp is first and foremost a newspaper publisher, with a presence in three languages. DB Corp’s newspapers are the largest circulated in India, as per ABC. Following two years of tepid growth, DB Corp is set to return to industry-beating growth, in FY18/FY19.

We project healthy advertising growth for the company in FY18/FY19. Topline growth shall be accompanied by margin expansion on pricing improvements, cost-cutting initiatives, leading to robust earnings growth through FY17E-FY19E.

DB Corp currently trades at 15.9X one-year forward earnings, well near the five-year bottom (band between 14X-25X one-year forward earnings). Expect the stock to experience significant re-rating as earnings begin to surprise, likely from the latter half of FY18.

Analyst: Equirus Securities

Torrent Power: YTD Return 6%

Recent NITI AAYOG document hints of support to gas-based plants and this could help the revival of 1.6 GW UNOSUGEN and DGEN. Focus on renewable expansions and distribution capex due to the GERC's thrust on RPO and Distribution will lead to a reduction in Stranded Gas based plants/Net Fixed Assets from 37 percent in FY17A to ~29 percent by FY20E.

Torrent is currently trading at 1.2x FY17 P/B with 9%/13% RoEs in FY18E/FY19E and potential to generate >18% RoEs if UNOSUGEN and DGEN recover their costs.

However, key risks could be a reversal of LNG prices while key triggers are government support for gas-based plants, GERC approval of UNOSUGEN tariff, pick up of demand, scale up at Dahej SEZ and addition of distribution franchisees.

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