Indian stock markets in 2022 stuck to their Unique Selling Propositions (USPs), as did their foreign counterparts-–unpredictable and volatile. From the lows of June, the markets created new all-time highs starting from the end of November and until the first week of December.
To be sure, the traditional favourites -- technology, pharmaceuticals, mid-cap and small cap stocks -- didn’t join the rally. New-age technology companies that at one time were demanding sky-high valuations, fell flat.
Sectors that shone bright included public sector banks, defence, stocks related to railways, autos and so on.
Goldmine
Talking about stocks, there are a total of 17 names from the BSE500 universe which more than doubled investors’ investments in 2022 and within these, there are two stocks, Mazagon Dock Shipbuilders Ltd and Adani Power Ltd, which surged more than 200 percent.
The PSU Bank index was the top contributor with five stocks and the defence sector was second with four. Three stocks from the Adani group joined the bandwagon of top stocks and there were also stocks from manufacturing, fast moving consumer goods companies, railways and chemical/fertilizer units that joined the party.
Will these returns sustain in 2023?
“While in most of these spaces, the up-move seems to have been done for the time being, these stocks could once again attempt to rise after a brief correction,” Deepak Jasani, Head of Retail Research at HDFC Securities, told Moneycontrol.
That said, returns of the same magnitude may be difficult to match in 2023, but, experts do expect the domestic consumption story to remain strong in the next year, and a lot will also depend on the macro environment and corporate earnings amid recessionary headwinds overseas (at least in the first half of the year) and how the government plays out in the last year before the general elections.
“A lot more of the performance we saw in 2022 will now be dependent on the earnings delivered by the companies on account of recessionary pressure in advanced economies in the beginning period of 2023,” Raj Vyas, Portfolio Manager at Teji Mandi, told Moneycontrol.
What drove these stocks?
Apart from the sectoral play, the stocks found favour because of their strong financials, positive quarterly results, robust order books and better growth prospects backed by the government’s Make in India push.
Also, “attractive valuations, improving fundamentals/visibility and low institutional holdings floating stock have been the key reason for their outperformance” added Jasani,
Stock-specific reasons also propelled the surge in their prices.
The stock of Mazagon Dock Shipbuilders outperformed all other stocks from the BSE500 with returns in excess of 230 percent during the year.
MDL is India’s only shipyard to have built destroyers and conventional submarines for the Indian Navy. “It has a strong order backlog of Rs 42,000 crore which gives strong revenue visibility”, said an analysts at ICICI Direct Research.
The government’s Make in India push and modernization of the Indian Navy put the company on a strong footing.
Over the last 10 years, its revenue increased at a compound annual growth rate of 10.5 percent while Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) and net profit increased 3.6 percent and 3.9 percent CAGR, respectively, during the same period due to a fall in operating margins.
Its EBITDA margin during the quarter ended September 2022, improved by 149 basis points Year-on-Year (Y-o-Y) to 6.9 percent with a 38.3 percent YoY increase in EBITDA to Rs 117.8 crore. H1FY23 EBITDA was up by 87.5 percent and profit after tax for the half year increased 85.4 percent.
Analysts at ICICI Direct Research expect MDL to deliver earnings CAGR of 24 percent in FY22-24 led by 18 percent revenue CAGR (on better execution) and sustainable margins.
The key triggers for the company’s performance will be the strong order backlog of Rs 42,000 crore (6.1x Trailing Twelve Month revenue) which provide strong revenue visibility; the company will be a key beneficiary of huge expansion plans of the Indian Navy over the next four years which involve an outlay of ~Rs 1.8 lakh crore for the purchase of destroyers, frigates and submarines.
The brokerage values the company at Rs 1,025 per share on 22x P/E (Price-to-Earnings) on the FY24 Earnings Per Shares basis.
Other stocks from the defence basket that have turned multibaggers include Bharat Dynamics Ltd (+144 percent), Great Eastern Shipping Co Ltd (+143.8 percent) and Hindustan Aeronautics Ltd. (+130 percent).
Bharat Dynamics had reported 42 percent on-year growth in Q2FY23 EBITDA (123 percent Quarter-on-Quarter) at Rs 94 crore. Its EBITDA margin expanded to 17.5 percent in Q2FY23, up from 13.1 percent in the year ago-quarter and 6 percent over Q1FY23. Its gross margin too remained healthy at 55.4 percent during the September quarter. The margins improved on sound execution of more profitable orders and a 33 percent on-year decline in costs.
“Order book stands at ~Rs12,000 crore (4.3x FY22 revenue), indicating enough headroom for growth” wrote analysts at ICICI Securities.
Going ahead, they expect performance to improve further as management expects and order book position of Rs 25,000 crore in the next 2-3 years, primarily due to orders for Akash 3rd and 4th regiments, and Medium Range Surface-to-Air Missiles (MRSAMs) from the Indian Navy.
“We expect FY23 revenue likely at Rs 3,000-3,500 crore with double-digit growth from FY24 onward and EBITDA margin in the range of 20-23 percent”, the analysts added while forecasting a target price of Rs 1,100 per share based on the discounted cash flow methodology methodology for Bharat Dyanamics, implying a P/E of 30.7x FY24 EPS.
Hindustan Aeronautics Ltd (HAL) is another defence public sector unit that surged more than 100 percent in 2022. During the period from FY18-22, the company generated revenue at a CAGR of 7.4 percent, EBITDA at a CAGR of 12 percent and PAT at 26.5 percent.
Analysts at ICICI Securities expect the contribution to revenue from repairs and overhauling (ROH) and spares to remain elevated until FY24 and EBITDA margins of 26-27 percent due to higher ROH revenue and cost efficiencies.
“Order book accretion by Rs 50,000 crore is possible through new orders of both aircraft and helicopters while RoH and development projects are likely to contribute another Rs 15,000 crore and Rs16,000 crore, respectively,” ICICI Securities wrote in a note to clients.
The securities firm is of the opinion that a strong order pipeline along with development projects in progress are likely to maintain earnings momentum in the medium to- long-run; it maintains a ‘buy’ rating on the stock with a target price of Rs 3,170 per share.
Delays in execution is a key risk to its thesis. The company has witnessed significant overruns across its different projects which have resulted in steep escalation in project costs and have put a question mark on its execution capabilities. The Tejas Light Combat Aircraft is one big example. The company has to build efficiencies across the project cycle to be able to cash in on the strong order book it has.
At the same time, ICICI Direct Research has a ‘buy’ rating on HAL with a target price of Rs 3,300 per share, which is a 20x PE on FY25 EPS.
The Adani group has been on an acquisition spree for quite some time and has done some large deals across its business portfolio. It has become a formidable player in its space. As a result, Adani Power, one of the top private power players in the country, was able to generate more than 200 percent returns for its investors in 2022.
For the quarter ended September 2022, Adani Power reported a 202 percent rise in consolidated profit after tax (PAT) at Rs 696 crore compared with Rs 231 crore in the corresponding quarter last year.
Its consolidated revenue came in at Rs 8,446 crore, up 51.5 percent, compared to Rs 5,572 crore in Q2FY22, due to improved tariff realization and higher one-time income of Rs 771 crore on account of late payment surcharge.
Going forward, experts advise investors to exercise caution as the stock has become slightly overvalued while the real cause of concern is its burgeoning debt burden.
The stock became a multi-bagger in 2022 as it generated returns of ~135 percent during the year. Its performance was aided by 117 percent YoY jump in its consolidated net profit to Rs 461 crore and a 189 percent YoY bump in its net sales to Rs 38,175 crore.
The increase in income was on account of strong performance by integrated resource management (IRM) and Airport business.
According to available data, Adani Airports managed close to 90 percent of the pre-COVID passenger traffic during September quarter and 2 lakh metric tonnes (MT) of cargo. The company also achieved various milestones in its road, data centre, supply chain ecosystem (solar module) and mining services businesses.
Experts are positive about the stocks and believe that the company will be exploring green energy opportunities across the globe and any announcement towards it can lead to a rerating of the stock. Another trigger for a re-rating, according to them, is the possibility of a stake sale to a strategic investor in the airports business and a possible listing.
Ventura Securities projects a target price of Rs 4,310 per share for the stock over the next two years, which is a 16 percent upside from current levels. “The re-rating has been on the back of strong visibility around the green H2 ecosystem and the inclusion of the stock in Nifty50, which has triggered a slew of new demand,” the brokerage said in its note.
Over the period of FY22-25, Ventura expects AEL’s revenue to grow at a CAGR of 19.9 percent to Rs 1,19,539 crore; EBITDA to grow at a CAGR of 83.2 percent to Rs 22,831 crore and PAT is likely to witness a CAGR of 115.3 percent to Rs 7,751 crore.
EBITDA and net margins are expected to improve by 1375 bps to 19.1 percent and 537 bps to 6.5 percent respectively by FY25.
The company is the largest private city gas distributor and second only to Gujarat Gas Ltd in India. With the recently acquired geographical areas in the 9th, 10th and 11th rounds of CGD auctions, experts expect the company to grow its CGD network aggressively. The company has also announced its foray into EV charging stations and smart gas meter installations which will be its new revenue streams.
Experts believe that the stock has run far ahead of it fundamentals and they don’t see much upside from the current levels.
Ventura Securities has a ‘hold’ rating on the stock with a target price of Rs 3,475 over the next two years. At the current market price of Rs 3,340 per share, the stock is trading at ~130x FY25 Enterprise Value/EBITDA.
Public sector Banks
The PSU banks garnered tremendous interest from market participants with five stocks becoming multi-baggers during the year. The strength in their balance sheets, growth in net interest income, lower provisions and attractive valuations played in favour of these stocks.
Punjab & Sindh Bank was the top performer among this pack with returns of 157 percent. This was followed by the heavyweight Bank of Baroda (BOB) which generated returns of 141 percent. Union Bank of India (UBI), Indian Bank and Bank of India (BOI) were the other stocks that entered the league of multibaggers.
“From FY18 onwards, there has been marked improvement in asset quality of PSBs led by cautious growth approach and focus towards retail segments. Moreover, Insolvency and Bankruptcy Code, 2016 was also constituted and which paved the way for better recoveries together with ARC (asset resolution company) sale as well as partial write-offs,” Ashika Stock Broking wrote in a note.
On account of these coordinated efforts, gross non-performing assets (GNPA) ratio of public sector banks went down from 14.6 percent in FY18 to 7.4 percent in FY22. Decline in slippages in the corporate loan book and focus on granular loan growth improved asset quality. which is expected to keep the concerns on that front at bay.
“Revival in corporate capex cycle is one of the biggest triggers for higher credit growth, which will be supportive for the PSBs and that have been reflected in recent market share gains in advances,” wrote analysts at Ashika Stock Broking.
With improvement in credit-deposit (CD) ratio, a higher share of loans linked to external benchmarks and sticky CASA (Current and Savings Accounts), net interest magins are expected to improve for BOB while a steady cost-to-income ratio and muted credit costs will likely support its profitability ahead.
Ashika Stock Broking has a ‘buy’ on BOB with a target price of Rs 197 per share. At the current market price of Rs 177 per share, the scrip trades at a P/BV (Price to Book Value ratio) of 0.84x FY24 book value of Rs 210. It expects net interest margin to improve from 2.8 percent in FY22 to 3.1 percent in FY23 and 3.3 percent in FY24. At the same time, GNPAs (Gross Non-Performing Assets) are likely to come down from 6.6 percent in FY22 to 5.0 percent in FY23 and 4.5 percent in FY24.
For Indian Bank, headline asset quality ratios improved during the quarter ended September 2022, with an 83bps and 62 bps QoQ reduction in GNPA and NNPA (Net Non-Performing Assets) to 7.3 percent and 1.5 percent. Slippages moderated to Rs 2,460 crore (~2.7 percent annualized). This, coupled with healthy recoveries, upgrades and lower write-offs, aided asset quality.
Motilal Oswal Financial Services, in a note on Indian Bank, said: “We raise our FY23/FY24 PAT estimate by ~13 percent/7 percent as we build in lower provisions, backed by better than expected asset quality”. It expects a Return on Assets/RoE (Return on Equity) of 0.9 percent/15.4 percent in FY24. It has a ‘buy’ rating on the stock with a target price of Rs 290 per share. FY23 adjusted book value (ABV) is likely at Rs 326.5, representing a price-to-ABV of 0.8x.
Stocks from other sectors
Among stocks from other sectors, packaged consumer products maker Varun Beverages Ltd (VBL) saw its stock price zoom by more than 130 percent during the year.
VBL had posted tremendous volume growth (24 percent YoY) in Q3CY22, and surpassed the street’s expectations on the back of strong demand especially for Sting Tropicana and Dairy products. Its gross margin improved 90 basis points YoY despite raw material inflation aided by higher realization.
“We continue to remain bullish on the stock due to large growth opportunity for energy drink market and Tropicana (distribution reached to only 15 percent of the total outlets hence, huge room to grow) along with international market expansion and entry into non-beverages segment”, wrote analysts at Bonanza Portfolio Ltd.
Over CY22-24, they expect VBL to deliver EBITDA and PAT CAGR of 25 percent and 38 percent respectively.
Rail Vikas Nigam Ltd, Deepak Fertilizers & Petrochemicals Ltd, Rhi Magnesita India and JK Paper are the other constituents of the multi-bagger bag.
Deepak Fertilizers is setting up a new ammonia plant which is on track for commissioning by April-May 2023 and as per the estimates of IIFL Securities, is expected to contribute $230/ton of EBITDA, although at current elevated levels of realizations, the benefits are expected to be much higher. The company has also entered into a 20-year agreement with Aarti Industries for the sale of Nitric Acid.
IIFL Securities has retained its positive stance on the stock, as at 8x/11x FY23/24 P/E, it finds the valuations attractive.
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