The country is gearing up for Diwali, considered the most auspicious day to invest in the Indian equity markets. Sectors that are likely to be in focus from the medium-term perspective are defence, chemicals, banking & financial services, pharmaceuticals, infrastructure, and engineering goods.
The government’s ‘make in India’ initiative is likely to augur well for sectors like defence and chemicals. Changing dynamics as a result of the pandemic and the geo-political situation have forced global enterprises to look beyond China to augment their supply chains, and India is poised to be the biggest beneficiary of this shift.
Indian defence players have displayed their technical prowess with the launch of the Tejas Light Combat Aircraft (LCA), and the induction of the indigenous aircraft carrier INS Vikrant in the Indian Navy.
Credit growth in India, both on the retail and institutional side, is likely to sustain in the medium term. The capex drive initiated by the private sector will be a strong driver for the same. With improving asset quality, the sector will continue to garner investor interest.
The pharmaceutical space lost investor favour as the effect of the pandemic waned. The sector has been on a downturn for the past year and the valuations have now become attractive. With approvals from FDA and a line-up of new product launches, Indian pharma firms are again geared up for growth in the coming future.
Infrastructure and engineering goods firms are likely to remain in focus for the coming year with the government’s unrelenting emphasis on improving infrastructure.
We have shortlisted a few stocks from the sectors mentioned above which could prove to be good investment options in the medium term.
Defence
This aerospace and defence stock is a key beneficiary of the ‘atmanirbhar’ (self-reliant) defence and defence export policy. With the unique capability of manufacturing combat aircraft and helicopters, the company has a strong order book of Rs 82,000 crore covering the next 3-4 years, which is more than three times its current turnover. This bodes well for its future earnings growth.
“It’s high return on operating equity (adjusted for cash) of 47 percent shows its high operating efficiency and persistent competitive advantage,’’ said Vikas Gupta, CEO and Chief Investment Strategist, OmniScience Capital. Not surprising, since how many companies in India, or for that matter across the world, can make fighter aircraft.
“Given that the stock is trading at an attractive P/E multiple of 15, it is an attractive investment opportunity,’’ said Ashwini Shami, smallcase Manager. This was seconded by Gupta as well.
Cochin Shipyard is the manufacturer of India’s first indigenous aircraft carrier, and is likely to get the order for the second, and possibly the third carrier as well. It is one of the few companies in the world with the capability to manufacture an aircraft carrier.
“Its order book can last for more than six years if the current pace of execution is maintained,’’ said Gupta. It has numerous proposals in the pipeline to cater to the ambitious transformation that the Indian Navy is planning.
“Its high return on operating equity (adjusted for cash) of 27 percent reinforces its competitive advantage. As far as valuation is concerned, it is available at a cash-adjusted PE of ~8,’’ added Gupta. The strength of its balance sheet can be gauged from the high cash it has (net of debt), which is nearly one-third of its market capitalisation.
Chemicals
In Q1FY23, NOCIL witnessed strong growth and reported the highest-ever revenue and production volumes as it benefited from the China+1 alternative theme and NOCIL being one of the only major global non-China players. The company continues to witness strong demand in the replacement tyre market in domestic as well as international markets and showed a strong pick-up, despite a challenging environment of inflation and Forex fluctuations. Furthermore, the operational leverage will boost its margin profile in the coming quarters. We value NOCIL at 16x FY24 EPS to arrive at the target price of Rs 300.
Furthermore, operational leverage will boost its margin profile in the coming quarters. “The stock is currently trading at 13.5X FY24 earnings of Rs 19.3 per share. Given the expected 24 percent CAGR over the next two years, we expect the stock to trade at 16X (20 percent discount to TTM PE of 20X), valuing it at Rs 300 (please check the math here) per share”, said Neeraj Chadawar, Head, Quantitative Equity Research, Axis Securities.
BFSI
Nippon Life India Asset Management
The Indian mutual fund industry is likely to sustain its growth given its low penetration compared to major economies, increase in investment awareness, financialisation of savings, and rise in Systematic Investment Plans (SIP).
Further, “the company’s consistent increase in equity assets, industry-leading retail assets, focus on growing the SIP book, and strong presence in B30 (beyond top 30) cities augurs well for the firm’s growth prospects,” said Nirvi Ashar, Manager, Fundamental Research, Religare Broking. She recommended a ‘buy’ on the stock with a target price of Rs 331.
Axis Securities also has a ‘buy’ rating, with a target price of 360 (25X FY24E EPS), implying a 33 percent upside given its current market price of ~Rs 270 per share.
The company has been conservative in building its loan book during uncertain times, and this approach has helped it manage asset quality stress. Despite ups and downs in the commercial vehicles space, the management’s prudent lending has led to otherwise consistent performance in the past, resulting in strong return ratios. It has a return on assets (RoA) of +2.5 percent.
“We believe Sundaram Finance’s well-diversified, secured loan mix, with strong underwriting practices and comfortable capital position, and a capital adequacy ratio (CAR) of ~24 percent, will support operating performance in the current broad-based recovery in the commercial vehicles space,” added Chadawar, who has a one year target price of Rs 2,490.
Indian Railway Finance Corporation (IRFC)
The IRFC is the financing vehicle for the group companies of the Indian Railways. With AAA domestic credit rating , and a BBB- global rating, it has a strong financial profile. Only three private sector banks are larger than IRFC in terms of total assets, which should give a measure of its size.
“With a consistently growing topline and book value, and the large capex plans of the Indian Railways as per the National Rail Plan of 2024 and 2030, the future growth opportunity is strong. It is currently valued at price-to-book value of less than 1, PE of less than 5, and offers a dividend of 6.5 percent, which beats most bank fixed deposits,” said Gupta.
Pharmaceuticals
The company provides life science solutions to pharma, nutrition, agrochemicals, and other sectors. Geographically, too, its revenues are diversified across India, Europe, and the US, thus lending it stability. It is present in large and growing markets.
According to Gupta, “With several capex initiatives and a target to grow capacity utilisation from 70 percent to nearly 85-90 percent, the revenue growth visibility is high. It is priced quite attractively at a projected PE of 15.”
The company has been making investments in injectables, biosimilars, dermatology, and APIs, thus giving it good growth visibility. The company is attractively priced at a PE of nearly 13. “There might be a demerger of the injectables vertical, and that might unlock further value,” experts said.
Infrastructure and engineering goods
IRCON is a diversified infrastructure player that delivers projects related to high-speed railways, metros, highways, bridges, etc. Its order book is six times the FY22 revenue, and stands at Rs 43,700 crore as of March 2022, wherein Rs 16,000 crore worth of orders were awarded in FY22 itself.
“The stock provides a good investment opportunity as it has a trailing P/E ratio of 6.1 and a dividend yield of 6 percent,” said Shami. “The P/E multiple, after adjusting for net-free-cash, falls below 5, implying an earnings yield of more than 20 percent,” he added.
Bharat Electronics is a play on defence and railways growth vectors and has unique high-end manufacturing and engineering capabilities.
“It has a large order book that will last for nearly four years, providing growth visibility in the medium term. It is attractively priced at a cash-adjusted PE of 25 for a company with a return on operating equity of 43 percent (cash adjusted),” added Gupta.
Among stocks from other sectors, Ashok Leyland and United Spirits may generate healthy returns in the medium term given the cyclical recovery in the commercial vehicles space for Ashok Leyland, and growing premiumisation in the alcoholic beverages market.
The company remains well-positioned to benefit from the cyclical recovery in commercial vehicles, especially in buses and higher tonnage trucks, where it has a higher market share. Demand recovery and gradual price increase are also expected to drive improvement in the long run.
“With a pick-up in infrastructure, construction, and mining activities, the growth momentum of commercial vehicles continues to be robust,” said Apurva Sheth, Head of Market Perspectives, Samco Securities.
The company is expected to increase its market share on the back of new launches and a strong product portfolio.
“Raw material cost pressures are likely to subside, leading to margin improvement in the upcoming quarters. We value the company at 19X its FY24 EPS, and arrive at our target price of Rs 175,” added Chadawar.
United Spirits gains favour in the FMCG-beverages segment given the industry’s positive growth prospects, coupled with the company’s tie-up with global giant Diageo, focus on premiumisation, and innovation.
The company has managed to reduce its debt considerably over the past five years through internal accruals and better working capital management. “The current debt-to-equity ratio stands at a comfortable 0.1X in FY22 as against 1.5X in FY16, which is a positive development,” said Ashar. She recommends a ‘buy’ on the stock with a target price of Rs 1,093.
Disclaimer: The views and investment tips of investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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