Mid & smallcap stocks look expensive! 10 largecap which could give 40% return

The Indian market witnessed price-to-earnings (PE) multiple expansion in the year 2017 but this year will be all about earnings growth, Abhay Laijawala, Head-India Research, Deutsche Equities, said in an interview with CNBC-TV18.

As far as midcaps are concerned, Laijawala cautioned investors the valuations are looking extremely high. The Nifty50 trailing midcap PE is trading at double valuations compared to Nifty. The risk-to-reward ratio is far more compelling for largecaps than midcaps, he said.

The Indian equity market witnessed a strong rally during the current financial year on the backdrop of improving macro fundamentals coupled with a revival in corporate earnings.

The S&P BSE MidCap index rose 48 percent in the calendar year 2017 while the major index like Nifty soared by about 29 percent which cheered the market sentiment with a bullish outlook. Many individual mid-cap stocks have gone up 2-3 times in the same period.

“The Nifty is currently trading at 26.8x its trailing earnings compared to over 100x for the Midcap index. Forward PE of Nifty stocks is 22x while that for the midcap universe is over 75x. It is natural that the valuation gap should narrow down over time and this leaves room for upside in frontline stocks,” Atish Matlawala of SSJ Finance & Securities told Moneycontrol.

“Although we continue to believe that earnings growth momentum in midcaps will be much more than largecaps. For 2018, we are of the opinion that the largecap index will outperform its midcap peers with the anticipation of a smart recovery in earnings in the immediate quarters,” he said.

We have collated a list of top ten stocks from different analysts on largecaps which could give up to 40% return in the next 12-24 months:

Analyst: Atish Matlawala of SSJ Finance & Securities

Tata Steel Ltd: BUY| Target Rs1000| Time 18-24 months| Return 30%

Tata Steel is expanding its domestic capacity from 9.7 MT to 12.7 MT. This expansion is coming at a time when steel prices are moving northwards. On the other hand, its European operations are improving due to favourable market conditions and depreciating rupee.

Tata steel domestic and Europeans operations doing well will enable the company to reduce its debt from Rs 88,000 crore to Rs 80,000 crore in the next 2 years.

We expect EBITDA per ton from Indian operations to improve to Rs 10,000 per ton and USD 75 per ton for European operations in FY19E. One can buy Tata steel with a price target of Rs 1000 in next 18-24 months.

NMDC: BUY| Target Rs190| Time 18-24 months| Return 28%

NMDC is reaping benefits from rising iron ore prices which allowed NMDC to hike ore prices by 10-12% in last 1 year. We also expect iron ore supply to remain tight over next 2-3 years on account of many private mines lease expiring by the end of FY20.

The capacity utilization rate of 80 percent allows NMDC to hike production at a short notice. NMDC is also setting up a steel plant in Chhattisgarh which is delayed and will not be completed before FY20 hence, we have not taken benefits from the same in our assumption. One can buy NMDC with a price target of Rs 190 in next 18-24 months.

Aurobindo Pharma Ltd: BUY| Target Rs900| Time 18-24 months| Return 40%

Aurobindo Pharma as of September 2017 had filed 463 ANDAs and received approval for 3334 approvals including 40 tentative approvals, thus we expect a string of product launches over next 2-3 years.

Also, Aurobindo has lowest product pricing risk among its peers as no single product contributes more than 3 percent of sales. We are positive on the company as the company has strong US pipeline, diversified product mix, and no pending USFDA issues. One can buy the stock with a price target of Rs 900 over next 18 – 24 months.

HDFC Bank: BUY| Target Rs2100| Time 18-24 months| Return 11%

HDFC Bank has always outperformed its largecap peers in terms of advances growth and we expect it to continue to do the same in future.

Advances growth in the range of 20-25 percent, stable NIMs (4.5%) and stable asset quality with net NPA less than 0.5% makes HDFC Bank preferred choice for investors. One can buy HDFC Bank with a price target of Rs 2100 in next 18-24 months.

Maruti Suzuki India Ltd: BUY| Target Rs12000| Time 18-24 months| Return 28%

Maruti Suzuki (MSIL) is the largest car manufacturer in India with the market share of ~ 50% in the Indian PV segment selling over 15 lakhs PVs in a year.

We expect Maruti to deliver volume growth of 10-12% CAGR driven by lower interest rates, an uptick in the economy and healthy product pipeline. Maruti has vast dealership network with over 2300 outlets.

Maruti is expanding its capacity at Gujarat plant to cater to rising demand. Maruti has no debt with superior cashflow.

We believe Maruti will be able to keep competition away by launching newer products at regular intervals. One can buy the stock with a target price of Rs 12,000 over next 18-24 months.

Brokerage Firms: CLSA, UBS, Sharekhan

L&T: BUY| Target Rs1565| Time 12 months| Return 18%

CLSA maintains a buy call on L&T with a 12-month target price of Rs1565. The global investment bank like its strategy of preserving capacity for a pick-up in capex cycle. It forecast 16.3 percent CAGR in the earnings per share (EPS) over FY18-2020.

The defense order starts to flow but the risk of aggressive bids by PSUs, said the investment bank. CLSA puts the FY21 target of 18 percent return on equity (ROE) which remains intact and 2018 is likely to see credible progress.

TCS: BUY| Target Rs3000| Time 12 months| Return 5%

UBS maintains a buy recommendation on TCS with a 12-month target price of Rs3000. The Q3FY18 results were largely in-line with estimates. Retail picked up, but banking vertical declined.

The management expects retail vertical to return to double-digit growth in near future. It is confident of achieving 26-28 percent constant currency margins. UBS expects muted reaction given in-line Q3 numbers. The pickup in retail is positive, but concerned about the decline in banking.

Infosys Ltd: BUY| Target Rs1300| Time 12 months| Return 15%

CLSA maintains a buy recommendation on Infosys post Q3 results but raised its 12-month target price to Rs 1300 from Rs 1230 earlier. The previous quarter remained in line with respect to revenue growth and steady margins.

Tax cuts drove next two financial year’s earnings per share estimates by 2 percent, said the note. Client mining stayed strong with solid growth in the top client which augers well for Infosys.

Impressive margin performance continues despite hikes and variable pay. The new CEO is yet to fully sponsor the strategic direction. Infosys has now limited gap with peers, have stability and improving execution which deserves a re-rating.

Bharti Airtel: BUY| Target Rs600| Time 12 months| Return 20%

Sharekhan maintains a buy rating on Bharti Airtel with a target price of Rs600. Bharti Airtel (Airtel) is the largest mobile operator with over 280 million subscribers in India and over 80 mn subscribers across 15 countries in Africa. In India, the company provides mobile services in 22 telecom circles along with the fixed line, enterprise data, and DTH services.

The continuous focus of Airtel on remodeling activities in African business has resulted in steady improvement in operating margin (up 730 bps) over the last four quarters.

Of late, the telecom sector is witnessing pricing sanity and diminishing competitive intensity. Further, with media reports suggesting Reliance Jio going public in late 2018 or early 2019, we expect a favourable competitive environment and lesser predatory pricing action.

ONGC: BUY| Target Rs221| Time 12 months| Return 12%

Sharekhan maintains a buy rating on ONGC with a target price of Rs221. ONGC has reversed the decline in its gas production (declined at 2.1% over FY2013-FY2017) with robust growth of 8.4% YoY in H1FY2018 and 3.3% in FY2017.

The company has guided its gas production to grow by 8.9%/16.5% to 25.34 bcm/29.53 bcm in FY2018E/FY2019E. We have conservatively assumed oil/gas volume CAGR of 1%/7% over FY2017-FY2019E, which is much lower than management’s guidance.

This coupled with higher oil and gas realisation is expected to drive adjusted standalone earnings growth at a 15% CAGR over FY2017-FY2019E.

Overall, the domestic brokerage firm expects consolidated earnings of ONGC to report a CAGR of 20% over FY2017-FY2019E on account of the likely improvement in earnings of the standalone business and higher profitability for OVL.

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