Market experts advise a prudent, stock-specific approach in such an uncertain market
Indian equity market looks fragile at this juncture as global and domestic headwinds have eroded investors' risk appetite.
At first glance, it appears that the trend of 'sell-on-rise’ is dominant as every one or two sessions of gain in the market is succeeded by a fresh wave of selling.
While the worries over the US-China trade war remain, deteriorating domestic microeconomic health, plunging auto sales—a major indicator of the country's economic health—and the budget proposal of tax surcharge on super-rich have shaken India's position as an attractive market.
"Markets mostly have been a one-way street since the presentation of Union Budget on July 5 when the government proposed to increase tax on foreign portfolio investors (FPIs) up to 42 percent," said Standard Chartered (India).
Following the proposal, foreign investors pulled out over Rs 11,000 crore from Indian equities in July, the steepest outflow in nine months.
The market, however, is still hopeful that the government will come up with measures to boost the economy and may modify the Long Term Capital Gains (LTCG) tax and rollback the tax surcharge proposal to regain the trust and confidence of the overseas investors.
What steps will the government take, its timing and impact on the sentiment is anyone's guess as of now.
Market experts advise a prudent, stock-specific approach in such an uncertain market. Based on their recommendations, here are nine mid and smallcap stocks that analysts say should deliver gains over one-year horizon. Take a look:
Siddharth Sedani, Vice President - Equity Advisory, Anand Rathi Shares and Stock Brokers
Sagar Cements | Buy | Target price: Rs 823
"We expect its operating performance to persist in coming quarters given that the small drop in prices is offset by a demand pickup and lower costs. The proposed expansions in the Centre and East are on track. However, this would keep leverage high," said Sedani.
Sedani expects revenue to grow by a 17 percent CAGR, backed by a 9 percent volume CAGR over FY19-21.
"On the ramp-up of the WHR plant and the commissioning of the 18MW thermal plant along with savings in logistics costs on account of reallocation of sales, we expect EBITDA per tonne to touch Rs 820 by FY21, against Rs 428 in FY19," he added.
"Post-capex expansion in FY21, net-debt-to-equity will be 0.7 times and with the stable pricing environment and cost reduction measures, the company's operating performance will be consistent," Sedani said.
Century Plyboards | Buy | Target price: Rs 183
Driven by all segments, Century's Q1 came ahead of estimates, with revenue and PAT rising about 7 percent each on a good base.
"Revenue, EBITDA and PAT came higher nearly 7 percent YoY each and were ahead of our estimates. The 16.1 percent EBITDA margin surprised positively, though its sustenance is the key," the analyst said.
As per the analyst, while the short-term challenges, such as weak demand and competition in MDF, can be seen, the structural long-term growth outlook is intact. "We expect 11 percent, 20 percent and 31 percent CAGRs in consolidated revenue, EBITDA and PAT, respectively, over FY19-21," Sedani said.
He added that the company's diversified product range, leading position in key products and disciplined balance sheet makes it an attractive bet. However, rising input costs and currency fluctuations are the key risks for it, Sedani said.
City Union Bank | Buy | Target price: Rs 226
"With its asset quality more stable than its peers, sturdy capitalisation and focused SME and retail lending strategy, we expect its good profitability to endure in the medium term," said Sedani.
The bank's loan book grew nearly 13 percent year-on-year in June quarter given that Q1 is a seasonally weak growth quarter for the bank. The management is confident it would grow its book 18-20 percent during the year.
"Given the overall weak economic environment, however, we estimate it at 17 percent. Besides, with 15.7 percent capital adequacy, the bank is adequately capitalised for high-teen loan growth in the medium term," Sedani added.
His August 2020 target of Rs 226 is based on the two-stage DDM model. This implies a nearly 2.7 times P/BV and nearly three times P/ABV multiple on its FY21E book.
Nikhil Shetty, Research Analyst, BP Equities
Granules India (GIL) | Buy | Target price: Rs 155
The analyst believes FY20/21 to be much better for GIL on revenue front, on the back of commissioning and ramping up of fresh capacities in API and PFI with expected three-give products (formulations) launch in the next 12 months.
"We modelled a nearly 19.7 percent top-line growth for GIL over FY19-21E as we believe most of the benefits from capacity addition and ANDA approval would be seen in FY21E," Shetty said.
The company plans to file 20-22 ANDA filings from India and Virginia facility put together over the next two years. For FY19-21E, Shetty expects the company’s earnings deliver CAGR of 29 percent with 200bps improvement in EBITDA margin over FY19-21E.
Operational efficiency, moving up the value chain towards high margin business, improved capacity utilization, commitment to reduction in debt and gaining traction in JVs may improve EBITDA margins.
Hikal | Buy | Target price: Rs 233
"Considering the expected strong growth in profitability, healthy balance sheet, improving return ratios and good corporate governance practices, we are optimistic on the long-term growth prospects of the company," said Shetty.
The analyst expects the company to post 15.8 percent revenue CAGR over FY19-21E led by the commercialisation of new products and favourable demand in the existing product portfolio for both businesses.
"We forecast 134bps EBITDA margin expansion over FY19-21E, led by better product mix and operating efficiency on account of higher utilization levels and cost rationalization measures at the Pharma facility and estimate 20.3 percent PAT CAGR on the back of better operational performance," said the analyst.
S H Kelkar and Company (SHK) | Buy | Target price: Rs 188
"Considering the expected strong growth in profitability, healthy balance sheet, improving return ratios and good corporate governance practices, we are optimistic about the long-term growth prospects of the company," said Shetty.
The analyst believes SHK would be a major beneficiary of increasing demand from FMCG companies, specifically present in personal care, packaged foods and dairy products.
"We expect the company to post 10.4 percent revenue CAGR over FY19-21E led by steady growth in end user industry. We forecast 457bps of EBITDA margin expansion over FY19-21E, driven by the shift in composition of exports in favor of high value added items," said Shetty.
He added that the shift in production base of ingredient business from high cost region of Netherlands to the low cost region in India and normalization of Input cost increase will also support EBITDA margin. He estimates a nearly 23 percent PAT CAGR on the back of better operational performance.
Mustafa Nadeem, CEO, Epic Research
ITC | Buy | Target price: Rs 305
Due to its dividend history, it is one of the must have stocks. Besides, its diverse business also makes it attractive since it has many businesses that expand from FMCG, hotels to agribusiness.
With adding 60 new products in FY19 and expanding the sales in rural markets with a growth of 20 percent, it is a value buy since the operating efficiency would further improve in FY20.
"We believe the stock can move higher from here and retest the levels of Rs 305 in the next one year," said Nadeem.
PFC | Buy | Target price: 144
This public infrastructure company, that is foraying into financing of electrification, has a decent track record in terms of its performance and decent quarterly sales growth.
"We have seen an almost 10 percent jump in sales while the recent merger of REC would make PFC a dominant player with its income and sales almost doubling in the coming financial year based on its inorganic growth," Nadeem said.
Power Grid corporation | Buy | Target price: Rs 257
Double-digit ROCE and quarterly sales growth along with consistent dividend yield makes it attractive.
"It has a 50 percent market share of power transmission and with one nation one grid and further foraying in solar power projects, smart grid and smart city projects, it will continue to have double-digit growth in the coming financial year," the analyst said.Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.