SMC Research
The market saw another spectacular year (2017) with benchmark indices gaining 28 percent on the back of reforms initiated by the government and increasing appetite for equities of domestic investors.
As a matter of fact domestic mutual funds poured in about twice the money in equities put in by the foreign institutional investors amounting to close to USD 8 billion.
The gains in the domestic markets were in line with the major global markets indicating firmness in growth going in 2018 with some agencies predicting best growth in 2018 since seen in the year 2011.
With Benchmarks Nifty 50 and Nifty Midcap 150 trading at 26 and 54 times to earnings, these benchmarks are trading at premium of about 26 percent and 116 percent to their historical five year average. Actually, rise in domestic and global liquidity led to P/E re-rating in the market.
On the flip side, since the Gujarat state election win was not an easy win for Bhartiya Janta Party (BJP), we expect government to embrace more populist measures and focus on completing the reforms undertaken in the last three years.
Now talking about the risks going in 2018, the first risk coming from the global arena would be the major central bankers would be on course to trim their balance sheet and also they would hike interest rates given the firmness in growth they are experiencing.
While major central banks are calibrating their moves in such a manner that there should not be any disruption in financial markets but all of this can mean trouble for emerging markets in the sense that there would be liquidity constraint and also may see withdrawal from bond markets.
As a matter of fact foreign institutions have pumped nearly USD 8 billion in equities and USD 23 billion in debt market so far in 2017.
The other risks would be sustenance of high oil prices and additional spending by government ahead of 2019 elections thereby leading to challenge for fiscal deficit and continuation of neutral stance by the Reserve bank of India in response to commitment to keep inflation close to 4 percent.
2018 is expected to be another good year — with the results of all policy initiatives taken in the last 2 years beginning to take shape.
The government is expected to outline a roadmap on NPA resolution and frame a better outlook going forward with PSU banks. The clean-up and recapitalization of public sector banks (PSU) and its positive impact on overall earnings growth is expected to be the major drivers of the stogck market in 2018.
On the economy front, after 7.1 percent growth in 2016 and a projected 6.7 percent uptick in 2017, the Indian economy is expected to grow 7.4 percent next year with government policies shifting towards the stress-ridden rural landscape.
Modi government has enacted Goods and Services Tax (GST), a demonetisation plan, a new bankruptcy law, an inflation-targeting framework for its central bank, a Real Estate Regulation Act and many more in the last two years, and there is an expectation that government would try to give shape to these initiatives.
The upcoming Budget is expected to be focused on farmers, creating jobs and infrastructure while making all attempts to follow a fiscal prudence path. A long Term investors should remain invested.
Here is a list of 10 stocks that rallied up to 77 percent in 2017 (YTD) and can still give up to 27 percent gains in 2018:
L&T | Rating - Buy | Target - Rs 1,450 | Upside - 15%
Larsen & Toubro is a major Indian multinational engaged in technology, engineering, construction, manufacturing and financial services, with global operations.
The company continues to focus on profitable execution of the large order book, selective order picking, on-time deliveries & operational excellence through digitalisation. The management is also emphasizing on cost competitiveness, continuous optimisation of working capital, restructuring of its business portfolio and value creation with an aim to enhance its return on equity.
The government's determined efforts to revive the investment sentiment and globally, the developed economies appear hopeful of a recovery and better growth prospects. The investment climate in the company's focus market Middle East continues to provide some selective opportunities despite the oil price shock and the geo political risks.
Thus, it is expected that the stock will see a price target of Rs 1,450 in 8 to 10 months time frame on a 1 year average P/Ex of 26.05x and FY19 EPS of Rs 55.68.
Zee Entertainment | Rating - Buy | Target - Rs 667 | Upside - 16%
Zee Entertainment Enterprises is one of India’s leading media and entertainment companies. It is amongst the largest producers and aggregators of entertainment content in the world, with an extensive library housing over 2,50,000 hours of television content.
With rights to more than 4,200 movie titles from foremost studios and of iconic film stars, ZEEL houses the world’s largest Hindi film library.
The company has entered into newer geographies both domestically and globally, launched multiple channels, strengthened distribution, expanded the genres and widened its audience profile. Moreover, the management focuses towards expansion and it is expected that market share would give strong growth to the company in coming years.
Thus, it is expected that the stock will see a price target of Rs 667 in 8 to 10 months time frame on a target P/E of 38x and FY19 (E) earnings of Rs 17.54.
Tech Mahindra | Rating - Buy | Target - Rs 569 | Upside - 16%
Tech Mahindra is a specialist in digital transformation, consulting and business re-engineering solutions. It has major focus on two key verticals, telecommunications and manufacturing that account for 70 percent of its revenue.
According to the management, the company would focus on digital, domain and execution to transform it from IT (information technologies) to DT (digital technologies). It has once again proved that despite the occasional headwinds, geopolitical uncertainties and changing demands, it would rise to grow.
With its DAVID (digitalisation, automation, verticalisation, innovation, and disruption) Strategy at play, it has posted reasonably good growth in the quarter across revenue, profit and new business.
Thus, it is expected that the stock will see a price target of Rs 569 in 8 to 10 months time frame on a two year average P/E of 15.12x and FY19 (E) earnings of Rs 37.66.
Bharat Electronics | Rating - Buy | Target - Rs 213 | Upside - 13%
Bharat Electronics Limited is a multi-product, multi-technology, multi-unit Navratna company providing the techonology and product as per the needs of defence in diverse fields in India and outside India.
Government’s greater emphasis on ‘Make in India’ initiative in Defence sector provides a great opportunity for the Company to enhance its indigenisation efforts and to address the opportunities in Indian Defence sector.
Healthy order book and orders in pipeline, capacity enhancements and creation of new test facilities has helped the company in achieving the targeted growth and also would continue to drive the growth in the coming 4 to 5 years.
Thus we expect the stock to see a price target of Rs 213 in 8 to 10 months time frame on a 1 year average P/E of 26.46 and FY19 (E) earnings of Rs.8.05.
NHPC | Rating - Buy | Target - Rs 38 | Upside - 24%
NHPC is India's premier hydropower company, with 15 percent share of installed hydro-electric capacity in India. Government of India (GoI) holds 74.5 percent stake in NHPC (as per the shareholding pattern as on 30 September 2017).
The company has taken some very effective steps for its capacity addition to meet the annual demand for power and growth. It has adopted new technologies in the areas of electrical and civil engineering for improvement in planning and investigation, which will reduce delays in construction and problems of siltation.
Thus, it is expected that the stock will see a price target of Rs 38 in 8 to 10 months time frame on a current P/E of 13.12x and FY19 (E) earnings of Rs.2.88.
Indian Bank | Rating - Buy | Target - Rs 488 | Upside - 15%
The bank expects to improve its loan growth to above 15 percent by end March 2018. Bank aims to reduce gross non-performing assets (NPA) ratio below 6 percent and net NPA ratio below 3 percent by March 2018.
The bank enjoys a healthy strong balance sheet with very good capital adequacy ratio, healthy assets and extremely low and controlled non-performing assets ratio. Hence, the bank is expected to do well in near future.
Thus, it is expected that the stock will see a price target of Rs 448 in 8 to 10 months time frame on a target P/Bv of 1.35x and FY19 BVPS of Rs 331.97.
Engineers India | Rating - Buy | Target - Rs 239 | Upside - 17%
Engineers India provides engineering consultancy and EPC services, mainly to the oil and gas and petrochemical industries. The company has also diversified into sectors like infrastructure, water and waste management, solar and nuclear power and fertilisers to leverage its strong technical competencies and track record. The government of India holds 58.87 percent (as per shareholding pattern as on 30 September 2017).
The company has a healthy balance sheet and strong cash balance. The company is best placed to benefit from revival in Oil & Gas capex, given its dominant position in the segment. The company’s order inflows have improved in the last one-two years. The company has a healthy mix of domestic and overseas orders.
Thus, it is expected that the stock will see a price target of Rs 239 in 8 to 10 months time frame on a 2-year average P/E of 32x and FY19 (E) earnings of Rs 7.48.
Swaraj Engines | Rating - Buy | Target - Rs 2,384 | Upside - 17%
Swaraj Engines is engaged in manufacturing engines for fitment into Swaraj tractors, which is manufactured by Mahindra & Mahindra (M&M) at its Swaraj division. It is also supplying high technology engine components to SML Isuzu for assembly of commercial vehicle engines. Its business activities relate to diesel engines, diesel engine components and spare parts.
The management of the company expects good growth for demand of domestic tractor due to Government’s continued thrust on agri and rural sector, which would help the company to increase market share and financial growth of the company. The central government has time and again reiterated its aim to double farm income by 2022, which has envisaged to be attained through better productivity and enhanced farm realizations.
SEL is a leading supplier of engines for the tractors to market leader i.e. M&M. The company is one of the key players to benefit from this transition.
Thus, it is expected that the stock will see a price target of Rs 2,384 in 8 to 10 months time frame on a 2-year average P/Ex of 29.49x and FY19 EPS of Rs 80.83.
Ahluwalia Contracts | Rating - Buy | Target - Rs 473 | Upside - 27%
Ahluwalia Contracts (India) is an India-based integrated construction company. The company's project portfolio encompasses projects across residential and commercial complexes, hotels, institutional buildings, hospitals and corporate offices, information technology (IT) parks and industrial complexes, metro station and depot, power plants and automated car parking lot, among others.
The strong order backlog, combined with proven execution capabilities and low-geared balance sheet would help the company to deliver healthy growth in the foreseeable future. The government’s increasing focus on the construction industry is expected to generate better order flows going forward.
Thus, it is expected that the company would see good growth going forward and the stock will see a price target of Rs 473 in 8 to 10 months time frame on a one three-year average P/E of 21.41x and FY19 (E) earnings of Rs 22.1.
Gati | Rating - Buy | Target - Rs 158 | Upside - 15%
Gati is a pioneer and leader in express distribution and supply chain solutions.
With its comprehensive integrated service portfolio, Gati is distinctively positioned to support the consequent supply chain realignment. Moreover, the company's pan-India reach has been already designed on a hub and spoke model for efficiency and speed.
Over the last few years, the company has undertaken significant initiatives to fortify its stronghold to deliver consistently to customers, by developing end-to-end solutions, enhancing technology capabilities and augmenting operations quality processes.
Thus, it is expected that the stock will see a price target of Rs 158 in 8 to 10 months time frame on a target P/E of 25x and FY19 (E) earnings of Rs 6.31.
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