The market is expected to continue its rally next year as well, but the gains may be less compared to 2017 as the coming year is expected to be volatile due to events like state elections and full-fledged Budget of Modi government before going into general elections 2019.
What a year it was! The 30-share BSE Sensex registered 28 percent gains in the year 2017 to end at a record closing high on the last day of the year.
The broader markets not only participated in the bumper rally but also outperformed frontline indices as the Nifty Midcap surged 48 percent. All sectoral indices, too, closed the year on strong note barring Pharma.
The solid rally was largely led by liquidity, which was the king in passing year, followed by Modi government reforms, assembly elections, hopes of corporate earnings growth and positive global cues.
The market is expected to continue its rally next year as well, but the gains may be less compared to 2017 as the coming year is expected to be volatile due to events like state elections and full-fledged Budget of Modi government before going into general elections 2019, experts suggest.
We expect markets to do well as the corporate earnings improve going forward as we move ahead in the year but given the spectacular returns in 2017, we should temper our expectations for 2018.
Thukral said the real fruits of the reform of the decade such as GST would be seen in the next 12-18 months as things get sorted out, tax revenues improve and consumption rises following a drop in prices for the end users.
HDFC Securities in a note said that investors would now have to moderate their expectations for index returns in calendar 2018. It feels that investors would keep getting individual stock opportunities that could yield much higher returns.
Though 2018 is being ushered-in amidst few macro concerns like rising crude oil prices, inching inflation along with an increase in the government borrowing programme leading to some slippages on fiscal consolidation path; he feels that these developments would be short-lived.
The domestic brokerage firms further added that the focus may slowly shift from liquidity to earnings. “An issue for worry is whether the markets have fully discounted all the India positives in advance and is going overboard on valuation just based on expected unending inflows from global/domestic sources,” it said.
Here is a list of 10 stocks that rallied up to 137 percent in 2017, still have potential to increase up to 26 percent in the coming year:
Brokerage - Motilal Oswal
Dabur India | Rating - BUY| Target - Rs 410 | Return 17%
Nearly 50 percent of Dabur’s domestic sales come from rural India – the highest proportion among FMCG companies – making it an ideal play on rural revival.
For Q2FY18 rural sales grew by 11 percent, faster than its growth in urban sales at 10 percent. Worries on both the wholesale channel due to GST implementation and rural sales are receding faster than expected.
L&T | Rating: BUY| Target Rs 1,440 | Return 15%
Larsen & Toubro (L&T) is exposed to several levers across business/geographic segments and has emerged as the E&C partner of choice in India, which provides a robust foundation to capitalise on the next leg of the investment cycle.
Under its new five-year strategic plan to FY21, LT aims to - 1) grow sales at 12-15 percent CAGR to reach Rs 2 lakh crore by 2021; 2) expand margins to 11.2 percent, up 120bp over FY16, driven by higher profitability in key manufacturing verticals (power, process, forgings and Katupalli yard) and hydrocarbons; 3) unlock value via asset sales to drive return on equity (ROE) to 18 percent from 12 percent in FY16; and 4) reduce working capital to 18 percent of sales from 24 percent currently.
Oberoi Realty: Rating BUY | Target Rs 580 | Return 21%
Oberoi Realty is a Mumbai-focused premium real estate developer, with a presence in the residential, commercial and hospitality segments. It enjoys EBITDA margins of more than 50 percent.
Its residential portfolio comprises 19msf of the developable area, providing strong growth and cash flow visibility over the next 10-12 years. The recent foray into affordable housing completes its bouquet of offerings and should help it enjoy tax incentives.
It plans to multiply its annuity portfolio from 1.6msf to 4.2msf by launching two new malls and an office complex on its existing land bank, which is fully paid for. The expansion will result in leasing income increasing by 4x over the next five years.
Nilkamal: Rating - BUY| Target - Rs 2,215 | Return 21%
Nilkamal is a market leader with 32 percent share in the moulded furniture segment and sells about 1.4 million plastic chairs per annum (one of the largest in India). The plastics division (89 percent of revenue) has grown consistently at 8.3 percent CAGR over FY12-17.
The retail division, @home has a turnaround from negative EBIT to Rs 3.2 crore EBIT profit in FY17. Over FY12-17, Nilkamal's revenue and PAT grew at 7/17 percent as EBITDA margin expanded by 110bps.
We expect margins to further improve. The company has free cash flows with very low leverage (D/E of 0.14x FY17). The return ratios (RoE) improved from 10 percent in FY15 to 18 percent in FY17.
Motherson Sumi: Rating BUY | Target - Rs 458 | Return 21%
Motherson Sumi has four divisions wiring harness (15 percent), polymers (52 percent), mirrors (28 percent) and others components (5 percent), operates 230 plants in 37 countries and has an enviable track record of strong performance with an unwavering focus on capital allocation.
It is in a sweet spot to benefit from evolving disruptive global automotive trends, which would drive its next wave of growth. The latest acquisition of PKC strengthened its presence in commercial vehicle wiring harness segment.
Premium valuations are justified considering sharp improvement in post-tax RoCE (around 21.2 percent in FY20 versus average around 13.4 percent in last 5 years) and the possibility of stronger than expected earnings growth. Value the stock at 25x FY20E consolidated EPS with target price Rs 458.
Brokerage - Axis Direct
SBI Life Insurance: Rating BUY| Target - Rs 850 | Return 21%
SBI Life with its unparalleled distribution network, leadership in new business premium (NBP) among private insurers, strong management team and top quartile service ratios is a proxy play to the huge opportunity in India’s life insurance space.
We expect 19.5 percent enterprise value CAGR over FY17-20E to Rs 28,200 crore driven by around 30 percent CAGR in Value of New Business (VNB) to Rs 2,270 crore in FY20E. We initiate coverage with Buy rating and target price of Rs 850.
InterGlobe Aviation: Rating BUY| Target - Rs 1,505 | Return 26%
It is best placed to capitalise on domestic passenger traffic growth. Indian aviation industry is the fastest growing in the world. The domestic passenger traffic posted CAGR of around 13 percent over last decade (grew at 17 percent YoY in CY17 YTD).
Indigo’s key moat is its low operating cost. Bulk orders help in negotiating significantly lower purchase prices for aircrafts which generate cash incentives – a key driver for its cash flows and earnings.
Endurance Technologies: Rating BUY| Target - Rs 1,550 | Return 14%
Endurance Technologies (ETL) ticks all the boxes of what we like in an auto component firm – (1) high economies of scale – given that it’s the largest 2-wheeler auto component player; (2) one-stop-shop for OEMs – given its strong presence in 4 key products; (3) diversified in terms of products/geography; and (4) consistently outperformed underlying industry.
We see ETL as the best way to play the 2Ws theme in India. Given its unmatched scale, strong R&D, and 4 key products under 1 roof (castings, suspension, transmission, and brakes), it’s a one-stop-shop for OEMs that anyway strive to consolidate their vendor base. Our target price of Rs 1,550 values the company at 15x FY20 EV/EBITDA - a slight premium to its leading auto component peers.
Godrej Agrovet: Rating BUY| Target - Rs 648 | Return 14%
We rarely see companies where all factors align, viz: (1) secular business with deep moat; (2) attractive industry dynamics; (3) strong corporate governance; and (4) excellent management team under a great leader. Godrej Agrovet (GAVL) is one such opportunity.
GAVL will continue its multi-year secular growth; tremendous growth potential in each segment as each business segment. GAVL operates in is either under-penetrated (animal feed) or in high growth areas (dairy, poultry, agri-inputs).
It has strong financials; more than 40 percent PAT CAGR over past 7 years, minimal working capital requirement, RoCE of around 20 percent, high asset turn (~5x). We expect 20 percent PAT CAGR over FY17-21.
Brokerage - HDFC Securities
Jagran Prakashan: Rating BUY | Target - Rs 215 | Return 26%
Jagran Prakashan is India's leading media and communication group. It has a pan India footprint with interests spanning across Print, OOH, Radio and Digital.
The radio industry is expected to grow at an excellent rate going forward due to an increase in listenership. Digital Advertising is the fastest growing vertical in the Indian M&E industry and going forward, we expect high growth on the back of higher internet speed, low cost of bandwidth and Government’s push for ‘Digital India’.
We recommend Jagran Prakashan Buy at CMP of Rs 170.45 (10x of FY20 EPS) and add on decline of Rs 154 for the sequential targets of Rs 199
(12.1x of FY20 EPS) and Rs 215 (13.1x of FY20 EPS).
MORE WILL UPDATE SOON!!
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