Most analysts expect the government to focus on increasing government expenditure on rural economy as well as introduce a measure to kick-start investment cycle in the economy.
The next big trigger for India market is Budget 2018 which will be the last full Budget of the Modi-government ahead of general elections 2019.
Most analysts expect the government to focus on increasing government expenditure on rural economy as well as introduce a measure to kick-start investment cycle in the economy.
In the upcoming Union Budget, the government is expected to focus on infrastructure and the rural sector. The prime objective is to generate employment in the rural sector by the implementation of various measures.
The government has been also focusing on agricultural subsidies to increase productivity and yields from cultivation. The central government launched the direct benefit transfer (DBT) for fertilisers in various states in the month of October 2017. This ensures that there is no extra burden on farmers as they will continue to get fertilisers at a subsidised rate.
Sofat further added that such measures would increase the disposable income in rural India and drive the consumption pattern in India. Some of the stocks that are likely to benefit from the consumption-oriented landscape and likely consumption sector friendly sops in the Budget are Hatsun Agro, Jyothi Laboratories, and Varun Beverages.
Last month, Finance Minister Arun Jaitley said the government has been creating "instrumentalities" like providing agricultural inputs at lower cost and making cheap credit available to farmers so as to double their income.
Jaitley added that increase in income and purchasing power of the farmers "is extremely" important for the government as the growth of "larger economy depends on the economic potential and power of this group.
We feel this government is now realigning its policy priorities towards rural India. Going by these new priorities, rather than sectors we prefer to think in terms of businesses that would benefit from these structural tailwinds which will support rural income growth over the next few years.
We think all businesses catering to the consumption and investment needs of the farmers are in for a bounty. This could span a wide spectrum of ideas right from a rural housing finance company, to a rural road or canal construction player, a tractor manufacturer and consumer stories in durables and staples which are closer to rural markets in terms of product mix.
Can Fin Homes (CFHL): Target Rs 612
Geojit Financial Services maintains a buy recommendation on Can Fin Homes with a target price of Rs612. CFHL is a south based housing finance company (HFC) sponsored by Canara Bank with focus on Tier 1 and 2 cities.
Going ahead, initiatives by the government like “Housing for all by 2022” and incentive like credit linked subsidy scheme will drive the business growth for all HFCs and CFHL is well placed to exploit this growth opportunity.
The brokerage firm expects the net interest income (NII) and PAT to grow at a robust pace of 25 percent and 30 percent CAGR, respectively over FY17-19E led by strong loan growth (25% CAGR) along with stable asset quality.
UPL Ltd: BUY| Target Rs 887
Geojit Financial Services maintains a buy recommendation on UPL with a target price of Rs887. UPL is a leading manufacturer of crop protection products and ranks among the top 5 generic agro-chemical companies globally.
It offers a range of crop protection products, such as herbicides, insecticides, fungicides. Led by backward integration and higher contribution from branded products, UPL enjoys superior EBITDA margin of 18%- 19.8% compared to industry average of 12-15 percent.
Despite facing adverse weather conditions and subsequent slowdown in demand, UPL maintained a Revenue & PAT growth 15 percent & 24 percent CAGR over FY15-17.
Going forward, we expect revenues to grow at 14.4% CAGR, while led by backward integration & better product mix, EBITDA margin to hover in the range of 20%-21% during FY17-19E.
Escorts: BUY| Target Rs 829
Geojit Financial Services maintains a buy recommendation on Escorts with a target price of Rs829. Escorts Ltd (EL) is the third largest Agricultural tractor manufacturer in India. It has a strong presence in the north and west market, with an overall market share of 11 percent as on FY17.
The government focused approach to encourage farm mechanization and growth in infrastructure segment is expected to drive demand for tractors. EBITDA margins to expand by 270bpsYoY over FY17-19E driven by higher sales cost control initiatives.
The brokerage firm expects revenue & PAT to grow at 17 percent & 36 percent on a YoY CAGR over FY17-19E led by higher segmental revenue and new product launches.
Swaraj Engines Ltd: BUY| Target Rs 2384
SMC Capital maintains a buy recommendation on Swaraj Engines with a target price of Rs2384.
Swaraj Engines Limited (SEL) is engaged in manufacturing engines for fitment into Swaraj tractors, which is manufactured by Mahindra & Mahindra Ltd. at its Swaraj Division.
Increase current tractor penetration level, agri-mechanization, generating rural employment opportunities through various schemes, scarcity of farm labour especially during the sowing season, shortened replacement cycle, healthy credit availability, momentum in infrastructural projects etc. would be the positive drivers for tractor industry in the long-term.
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.
Godrej Agrovet: Rating BUY| Target - Rs 648
Axis Direct maintains a buy recommendations on Godrej Agrovet. 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.
SBI: BUY| Target Rs 386
Prabhudas Lilladher maintains a buy recommendation on SBI with a target price of Rs386. Fresh slippages for the bank were lower than trends at Rs90 billion with half from the corporate book and half from SME/Retail/Agri.
Half of the corporate book slippage was from watch list bringing down the watch list to Rs212.9bn or 1.2% of loans (down from 1.35% in Q1FY18). 50% of watch list is now power and some exposure towards telecom/steel.
Bank expects retail slippages to be lower and recoveries to improve as they see more stability to the retail credit, with Agri recoveries to be realised in Q3/Q4FY18. The corporate slippages are likely to be volatile as there are few lumpy accounts still left.
Provisioning levels will remain elevated at 250-300bps of loans as the bank continues to improve PCR with a combination of aging and voluntary provisions.
SBI is Prabhudas Lilladher’s preferred pick among PSBs as it will dominate market share on both loans & liabilities with strong low-cost deposits mix helping it keep the cost of funds much lower.
Hatsun Agro Products: BUY
Edelweiss in a report said that Hatsun Agro Product (Hatsun) is the dominant dairy player in its home state Tamil Nadu & surrounding southern states, underpinned by established brands Arokya, Arun Ice?creams and Ibaco.
The company has aggressively expanded its procurement network in untapped regions over the past few decades and boasts of 10,000 milk banks covering 13,000 villages spearheaded by strong relationships with farmers.
Hatsun’s strength lies in its near 100% direct procurement as well as 100% exposure to the retail segment, commanding strong 9% EBITDA margin despite milk revenue share of nearly 70%.
The company’s focus on untapped regions, premium product offerings and high ad spends has reinforced its pole position. Further expansion of its procurement network outside of Tamil Nadu and deeper into untapped geographies will drive Hatsun going forward.
Supreme Industries Ltd: BUY| Target Rs 1450
Sharekhan maintains a buy recommendation on Supreme Industries with a target price of Rs1450. Supreme Industries Limited (SIL) is the most prominent plastic piping product player in India, with a market share of 14% in the organized domestic market.
The organized market currently accounts for 60% of the total market. Under GST regime, the shift in market share to the organised from the unorganised sector will benefit the largest players like SIL (7,300 plastic piping products with 916 partner channels) to gain the market share at a faster pace going forward.
Further, the company makes a conscious effort to enhance its existing offerings in its product basket as well as make new offerings across industries (infrastructure, affordable housing, Agriculture, etc) wherein the Government infuses a significant outlay for their progress.
The brokerage firm revised earnings estimates upwards for FY19/20E led by the expansion of its overall capacity beyond FY2018, surge in Government spending in key sectors where SIL has a strong presence and the fact that it’s significant.
Varun Beverages: BUY| Target 10-12% upside
Sharekhan maintains a positive stance on Varun Beverages (VBL). The company intends to enter into a binding agreement with PepsiCo India to acquire franchisee sub-territory in Jharkhand along with manufacturing facilities and franchisee rights for Chhattisgarh (subject to satisfactory due diligence and final approval of PepsiCo India).
The stock price of VBL has seen decent run-up of 15 percent post the recent acquisition of two territories. However, with 2-3 percent add-on in revenue and consequential add-on in earnings would result in 10-12% upside from current levels.
Further, the long-term growth prospects of VBL are intact, as the company is continuously focusing on acquiring new territories in different states and gaining operating efficiencies through various initiatives.
The brokerage firm maintains their positive view on the stock with 10-12% upside from current levels.
Action Construction Equipment (ACE): BUY| Target Rs 165
LKP Securities maintains a buy recommendation on ACE with a target price of Rs165. The company is a leading player in Cranes, Material Handling & Construction Equipment in India. Given its strong brand equity ACE is a virtual duopoly in Mobile Cranes with a 63 percent market share and a leading player in Crawler & Tower Cranes.
ACE in our view is a huge beneficiary of operating leverage in all its key business verticals and is our pick to play the India Growth Story.
ACE is now fast emerging as a Pan India player in Road Construction & Farm Equipment and the recent entry of Institutional Investors this quarter lends credibility to our thesis on its ability to scale up in its high growth verticals.
ACE now is making material headway in its Farm Equipment business and should contribute to overall profitability this fiscal. The brokerage firm continues to remain optimistic on ACE and recommend a Buy with a price objective of Rs165.
Mahindra CIE: BUY| Target Rs 297
Motilal Oswal maintains a buy rating on Mahindra CIE with a target price of Rs297. Mahindra CIE (MACA) is a multi-technology automotive components supplier, with annual revenue of INR53b in CY16. It is one of the top manufacturers of forging parts in India (leader in crankshafts and stub axles) and the EU.
India contributes 38 percent of MACA’s overall business, while the EU contributes the rest. It caters to top customers like Maruti, M&M, Tata Motors and Hero Moto Corp in India. MACA acquired Bill Forge (BFL) in India at INR13b in 2016, enabling it to diversify further.
MACA's India (ex BFL) business is focused on fast-growing/recovering segments of UVs, LCVs, and Tractors, which contribute nearly 2/3rd of revenue.
Top-2 customers, M&M and Tata Motors, which contribute over 55% to revenue (ex BFL), are witnessing a good recovery in volumes, driven by product lifecycle as well as rural recovery (for M&M).
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