Q1 earnings review: Bet on these top 20 stocks that could return up to 86%
Experts expect the rally to continue going forward, but volatility may increase as we are moving closer to state and general elections.
The northward journey that started in July, following sideways movement in the April-June quarter (after a correction in February and March) continued in August, helping benchmark indices scale fresh highs.
In line to better-than-expected earnings, stability in crude oil prices, sustained domestic inflows and easing trade war tensions after renewed talks between the US and China boosted investor sentiment.
In the last two months, benchmark indices rallied 8 percent. The BSE Midcap and Smallcap indices rose 7 percent and nearly 6 percent, respectively, though the year-to-date performance of all these indices is mixed. The Sensex climbed over 12 percent and Nifty nearly 10 percent, but the midcap and smallcap indices lost 7 percent and 12 percent, respectively.
Experts see the rally continuing going forward, but the volatility may also increase as we are move closer to states and general elections.
If the September quarter earnings, which will begin in October, improve further, then the market may see new highs, experts said, adding that any sharp selling could be because of global reasons and not domestic.
Analysis of the Q1 FY19 results indicate that an earnings recovery, which we were expecting in the current and next financial year, is on track. So far, results have largely been in line or better-than-market expectations.
Overall, the research house maintained its optimistic outlook on the equity market. "With the forecast of normal monsoons and firm rural demand, amid a pick-up in industrial activity, we expect the Sensex to be on track to stage an impressive earnings recovery, growing in excess of 20 percent CAGR in FY18-20e.
Inflows into domestic mutual funds remained strong despite some moderation in the last few months. Average monthly inflows into equity oriented funds, including the equity component of balanced funds in the first four months of FY19, is around Rs 14,000 crore. The same during the four months of FY18 was Rs 21,500 crore. Inflows from systematic investment plans have seen a consistent rise and stood at Rs 7,500 crore in July.
Consistent domestic inflows will prevent any significant downside and act as strong support at lower levels as seen in the last few months, where buying interest was seen at lower levels.
Prabhudas Lilladher, which also has a positive view on the markets due to strong upsurge in rural demand and benefits from implementation of the Goods & Service Tax, said performance of the Bharatiya Janata Party in state elections will be a major determinant, given anti-incumbency factor and repeated attempts by the opposition to cobble up a working alliance. Despite huge popularity of Prime Minister Narendra Modi, we remain cautious given that it is nearly impossible for the BJP to sweep the Hindi heartland in the manner it did in 2014.
Here is the list of 20 buy ideas that could return up to 86 percent in the next one-to-one-and-half-year:
Among stocks, 17 stocks corrected between 3 percent and 52 percent in 2018 so far, while three stocks JK Paper (up 37 percent), L&T (up 5 percent) and Khadim India (14 percent) gained.
RPP Infra Projects: Buy | Target: Rs 353 | Return: 63%
RPP Infra Projects (RPP) reported a weak set of numbers in Q1FY19 with sales down 11 percent YoY and PAT down 18 percent YoY. Weakness in execution was led by ongoing projects nearing completion stage. Order inflow remained strong with YTD inflow of around Rs 700 crore.
The company is guiding for Rs 650-700 crore sales with EBITDA margin of 13-14 percent for FY19. We believe the company is a good play on government’s increasing focus on improving rural infrastructure.
We have cut our earnings by around 7 percent for FY19/FY20 to factor in lower margin due to higher contribution of infrastructure in order book. We expect RPP to deliver sales and PAT CAGR of 31 / 32 percent, respectively, over FY17-20E. We maintain Buy at a target price of Rs 353.
Larsen & Toubro: Buy | Target: Rs 1,566 | Return: 18%
L&T has guided for 12-15 percent sales growth, 10-11 percent order inflow growth. Order flow for the quarter was up around 37 percent YoY to Rs 36,100 crore and order book stood at Rs 2.7 lakh crore, up 3.5 percent YoY. The domestic inflow for Q1FY19 was up 44 percent YoY while international inflow was up around 19 percent YoY.
Order Inflow growth were mainly driven by infrastructure, heavy engineering & hydrocarbon. Tendering activity continues to be strong in domestic market while outlook in international markets is on improving trend.
In domestic markets public sector continues to drive order inflows while private sector is on wait & watch mode.
J Kumar Infra: Buy | Target: Rs 357 | Return: 62%
Order book at the end of Q1FY19 stood at Rs 8,320 crore. The company won Rs 1,290 crore worth orders in Q1FY19 and Rs 1,520 crore worth orders in August. It is targeting an order book of Rs 10,000-12,000 crore by year-end. It has bid for projects worth Rs 3,000 crore.
Bid pipeline includes Delhi-Dwarka Expressway, additional work coming up in Delhi and Mumbai Metro, Mumbai-Ahmedabad High Speed Corridor line, regular work from MMRDA and CIDCO. Plan to bid for NHAI – EPC projects in and around Delhi. Focus on transportation and metro segment as JKIL sees huge opportunities in this space.
Bharat Electronics: Buy | Target: Rs 150 | Return: 27%
Order book at the end of Q1FY19 stood at around Rs 41,650 crore (up 1.4 percent YoY). Order inflow for the quarter stood at Rs 3,600 crore, up 48 percent.
BEL expects the order inflow to remain healthy at Rs 10,000-15,000 crore for the next few years, given the healthy pipeline. The company expects sales to grow at around 12-15 percent CAGR over the next five years.
BEL is investing in capex to support execution of strong order book; it is also looking at R&D spend at 10-12 percent of sales to maintain technological edge and retain leadership position in strategic electronics.
Major orders expected in FY19 include Akash Missile Systems (7 Sqdn) and Long range surface-to-air missile. These orders got delayed and now are expected to be finalised in FY19.
Raymond: Buy | Target: Rs 1,278 | Return: 63%
Despite muted quarter (Q1FY19), the company has strong prospects ahead in the core businesses followed by its turnaround performance in the non-core segments as well.
We believe that the company has more potential to offer in the upcoming years. With improving margins and improvement in operational efficiency, we maintain our target price to Rs 1,278 per share.
JK Paper: Buy | Target: Rs 251 | Return: 34%
The robust demand outlook and rising consumerism bodes well for the Indian paper industry, which is expected to maintain its growth momentum in the near future. Rapid urbanisation and transformation in lifestyle habits have resulted in a larger offtake of packaged products. Market leadership in branded copier paper segment, focus on value added products, improving profitability and robust outlook for the Indian paper industry are the key positives for the company.
The recent acquisition of Sirpur Paper Mill will provide synergistic advantage both in terms of a strategically located manufacturing facility and access to raw material. We value the company at 12x its FY20 (E) EPS of INR20.89 and upgrade target price of Rs 251 (earlier target price Rs 173).
Khadim India: Buy | Target: Rs 946 | Return: 23%
On the back of favorable policies by the government towards development of businesses in India coupled with aggressive organic growth, KIL is expecting a healthy growth of 10-12 percent per year for a period of 5 years.
Aggressive brand building policies would lead to the company accruing 12-13 percent EBITDA in a period of next 3 years. Healthy revenue growth, mix improvement, operating leverage benefits and lower interest costs may drive 23 percent earnings CAGR over FY18-20E. Considering the same-store-sales (SSG) growth and margin expansion we assign a P/E multiple of 30 (x) on FY20E EPS Rs 31.54, to arrive at a target price of Rs 946.
Meghmani Organics: Buy | Target: Rs 125 | Return: 35%
The outlook for the company remains strong for the upcoming years, backed by the aggressive expansion plans taken up by the company in the past few years and positive market condition. The diversified business model of the company shields the companies earnings from any unfavourable situation.
The company has robust execution capabilities and with the increased utilisation and demand for its products it will continue to hold a strong position in the Indian chemical industry. However, the softening of caustic soda prices and increase in raw material prices of pigments and other chemicals due to volatility in crude oil prices may impact the company’s performance. With this, we cut the target price to Rs 125 from Rs 140, maintaining the Strong Buy rating.
Thermax: Buy | Target: Rs 1,420 | Return: 43%
Company’s key strategy has been to protect its business from cyclicality of the India's capital goods sector. Through selective internationalisation of the product businesses and strategic expansion of its product manufacturing footprint, the company has progressed well in this direction.
With the help of its new capacities, company is well positioned to benefit from domestic and global demand recovery and expected to generate positive cash flow in future.
On the back of increased traction in order inflow, capacity expansion and acquisition of Babcock and Wilcox, we expect FY19 and FY20 to witness strong growth. We continue to maintain Buy rating with a target price of Rs 1,420.
Simplex Infrastructure: Buy | Target: Rs 600 | Return: 42%
Simplex Infrastructure results for Q1FY19 were in line with our expectations on revenues and profit front. Lower than expected margins were set off by higher other income during the quarter.
Debtors have started recovering during the quarter and further recoveries are expected in the coming quarters.
We maintain our estimates and price target of Rs 600 based on 15x FY20 estimates. Due to sharp growth expected in revenues going forward coupled with stable margins, we expect healthy growth in net profits. Cash flows are likely to improve from FY19 onwards. We maintain Buy on Simplex Infrastructure.
Maharashtra Seamless: Buy | Target: Rs 805 | Return: 63%
Post Q1FY19 result and interacting with the company’s management, we reiterate positive view on MSL stock. We sharply revise FY20 earnings estimate upwards (revise FY20 PAT by 40 percent); believe that MSL valuations can get further rerated on back of strong growth in company’s estimated consolidated profits through FY19-20E driven by recovery in demand for seamless pipes in the domestic/international market and 2) company’s leadership positioning in Indian market.
MSL stock continues to trade at attractive valuations at 4.6 FY20 EV/EBITDA. We value MSL stock at 7.5x EV/EBITDA FY20E earnings and maintain Buy with revised target price of Rs 805 per share (Rs 615 earlier).
Voltamp Transformers: Buy | Target: Rs 1,320 | Return: 42%
Voltamp reported good set of numbers for the quarter revenue and EBITDA topping our estimates. However, lower than expected other income led to profit miss.
Valuations are attractive compared to peers and more so considering that management remains prudent and has been able to preserve quality of balance sheet even through years of industry distress.
Voltamp remains one of the best stocks to play future upturn in industrial demand. Maintain Buy with marginally revised price target of Rs 1,320 (Rs 1,350 earlier), valuing the stock at 13x FY20E earnings.
Vascon Engineers: Buy | Target: Rs 48 | Return: 72%
The company is positive on its business segments and expects new sales booking from the next phase of launches in Katvi, Forest Edge, Coimbatore, etc. Further, strong EPC order book would drive revenue for EPC segment.
We have revised estimates lower for FY19E and FY20E factoring in lower revenue from real estate segment and lower order inflows guidance for EPC segment. The stock is trading at FY19E and FY20E PE of 11.4x and 7.5x based on revised EPS of Rs 2.4 and Rs 3.6 respectively. We maintain Buy on VEL with revised SOTP based target price of Rs 48 (versus Rs 52 earlier).
Magma Fincorp: Buy | Target: Rs 220 | Return: 52%
Magma Fincorp recorded a healthy performance in a seasonally weak quarter with PAT growing 75 percent YoY on IndAS basis.
We expect return on assets to improve to 2.15 percent by FY21 (versus 1.5 percent in FY18) as we believe the worst in terms of provisioning on legacy stressed assets is over.
With clean-up of legacy book and significantly lower delinquencies in book originated post Dec’15, we expect profitability trends to improve going ahead.
We forecast earnings CAGR of 30 percent over FY18-21E led by revival in loan growth and improvement in asset quality. We value Magma at 1.8x Sept’20 BV, implying a Sept’19 target price of Rs 220. We maintain Buy.
KNR Constructions: Buy | Target: Rs 285 | Return: 24%
KNR Constructions has been showing excellent pace execution for last couple of quarters and consistently been surpassing revenue expectations. Its order backlog as on 30th Jun’18 stood at Rs 5,960 crore (3.1x FY18 revenue), which includes Rs 3,980 crore of EPC orders from five HAM projects. KNRC expects to meet financial closures of these projects in coming months.
While KNRC has already obtained bank sanctions for 3 projects, land acquisition is still underway. It expects revenue flow to commence from 3QFY19 onwards from these HAM projects.
We maintain our positive view on KNRC mainly owing to healthy order book, strong balance sheet (0.2x net D/E) and sound execution credentials. We reiterate fundamental Buy recommendation on the stock with a SOTP-based target price of Rs 285.i
ITD Cementation: Buy | Target: Rs 190 | Return: 43%
Strong, 25 percent, Q1 FY19 revenue growth was a sign of the shape of things to come for ITD Cementation. Q2 FY19 is even better with even stronger revenue growth, implying execution is gathering pace with each passing quarter.
The quarter could have been better on order additions, but a healthy L1 status and a buoyant opportunity landscape suggest better days ahead. With its strong order backlog (and good progress in new orders), a buoyant opportunity landscape and a healthy balance sheet, the future looks bright.
The fall in the stock price (around 17 percent in three months, around 29 percent in six) renders it attractive. Thus, we upgrade it to a Buy.
Ahluwalia Contracts: Buy | Target: Rs 422 | Return: 36%
Q1 was muted as there was slower than expected movement on a couple of projects, for varying reasons. However, its recent strong order accretion and as projects that faced issues in Q1 get going, we see Ahluwalia set for healthy growth in the foreseeable future.
While stiff competition are points of caution, we are positive on the appealing return ratios, a healthy balance sheet and healthy revenue assurance, which drive us to maintain Buy on the stock.
Skipper: Buy | Target: Rs 242 | Return: 86%
The company’s performance at profitability level was disappointing due to multiple headwinds getting bunched up (raw material cost escalation & inventory stocking costs coupled with aggressive marketing push in polymer business). Polymer revenue grew 29.5 percent YoY as the new strategy seems to be working well for the company, albeit at the cost of margins. Polymer margins could be subdued for few more quarters.
We expect CAGR growth of 17 percent in net profit over FY18_20E. We have revised target price to Rs 242 (15.4x its FY20E EPS). The stock has fallen sharply post Q1FY19 results.
We believe that one off’s relating to engineering business will even out and the spend on sales push in polymer business is an investment to drive growth. The fall in stock price offers an excellent buying opportunity. We maintain Buy recommendation on the stock.
Brigade Enterprises: Buy | Target: Rs 299 | Return: 53%
Adoption of IND AS 115 had a negative impact on reserves of Rs 410 crore. Revenue for Q1FY19 came in at Rs 700 crore. Due to IND AS 115, revenue was higher by Rs 120 crore. EBIDTA margins increased 293bps YoY to 25.7 percent. Interest cost increased 3.4 percent YoY to Rs 62.8 crore. APAT came in at Rs 63.1 crore.
BEL held an annual showcase in Jul-18, which saw 9 new launches and has driven sales of around 0.6mn sqft (office+ residential) in Q2FY19 so far.
BEL has future plans of 13 million square feet of launches (Residential – 8 million sqft and Commercial – 5 million sqft) in addition to 2 hotels (around 300 keys). With a ramp up in the annuity portfolio we expect leasing to contribute Rs 370 crore in FY20E. We maintain Buy with SOTP-based target price of Rs 299 per share.
Ashoka Buildcon: Buy | Target: Rs 180 | Return: 27%
Considering the strong track record, robust orderbook, well funded BOT project portfolio and huge opportunities ahead, we stay positive on Ashoka’s long term prospects. Hence, we expect EPC revenues to grow robustly at 29.7 percent CAGR to Rs 4,156.2 crore.
There has even been a strong revival in traffic growth across its project portfolio, which is expected to be sustainable, going forward. We continue to maintain Buy recommendation with an SoTP based target price of Rs 180 per share.
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