Five Top Quality Stocks Worthy Of A Buy Now For Huge Upside

We expect revival in profitability of the E&P segment (driven by completion of legacy projects) as well as lighting and consumer durables segments (driven by improved volume growth). Turnaround in the E&P segment, which alone accounts for 60%-65% of total capital employed, and stabilisation of consumer businesses will result in healthy earnings growth along with a sharp recovery in RoCE/RoE from 5.9%/(0.7)%, respectively, in FY14 to 23.3%/19.1%, respectively, in FY16E. We have valued BJE stock at 16x September 2016E earnings (a steep discount compared to peers) with a target price of Rs305.

Voltas, India’s leading room air conditioner (RAC) manufacturer (with ~20% volume market share) & electro-mechanical project & services (EMPS) player, is set to benefit from a changing demographic profile & revival in India’s investment cycle. Its unitary cooling products (UCP) division’s revenue has grown at 16% CAGR in FY10-14 mainly due to a change in product mix towards premium products. With sustained demand from tier-II, tier-III cities and rising trend of urbanisation, we expect the UCP division to witness volume growth of ~8% (vs. ~5% industry growth) for FY14-17E. In the EMPS business, Voltas’ strategy to focus on profitability by bidding for small size, high margin projects and their timely execution would help in margin expansion in future. Given the strong performance of UCP division, its contribution to revenue may change from current 39% to 44% by FY17E. We expect consolidated sales, earnings CAGR of ~12%, ~24%, respectively, in FY14-17E. We initiate coverage on Voltas with a BUY rating.

Our interaction with Federal Bank (FB) management corroborates our positive stance on the stock. FB trades at 1.3x FY17E ABV (Rs 111) with RoAs/RoEs of 1.3/~15%. We retain FB as a top pick within mid-tier PVT banks as we see a case for an expansion in both earnings and multiple. Maintain a BUY rating with a TP of Rs 177.

VA Tech Wabag (Wabag) is a leading MNC in the water treatment space with a global presence and access to over 100 patents. The company operates on an asset light EPC model, thereby manifesting a lean balance sheet. With growing concern on access to clean water and urgent measures to solve the issue of depleting water resources, the investment in water treatment is likely to increase manifold globally. Accordingly, Wabag is expected to benefit significantly by leveraging its strong domestic presence and rising global footprint. The company’s strong book-to-bill ratio of ~2.3x provides revenue visibility for two years. This coupled with a strong execution track record is expected to lead to 15.5% revenue CAGR in FY14-17E to | 3,452 crore while margin is expected to expand 90 bps to 10.2% over FY14-17E. Hence, we initiate coverage on Wabag with a BUY recommendation and a target price of Rs 1,725.

The expected pick-up in automotive volumes as well as industrial capex recovery is now reflected in valuations also with Fag Bearings, SKF’s key peer, now trading at a premium valuation of 25.4x CY16E earnings. Given SKF’s leadership position in the bearing space, strong earnings growth (24% CAGR in CY13-16E), healthy balance sheet with robust cash flow generation (| 675 crore over CY14E-16E) and core RoEs in excess of 30%, we believe SKF would be the key beneficiary of the automotive segment pick-up as well as industrial capex recovery. Consequently, we now assign a higher multiple of 26x (vs. 24x earlier) on CY16 earnings and revise our target price to | 1568/share with a BUY recommendation.