5 Top Stock Picks By Kotak Securities With 48% Gain Potential

Top Investment Ideas – 5 Top Stock Picks

Kotak Securities has recommended 5 Top Mid-Cap Stock Picks With 48% Gain Potential. Stocks are chosen across sectors like Textiles, Power, Infra, Tourism/ Travel and Oil & Gas. All stocks are of well established companies, with good track record for corporate governance. Valuations are reasonable

**Price – Close price as on 30th September 2019
#Potential Gain/Loss is difference between Target Price and Price. Potential Gain/Loss % = (Target Price – Price)/(Price) * 100

Recommendation issued by Kotak Securities – Private Client Group, *Kotak Institutional Equities

Himatsingka Seide Ltd

Key Highlights:

 Himatsingka Seide Ltd (HSL) is a vertically integrated home textile player with manufacturing facilities in India and has retail and distribution businesses in North America, Europe and Asia.

 HSL is focused on building a strong brand portfolio through owned and licensed brands contributing 75-80% of its revenue. It has license to manufacture, source and distribute home textiles brands such as Calvin Klein Home, Tommy Hilfiger Home, Barbara Barry, etc in major geographies such as North America, Europe, etc.

 Going forward, the company intends to add more brands as part of its long term growth strategy and enhancing its market share in branded home textiles segment.

 HSL has emerged as a global leader in track and trace capabilities with regard to the cotton value chain. This helps in delivering quality products to its customers.

 HSL is at the final stage of its capex with deleveraging going to be the core focus of the company. We expect the company’s net debt to equity to improve from 1.7x in FY19 to 1.2x in FY21E.

 The company’s strategy to consolidate home textiles portfolio and sweating new capacities of Terry towel would help it in achieving operating leverage and improve operating cash flows.

 The central government revised incentive scheme will positively impact margins of home textiles exporters in FY20E.

 We expect high single digit growth in revenue in the next two years based on the volume growth in bed linen business, contribution from terry capacity and from new licenses acquired in the last one year.
 At our target price, the stock is valued at 9x FY21E EPS, which is at a discount to its last five years average forward PE of 11.6x.

Voltamp Transformers Ltd

Key Highlights:

 Voltamp has a manufacturing capacity of 13000 MVA capable of making transformers upto 160 MVA, 220 KV, class for many applications covering most segments of users including industrial, utility and buildings.

 The company caters to a wide spectrum of transformer users in various industries like: petrochemical, oil refining, cement, paper and pulp, pharmaceuticals, automobiles, steel, power plant, building, metro rail applications, mining and minerals and many others.

 From our discussion with the management, it sounded optimistic on the current business scenario and is witnessing higher orders enquiries in the market than in earlier quarters.

 Order book at the end of August 2019 stands at ~ Rs 5.1 bn. The management is fairly positive on the level of order book, which gives it a good revenue visibility for the remainder of the fiscal.

 The Company continued to focus on optimizing its working capital to improve cash position. The company could leverage its cash availability position to get better terms from suppliers

 Treasury investments and cash at the end of Q1FY20 stood at Rs 4.36 bn (Rs 3.8 bn in FY19)

 In FY19, the company delivered 30% growth in revenue, the highest in FY08. Going into FY20E, the company is in a comfortable position in terms of order book. It is thus targeting double digit growth in volumes terms.

 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.

 Reiterate BUY with a target price of Rs 1622, valuing the core EPS (Rs 80 per share) of the stock at 14x FY21E and adding value of the treasury and investments (Rs 499 per share in FY21E)

PNC Infratech Ltd

Key Highlights:

 PNC Infratech Ltd (PNC) is present in the business of construction and infrastructure development with expertise in highways, bridges, flyovers, airport runways, development of industrial areas, etc.

 PNC is executing road projects on EPC contract basis and is also operating 6 BOT projects, 1 OMT project and developing 7 HAM road projects.

 PNC has robust total order book of Rs. 119 bn (including HAM projects where appointed date not yet received) which is 3.8x its FY19 revenue, gives strong revenue growth visibility for the next 2-3 years.

 It has 7 HAM projects of costing Rs. 88.97 bn out of which six are in construction phase while in balance one, it has achieved financial closure and is awaiting appointed date.

 PNC has infused Rs. 2.8 bn equity in HAM projects and further requires Rs 5.5 bn of equity in 7 HAM projects in the next 2-3 years.

 The company does not see any major problem in meeting equity commitment in HAM projects as it has strong cash generation and has low net debt.

 PNC reported robust Q1-FY20 standalone revenue growth of 79.7% YoY driven by strong execution of its EPC and HAM projects. The company expects strong execution to continue in Q3 and Q4 FY20 as well. But, due to heavy monsoon, execution may slow down in Q2FY20.

 PNC has maintained guidance of over 45-50% YoY growth in FY20E revenue with EBITDA margins of 13.5-14% based on strong order book and execution timeline.

 The EPC business (adjusted for Rs. 41 per share value of BOT) is available at a PE of 10.7x and 7.6x based on FY20E and FY21E EPS of Rs. 12.2 and Rs. 17.5 per share, respectively.

 We have Buy rating on the stock with SOTP based target price of Rs. 264, (EPC valued at 12x FY21E EPS & BOT/HAM valued at 1x BV)

VIP Industries Ltd (VIP)

Key Highlights:

 VIP Industries reported strong topline growth of ~27% in FY19 amidst strong consumer demand, stabilisation of the GST rate at 18%, wider acceptance of fashionable and high-end luggage, consumer upgradation from un-branded to branded luggage and personalisation of luggage.

 However, depreciating rupee, volatile crude prices impacted the demand and profitability. The demand was impacted by slowdown in air-travel.

 In categories, polycarbonate luggage and duffel/duffel trolleys were important growth drivers in FY19.

 The Hypermarket channel continues to witness the strongest growth amongst channels. New product introductions in brand V.I.P was widely accepted by consumers for their contemporary designs and faith of consumers on the brand for its quality led to a very high growth in the brand

 In sales and distribution, VIP has about 1,000 dealers and 100 distributors (reaching 1,000 retailers), and 250 exclusive brand outlets, 250 franchisees and 1,000 modern trade outlets. The total point of sales are about 11,000

 VIP has been continuously focusing on strong brand visibility of its products. The company’s brands include Carlton, VIP Bags, Skybags, Aristocrat, Alfa and Caprese. Historically, the company has been spending around 5-6% (percentage of sales) on ad spends to increase its brand visibility and we expect the trend to continue over FY19 to FY21E.

 Due to increasing labour costs and other reasons such as strengthening of the Yuan vs. INR, the company decided to reduce dependency on China in the long run and has setup a manufacturing facility in Bangladesh through its wholly owned subsidiary for manufacturing soft luggage.

 VIP is currently looking at expanding its footprint in newer geographies. Currently, it exports to countries such as UK, Europe, UAE, Qatar, Kuwait and the Asia Pacific.

 For VIP, we estimate situation to remain strong. We continue to estimate a revenue CAGR of 11% and earnings CAGR of 24% over FY19 to FY21E with strong operating margins and return ratios. Recommend BUY with a TP of Rs 555 at 37x FY21E earnings.

Gujarat Gas Ltd

Key Highlights:

 Gujarat Gas Limited continues as the largest city gas distribution company in India and have ~1.695 lacs square kms of licensed area under coverage.

 GGL is focusing on connecting new consumers, geographical expansion, focus on CNG segment, retaining existing & new users and maximizing margins. The strategy of volume growth led earnings increase will support long-term growth earnings of the company. We believe this is prudent strategy considering GGL has take-or-pay contract with long-term LNG supplier. Further, it blends cheap spot and long term LNG volumes to make average lower.

 Modest CNG gas sales volume growth was supported by 63 new CNG stations in FY19. CNG is a strong profitable segment given uninterrupted supply of cheap domestic gas.

 In March’19, the National Green tribunal has ordered to ban the use of coal based gasifies in Morbi, Gujarat.

Pursuant to this, industries shifted to alternative fuel such as natural gas. GGCL got benefited due to this.

 Margin improvement and strong revenue visibility makes us positive on its growth prospects. Additionally, strong free cash flow and healthy return ratios also provide high comfort.

 In FY19, the Company received license to operate in 7 districts in the State of Punjab, 2 districts in the State of Haryana, 4 districts in the State of Rajasthan and 5 districts in the State of Madhya Pradesh.

 In FY19, GGL connected ~1 lakh household customers and added 63 new CNG stations. Sales volume have grown 6% in the residential and 10% in transport (CNG).

 RoE is expected to improve with better capacity utilization, higher volumes, margin improvement, etc.

 We value GGL at 15.4x PE (25% discount to its peers) based on EPS of Rs.12.6 for FY21E.