Consumption and Commodities strong pillars of growth; NBFC’s continue to shine
First, Gautam Duggad of Motilal Oswal has conducted a systematic and detailed analysis of the Q1FY19 earnings season.
The bottom line of the analysis is that the profits of the companies, excluding Corporate Banks, are in-line with expectations and there are no nasty disappointments.
The sales growth has thrilled by being at 25 quarter high.
The consumption and commodity stocks have been strong pillars of growth.
As expected NBFCs have continued to shine with stellar results.
In fact, NBFCs have maintained their earnings growth trajectory of 44% PAT growth which is at multi-quarter-high.
#MarketView | Don't see too much room for upside in valuations for Nifty. ICICI Bk preferred pick among banks as see things settle down. Risk reward favourable for the Bk, says Gautam Duggad of Motilal Oswal Securities (@MotilalOswalLtd) @nikunjdalmia @AyeshaFaridi1 @tanvirgill2 pic.twitter.com/leohiIewJE
— ET NOW (@ETNOWlive) August 9, 2018
Ten focus stocks from 1QFY19 earnings season
Thereafter, focus has been put on ten stocks which have sparkled in Q1FY19 with stellar results.
These ten stocks are the following.
ICICI Bank: ICICIBC is in the midst of an improvement in operating environment (stressed asset resolution and growth pick-up) and overcoming the transitory management/regulator issues. The bank has substantially increased coverage on NCLT exposure (87.9%/60.7% coverage on NCLT list-1/list-2, thus increasing probability of higher write-backs) and is on track to achieve 70% NPL coverage as guided. Net stressed assets declined to a multi-year-low of 6.8% of loans v/s 7.8% in 4QFY18. Near-term loan growth would be driven by the retail business. With a gradual decline in credit cost and a pick-up in revenue growth, we expect ICICIBC to report ~1.2% RoA over FY20. ICICIBC is our preferred pick to play the recovery in corporate banks.
Hindalco: Novelis is now reaping the benefit of the USD2b investment in auto lines and recycling facilities across the world a few years ago. The recently announced acquisition of Aleris strengthens its position further and brings synergies and growth option in aerospace and in China. Indian smelting business continues benefiting from bauxite and coal mines and plans to grow through value addition. Strict management focus on high-IRR projects should drive the stock outperformance, in our view.
Petronet: Dahej continued over utilization despite the fact that LNG prices had almost doubled YoY. We expect the same to continue. Kochi terminal’s utilization would increase as Kochi refinery stabilizes and Kochi-Mangalore pipeline gets completed. Dahej would get further boost when it’s expansion from 15mmtpa to 17.5mmtpa completes early next calendar year. Reiterate Buy with target of INR312.
ACC: The company posted 34%QoQ improvement in EBITDA/t of INR 922 beating our estimate of INR 698/t, led by higher proportion of (a) premium sales and (b) sales from its new cost-efficient units of Jamul and Sindri. Additionally, ACC has managed to limit the cost increase, driven by its higher proportion of linkage coal, lower lead distance and route optimization. The company has also made efforts toward cost rationalization of fixed costs, resulting in improved profitability. We value ACC at 9x (30% discount to peers vs present discount of 45%) to arrive at a TP of INR1,633. Upgrade to Buy
Ashok Leyland: AL is highly focused on making business acyclical by reducing India truck business revenues to 50% in 5 years (from ~62% currently), by growing share of LCVs, Exports, Spare parts and Defence. This will not only reduce dependence on domestic trucks, but also drive strong revenue growth. In 1QFY19, overall results were above estimate led by full benefits of cumulative price hike of ~5% from Jan-Apr, better mix, ~28% growth in aftermarket and ~24% in exports revenues leading to EBITDA margins of 10.4% (est 9.3%). In FY18-20E, we estimate revenue/EBITDA/PAT CAGR of 14%/22%/27%.
Titan: Jewellery business continued gaining market share in 1QFY19, with reported growth of 6.3%. Jewellery sales miss v/s estimate of 14-15% means that full-year growth may be ~22-23% now. Jewelry business growth prospects remain robust, with Watches and now Eyewear starting to contribute to growth. The 18.8% margin achieved in the Watches segment during the quarter may not be sustainable, but the company is confident of delivering double-digit margins in the segment.
Sun Pharma: The overall results has been in line. However, US sales (Ex-Taro) surprised positively by growing at 17% YoY/15% QoQ (23% of sales). With increased traction from the Halol facility and new launches (specialty portfolio and ANDA approvals), we expect US sales run-rate to gain further momentum. Even emerging market business (18% of sales) had broad-based growth across regions. Operating cost is expected to increase at a lower rate compared to sales growth and provide enough scope for improving operating leverage, and thus, profitability. Buy with a target price of INR700.
Infosys: With the quarter largely in-line, INFO remains on track to deliver on its guidance of 6-8% YoY CC growth in FY19. Our EPS estimates have remained intact. Although lower half of the guided band appears more likely in FY19, we continue believing that the margin band is conservative, with the share of Digital inching up, recent INR depreciation, and investments already defined internally. Our TP of INR1,550 discounts forward earnings by 17x, based on our thesis of a narrowing gap with tier-I Indian and global peers such as TCS, Cognizant and Accenture. Maintain Buy.
BOB: BOB has reported steady improvement in asset quality as watchlist size has reduced to INR86b (includes SMA in stressed accounts) while the provisioning coverage has increased to ~69% (one of the highest among peers). This provides comfort on strength of the balance-sheet as ~85% of slippages for BOB during 1QFY19 occurred from the watchlist. We expect stress addition and credit costs to moderate from 2HFY19 – SBI results further reinforces our confidence in broader recovery in corporate NPL cycle. This coupled with steady improvement in margins (robust retail growth and rundown in overseas business) will drive healthy earnings recovery. We maintain Buy with a target price of INR175 (1.3x FY20E ABV).
L&T Finance: LTFH has scripted an impressive turnaround and delivered strong growth with a consistent improvement in profitability. The company has grown well in the high-RoE business and continues allocating more capital to it. The hit on networth due to ECL, which was expected to be taken over FY19 and FY20, has been taken upfront. Hence, while this would be neutral to FY20 networth, it would be accretive to FY20 EPS. Despite elevated provisioning, we arrive at 19% RoE for FY19/20. Maintain Buy with a TP of INR240 (3.0x FY20E BVPS).
Top ten large-cap stocks to buy now
Ten blue-chip large-cap stocks have been identified as being worthy of a buy now.
These are the following:
|Larsen & Toubro||24.9||1,240||1,540||24|
As one can see, IOC rules the roost with a magnificent potential for 59% gain followed closely by Hindalco with 51% gain.
HDFC Bank, the evergreen multibagger, is expected to continue to thrill with 24% gain.
L&T, the engineering behemoth, is also expected to churn out 24% gain.
ICICI Bank is unfortunately at the bottom of the barrel with a paltry gain of only 4%.
Top ten mid-cap stocks to buy now
The list of the best mid-cap stocks to buy now is as follows.
|Preferred Mid-cap ideas|
|Team Lease Serv.||0.6||2,617||3,500||34|
|CG Consumer Elect.||2.3||262||305||17|
Here, JSPL is expected to delight with magnificent gains of 65%.
Petronet LNG, Tata Chemicals, Team Lease and Oberoi Realty are expected to shower gains of at least 30%.
Even the stock which is at the bottom of the barrel, namely RBL Bank, is expected to give 14% gain, which is quite respectable.
Rating upgrades and downgrades
In addition to identifying the best stocks to buy, Motilal Oswal has upgraded two stocks from ‘neutral’ to ‘buy’.
These stocks are ACC and Nanveet Education.
However, at the same time, six stocks have been downgraded from ‘buy’ to ‘neutral’.
These stocks are well known names such as Kotak Mahindra Bank, Bajaj Finance, Dabur, Page Industries, Quess Corp and D B Corp.
Leave a Reply