As Sensex at 38000, Nifty at record high, these top 10 stocks could still return up to 60%

The bulls have taken control of Dalal Street for more than a couple of weeks now, though bears tried intermittently for control. The market has consistently been hitting fresh record highs, backed by select largecaps and banks on hopes of a likely improvement in asset quality going forward.

The Sensex decisively crossed the new milestone of 38,000 on Thursday while the Nifty is just shy of the 11,500-mark. These levels seemed distant 3-4-month back and no one had predicted that it would cross these levels so soon. Experts attribute this to strong Q1 FY19 earnings, which so far have been much better than what the street expected.

The Sensex gained over 11 percent and Nifty nearly 9 percent in 2018 on top of a 28 percent rally each in 2017. Experts expect the market to hit newer highs, but are concerned it is gradually getting overvalued and appear similar to valuations like that at the start of 2018.

“The future long term outlook for Indian equity markets continues to look bright. The government’s focus on financial inclusion of masses and raising farm incomes will be a positive for private banking and consumption sectors,” Hemang Jani, Head – Advisory, Sharekhan by BNP Paribas, said. However, he sees short term concerns such as rising crude oil prices and global trade wars negatively impacting.

Nilesh Shah of Envision Capital feels if the rally breaks it would be only because of global factors (excluding crude which is not a major concern now) and not any domestic cue.

Here is a list of 10 stocks that could return up to 60% over one-year period:

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Brokerage: HDFC Securities

Mphasis – Buy | Target – Rs 1,300 | Return – 13%

Mphasis posted a strong quarter (largely in-line with estimates) with revenue at $269 million, 1.7/16.4 percent QoQ/YoY (2.9/16.2 percent in constant currency terms). Direct Core (53.9 percent of revenue) and HP/DXC channel (27.4 percent of revenue) led the growth at 4.2 percent QoQ and 4.5 percent QoQ in constant currency terms, respectively. Adjusted APAT stood at Rs 258 crore supported by lower ETR.

We factored in dollar revenue growth at 10.1/12.3 percent and EBIT margin at 16.7/17.9 percent for FY19/20E, respectively. Direct core growth estimates at 3.0/3.2 percent CQGR and DXC growth at 2.8/2.9 percent CQGR for FY19-20E. Maintain Buy with target price of Rs 1,300, 20x FY20E-EPS supported by 19 percent EPS CAGR over FY18-20E and strong payout.

Brokerage: Elara Capital

Birla Corporation – Buy | Target – Rs 1,100 | Return 38%

We believe the company will gain pricing power in the central region, accounting for 56 percent of overall capacity on limited capacity addition.

Cost structure is likely to improve, as the company will cut power purchase from the grid in RCCPL by installing a WHR system.

Apart from this, a strong pipeline of capacity addition would ensure it will grow faster than the industry. Thus, we reiterate Buy with a target price of Rs 1,100 on enterprise value per tonne of $110 on FY20E capacity.

Brokerage: Motilal Oswal

NMDC – Buy | Target – Rs 178 | Return – 57%

NMDC’s iron ore volumes have suffered recently due to uncompetitive pricing in Karnataka and a fall in global iron ore prices. However, it has taken corrective price actions, which drove some sequential improvement in volumes in July.

Overall volumes in July were still weak (down around 34 percent YoY) due to monsoon-related dispatch issues in Chhattisgarh, which should recover.

We expect iron ore volume CAGR of 5-6 percent over the next 4-5 years from the existing mines. The steel plant is likely to produce about 1mt in FY21 and full 3mt in FY22.

Margins in the steel business are likely to be 10,000 per tonne, as it has many advantages. Despite factoring in lower iron ore margins w.r.t. Q1FY19, we expect EBITDA CAGR of 13 percent to Rs 10,300 crore over FY18-22.

The stock is trading at attractive valuations of EV/EBITDA of 4.1x FY20E and a dividend yield of around 6 percent. We value NMDC at 5x FY20E EV/EBITDA and CWIP at book value at Rs 178 per share. Maintain Buy.

Nalco – Buy | Target – Rs 108 | Return – 60%

Nalco is likely to benefit from strong alumina prices, led by the closure of Hydro’s alumina facility and shutdowns at Chinese refineries. Spot alumina prices are trading above $500 per tonne versus estimate of $450 per tonne for the remainder of FY19 and FY20.

NALCO is a key beneficiary of higher alumina prices, given its net long position and advantage of low-cost captive bauxite.

We upgrade EBITDA estimate by 13 percent to Rs 2,840 crore and PAT estimate by around 12 percent to Rs 1,760 crore on the beat in Q1.

We expect EBTIDA to increase by 71 percent to Rs 2,840 crore in FY19, considering the strong sector tailwinds. The stock is trading at attractive valuations of EV/EBITDA of 3x FY20E. We value the stock at 5.5x FY20E EV/EBITDA at Rs 108/share. Maintain Buy.

Future Consumer – Buy | Target – Rs 69 | Return – 48%

We expect revenue growth to pick up for the remainder of the year, with the momentum continuing thereafter for a few years, given the tremendous growth opportunity. We expect revenue CAGR of 35.9 percent over FY18-20 and 35.2% over FY18-22.

As Future Consumer is likely to be profitable at the consolidated net level only in FY19, we believe that the near-term P/E multiples are always likely to appear extremely expensive on a one-year forward basis.

We, thus, value the company on an EV/sales basis, assigning a multiple of 2x (around 60 percent discount to EV/sales of our coverage staple universe). This results in a target price of Rs 69, implying around 48 percent upside from current levels. Maintain Buy.

HPCL – Buy | Target – Rs 428 | Return – 51%

Oil marketing companies (OMCs) have seen a sharp correction in the recent past due to fear of a price cap on auto fuel in the light of upcoming elections and rising crude oil price.

However, healthy implied marketing margins during the quarter negate the fear. Thus, we believe that this sharp correction in stock prices offers an attractive opportunity to add OMCs.

HPCL is trading at 5.5x consolidated FY20E EPS of Rs 51.8 and 5.4x FY20E EV/EBTIDA. We value refining and marketing at 6x EV/EBITDA, and pipeline at 7.5x EV/EBITDA. Reiterate Buy with a target price of Rs 428. Higher crude oil price remains the biggest risk.

AU Small Finance Bank – Buy | Target – Rs 760 | Return – 16%

AU Small Finance Bank has been reporting strong progress on business growth and is alongside making adequate investments to support the momentum for the next few years.

With the recent capital raise, the bank is well positioned to further capitalise on growth opportunities and deepen its presence across the chosen geographies.

We revise estimates to factor in strong growth and recent capital infusion, which has resulted in 12/20 percent increase in FY19/20E book value. We, thus, increase target price to Rs 760, which corresponds to 4.9x September-20E book value and 31.2x EPS.

We believe AU Small Finance Bank should continue trading at a premium, given its robust growth trajectory, high visibility on earnings improvement and accelerated SFB transition. Maintain Buy.

Indian Bank – Buy | Target – Rs 430 | Return 21%

Indian Bank reported a 44 percent YoY decline in net earnings to Rs 2,090 crore (in-line) due to elevated provisions. NII grew 24 percent YoY to Rs 1,800 crore (7 percent beat), led by 22 percent YoY loan growth and a 25bp improvement in the margins (to 3 percent) on account of Rs 145 crore recoveries recorded in interest income. Loan book grew by 22 percent YoY to Rs 1.58 lakh crore, while deposits increased 10 percent YoY to Rs 2.1 lakh crore.

Focus on balance sheet consolidation and moderation in fresh slippages/provisions will support earnings recovery. Indian Bank has a strong capital position, with tier-1 of 11.6 percent. It, thus, is well poised to grow its loan book and benefit from a further improvement in operating leverage.

We expect FY20E RoA/RoE to be the best among PSBs at around 0.8/14.2 percent. Maintain Buy with a revised target price of Rs 430 (1.2x FY20E ABV).

Sanghi Industries – Buy | Target – Rs 130 | Return – 48%

SNGI is likely to deliver EBITDA CAGR of 16 percent over FY18-20, led by healthy volume growth (driven by higher sales to Mumbai market and favourable base).

With 43 percent earnings CAGR over FY18-20 led by healthy EBITDA growth and lower interest cost, SNGI is available at attractive valuations of 6.6x FY20E EBITDA and USD63/t on FY20E capacity.

We value the stock at $83 per tonne on blended capacity of 8.2mt (valuing present capacity of 4mt at $100 per tonne and new capacity at $65 per tonne) and arrive at a target price of Rs 130 per share. Buy.

Brokerage: Centrum Wealth Research

KEC International – Buy | Target – Rs 457 | Return – 48%

For Q1FY19, KEC continued to report good operational performance (EBITDA margin of 10.3 percent), in-line with expectation, owing to forex gain, certain cost control measures and higher share of non-T&D businesses.

Current structural changes in the balance sheet have resulted in elongated working capital cycle leading to higher debt. Factoring the same, we have cut FY19E/20E profit estimate by 2.2/2.9 percent. We, however, maintain revenue CAGR of 15 percent over FY18-20E with average EBITDA margin of 10.2 percent.

We continue to be positive on the steady pace in the transmission & distribution (T&D) business and ramp up in the non-T&D businesses (railways, cables, civil and solar). We maintain Outperformer rating. We value the stock at 18x FY20E EPS giving a revised target price of Rs 457 (versus Rs 471 earlier).

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