Spurred by the Bharatiya Janata Party’s massive win in the politically-crucial state of UP as well as some other states, the stock markets are likely to break into a new zone, which will be good for investors too. This victory is being seen as an affirmation of PM Modi’s various policy initiatives which will give a big leg-up to the nation’s economy and markets going ahead. Experts, therefore, believe that it may be a good time for investors, who were waiting for a long time to invest in the stock markers, to dabble in quality stocks.
Here we are taking a look at 10 such stocks which you can buy now for mid to long-term gains.
1. Jindal Steel & Power
Target Price: Rs 160
Edelweiss Research has upgraded Jindal Steel & Power (JSPL) to ‘BUY’ as it believes that : 1) Angul capacity ramp up will propel sales volume by ~30% CAGR to 6.8mt amidst relatively benign steel environment owing to capacity closures in China, resulting in 32% EBITDA CAGR over FY16-19E; 2) there is high probability of net debt plummeting ~25% to INR335bn through to FY19E post INR40bn consideration from sale of 1,000MW power plant; and 3) the stock is trading at 6.5x FY19E EBITDA, at a sharp discount to 15 years’ trading average of 8.4x. Ergo, Edelweiss Research has revised up FY18E and FY19E volumes by 5% and 12%, respectively, and the target price to Rs 160 (earlier Rs 97), implying 7.0x FY19E EBITDA, which is at a discount to global peers.
Edelweiss Research believes that commissioning of the 3.2mtpa blast furnace will majorly boost earnings, particularly with the steel milieu looking benign. Further, the stock is trading at 6.5x FY19E EBITDA, which is at a discount to peers and historic trading multiples.
2. Tech Mahindra
Target Price: Rs 642
Tech Mahindra (TECHM) announced acquisition of CJS Solutions, an IT and consulting services company for healthcare players based in the US and the UK. The acquisition will open cross-selling opportunities for TECHM and strengthen its prowess in the fast growing healthcare & life sciences vertical, which currently contributes sub-5% to the company’s revenue. Valuation at 1.0x EV/sales for TTM September 2016 is reasonable considering TECHM’s focus on enhancing presence in the fast-growing healthcare space.
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The acquisition will aid TECHM to cater to the >USD100bn healthcare spends in the US and the UK. The acquisition is reasonable and in line with the company’s focus to expand its presence in the fast-growing healthcare space. The stock currently trades at 10.9x FY19E EPS. Edelweiss Research maintains ‘BUY/SP’ with a target price of Rs 642.
3. Max India
Target Price: Rs 175
Max India’s (Max) hospitals business revenue/EBITDA grew 14%/ 17% YoY, despite headwinds from demonetisation and weaker onset of winter compared to last year. Core operating metrics remained robust with ARPOB growing 7% YoY, and occupancy steady at ~69%. Gross premiums in healthcare insurance business increased 24% and Max maintained EBITDA breakeven guidance for FY19 in this business. Max is a compelling bet on the tertiary care opportunity in the NCR market, which could have upsides from investments in health insurance.
Edelweiss Research forecasts revenue CAGR of 18% with EBITDA margin improving by ~140bps, driving ~25% EBITDA CAGR over FY17‐19E. RoCE is estimated to jump 433bps to 12.3% during the period. It maintains ’BUY/SO’. It has assumed 20x FY19E EV/ EBITDA for MHC and 1x FY19E P/BV for Max Bupa and Antara to arrive at SoTP-based target price of Rs 175.
4. Tech Mahindra Ltd
Target Price: Rs 600
Angel Broking has signed a definitive agreement to acquire CJS Solutions Group LLC, a US-based healthcare information technology consulting company that does business as the HCI Group. The deal values CJS Solutions at an enterprise value of US$110mn.Tech Mahindra will make an upfront payment of US$89.5mn for purchase of an 84.7% stake in the firm. The balance stake of 15.3% will be acquired over a period of three years. The HCI Group works with global tier-I healthcare service providers, primarily in the US and the UK. The company also has a presence in Europe, West Asia and Asia-Pacific, and employs more than 500 professionals globally.
The CJS transaction is expected to close by April 2017. The acquisition will be mostly funded through internal accruals. While the acquisition is small one, it will enable the company in diversify its revenue stream. On valuations it’s difficult to comment as the ROE of the acquired firm is not known, though it will not add anything substantial on the net profit front, given the low margins of the acquired business and hence Angel Broking maintains its BUY rating with a price target of Rs 600.
5. FAG Bearings
Target Price: 4700
FAG Bearings’ (FAG) Q4CY16 revenue growth of 4.9% YoY was 1.5% below estimate, mainly hit by lower auto aftermarket sales, which reeled under demonetisation effect. However, PV OEMs, CVs and railway segments logged decent growth. Even as EBIDTA dipped 16.6% YoY (in line with estimates) primarily owing to product mix, currency impact and higher employee expenses, PAT came 15.5% above estimates led by higher other income. FAG is well poised to gain from the huge capex of Rs 1bn incurred in CY16, as recovery in automotives is underway and industrials is set for an uptick. The company also stands to gain from structural benefits of localisation and innovation (145 new products introduced in CY15), leading to sustained margin improvement. Edelweiss Research maintains ‘BUY’ with a target price of Rs 4,700, based on 28x CY18E EPS.
6. Grindwell Norton
Target Price: 390
Grindwell Norton’s (GWN) Q3FY17 revenue (INR3.1bn) grew by strong 16% YoY, 3% above expectations amid tough market conditions. EBITDA grew 4% to INR440mn, but 2% below our expectations as EBITDA margin dipped 153bps YoY to 14.0% on higher employee cost and other expenditure. Abrasive and ceramic segments grew by healthy 12% YoY each, while others segment growth surged 51% YoY. PAT, at INR270mn, moved up 11% YoY. Going forward, expected upturn in automotive industry will favour GWN as it has high exposure to automobile and auto ancilliaries sectors versus competition. Hence, sales CAGR of 15% and EBITDA CAGR of 17% over FY17-19 are estimated. On strong product portfolio of 30,000 SKUs with 30% revenue contribution from new products, wide distribution network, benefits of strong parentage, and expected 339bps expansion in RoE to 20%, Edelweiss Research upgrades it to ‘BUY’ with TP of Rs 390, based on 25x FY19E EPS.
7. Jet Airways
Target Price: Rs 542
Jet Airways’ (JAL) Q3FY17 consolidated revenue, at INR54.8bn, was flat YoY as the 5% RPKM growth was compensated by the 4% correction in passenger yield. Despite improvement in non-fuel costs (CASK – ex fuel down 1.7% YoY), spurt in fuel cost saw EBITDAR margin dipping by ~680bps to 15.8%. As a result, PAT plunged 70% YoY to INR1.4bn. “Going ahead, improvement in profitability hinges on yield stabilisation and sustained drop in non-fuel costs and debt. As we roll over to FY19E, we factor in lower growth and impact on yield (driven by focus on international operations) versus peers, Indigo and SpiceJet. We value JAL at 7.0x FY19E EV/EBITDAR giving us a revised target price of Rs 542 (Rs 529 earlier). Maintain BUY,” says Edelweiss Research.
8. Vesuvius India
Target Price: 1378
Vesuvius India’s (VIL) Q4CY16 revenue growth of 13.9% belied estimates, on lower sales in December hit by DeMon and lower exports. EBITDA and PAT growth of 4.6% and 4.2% YoY, respectively, came below estimates impacted by the change in product mix, higher retirement expenses (due to changes in actuarial valuations) and one-off provision for entry tax for earlier years. The government’s recent initiatives for infra makes VIL optimistic about the rise in steel demand from H2CY17. Further, with steel capacity addition by bigger players expected in CY17/18, large addressable categories like advanced refractories and industry growth moving to large integrated players, “we believe VIL is well placed to capture the uptick in cycle even in CY18. With the company in a sweet spot we expect it to post strong sales and earnings CAGR of 15.4% and 20.8%, respectively, with 253bps RoCE expansion to 27.6% over CY16-18. Maintain ‘BUY’ with TP of Rs 1,378 (22x CY18E EPS),” says Edelweiss Research.
Target Price: 236
ONGC’s Q3FY17 EBITDAX of INR103bn (up 18% YoY, 8% QoQ) came exactly in line with estimates. While production was largely in-line, realisation of oil/gas was 3%/4% ahead. PAT, at INR44bn (up 12% YoY, down 13% QoQ), however missed estimates by 18% primarily on account of higher than expected exploration expense (INR14bn) due to couple of high-cost dry well write-offs. Management guided production to improve, primarily gas (FY18 growth guidance of 8%) as new projects get commissioned. Current trend of low opex will continue as drilling activity (workover rigs) and rig rates are down. These coupled with higher oil and gas price portend brighter prospects from FY18. Edelweiss Research maintains ‘BUY’ with a target price of Rs 236.
10. Eicher Motors
Target Price: Rs 29,884
Eicher Motors’ (EIM) Q3FY17 EBIDTA (standalone), at INR5.8bn (up 60% YoY), was in line with our estimate. Key conference call takeaways were: 1) RE’s order book continues to rise—average waiting period now at ~3 months for Classic 350 and slightly lower for other models; and 2) RE dealership expansion plans on track; currently has 640 dealerships and plans to add 8-10 outlets each month; 3) current production capacity is 60K/month; RE yet to provide capacity guidance for FY18; 4) commodity costs impacted margins by ~20bps and company has not taken price hikes. Edelweiss Research maintains ‘BUY’ with a revised TP of Rs 29,884 (Rs 25,880 earlier).
(Disclaimer: These stock recommendations have been made by Edelweiss Research and Angel Broking. Although due care has been taken while making these recommendations, investors are advised to consult their financial advisors before investing in any stock based on these recommendations.)