Top picks for Diwali: Axis Bank, Aadhar Housing Finance, Godrej Agrovat in Kotak Sec’s list to light up Samvat 2081

Indian markets created history in Samvat 2080 by hitting milestone after milestone. The Nifty surpassed 26250 and the Sensex surpassed 85900 in September 2024, with both indices gaining around 25% during Samvat 2080. The BSE Midcap and Smallcap index outperformed and gained 45% and 50% respectively. The upmove in markets was exceptional considering the spread of Covid19 and subsequent lockdowns. The upmove in markets was exceptional considering geopolitical tensions, global weakness, and elevated interest rates. All classes of investors drove the upmove. 

Here are top picks for Samvat 2081:

Aadhar Housing Finance 

Aadhar Housing Finance is a large affordable HFC. (Rs 21,100 crore of AUM in FY24). The company has a 7% market share in the affordable segment. It has a long track record, a well-diversified geographical presence, and a customer profile. Its multipronged expansion and appraisal strategy will drive 21% AUM CAGR (FY24-27E). Stable margins and improving leverage will accelerate RoEs back to the high teens. The company stands out versus most peers due to a larger balance sheet, and longer vintage and seasoning. It has a geographically diversified AUM mix with no state contributing more than 15%. Also, the company has reported strong asset quality performance over the years. We maintain a Buy rating and RGM-based target price of Rs 550; at our target price, the stock will trade 3.1X book and 20X earnings in June 2026E. 

Axis Bank 

Business execution is on expected lines, with a focus on the GPS strategy to build a solid franchise. On deposits, the management held its view that the initiatives taken were granular and focused, but they would deliver the desired outcomes to grow faster than the industry average over time. On loan mix, the bank would continue to build a profitable portfolio and was comfortable delivering better risk-adjusted growth. Axis Bank reported an 18% yoy earnings growth due to a 25% operating profit growth in Q2 FY25. The asset quality ratio was stable, with slippages stable at 2%. The bank is trading at valuations, which largely address most key concerns. The private sector bank has one of the best upsides, among large private banks at these levels. We maintain Buy with a target price of Rs 1,500 (unchanged), valuing the bank at 2.2X book and 15X FY26 EPS for RoEs of 15%.

FIEM Industries

FIEM is a leading tier-1 manufacturer of automotive lighting and rearview mirrors, catering primarily to the two-wheeler OEMs. FIEM is well-placed to benefit from the two-wheeler industry recovery. FIEM has a strong presence with key players in the two-wheeler segment. The company also has a strong presence with two-wheeler EV players. Rising LED lighting adoption in the automotive segment to aid revenue growth. The LED-based lamp content per vehicle is higher as compared with the halogen lamp. The company is looking at leveraging its LED automotive lighting expertise and strong R&D in the four-wheeler segment. The passenger vehicle segment provides significant growth opportunities over the medium term. We expect FIEM’s revenue to witness healthy growth over FY24-25. We expect FIEM’s earnings to grow at a healthy 19% CAGR over FY24-FY27. Debt-free balance sheet; cash flow generation expected to remain robust.

Gravita India 

Gravita India is the market leader in India’s emerging recycling industry with a focus on lead recycling. Its operations are spread across India & overseas. The organized segment’s market share is likely to expand significantly with regulatory tailwinds. Gravita is on best place to capture this opportunity. Penalties on battery OEMs for missing recycling obligations: Boost to recycling.  The company is increasing its recycling capacity by 72% to 500 ktpa by FY27. The company is foraying into new recycling segments – rubber/paper/steel/copper and lithium which would drive the revenue growth going ahead. We expect earnings per share to grow by 31.8% in FY25 & 31.6% in FY26.

Godrej Agrovet

The mixed near-term trends, promise a longer-term outlook. The animal feed and downstream businesses: prices remain subdued. We believe there is strength in Astec’s product pipeline—which we find promising. The palm oil duty benefit is likely from Q3 FY25. Godrej’s ability to attract talent should help Astec continue to grow rapidly in CDMO. The Q1 FY25 consolidated earnings grew at a healthy double-digit pace year over year. We consider the acquisition of the 49% minority stake in the company an incremental positive. The expectation of healthy earnings growth in FY26 as well. We roll forward, build in stake purchase at Godrej Agrovet & assign an EV/EBITDA multiple of 15X to standalone crop protection. We maintain the Add rating after the recent rally. 

JB Chemicals & Pharma

JB Chemicals is a domestic formulations-focused company, coupled with a significant presence in export formulations and a burgeoning CMO business. Its share of domestic formulations and CMO in overall sales has together increased to 67% in FY24 from 55% in FY20. The company ranked 22nd in the IPM as of FY24, JB has five brands among India’s top 300 brands, contributing more than 50% of domestic formulation sales. The robust CMO track record, with global leadership in manufacturing of lozenges. The domestic business: Healthy mix of legacy products and acquired brands to drive growth for JB Chemicals. We expect JB to deliver 14%, 19% and 22% revenue, EBITDA and PAT CAGRs, respectively, over FY24-27.

S H Kelkar and Company

The flavors & fragrances (F&F) supplier, starting to make inroads into the global market. The company is well-placed to drive double-digit revenue growth. A small but emerging contender in the vast F&F market. The company has persevered for years before seeing initial success. SH Kelkar and Company is tiny relative to global majors, but its technical capabilities are reputable. The growth drivers: Secular growth in the F&F market along with market share gains. We see a long runway for growth, given its established and sticky relationships. The large order win from Unilever bolsters confidence in management guidance. High entry barriers in the F&F industry make for an attractive industry structure. Potential for margin expansion – higher-margin geographies & operating leverage. We reinstate coverage with a Buy rating & FV Rs400 (24X September 2026E P/E).

Zomato

Zomato is one of India’s largest food services platforms that connects customers, restaurant partners and delivery partners. Also, Its offerings include dining-out services, Loyalty programs, quick-commerce service (through subsidiary Blinkit) and others. Zomato has gross merchandise value share (~52%) versus Swiggy (48%) in CY23. Zomato has a wide geographical presence in 750 cities vs 660 cities (Swiggy) as of CY23 Blinkit is a rapidly evolving business given high growth rates, expansion to new cities and continuous new category addition. We expect Zomato to deliver a revenue CAGR of 44% over FY24-27E and a strong improvement in EBITDA margin over the same period.

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