Even as we come to the end of 2017 and investors may be on the lookout for top wealth creation opportunity in 2018 and beyond, Edelweiss is betting big on two small-cap stocks in the upcoming year. In its latest research report on Edelweiss has identified housing sector as the theme to bet on in 2018. Edelweiss is bullish on companies into home-building materials, as it expects government thrust on affordable housing combined with low interest rates to bode well for the sector. According to the research firm, major growth drivers in the space include India’s low per capita consumption of all home building material products; rising GDP, urbanization, disposable income, nuclear families; shortening renovation cycle due to high real estate cost; and virtually untapped but high potential rural market.
Further, Edelweiss notes that organised players will gain market as GST implementation and revision of rates from 28% to 18% will reduce price differential between organised and unorganised. Edelweiss also notes that organised players have presence across price points and higher presence in the faster growing but low competition premium category segments; Strong distribution network along with high ad spends and branding activities to boost visibility of organised players and Capacity expansion due to lean balance sheet along with strategic alliances and outsourcing resulting in high RoCE. We take a look a two top stock bets from the space.
Asian Granito India
India’s major tile-maker Asian Granito India has has an excellent year in the bourses in 2017, returning more than 145% since January. “We estimate AGL to clock revenue CAGR of ~15% over FY17‐19E, driven by increase in tiles sales volume CAGR by 12%, improvement in utilization, introduction of new products and increase in distribution reach to 5,500 sales points. We estimate AGL’s operating margin to catapult 250bps over FY17-19E on account of: (a) increased contribution of VAPs; (b) higher B2C sales; c) lower gas prices; d) sharpening focus on branding; and e) expansion of dealers’ network,” Edelweiss noted in its report. Taking note of Asian Granito’s valuation, Edelweiss says, “ We believe, the boost in the company’s profitability in coming years, is likely to lead to re-rating of valuation multiple. We re-iterate our ‘BUY’ recommendation with target price of INR 640 based on 25x FY19E earnings (12% discount to Kajaria’s target multiple). The stock iscurrently trading at 28x/19x FY18E and FY19E.” Asian Granito India shares were trading at Rs 539.4 on NSE this afternoon. Edelweiss target price implies an upside of more than 18.5% from the current market prices.
Building and steel products maker, Everest Industries has more than tripled investor wealth since january. “It is among the largest PEB companies in India with over 2,000 PEB projects designed and erected. It is also among India’s leading building solution providers, offering detailed technical assistance in the form of designs, drawing and implementation for every project,” notes Edelweiss. Sharing its investment hypothesis for the stock, Edelweiss notes,
“The PEB sector is poised for growth with rising demand for warehouses on the back of the rise in e-commerce and agricultural enterprises. EIL is well positioned to gain in tandem with industry growth. EIL is trading at 12.7x/10.3x PER and 7.1x/6.0x EV/EBIDTA FY19E/FY20E, respectively. We initiate a trading BUY with a target price of INR 624, valuing the stock at 26% discount to historical 1-year forward average multiple of 19x i.e. 14xFY20E earnings.” Everest Industries shares were trading at Rs 583. Edelweiss’ target price implies an upside of more than 7% from the current market prices.