The stock market has regained some strength as a surprise growth of 7% in the third quarter GDP data has given a renewed buying interest. But the concern on premium valuation may influence investors to take a cautious approach.
The stock market has regained some strength as a surprise growth of 7% in the third quarter GDP data has given a renewed buying interest. But the concern on premium valuation may influence investors to take a cautious approach. The market, however, is providing ample opportunity under the bottom-up approach, a glimpse of turnaround in beaten-down sectors like IT & pharma sectors, which are available at cheap valuation compared to historical parameters.
The roll-out of GST, scheduled for July, is a positive outcome as the uniform tax rate will benefit the organized players. DIIs and FIIs were net buyers on a month to date basis, which is positive for India as in the short term the weakness in USD is likely to continue. Even at this premium valuation, experts believe, the market is giving perpetual opportunity for the long-term investment.
Given below are 10 growth stocks which you may consider to buy now for medium to long-term gains:
1. Bharat Electronics Ltd
Target Price: Rs1,761
Bharat Electronics Ltd (BEL) is a Navaratna enterprise having 37% market share in Indian Defence Electronics. BEL’s core capabilities are in radar & weapons systems, defence communication & electronic warfare. The current order book is at Rs 33,806 crore, which is 4.7x FY16 sales, provides strong revenue visibility for the next 4 years. BEL will be a major beneficiary of GoI higher focus on Make in India and higher indigenous procurement. “More potential in earnings growth will emerge as per the progress of the recently-initiated modernization & indigenisation programme. We factor earnings to grow at 15% CAGR over FY17E-FY19E. We have a Buy rating with a target price of Rs1,761,” says Vinod Nair, Head of Research, Geojit Financial Services Ltd.
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2. Finolex Cables Ltd
Target Price: Rs 498
Finolex Cables Ltd (FCL) is India’s largest manufacturer of electrical (85% of revenue) and telecommunication cables (9%). FCL has a wide distribution network with a high brand recall. The implementation of GST is expected to shift the business from informal to formal, which will help organised players like FCL to gain market share. FCL’s current focus is to expand its products portfolio, which includes fans, switches and water heaters, which will drive future growth. Earnings are likely to grow at 12% CAGR over FY17E – FY19E. Geojit Financial has an Accumulate rating for the stock with a target price of Rs 498.
3. Titan Company Ltd
Target Price: Rs 459
Titan Company Limited (Titan), a Tata Group company, is India’s leading watches, jewellery and eyewear retailer. Titan has 1333 stores with over 1.76 million sq ft of retail space. With rollout of GST, Titan is expected to gain market share from unorganised players in the long term. Given the store expansion, launch of new collections, strong growth in studded jewellery and improvement in overall consumer sentiment, “we expect revenue & PAT to grow at a CAGR of 15% and 19%, respectively, over FY17-19E. We have a Buy rating with a target price of Rs 459,” says Nair.
4. V-Guard Industries Ltd
V-Guard Industries Ltd (VGIL) is one of leading players in the electrical consumer durables space. Its major product segment includes stabilizers, cables & wires, UPS, pumps and electrical appliances. VGIL is also looking for inorganic growth opportunity in the electrical appliance business. In the long term, with the benefits of GST and shift of business to more formal economy, organised players like VGIL are expected to benefit by higher market share gain. Earnings are likely to grow at 28% CAGR over FY17E-FY19E. Geojit Financial has an Accumulate rating for the stock.
5. Federal Bank Ltd
Federal bank’s (FB) earnings are on strong revival as asset quality risks from legacy corporate loans are behind and fresh slippages are expected to moderate going forward. FB has diversified its loan book with high growth retail, SME & corporate and has grown at a healthy CAGR of 12% over the past 5 years. “Loan growth is expected to gain strong momentum with the high growth diversified retail, SME and corporate exposure. Strong CASA ratio of ~33% built on the expanding retail franchise is a major strength, which will continue to help keep the cost of funds lower and improve profitability,” says Nair.
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6. The Byke Hospitality Ltd
Target Price: Rs 233
The Byke Hospitality Ltd (Byke) reported a good set of numbers for Q3FY17. Revenue grew 12% to Rs 79 crore and EBITDA was up 14% to Rs19 crore, despite demonetization. Byke maintained excellent occupancy levels at ~70% and sold ~1.7 lakh room nights in room-chartering business (growth of 17% YoY). Net profit grew 17% to Rs11 crore. The management in its post result conference call has maintained its guidance of taking the hotel properties to 25 by FY20. “The company expects a 20% revenue CAGR over FY16-FY20E with a scope of margin improvement (currently ~23% EBITDA margins) on the back of a higher share of the food & beverages (F&B) segment. Byke currently has 11 properties with a room portfolio of 797 rooms. We maintain BUY with a target price of Rs233, valuing it at 18x Sept’18 EPS,” says Siddhartha Khemka, Head Research and Equities (Wealth), Centrum Broking.
7. Repco Home Finance Ltd
Target Price: Rs754
Repco Home Finance Ltd (RHFL) reported a good set of numbers with net interest income (NII) growing 16% YoY backed by a 21% growth in loan book at Rs 8,656 crore. Pre-provisioning profit (PPP) grew 19%, supported by a 225 bps decline in cost-income ratio (CI%) to 16.8% and net profit grew 20%. In line with the cyclical trend, on a QoQ basis, asset quality weakened with gross and net NPAs increasing 28bps to 2.65% and by 20bps to 1.51% as on December 31, 2016. Considering, strong growth recovery (management guidance of +30% loan growth) from FY18 onwards along with healthy financials, Centrum Broking remains positive on RHFL from a long-term perspective. It maintains its Buy reco with a target price of Rs 754, valuing the stock at 3.5x its Sept’18 ABV.
8. Essel Propack Ltd
Target Price: Rs 293
Essel Propack Ltd’s (EPL) Q3FY17 consolidated results were impacted by demonetization and consolidation of Essel Deutschland (EDG). Consolidated revenue grew by 18% to Rs 588 crore (including EDG). However, on a comparable basis (ex. EDG) revenue grew 7.7% to Rs 537 crore mainly impacted by India business. EDG merger led to Rs 51 crore additional revenue, but also had an EBIT loss of Rs 1.7 crore. Consequently, EBITDA was flat at Rs 100 crore with margins contracting by 296bps to 17.0%. According to the management, due to demonetization – the India business lost revenue of ~Rs 27 crore and EBIT of Rs 12 crore. Net profit declined by 7.6% to Rs 38 crore. Given the expected improvement in operational efficiency and better growth prospects across regions, Centrum Broking maintains its positive view on the stock.
9. Bharat Financial Inclusion Ltd
Target Price: Rs 1,053
Bharat Financial Inclusions Ltd (BFIL) posted a decent set of numbers despite a QoQ decline in disbursements and non-Andhra Pradesh loan book, due to the impact of demonetisation. Net interest income grew 38% YoY to Rs 204 crore, backed by a 38% non-AP loan growth. Pre-provisioning profit and net profit grew by 31% and 80%, respectively. “Asset quality remained stable, at 0.06% gross non-performing assets (NPA) and 0.01% net NPA, after utilizing RBI’s 90dpd dispensation. We recommend Buy with a target price of Rs1,053, valuing it at 3.5x Sept’18 ABV and adding DTA benefit,” says Khemka.
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10. L&T Finance Holdings Ltd
Target Price: Rs128
L&T Finance Holdings (LTFH), in Q3, remained focused on its broader business strategy to expand RoE, which increased 352bps YoY to 12.8%. While loan growth was slower at 10% than the usual run-rate, the company reported a good set of numbers with net interest income and net profit growing by 16% and 32%, respectively, aided by a 500bps YoY decline in cost-income ratio. Focused loans grew 15% while defocussed book declined 39%. Asset quality weakened with gross NPA increasing 16bps QoQ to 4.86% and net NPA at 3.1%, up 3bps QoQ. Centrum Broking maintains its Buy rating on the stock with a target price of Rs128 on SOTP basis (core business – 2x Sept’18 ABV and Rs22 for investment and wealth businesses).
(Disclaimer: These stock recommendations have been made by Geojit Financial Services Ltd and Centrum 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. CMPs of stocks are of last week.)