As India moves towards a less cash economy, stock markets are likely to continue doing well as businesses shift from unorganised to the organised space. Companies that are listed on stock exchanges represent the established, formal part of the economy and that is bound to benefit from demonetization, GST and other policy initiatives.
In addition to this, “with other investment options like property and bank FDs becoming less attractive, the sheer volume of investor funds flowing into mutual funds and shares will also help keep the stock markets buoyant. This opportunity, however, needs to be exploited with caution as we are certainly living in an age of disruption. The sheer scale and speed of changes happening in technology, ways of doing business, regulation and communication means that every investment decision needs to be researched and monitored closely,” says Ashish Kapur, founder and CEO of Invest Shoppe, a wealth management and investment advisory firm.
Mentioned below are 10 stock ideas which investors with long-term horizon may consider for investing. Needless to say that their prospects need to be observed regularly.
1. Reliance Capital
Current Market Price (CMP): 519
With a market capitalization of Rs 13,000 crore, Reliance Capital is trading at a very attractive valuation. Sentiment on this stock has been negative for many years due to the overhang of the ADAG group. Due to the pessimism around this group, the market is ignoring the many positives and the deep discount at which this stock is trading. It is trading at 0..8 x for FY18E forward P/ABV compared to more than 3x for a majority of other competitors like Cholamandalam, M&M Finance etc. Consolidation of the businesses of insurance and AMC in its subsidiaries and the robust growth of various segments of financial services businesses are the positive triggers going ahead.
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2. Wonderla Holidays
It is one of the largest and most profitable parks in India.
Globally, most large amusement parks are loss-making. The expensive valuation (multiple of 23x of FY18E EPS) is justified, given its profitable operations, experienced management and significant opportunity for amusement parks growth in India.
Remain a growth and concept stock where even expensive valuation can justify given the tremendous opportunity (total footfall in India much less than that of Disney US).
Debt-free balance sheet and higher return ratios (RoIC of 37% in FY16) augur well for the stock.
3. Mahindra Holidays
Annuity-based stable revenue with strong growth in net addition of members (~30%) YoY.
Debt-free balance sheet with RoE of ~15-20%.
Valuations not expensive at ~12x of Fwd EBITDA.
4. Future Enterprises
The company provides infrastructure support for the retail operations of the Group and envisages being the retail infrastructure service provider for the industry.
Has multiple investments in other group companies and non-core businesses / JVs which has current value of ~Rs 13000 crore, much more than the debt of Rs 4400 crore.
Also it has around ~Rs 600 crore lease rental income and ~Rs 200 crore manufacturing income.
The EPS for 9 months FY17 is Rs 5 and the stock looks deeply undervalued.
Market cap of Rs 1,282 crore is just 34% of the revenue for FY17e with investment value of worth Rs 13000 crore.
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5. Shakti Pumps
As per its annual report, it is pioneer and the largest player in India’s solar pumps segment.
In FY 2016, solar pumps contributed ~12% to the top line and it forecasts to increase the revenue mix.
Under the various government farm reforms, the Indian government intends to replace 20 million energy inefficient agricultural pumps and another 10 million diesel-driven agriculture pumps with energy efficient alternatives.
Eyeing this in mind, in 2014 Shakti asked KPMG to conduct a study to evaluate the economic feasibility to shift from traditional pumps to solar pumps from Govt, discoms and suppliers perspective.
Shift from unorganised players to branded luggage will boost VIP’s growth, particularly in their entry-level brands. The company is gaining market share and long-term drivers in the form of GST and higher sales via the banking channel envisaged to boost branded luggage sales. This clearly is a great stock to hold in your portfolio. Margins are regularly expanding and management guidance suggests that the trend will continue. It has a wide range of luggage brands across different segments – Skybags, VIP lags Skybags, Aristocrat, Alfa and Carlton, supported by a robust marketing and distribution network. Also, “being the only listed player in the luggage market, it will enjoy a scarcity premium once the earnings visibility improves. VIP is continuously improving its perception amongst investors. VIP is available at around 14x FY 18 estimated EV/EBITDA. With improving market share, margins and Return on Assets, this is a key stock to have in your portfolio,” says Kapur.
7. RBL Bank
With a diverse product portfolio, no legacy issues, highly capable management and low market share, one can expect RBL to be a multi bagger stock idea. The management expects loan growth to be at a CAGR of ~35% over FY16-19. We expect stable/improving margins due to changing loan mix toward high-yielding loans, a sharp fall in cost of bulk deposits and improvement in the CD ratio. “Strong balance sheet growth is expected to drive operating leverage for the bank. Asset quality remains flawless, with net stress loans of just 80bp. We expect Return on Assets to reach 1.3% by FY19. Credit growth in our country is likely to remain buoyant and show further traction going ahead. This augurs very well for well-managed banks like RBL,” says Kapur.
8. Strides Shasun
Strong growth led by regulated markets and market share improvement in key US products is helping Strides Shasun improve its fundamentals. EM’s (18% of sales) grew 42% YoY (-4% QoQ) led by Africa (post inventory correction) despite impact of demonetization in India. Margins have expanded on exit from CRAMS business and improved revenue mix. “Restructuring of ‘Strides Pharma’ with sharper focus on high margin business is the key positive trigger. Restructuring is also directed towards improving supply chain and front end towards a fully integrated formulations business in regulated markets (US & Australia), emerging markets (branded generics in India & Africa) and institutional business (ARV & antimalaria tenders) which would have superior margin profile, better asset turnover and healthy return on capital. All these efforts are already showing results and we are convinced that this is a multi-bagger stock idea,” says Kapur.
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9. Orient Bell
The company is into manufacturing of non-Vitrified and Vitrified tiles as well as sanitary products. The company acquired and merged with Bell Ceramics in December 2010. Post this merger, the company has emerged as the only one in the industry to have plants in North, West and South of India. The merger has been a good opportunity and will enable the company to grow inorganically at a much faster pace.
Strong government thrust: The government’s thrust on improving sanitation system in India has provided a new growth opportunity to the Indian sanitary ware and ceramic tiles industry. According to ‘India Sanitary Ware Market Forecast & Opportunities, 2017’, in the coming years India will witness huge improvements in the sanitation level. The industry is already growing at a fast clip and it has huge potential due to under-penetration. The industry is likely to witness high growth for at least the next 20 years before it saturates. Over 60% of the Indian population does not have proper bathrooms and toilets, and in the remaining 40%, the share of the organized industry is negligible. Implementation of GST is likely to provide a major fillip to the earnings potential of organized players like Orient Bell.
Sound track record: The Company has track record of turning Bell around within first 15 months of acquisition which reflects the excellent management qualities. Also the company has been able to integrate the different brands of ‘Orient’ and ‘Bell’ into one i.e. ‘Orient Bell’.
Valuation at deep discount to peers: The company’s market cap of $19mn appears quite low given its stable revenues of around $100mn. Also, if we compare it with other peers, it remains quite attractive since it has one of the lowest P/S ratio and other relative valuation ratios. This company is available at a deep discount to the industry leaders. The relatively lower margin to its peers is set to improve as the company integrates operations of Bell, saves power costs due to a new gas pipeline, improves capacity utilization and adds higher value added products to its portfolio. Even if the leaders continue to enjoy better valuations, the gap is set to come down considerably as investors are now likely to start looking beyond the big companies.
10. Bharat Forge
With strong focus on product innovation in globally scalable segments like aerospace, oil and gas, passenger cars, etc., we expect BHFC to see a significant ramp-up in profitability over the next 3-5 years.
“The forgings business can be a capital intensive one if the growth strategy is not managed in a specific manner. Achieving higher machining mix quickly would always require much higher capex compared to a refurbished pure forgings machine. A prudent strategy of managing capital allocation and working capital has led BFL to maintain and improve its return ratios. Going ahead, we believe the performance will improve from current levels and expect that standalone RoE, RoCE will trend upwards,” says Kapur.
(Disclaimer: These stock recommendations have been made by Invest Shoppe. 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.)