Samvat 2074 has not been very kind for investors. Though Sensex and Nifty have held out against macroeconomic headwinds, the damage has been quite severe in broader markets.
Unfortunately, many investors increased exposure to low‐quality momentum stocks during the massive rally in 2017.
Quality matters! Investing in equity is all about learning from past mistakes.
Post a sharp correction, stock market valuations have turned reasonable and earnings are set to grow at a healthy rate over the next couple of years.
Stick to basics, invest in quality companies with a healthy growth outlook and reasonable valuations, say experts. Moreover, building a portfolio is all about understanding the macroeconomic conditions.
For Samvat 2075 portfolio, Sharekhan hand‐picked 12 quality stocks which are a mix of large and midcaps.
Aarti Industries:
Aarti Industries is a leading Indian manufacturer of speciality chemicals and pharmaceuticals with a global footprint. During FY2018‐21E, growth prospects are strong, as the company plans to expand across the benzene value chain and has also diversified into the toluene value chain.
Concerns over specialty chemical supplies from China will help Indian companies, including Aarti Industries, increase its market share in world trade.
Aarti has won multi-year large orders worth Rs 4,000 crore for 10 years and Rs 10,000 crore for 20 years from two global clients. These orders indicate growing confidence in the company and can drive up its revenue in two global clients. Orders indicate growing confidence in the company and can drive up its revenue in the long-term.
Britannia Industries:
Britannia is one of the largest biscuit and snack manufacturers in the domestic market. It is the largest biscuit maker in India, ahead of Parle, with a turnover of close to Rs. 10,000 crore market-cap Rs 66,777 crore.
Sharekhan expects the domestic sales volumes to keep growing at 10‐12% pace, aided by strong growth in regional markets along with better demand in the urban market will drive sales.
Sustained focus on innovation and distribution expansion in core categories is expected to drive the near‐term performance.
In the coming years, the company can achieve double-digit earnings growth by launching products with high gross margins, growing in adjacent product categories such as cakes and rusk and driving up margins through operating efficiencies and improving profitability in the cheese segment.
Divis Laboratories:
Divis is an Indian pharmaceutical company based in Hyderabad, Telangana, India. The Indian rupee has depreciated by 10‐11% in the past five months, benefiting exporting pharmaceutical companies such as Divis in terms of better sales realisation and profitability.
Besides a weak rupee, there is immense scope for better‐than‐expected growth and re‐rating of valuation multiples in the coming months.
The company stands to gain for two reasons, one, capacity expansion, as two manufacturing blocks are to be commercialised in FY2019 and two, emerging opportunities from China, where pollution‐related issues are restraining supply, which open up opportunities for Divi’s.
ICICI Bank:
ICICI Bank is one of India’s largest private sector banks and also has subsidiaries which operate in financial services and insurance (BFSI) space. Sharekhan believes that non‐performing assets (NPAs) cycle has peaked and though incremental loan slippages are likely to be elevated for the medium term, but are expected to trend downwards.
ICICI Bank is well capitalised, with a capital to risk (weighted) assets ratio (CRAR ) of 18.3 percent and tier‐1 capital reserve of 15.8 percent. This will enable it to make the most of opportunities in the retail and corporate loan reserve of 15.8 percent.
This will enable it to make the most of opportunities in the retail and corporate loan segment as PSU banks & NBFCs grapple with their own challenges. ICICI Bank has got a strong liability franchise, where current and savings account (CASA) deposits constitute 50.5 percent of overall deposits, which helps the bank manage its cost of funds and in turn sustain its net interest margins.
IndusInd Bank:
With superior metrics, IndusInd Bank has been among the best‐performing private sector banks. During FY2014‐FY2018, the bank’s advances recorded a 26.7 percent CAGR, while net profit clocked a CAGR of 27.7 percent in the same period.
In FY2018, net interest margin stood at a healthy 4 percent. Despite the banking sector being marred by non‐performing asset (NPA)‐related issues, IndusInd Bank has been able to maintain good asset quality with a gross NPA ratio of 1.09 percent as of Q2FY19, which is commendable.
Infosys:
Infosys is India’s second‐largest IT services company in terms of export revenue, $10,939 million in FY2018. Infosys focuses on a four‐pronged strategy to navigate clients’ digital journey, as it provides significant room for growth given there are opportunities worth $160-200 billion in the agile digital market.
The company has stepped up its investments and acquired companies such as Fluido, WongDoody, etc to build up its digital capabilities and catch up with large competitors. Rapid revenue growth in the digital business has shown initial signs of progress.
The stock currently trades at 16 times its FY20E earnings, a meaningful discount to TCS. We believe that the valuation gap would gradually narrow as Infosys catches up with TCS on most parameters.
Jubilant FoodWorks:
JFL, India’s largest food service company had shifted its focus to customer satisfaction from store additions to improve its store fundamentals over the long run, which has fructified in the near term, as desired.
The management is focusing on offering superior, value‐for‐money products and improve the customer experience. The move to use digitalisation to improve product delivery has also worked well.
The company’s same‐store‐sales growth of 25.9 percent in Q1FY19 and 26.5 percent in Q4FY18 were the highest in last few years and is expected to remain robust going ahead too is expected to remain robust going ahead too.
JFL would be one of the key beneficiaries of improvement in the discretionary environment in the domestic market.
L&T:
L&T is the best play on the recovery in the domestic capex cycle. The management is focusing on a multi‐pronged strategy ‐ achieving profitable growth, driving up return on equity (RoE) in the medium term and superior capital allocation.
This augurs well for the company’s earnings that can clock an 18% CAGR from superior capital allocation. This augurs well for the company s earnings that can clock an 18% CAGR from FY18 to FY20E.
L&T began FY19 with strong order inflows in the infrastructure, hydrocarbon and heavy engineering businesses that took the total order backlog to Rs 2 7 lakh crore for Q1FY19.
These orders offer revenue businesses that took the total order backlog to Rs. 2.7 lakh crore for Q1FY2019. These orders offer revenue visibility for 2.2 years on a trailing twelve month (TTM) basis.
Larsen & Toubro Infotech (LTI):
Set up by L&T in 1996, LTI is India’s sixth‐largest IT services company in terms of revenue, $1,132 million in FY18. It is also among the top‐20 IT service providers globally. The company’s prudent strategies and efficient sales force have helped it gain share in large accounts.
The company’s prudent strategies and efficient sales force have helped it gain share in large accounts and new logo wins.
Digital revenue currently contributes 34% of the company’s overall revenue as against 25‐30% for the top four Indian IT companies.
Over FY18‐FY20E, LTI is well placed to deliver industry‐leading revenue and earnings CAGR of 20% and 22%, respectively.
Reliance Industries (RIL):
RIL is a diversified conglomerate with business interests spanning from refineries, petrochemicals, exploration & production, retail, and digital services. Sharekhan expects the refining margins to be robust in H2FY19E and FY20E, riding on a gradual ramp‐up of petcoke gasification project over H2FY19.
Moreover, the relatively better economics of the petcoke gasification project, given rising crude oil prices and implementation of the revised International Maritime Organization (IMO) regulations from January 2020 to lower sulphur content for marine fuels would further drive up gross refining margins.
Financials of the telecom business are likely to improve as we expect Reliance JIO to gain revenue market share; margins are likely to widen on account of operating leverage.
Moreover, the launch of fixed‐line broadband services (JIO Gigafiber) would add to the revenues of the digital services business. The retail business is also doing well with high double‐digit revenue and EBITDA growth.
Disclosure: Reliance Industries Ltd. is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments Ltd.
Sundaram Fasteners:
Sundram Fasteners Ltd (SFL) is witnessing a healthy traction across geographies. Strong demand traction from the OEM’s and a rise in content per vehicle (on back of technologically advanced and value added is likely to drive the domestic operations (65% of sales).
Further, capacity expansion in fast‐growing cap Rs. 11,235 crore is likely to drive the domestic operations (65% of sales).
Further, capacity expansion in fast-growing geographies (SFL recently expanded capacity in China) and a rise in the share of business in existing markets such as North America would drive up exports that account for 35 percent of sales.
SFL is a quality auto‐ancillary stock with return ratios of over 25 percent. Earnings are poised to outpace growth in the automotive industry over the medium term. Strong return ratios and robust growth make it an attractive investment bet.
Arvind:
Arvind Ltd has transformed itself from a pure textile manufacturer into the largest branded retail player, with a portfolio of top global brands across all market and price segments.
The management proposes to demerge its branded and retail apparel and engineering businesses as both have matured enough to enhance growth prospects in the coming years. Moreover, listing these businesses as separate entities will help boost the value of these businesses.
After the demerger, the company plans to invest Rs. 1,500 crore in garments, knitted fabrics, and technical textiles. Margins of the branded & retail business are likely to improve with consistent growth in power brands, emerging brands turning profitable and operating leverage in Unlimited Fashion.
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