After a blockbuster 2017, profit booking and relentless selling by foreign institutional investors (FIIs) pulled the S&P BSE Sensex lower by 6 percent so far in the year 2018 as of closing price of on March 12.
There are plenty of domestic and global factors which pulled the index lower but the good news is that the bull run is intact and investors who are in the market for long innings have nothing to fear.
Investors should look at companies across market caps which have a sustainable business model and can deliver high-quality growth. Smallcaps are still a better bet than Sensex or Nifty, suggest experts.
Commenting on the Indian market, Shankar Sharma of First Global in an interview with CNBC-TV18 said that there is no bear market in Indian equities as well as global markets. India is not in a bear market but it could lag in terms of performance. “I am publically very bullish on the smallcaps for the last 4 years,” he said.
“After speaking to the management of many companies in the last 1 month in which we have exposure suggest that FY19 numbers for most of the companies suggest earnings growth of 30-50 percent or even 150 percent which makes valuations not very demanding,” he suggests.
After the recent correction, valuations of Indian market have come down to a reasonable level which should give motivation to investors to accumulate quality stocks on declines. Investors should focus on stocks which have either corrected a lot or have huge growth potential.
Indo Count
The home textile companies which are mainly exporters of bed linen and terry towels like Indo Count should do well in the next 2-3 years as the destocking by large retailers in the US is coming to an end and as they start restocking growth should come back. Indo Count is trading at 10x FY19E for a 10 percent RoE profile.
Cochin Shipyard
Cochin Shipyard has been performing poorly because of the physiological linkage to the shipping industry. It does a large amount of ship building work for the Navy and Coast Guard.
The order book is healthy providing visibility for next 4 years. If one removes the cash and other income then operational RoE goes to 25 percent compared to 11 percent reported in FY18E.
UPL
Agrochemical stocks which have corrected a lot are also contra buys. We like UPL Ltd. in this space as it is the largest player in the industry and its earnings this year is expected to be nearly 5x higher than its second largest peer, PI Industries.
The sector has companies which have a RoE profile of 20 percent and trades at ~20x one Forward PE basis. UPL for a 24 percent RoE profile and trades at 15x on Fw PE basis.
DB Corp
DB Corp could be a good contra play in the media space. People have a very negative sentiment towards print media companies.
The worst seems to be behind in FY18 and numbers should improve from FY19E onwards. Due to the favourable election cycle, the print advertisement should pick up in FY19. For more than 25 percent EBITDA margin, more than 20 percent RoE and a dividend yield of over 3 percent the stock trades cheap at around 13x FY19E.
Tata Motors
Tata Motors could be a good contra play in the automobile space. Past few quarters have disappointed investors due to volatile margins and forex hedging losses. Going forward as Hedging losses unwind we expect JLR EBITDA margins to improve.
Based on the anticipated improvement in EBITDA margins and earnings the stocks look cheap. There could be a positive surprise from Indian operations, mainly CV business.
State Bank of India
The SBI stock has corrected 21 percent from its recent high. However, the stock can be a good contrarian play as lower slippages in FY2019E over FY2018E, improving loan growth and resolutions of IBC accounts are expected to improve margins in the near term.
CASA growth has remained strong in recent quarters led by strong growth in savings accounts and this will provide some relief to incremental borrowings cost.
Analyst: Vinod Nair, Head of Research at Geojit Financial Services
HCL Technologies
The stock underperformed the benchmark Nifty index in the last 1 year, up to a little over 13 percent. Geojit continues to remain positive on HCL on a consolidated basis driven by traction in deal wins and strength in Mode 2 & 3 services (focus on next-gen offerings).
Revenue contribution from Mode 2 & 3 services surpassed 25 percent of the total revenue and the management is eyeing to further increase the contribution from digital business to 40 percent over the next few years.
Deal wins remained strong in Q3FY18 with the company signing twenty transformational deals across services. The company’s strategy of augmenting its IP based partnerships with technology vendors to broaden its product offerings is expected to provide a tailwind to revenue growth going ahead. We factor revenue CAGR of 9 percent over FY17-20E.
Aarti Industries
After rallying a little over 50 percent in the last one year, the stock has undergone some bit of consolidation so far in the year 2018. It rose a little over 2 percent in the same period.
AARTI Industries Ltd (ARTO) is a global leader in Benzene based derivative products. The company has a diversified product portfolio with end users in pharma, agrochemicals, specialty polymers, paints & pigments.
ARTO’s Q3 Revenue grew by 29 percent YoY, led by strong growth across business segments with Speciality chemical business grew by 23 percent YoY, home & personal care business 103 percent YoY and Pharma 35 percent YoY.
Recently, ARTO signed Rs10,000cr exclusive supply contract with a global chemical conglomerate for high-value speciality chemical intermediate over a period of 20 years with the commencement of supplies from the Year 2020.
Going forward, we believe that with strong off-take Pharma segment and stable growth from Specality chemicals segments, we factor revenue to grow 14 percent CAGR over FY18E- FY20E. Given healthy earnings outlook, we continue to have a positive rating on the stock.
Torrent Pharma
The stock is down nearly 6 percent so far in the year 2018 and on a 1-year basis, it slipped by nearly 1 percent. But, Geojit feels that there is tremendous potential in the business.
Torrent’s acquisition of branded formulations business of Unichem Laboratories will strengthen its presence in the domestic market with expansion in the chronic portfolio, improved market share and widen distribution networks.
Besides recovery in US business is expected to drive robust growth going ahead. Higher revenue growth from Europe is also another positive for the company. Given increased R&D spends for high margin/high-volume products and meaningful new launches for coming years.
Notably, the management has guided for 10-15 ANDA filings in FY18 and also indicated plans to submit 3-4 derma products by this fiscal end. We expect Torrent Pharma’s revenue and Adj. PAT to grow at a CAGR of 14 percent/9 percent over FY17-20E owing to increased contribution from the domestic, gradual pickup in US sales through quality filings and strong growth in Germany, Brazil and RoW.
Idea Cellular
Amid the ongoing troubles in the telecom sector, shares of Idea Cellular slipped a little over 27 percent so far in the year 2018 and on a 1-year basis it has fallen over 24 percent.
Idea’s focus on the Vodafone merger and accelerating synergistic benefits both in terms of operating cost and capex is expected to achieve a higher level of efficiency going ahead.
The merger process is likely to be completed by H1CY18, we expect synergies to start accruing from FY20E leading to an expansion in EBITDA margin to 28.4 percent in FY20E.
Importantly, the company’s fund-raising will provide Idea with much-needed liquidity to boost network and protect its revenue and market share. Moreover, Idea’s plan to monetise its tower assets will strengthen its balance sheet.
Tata Global Beverage
The stock has fallen over 14 percent so far in the year 2018 but it nearly doubled in the calendar year 2017. Geojit Financial Services feel that the stock is a good buy on declines.
Tata Global Beverages (TGB), an integrated natural beverage company derives ~70 percent of revenue from branded tea business and ~60 percent of the revenue comes from markets outside India.
TGB has put in place a new strategy to drive growth and profitability including exiting from loss-making geographies. Under the core business rejuvenation, TGB will expand its product offerings in premium and non-black categories and enhanced its focus on green and herbal tea categories (higher margins).
It is also planning to foray in large tea consuming Asian markets such as Singapore, Malaysia, and China. To renew Nourishco (JV), TGB launched several new products/variants under Tata Gluco Plus and Himalayan water brands.
We expect TGB to gain market share across geographies led by its innovative premium product offerings and expect revenue/PAT to grow at ~6 percent/23 percent CAGR over FY17-20E.
Analyst: Ritesh Ashar, Chief Strategy Officer, KIFS Trade Capital
Bhansali Engineering Polymers
The stock witnessed profit booking so far in the year 2018 after it rallied over 600 percent in the last one year. Investors should look at adding positions on every fall.
The company currently has a capacity of Rs80,000 whereas the domestic demand is 350000 which is being catered by only two such companies in India.
By 2018 and 2022 company is planning for capacity expansion to 350000 which is nearly 4 times. And, the company will be self-sufficient in catering the overall domestic demand. Financials of the company are very lucrative. Accumulate on dips should be the strategy.
Firstsource Solutions
The stock has underperformed on a 1-year basis when compared to the benchmark index. It rose a little over 11 percent in the last one year. But, tracking the momentum in 2018, IT stocks are likely to pick up momentum.
FSL is into small cap IT – Software’s we have seen IT has been performing and likely to outperform. As per RRG IT sector is the only sector which is in the Trending quadrant. free trial
The company has posted a net profit of Rs.99.55 crores for the period ended December 31, 2017, with reduction of debt and available at cheap valuations. FSL looks to be a turnaround and open for targets of more than 65 with long term horizon.
