‘Which stocks should I buy?’ we constantly hear investors asking…
There’s a dark cloud looming over the global economy with tariff wars, lack of growth triggers, deflationary pressures, high market valuations, low index earnings, corporate indebtedness.
And back at home, election results are around the corner, we’re faced with asset quality woes in the financial system, a lack of pick up in the private CapEx cycle, softening consumption.
‘Are there any stocks that show some promise within this volatile macro scenario?’
We believe that all market conditions present buying opportunities. All that you need to do is assess ‘stock stories’ carefully.
Here are fifteen stocks that we like, based on their individual stories.
Before you read any further, there are three things you must know:
1. Our shortlisted stocks belong to different sectors. We have chosen them with a bottom-up approach, yet have kept in mind the top-down trends to make our selection more effective.
2. Some of them have been posting impressive growth numbers, while others offer great value.
3. Interestingly, these stocks will help you invest in multiple themes that might play out over the next 12-18 months—import substitution, infrastructure development, exports and consumption.
(Source: ACE Equity)
India’s second largest multiplex chain, INOX Leisure with 557 screens (February 2019) spread across 67 cities has charted an aggressive screen addition strategy over the next 3 -5 years. With overall occupancy expected to remain in the range of 26-29%, aggressive screen additions coupled with increasing footfall monetisation and strong content performance will drive the growth for Inox Leisure going forward. The recent fundraising (through a preferential issue to a promoter), low gearing coupled with the possibility of real estate monetisation (Rs3.5bn) and 4.5% in treasury stock positions it strongly to execute large acquisitions.
L&T Technology Services Ltd.A leading global player in ER&D services, LTTS has an active presence across 10 verticals with 51 customers from the top 100 global ER&D spenders suggesting a huge opportunity for client mining. Supply constraints across developed markets and a strong deal pipeline with 6 large deals across various segments is a testament to strong demand opportunities for LTTS. A presence in the plant engineering space is one of the key differentiators of LTTS from other IT companies.
The transportation segment (31% of revenues) is the top revenue-generating vertical for LTTS (31%) and is expected to exhibit strong growth in the years to come. The company intends to focus on driving growth through its “T20: A30” model, whereby LTTS will prioritise customers which are within the range of $5-$30 mm and can be scaled up to $50 mm over the next few years.
With 2 manufacturing units (one of which is the world’s largest API manufacturing facility), Divis Labs is the leading manufacturer of APIs and custom manufacturing solutions. Apart from this, it has also recently forayed into the highly specialised Nutraceutical ingredients manufacturing.
It will be a key beneficiary of increased outsourcing opportunities underpinned by its expertise in complex chemistry, cost-efficient processes and relationships with global pharma majors. The consolidation in the API/CRO space, rising number of molecules in clinical trials stage and growing funding for Biotech research augurs well for Divis. Post-lifting of the import alert and normalization of operations at unit-I & II, Divis’ revenues are expected to see momentum. Also, Divis is undertaking aggressive CapEx to cater to larger opportunities in Big Pharma and capitalize on new ones arising from China supply disruptions. In addition to debottlenecking at unit-I & II, it has commenced brownfield expansion at two SEZ sites which are expected to be commissioned by FY20.
Ranked as the world's fourth-largest three and two-wheeler manufacturer, Bajaj Auto markets its products under various brands, namely Pulsar, Avenger, Dominar, etc. It also has partnerships with global leaders KTM & Triumph motorcycles. Sighting stiff competition in the mid-market segment, Bajaj has renewed its focus on the entry-level segment through penetration pricing. It has successfully boosted its market share in a slowing market that is dominated by Hero MotoCorp.
We expect market share gains to continue to drive volume growth, given the company’s shift in stance from profitability maximization to growth. With BS VI norms and rising insurance costs expected to curtail market growth, Bajaj stands to benefit from its aggressive pricing strategy. We expect Bajaj Auto to be an outperformer in the auto sector, with the impending launch of its new product ‘Qute’, in a new product category, being a key monitorable.
India's largest city gas distribution player, Gujarat Gas Limited has a presence spread across 23 districts serving India's largest customer base in residential, commercial and industrial markets. Its market ready infrastructure of ~ 22,200 km of gas grid stands it in good stead to serve the long-term gas requirement with only incremental capex. We expect the long-term double-digit NG volume growth story to pan out given that Gujarat Gas has multiple growth drivers in place
Deepak Nitrite is a speciality chemical company with the biggest growth driver being its foray into the (erstwhile 80%) import substitute phenol-acetone product market. Currently, the 200k -120k MTPA phenol-acetone facility, incepted in November 2018, is operating at 85%. Apart from the above, Deepak Nitrite has a presence across Performance Products, Fine and Specialty Chemicals and Basic Chemicals. Product portfolio expansion, along with strong R&D capabilities, has de-risked Deepak Nitrite’s business model with a higher level of customer stickiness. High entry barriers, a dominant market share across most of its product segments and limited competition has helped Deepak Nitrite sustain its leadership.
Part of the K.K. Birla Group, Avadh Sugar & Energy has four sugar mills at Hargaon, Seohara, Hata and Rosa in Uttar Pradesh with a combined crushing capacity of 31,200 TCD. The company also has two distilleries at Hargaon and Seohara with a total capacity of 200 KLPD along with 74 MW of co-gen power. The company is a direct beneficiary of the government’s ethanol policy and sops given to the sugar sector, aimed at pulling it out of the crisis of overproduction and consequently, lower prices. Ongoing efforts to improve the sugar yield, de-bottlenecking to enhance crushing capacity and consistent increases in power consumption are expected to boost the company’s financial performance, going forward.
Coffee Day Enterprises Ltd., a holding company, has multiple business interests across various verticals of coffee retailing - Coffee Day Global(CDGL), Logistics(Sical), SEZs
(Tanglin), Financial Services (Way2Wealth) & Investments (Coffee Day Trading). The stake sale in MindTree to L&T at better-than-expected valuations has provided a cash inflow of Rs 2,749 crore, which is expected to aid in net debt (total borrowing of INR 5050 cr) reduction by ~80% and pave the way for restructuring in the cafe and non-cafe segments, with clear capital allocation.
Apart from this stake sale, the management is looking at further divestments of its non-café businesses along with simplification of the holding structure. Further closure of unviable legacy stores, rationalization of costs, improvement in per store sales (target Rs 20,000 / day) and huge savings in interest are expected to lead to a significant improvement in net earnings and return ratios. This stock is ripe for a re-rating.
Praj Industries is a global process solutions company adding significant value to bio-energy facilities, brewery plants and water and waste-water treatment systems. The company is expected to benefit, largely on account of stricter implementation of ethanol blending in India, Southeast Asia and other European countries. The Government of India has targeted a 10% blending of ethanol with petrol by 2022 (achieved 7.2% in 2018). Praj has a domestic market share of 70%. Further, the domestic business contributes 68% to the total revenue and the remaining 32% comes from exports.
Jindal Steel and Power Limited is an India-based steel producer. The company's verticals include Iron & Steel, Power and Other. JSPL’s steel division has a total capacity of 6.75 million tons per annum and power generation capacity of approximately 5,060 megawatts. The growth over the next few years is likely to be on account of a volume ramp-up at the new 3.2 mtpa furnace at Angul which would take total steel capacity to 9.95 mtpa. Further, international operations are expected to deliver positive EBITDA on account of high coal prices. JSPL is better placed than its peers due to its imminent growth in production. It can be a good play considering the expected improvement in the CapEx cycle.
The sharp downturn in the market price of Sterlite Technologies following fears of a global slowdown in the optical fibre rollout has led to a sharp correction in the frothy valuations of the stock. Optic fibre (OF) remains key to the 5G global rollout and the healthy order book worth Rs 5500 (of the total order book of Rs 10,516 crore), with 70% exports, augurs well for the future revenue generation. Notwithstanding the pricing pressure due to the softening demand in China (5% exposure), not much price erosion is expected for the European and cross-Atlantic geographies. However, hybrid margins may correct given that the services business earns relative lower margins (~11%) compared to the products division (~23%). With an OF capacity expansion from 30 mnfkm to 50 mnfkm on track for the June 2019 rollout, strong revenue growth is expected to sustain.
JSAW is a well-diversified domestic and global play in the metal pipe industry with a significant presence in SAW (20,00,000 MTPA capacity), Seamless (2,50,000 MTPA capacity) and the DI (10,00,000 MTPA capacity) pipe segments. It has also forayed into multiple businesses (SAW Pipes, Seamless Pipes and DI Pipes, Manufacturing of Iron Plates and Coils and shipping logistics) housed in its subsidiaries which are loss-making. This has led to Jindal Saw’s consolidated debt ballooning to net debt of Rs 6,166 crore, which has skewed its net debt to EBIDTA to 6.5X and resulted in an interest coverage ratio 1.0X.
Despite the large debt burden at the consolidated level, the standalone has seen significant deleveraging from Rs 4218 cr in FY18 to Rs 3645 crin FY19. The management has guided for a further reduction to Rs 2450 cr by FY21, following an expected improvement in the working capital cycle and paring of debt (Rs 250 cr per annum). These trends would help improve the gearing ratios significantly.
Jindal Saw is a direct beneficiary of the upbeat CapEx investment cycle across Oil &Gas E&P, Gas Transmission and Water Transportation expected over the medium term. We expect a 20% CAGR in net revenues to Rs 15,000 cr and stable margins to lead to a 24% CAGR in net earnings to Rs 984 crore by FY22. The ROCE too is expected to expand to 12%.
Torrent Power (TPL) is present across the value chain from electricity distribution to generation. Apart from a regulated electricity distribution license for Ahmedabad and Surat (both being monopolies with the lowest AT&C losses), it was recently awarded the distribution licence for the Dholera Special Industrial Region (Dholera SIR). Its two Distribution Franchisee (DF) circles of Agra and Bhiwandi have seen a sharp performance improvement, and it recently won the DF license for Shil, Mumbraand Kalwa areas, which are adjacent to the Bhiwandi circles. Torrent has a renewable energy portfolio, which is expected to double to 1.4 GW by FY21 and has a mix of lucrative feed-in capacities with double-digit IRR. Its new competitively bid projects have equity IRRs ranging between 12-14%.
Of its 3.1 GW conventional generation capacity, ~1.3GW is operational with high double-digit ROEs while 1.8 GW of gas-based capacity remains untied. The sourcing of imported LNG has improved the profitability of the gas plant (with PPA) while efforts by the government to revive the gas-based power generation could lead to a positive contribution from the idle assets. It is an appreciable fact that despite 25% of its gross block being idle, the ROIC is only marginally lower than the leading PSUs NTPC and Power Grid.
Healthy operating cash flows, strong BS despite strong CapEx momentum. Low gearing and emerging growth opportunities make this a compelling buy. Any upside on the resolution of the idle gas capacities will be an added upside, which is not factored into the price.
Even after factoring in RE generation, Coal based power will increase 2.5-3X from the current requirements. Coal India produces 83% of total domestic coal and yet reaches only 66% of domestic demand. Thus, there exists a huge opportunity to form import substitution. Further, despite inflationary pressures, costs have continued to remain under control, given the natural attrition and operating leverage from higher production and a one-time price hike. In addition, there exists significant latent pricing power given that FSA pricing is at a ~50% discount to e-auction prices. And we expect a gradual move to market pricing over the next few years.
With government divestment expected to slow down over the next few years, overhead stock supply pressures will gradually dissipate. Currently, the stressed valuation and the mouthwatering dividend yield provides a significant margin of safety. This makes Coal India a must buy defensive stock addition to one’s portfolio.
With operations in over 120 countries, IPCA is a fully-integrated Indian pharmaceutical company, manufacturing over 350 formulations and 80 APIs. With multiple growth triggers falling into place, we expect the company to outperform the sector over the period FY18-21:
Disclaimer:
We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:
We do not have any financial interest of any nature in the company.
We do not individually or collectively hold 1% or more of the securities of the company.
We do not have any other material conflict of interest in the company.
We do not act as a market maker in securities of the company.
We do not have any directorships or other material relationships with the company.
We do not have any personal interests in the securities of the company.
We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships.
We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.
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