Article

5 best stocks to invest in current volatile markets

07 Aug 2019 Nikita Bhoota

Indian stock market, post the announcement of Union Budget 2018, is in a consolidation phase. The government’s implementation of Dividend Distribution Tax (DDT) of 10% on Equity Mutual Funds along with Long Term Capital Gain Tax of 10% on gain of more than Rs1lakh from equity investments has adversely impacted investors’ confidence. Further, emergence of PSU bank scams added to the woes.

At the global level, rising US bond yield and US President Donald Trump’s proposal to impose hefty import duties of 25% on all steel products and 10% on aluminum products has created panic in the global markets. The investors fear that the imposition of these taxes will create a trade war scenario, which will have a negative impact.

In February 2018, FIIs were the net sellers, FIIs sold (net) ~Rs12,500cr in the Indian equity market against net inflows of ~Rs14,000cr during January 2018.

However, identifying good stocks for investment that will give consistent returns in the long run is a real challenge. Based on fundamentals of the company, management outlook and business prospects, we have shortlisted 5 stocks that are expected to give healthy returns in the long-run.

Biocon

Biocon is India’s largest biologics company and an established player in research business. In FY17, small molecules, CRO, branded formulations and biologics contributed 41%, 29%, 14% and 12% respectively and the rest 4% came from the licensing fees.  In India, it is the largest biologics company and has products like INSUGEN, BASALOG, CANMAb, ALZUMAb, etc. Geographically, India contributes 30% of its total revenue, while 70% comes from overseas markets. Biocon’s early entry in the biosimilars business is positive for the company. The company, with its partner Mylan, is developing total 10 biosimilars, of which 3 (Pegfilgrastim Trastuzumab and Insulin Glargine) are submitted for regulatory submission. Company’s research business i.e. Syngene, in the last year has signed two new dedicated clients and has undertaken a capex of $200mn to expand its capabilities and forward integrate. This will help Biocon to grow its profit 6x over next five years. We expect 31.7% and 73.7% CAGR in revenue and PAT over FY18-20E. Biocon is expected to witness 38.6% EBITDA CAGR during this period.  We see an upside of 30% from CMP of Rs 586 over a period of 1 year.

Year

Net Sales
(Rs Cr)

OPM (%)

Net Profit (Rs Cr)

EPS (Rs)

PE (x)

FY18E

4,086

25.2

592

9.9

59.4

FY19E

4,869

27.0

706

11.8

49.8

FY20E

7,090

27.9

1787

29.8

19.7

Source: 5 Paisa Research

JK Tyre & Industries (JKTIL)

JKTIL is leading Indian Truck and Bus Radial (TBR) and LCV tyres manufacturer with 31% market share and capacity of 32mn tyres/annum (tpa). It derives 56% revenue from replacement segment, 34% from OEMs (standalone plus Cavendish) and 10% from exports (Tornel, Mexico, capacity 7.9mn tpa). We expect current margins to sustain due to better pricing environment.  The budget announcement of raising customs duty on TBR from 10% to 15% will make imports costlier, boosting volumes for JKTIL. Imposition of anti-dumping duty on Chinese TBR tyres, Government’s thrust on infrastructure and better consumer financing will result in strong CV sales, propelling JKTIL’s volumes. Hence, we expect revenue growth of 12% yoy in FY19E vs. 6% in FY18. After spending Rs3,700cr on capex (past 3 years), only maintenance capex of Rs100cr/year would be incurred over next 2-3 years. This will reduce D/E ratio from 3x in FY17 to 1.6x in FY20E. We see an upside of 40% from CMP of Rs152 over a period of 1 year.

Year

Net Sales (Rs Cr)

OPM (%)

Net Profit (Rs Cr) (before EO)

EPS (Rs)

PE (x)

FY18E

8,151

8.8

94

4.1

36.7

FY19E

9,129

13.7

440

19.4

7.8

FY20E

10,224

15.4

684

30.2

5.0

Source: 5paisa Research

Larsen & Toubro (L&T)

L&T is India’s largest engineering and construction company with no real peers when compared to its breadth and depth of offerings. Infrastructure formed 47%, Hydrocarbon 10%, Heavy engineering 3%, Power electrical & Auto 33% and Others 7% as of Q3FY18 revenue. L&T is well placed to benefit from the uptick in the investment cycle. Capital expenditure is expected to pick-up in India led by resolution of bad debt, pick-up in capacity utilization and recovery in demand. L&T’s order book as of 3QFY18 stood at Rs2,70,727cr. The order inflow is likely to increase from H2FY18 led by recovery in economy. We estimate revenue CAGR of 25% over FY18-20E. We believe that L&T’s focus on improving profitability will lead to PAT CAGR of 12% over FY18-20E.  We project an upside of 13% from CMP of Rs1,267 over a period of 1 year.

Year

Net Sales (Rs Cr)

OPM (%)

Net Profit (Rs Cr)

EPS (Rs)

PE (x)

FY18E

121,729

11.0

7,364

52.6

24.1

FY19E

135,891

10.8

7,825

55.9

22.7

FY20E

152,477

11.1

9,260

66.2

19.1

Source: 5 Paisa Research

HDFC Bank

HDFC Bank is the largest private sector bank in India with a market share of 4.5% in loan book terms. The bank’s strong competitive funding profile, better loan mix, high operating efficiency, and robust capital position to drive its earnings. For Q3FY18, HDFC Bank's retail and wholesale loan mix was 55:45, while cost-to-income ratio was 41.2%. Further, GNPA & NNPA ratio as of Q3FY18 was 1.29% & 0.44% respectively. We expect the judicious mix of wholesale and retail loan assets coupled with robust CASA growth to improve margins. We believe the bank to deliver loan book growth of ~21% CAGR over FY18-20E augmented by its strong branch network and strong capital position. The bank NIM is expected to be stable at 4.5% over FY18-20E due to higher credit/deposit ratio and high yield retail segment. Considering the superior growth in advances and better loan mix, we forecast ~21% EPS CAGR over FY18-20E. We project an upside of 15% from CMP of Rs1,857 over a period of 1 year.

Year

Net profit
(Rs Cr)

BVPS (Rs)

P/BV (x)

ROE (%)

FY18E

17,900

414.5

4.5

16.7

FY19E

22,800

502.6

3.7

17.5

FY20E

27,500

608.7

3.1

17.4

Source: 5 Paisa Research

Hexaware Technologies

Hexaware Technologies Limited is the fastest growing automation led, next-generation provider of IT, BPO and Consulting services. We believe that Hexaware’s successful implementation of “Shrink IT” has aided its industry leading growth despite ramp down in the past quarter from two clients (travel vertical). The strategy has enabled it to successfully weather the dampness in Enterprise Solutions (ES).  Hexaware’s CY18 revenue growth guidance of 10-12% is conservative considering that it easily beat the revised 15% guidance (from 10%) in CY17. Moreover, it is entering CY18 with 17.6% higher order book, which would drive 15%+ revenue growth once the ramp up starts.  Overall, we see 13.6% revenue CAGR over CY17-19E aided by successful strategy implementation and likely bottoming out of ES. We expect margins to be stable, despite pressures, aided by operating leverage and estimate PAT CAGR of 13.8% over CY17-19E. We expect an upside of 20% from CMP of Rs370 over a period of 1 year.

Year

Net Sales
(Rs Cr)

OPM (%)

Net Profit after EO (Rs Cr)

EPS (Rs)

PE (x)

CY17

3,942

16.6

500

16.6

22.3

CY18E

4,507

16.6

576

19.1

19.4

CY19E

5,090

16.7

647

21.4

17.3

Source: 5 Paisa Research

Research Disclaimer 

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5 best stocks to invest in current volatile markets

07 Aug 2019 Nikita Bhoota

Indian stock market, post the announcement of Union Budget 2018, is in a consolidation phase. The government’s implementation of Dividend Distribution Tax (DDT) of 10% on Equity Mutual Funds along with Long Term Capital Gain Tax of 10% on gain of more than Rs1lakh from equity investments has adversely impacted investors’ confidence. Further, emergence of PSU bank scams added to the woes.

At the global level, rising US bond yield and US President Donald Trump’s proposal to impose hefty import duties of 25% on all steel products and 10% on aluminum products has created panic in the global markets. The investors fear that the imposition of these taxes will create a trade war scenario, which will have a negative impact.

In February 2018, FIIs were the net sellers, FIIs sold (net) ~Rs12,500cr in the Indian equity market against net inflows of ~Rs14,000cr during January 2018.

However, identifying good stocks for investment that will give consistent returns in the long run is a real challenge. Based on fundamentals of the company, management outlook and business prospects, we have shortlisted 5 stocks that are expected to give healthy returns in the long-run.

Biocon

Biocon is India’s largest biologics company and an established player in research business. In FY17, small molecules, CRO, branded formulations and biologics contributed 41%, 29%, 14% and 12% respectively and the rest 4% came from the licensing fees.  In India, it is the largest biologics company and has products like INSUGEN, BASALOG, CANMAb, ALZUMAb, etc. Geographically, India contributes 30% of its total revenue, while 70% comes from overseas markets. Biocon’s early entry in the biosimilars business is positive for the company. The company, with its partner Mylan, is developing total 10 biosimilars, of which 3 (Pegfilgrastim Trastuzumab and Insulin Glargine) are submitted for regulatory submission. Company’s research business i.e. Syngene, in the last year has signed two new dedicated clients and has undertaken a capex of $200mn to expand its capabilities and forward integrate. This will help Biocon to grow its profit 6x over next five years. We expect 31.7% and 73.7% CAGR in revenue and PAT over FY18-20E. Biocon is expected to witness 38.6% EBITDA CAGR during this period.  We see an upside of 30% from CMP of Rs 586 over a period of 1 year.

Year

Net Sales
(Rs Cr)

OPM (%)

Net Profit (Rs Cr)

EPS (Rs)

PE (x)

FY18E

4,086

25.2

592

9.9

59.4

FY19E

4,869

27.0

706

11.8

49.8

FY20E

7,090

27.9

1787

29.8

19.7

Source: 5 Paisa Research

JK Tyre & Industries (JKTIL)

JKTIL is leading Indian Truck and Bus Radial (TBR) and LCV tyres manufacturer with 31% market share and capacity of 32mn tyres/annum (tpa). It derives 56% revenue from replacement segment, 34% from OEMs (standalone plus Cavendish) and 10% from exports (Tornel, Mexico, capacity 7.9mn tpa). We expect current margins to sustain due to better pricing environment.  The budget announcement of raising customs duty on TBR from 10% to 15% will make imports costlier, boosting volumes for JKTIL. Imposition of anti-dumping duty on Chinese TBR tyres, Government’s thrust on infrastructure and better consumer financing will result in strong CV sales, propelling JKTIL’s volumes. Hence, we expect revenue growth of 12% yoy in FY19E vs. 6% in FY18. After spending Rs3,700cr on capex (past 3 years), only maintenance capex of Rs100cr/year would be incurred over next 2-3 years. This will reduce D/E ratio from 3x in FY17 to 1.6x in FY20E. We see an upside of 40% from CMP of Rs152 over a period of 1 year.

Year

Net Sales (Rs Cr)

OPM (%)

Net Profit (Rs Cr) (before EO)

EPS (Rs)

PE (x)

FY18E

8,151

8.8

94

4.1

36.7

FY19E

9,129

13.7

440

19.4

7.8

FY20E

10,224

15.4

684

30.2

5.0

Source: 5paisa Research

Larsen & Toubro (L&T)

L&T is India’s largest engineering and construction company with no real peers when compared to its breadth and depth of offerings. Infrastructure formed 47%, Hydrocarbon 10%, Heavy engineering 3%, Power electrical & Auto 33% and Others 7% as of Q3FY18 revenue. L&T is well placed to benefit from the uptick in the investment cycle. Capital expenditure is expected to pick-up in India led by resolution of bad debt, pick-up in capacity utilization and recovery in demand. L&T’s order book as of 3QFY18 stood at Rs2,70,727cr. The order inflow is likely to increase from H2FY18 led by recovery in economy. We estimate revenue CAGR of 25% over FY18-20E. We believe that L&T’s focus on improving profitability will lead to PAT CAGR of 12% over FY18-20E.  We project an upside of 13% from CMP of Rs1,267 over a period of 1 year.

Year

Net Sales (Rs Cr)

OPM (%)

Net Profit (Rs Cr)

EPS (Rs)

PE (x)

FY18E

121,729

11.0

7,364

52.6

24.1

FY19E

135,891

10.8

7,825

55.9

22.7

FY20E

152,477

11.1

9,260

66.2

19.1

Source: 5 Paisa Research

HDFC Bank

HDFC Bank is the largest private sector bank in India with a market share of 4.5% in loan book terms. The bank’s strong competitive funding profile, better loan mix, high operating efficiency, and robust capital position to drive its earnings. For Q3FY18, HDFC Bank's retail and wholesale loan mix was 55:45, while cost-to-income ratio was 41.2%. Further, GNPA & NNPA ratio as of Q3FY18 was 1.29% & 0.44% respectively. We expect the judicious mix of wholesale and retail loan assets coupled with robust CASA growth to improve margins. We believe the bank to deliver loan book growth of ~21% CAGR over FY18-20E augmented by its strong branch network and strong capital position. The bank NIM is expected to be stable at 4.5% over FY18-20E due to higher credit/deposit ratio and high yield retail segment. Considering the superior growth in advances and better loan mix, we forecast ~21% EPS CAGR over FY18-20E. We project an upside of 15% from CMP of Rs1,857 over a period of 1 year.

Year

Net profit
(Rs Cr)

BVPS (Rs)

P/BV (x)

ROE (%)

FY18E

17,900

414.5

4.5

16.7

FY19E

22,800

502.6

3.7

17.5

FY20E

27,500

608.7

3.1

17.4

Source: 5 Paisa Research

Hexaware Technologies

Hexaware Technologies Limited is the fastest growing automation led, next-generation provider of IT, BPO and Consulting services. We believe that Hexaware’s successful implementation of “Shrink IT” has aided its industry leading growth despite ramp down in the past quarter from two clients (travel vertical). The strategy has enabled it to successfully weather the dampness in Enterprise Solutions (ES).  Hexaware’s CY18 revenue growth guidance of 10-12% is conservative considering that it easily beat the revised 15% guidance (from 10%) in CY17. Moreover, it is entering CY18 with 17.6% higher order book, which would drive 15%+ revenue growth once the ramp up starts.  Overall, we see 13.6% revenue CAGR over CY17-19E aided by successful strategy implementation and likely bottoming out of ES. We expect margins to be stable, despite pressures, aided by operating leverage and estimate PAT CAGR of 13.8% over CY17-19E. We expect an upside of 20% from CMP of Rs370 over a period of 1 year.

Year

Net Sales
(Rs Cr)

OPM (%)

Net Profit after EO (Rs Cr)

EPS (Rs)

PE (x)

CY17

3,942

16.6

500

16.6

22.3

CY18E

4,507

16.6

576

19.1

19.4

CY19E

5,090

16.7

647

21.4

17.3

Source: 5 Paisa Research

Research Disclaimer