Article

5 Evergreen Stocks for Investment

05 Oct 2020 Nikita Bhoota

The Indian stock market has recovered from March 2020 lows supported by the huge global liquidity and coordinated efforts by countries across the globe to fight coronavirus (Covid-19) pandemic. Easing lockdown rules and improving domestic auto sales numbers also supported the market growth. In addition to this, the changes in the norms for multi cap funds by the market regulator SEBI is witnessing huge buying in the midcap and small cap stocks. However, the rally in midcap and small cap index may be for short period of time as the fund managers have to reshuffle their multi cap funds portfolio. The benchmark indices Sensex and Nifty jumped ~49% and ~50% respectively from March 2020 lows to October 01, 2020

Finding out good quality stocks in the market where investors are planning to liquidate their portfolio to take the benefit of rise in markets is a real challenge. 5 paisa have eased the investors work to find quality stocks for investment. We have selected 5 stocks that have overcome the market challenges and have given consistent returns in the long run. The stocks are chosen after studying the fundamentals, management history, and business prospects of the company.

Larsen and Toubro (L&T)

L&T prefers to sit tight (for now) on the post-tax cash proceeds of ~Rs110bn from the sale of its Electricals & Automation (E&A) business to Schneider Electric. Debt reduction in the Hyderabad metro project (HMP) will be executed after the receipt of VGF from the state government. Management expects any meaningful growth in core revenues to be skewed towards 4QFY21, as a heavy monsoon and localised lockdowns continue to hurt execution in 2QFY21. Amid the challenging environment, Infra, Power T&D, and Water are expected to lead the recovery. Large opportunities in Defence have been in the WIP phase for a long time now, and any traction in decision making will bode well for L&T. In addition, of robust order book of 306,280cr (~3x TTM sales) Q3FY20 provides healthy revenue visibility for the next 2 years. We expect revenue and PAT CAGR of 6% and 3% respectively over FY20-22E. The stock currently trades at 17.6x FY21EPS.

Year

Net Sales (Rs Cr)

OPM (%)

Pre Exc PAT (Rs Cr)

EPS (Rs)

PE (x)

FY20

1,45,452

11.2

9,549

68.0

13.3

FY21E

1,44,713

10.8

7,194

51.2

17.6

FY22E

1,64,226

11.7

10,171

72.4

12.5

Source: 5paisa Research

HDFC Bank

HDFCB indicated that it had a very capable set of business leaders to take over from those who have left recently. Incrementally, it is finding robust growth opportunity in corporate loans without taking significant risk and has seen very positive trends in its retail/SME customer profile from a cash flow perspective. Just 9% of loans are under moratorium. Continuous efficiency improvement would support profitability. Given strong commentary and financial performance, we expect the valuation overhang to diminish. HDFCBs customer quality, deposit position and capitalisation are among the best in the sector. This will enable it to strongly gain market share in the long term The stock trades at 3.1x P/BV FY21E.

Year

Net profit (Rs Cr)

P/BV (x)

ROE (%)

FY20

26,260

3.6

16.4

FY21E

27,930

3.1

15.1

FY22E

35,380

2.7

16.5

Source: 5paisa Research

Hindustan Unilever (HUL)

HUL is looking at the HFD (Health Food Drinks) category as a penetration opportunity with rural penetration at 27% much lower than urban at 60%+. 25% of India’s population is under 14 years, with ~33% suffering from stunted growth, 25% from malnutrition and ~90% from micronutrient deficiency. Even in the southern and eastern regions, where Horlicks and Boost have a dominant position, rural penetration is 26-28%, while urban penetration is 60-67%. Management would focus on mobilising penetration in the southern and eastern regions, followed by the North and the West.  The company would also focus on expanding the nutrition category, through hi-science variants, targeting the maternal & women’s nutrition and adult deficiency & wellness categories, in the medium term. Since the announcement of the acquisition in December 2018, there has been a margin expansion of 250-300bps, executed by GSK itself Management has guided for another 550-700bps margin expansion in the medium term driven by Scale benefits in media and materials buying, optimisation of depots and route to markets and efficiencies in supply chain, such as logistics, distribution and factory operations. We estimate PAT CAGR of 19% over FY20-22E. The stock trades at 60x FY21EPS.

Year

Net Sales (Rs Cr)

OPM (%)

Net Profit (Rs Cr)

EPS (Rs)

PE (x)

FY20

39,100

25.3

6,900

29.4

71.3

FY21E

44,500

26.3

8,200

34.9

60.0

FY22E

48,800

28.1

9,700

42.5

49.3

Source: 5paisa Research

Hero Motocorp

Demand in rural and semi-urban markets is robust (better than urban), driven by a good Rabi crop, lower impact of the Covid-19 outbreak and forecast of a normal monsoon. As recovery is led by rural, share of scooters in the 2W industry may not increase in the near-term. Hero’s dealer inventory level is very much under control. Management is focussed on growing its exports (currently at ~3%). In Phase-I, Hero created a good footprint in more than 40 markets and made efforts to leverage its existing products. In Phase-II, it is focussing on developing customised products for each market cluster. With the BS-VI transition behind, R&D has better bandwidth for such product customisation. We expect revenue CAGR of 9% over FY20-22E. The stock currently trades at 26.2x FY21EPS.

Year

Net Sales (Rs Cr)

OPM (%)

Net Profit (Rs Cr)

EPS (Rs)

PE (x)

FY20

28,836

13.7

3,198

160.1

19.7

FY21E

27,094

12.1

2,398

120.1

26.2

FY22E

34,294

13.1

3,378

169.2

18.6

Source: 5paisa Research

Reliance Industries Lid (RIL)

RIL has aggressive growth plans for the retailing business; in the next 12-18 months, it plans to scale up the JioMart (on-line ordering and fulfilment) vertical and introduce other merchandise on this platform (pharmaceuticals, fashion and electronics etc). Simultaneously, Reliance Retail Ventures (RRVL) also plans to focus on expansion in tier II/III and IV cities, to expand its retailing space and grow its off-line presence. Recent agreement to acquire retailing and logistics assets of Future Group bodes well in this regard. Perhaps, cash mobilised through induction of strategic investor(s) would go a long way towards meeting this objective. We expect revenue and PAT CAGR of 19.5 and 12.7 respectively over FY20-22E. The stock currently trades at 24.5x FY21EPS.

Year

Net Sales (Rs Cr)

OPM (%)

Net Profit (Rs Cr)

EPS (Rs)

PE (x)

FY20

596,700

14.8

43,800

69.1

19.3

FY21E

774,900

10.1

34,600

54.6

24.5

FY22E

852,100

12.0

55,600

87.7

15.2

Source: 5paisa Research

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5 Evergreen Stocks for Investment

05 Oct 2020 Nikita Bhoota

The Indian stock market has recovered from March 2020 lows supported by the huge global liquidity and coordinated efforts by countries across the globe to fight coronavirus (Covid-19) pandemic. Easing lockdown rules and improving domestic auto sales numbers also supported the market growth. In addition to this, the changes in the norms for multi cap funds by the market regulator SEBI is witnessing huge buying in the midcap and small cap stocks. However, the rally in midcap and small cap index may be for short period of time as the fund managers have to reshuffle their multi cap funds portfolio. The benchmark indices Sensex and Nifty jumped ~49% and ~50% respectively from March 2020 lows to October 01, 2020

Finding out good quality stocks in the market where investors are planning to liquidate their portfolio to take the benefit of rise in markets is a real challenge. 5 paisa have eased the investors work to find quality stocks for investment. We have selected 5 stocks that have overcome the market challenges and have given consistent returns in the long run. The stocks are chosen after studying the fundamentals, management history, and business prospects of the company.

Larsen and Toubro (L&T)

L&T prefers to sit tight (for now) on the post-tax cash proceeds of ~Rs110bn from the sale of its Electricals & Automation (E&A) business to Schneider Electric. Debt reduction in the Hyderabad metro project (HMP) will be executed after the receipt of VGF from the state government. Management expects any meaningful growth in core revenues to be skewed towards 4QFY21, as a heavy monsoon and localised lockdowns continue to hurt execution in 2QFY21. Amid the challenging environment, Infra, Power T&D, and Water are expected to lead the recovery. Large opportunities in Defence have been in the WIP phase for a long time now, and any traction in decision making will bode well for L&T. In addition, of robust order book of 306,280cr (~3x TTM sales) Q3FY20 provides healthy revenue visibility for the next 2 years. We expect revenue and PAT CAGR of 6% and 3% respectively over FY20-22E. The stock currently trades at 17.6x FY21EPS.

Year

Net Sales (Rs Cr)

OPM (%)

Pre Exc PAT (Rs Cr)

EPS (Rs)

PE (x)

FY20

1,45,452

11.2

9,549

68.0

13.3

FY21E

1,44,713

10.8

7,194

51.2

17.6

FY22E

1,64,226

11.7

10,171

72.4

12.5

Source: 5paisa Research

HDFC Bank

HDFCB indicated that it had a very capable set of business leaders to take over from those who have left recently. Incrementally, it is finding robust growth opportunity in corporate loans without taking significant risk and has seen very positive trends in its retail/SME customer profile from a cash flow perspective. Just 9% of loans are under moratorium. Continuous efficiency improvement would support profitability. Given strong commentary and financial performance, we expect the valuation overhang to diminish. HDFCBs customer quality, deposit position and capitalisation are among the best in the sector. This will enable it to strongly gain market share in the long term The stock trades at 3.1x P/BV FY21E.

Year

Net profit (Rs Cr)

P/BV (x)

ROE (%)

FY20

26,260

3.6

16.4

FY21E

27,930

3.1

15.1

FY22E

35,380

2.7

16.5

Source: 5paisa Research

Hindustan Unilever (HUL)

HUL is looking at the HFD (Health Food Drinks) category as a penetration opportunity with rural penetration at 27% much lower than urban at 60%+. 25% of India’s population is under 14 years, with ~33% suffering from stunted growth, 25% from malnutrition and ~90% from micronutrient deficiency. Even in the southern and eastern regions, where Horlicks and Boost have a dominant position, rural penetration is 26-28%, while urban penetration is 60-67%. Management would focus on mobilising penetration in the southern and eastern regions, followed by the North and the West.  The company would also focus on expanding the nutrition category, through hi-science variants, targeting the maternal & women’s nutrition and adult deficiency & wellness categories, in the medium term. Since the announcement of the acquisition in December 2018, there has been a margin expansion of 250-300bps, executed by GSK itself Management has guided for another 550-700bps margin expansion in the medium term driven by Scale benefits in media and materials buying, optimisation of depots and route to markets and efficiencies in supply chain, such as logistics, distribution and factory operations. We estimate PAT CAGR of 19% over FY20-22E. The stock trades at 60x FY21EPS.

Year

Net Sales (Rs Cr)

OPM (%)

Net Profit (Rs Cr)

EPS (Rs)

PE (x)

FY20

39,100

25.3

6,900

29.4

71.3

FY21E

44,500

26.3

8,200

34.9

60.0

FY22E

48,800

28.1

9,700

42.5

49.3

Source: 5paisa Research

Hero Motocorp

Demand in rural and semi-urban markets is robust (better than urban), driven by a good Rabi crop, lower impact of the Covid-19 outbreak and forecast of a normal monsoon. As recovery is led by rural, share of scooters in the 2W industry may not increase in the near-term. Hero’s dealer inventory level is very much under control. Management is focussed on growing its exports (currently at ~3%). In Phase-I, Hero created a good footprint in more than 40 markets and made efforts to leverage its existing products. In Phase-II, it is focussing on developing customised products for each market cluster. With the BS-VI transition behind, R&D has better bandwidth for such product customisation. We expect revenue CAGR of 9% over FY20-22E. The stock currently trades at 26.2x FY21EPS.

Year

Net Sales (Rs Cr)

OPM (%)

Net Profit (Rs Cr)

EPS (Rs)

PE (x)

FY20

28,836

13.7

3,198

160.1

19.7

FY21E

27,094

12.1

2,398

120.1

26.2

FY22E

34,294

13.1

3,378

169.2

18.6

Source: 5paisa Research

Reliance Industries Lid (RIL)

RIL has aggressive growth plans for the retailing business; in the next 12-18 months, it plans to scale up the JioMart (on-line ordering and fulfilment) vertical and introduce other merchandise on this platform (pharmaceuticals, fashion and electronics etc). Simultaneously, Reliance Retail Ventures (RRVL) also plans to focus on expansion in tier II/III and IV cities, to expand its retailing space and grow its off-line presence. Recent agreement to acquire retailing and logistics assets of Future Group bodes well in this regard. Perhaps, cash mobilised through induction of strategic investor(s) would go a long way towards meeting this objective. We expect revenue and PAT CAGR of 19.5 and 12.7 respectively over FY20-22E. The stock currently trades at 24.5x FY21EPS.

Year

Net Sales (Rs Cr)

OPM (%)

Net Profit (Rs Cr)

EPS (Rs)

PE (x)

FY20

596,700

14.8

43,800

69.1

19.3

FY21E

774,900

10.1

34,600

54.6

24.5

FY22E

852,100

12.0

55,600

87.7

15.2

Source: 5paisa Research