Article

5 Stocks to BUY in 2020

29 Jan 2020

The Indian stock market continued to rally and gave a positive return for the straight fourth year in the CY2019. For year 2019, Nifty and Sensex climbed 11.5% and 13.8% respectively. The indices touched the historic closing high of 12271.80 (Nifty) and 41681.54 (Sensex) despite the slowdown in the economy. Slashing of corporate tax, the six years high FII flows of Rs1 lakh crore in 2019, significant progress on bankruptcy resolutions, and Govt.’s efforts to address liquidity issues of Real Estate and Infrastructure sector guided the market performance in 2019. On the international front, easing trade war tensions also acted as positive for the Indian markets.

Going forward, market performance will be driven by benefits of low corporate tax, macro- economic tailwinds, implementation of Government policies, interest rate scenario and good monsoon. Hence, based on historical performance, management outlook and earnings growth, we have picked the below mentioned stocks that are likely to offer decent returns in 2020.

Hero Motocorp (Hero)

CMP: Rs2,349
Target Price: Rs3100 (1-year)
Upside: 32%

Hero is the largest 2W company in India. The company currently has ~52% share in the Indian domestic motorcycle market and ~37% share in the domestic 2W market (including scooters). We expect revenue CAGR of over FY19-21E as retail demand has started improving across rural and urban markets from second half of September 19. We expect recovery in rural demand to continue following a good monsoon and expectations of a strong Rabi crop output. Additionally, the recent launches of Xtreme and XPulse are gaining good market share and are expected to do well hereon too. We expect margins to remain under pressure over FY19-21E due to higher promotional expenses related with BS IV inventory. With volume growth in FY21E expected, margins may see an up move on better operating leverage. We expect PAT CAGR of over FY19-21E. The stock trades at 13.3x FY21E EPS

Year

Net Sales (Rs Cr)

OPM (%)

Net Profit (Rs Cr)

EPS (Rs)

PE (x)

FY19

33,650

0.0%

3,384

169.5

13.9

FY20E

31,540

0.0%

3,232

161.8

14.5

FY21E

37,023

0.0%

3,514

176.0

13.3

Source: 5paisa research

ICICI Bank

CMP: Rs525
Target Price: Rs 570 (1-year)
Upside: 8%

ICICI Bank is India’s second-largest private bank with a loan book size of Rs5.9tn in FY19. It enjoyed a ~6.0% market share in system loans as of FY18. ICICI Bank is looking to tap the growth opportunity, through market-share gains across products, fast credit delivery to retail and SME customers by using data analytics and rule-based engines for pre-approved loan offerings, relentless focus on cross-sell to affluent/own customers, partnership with Fintechs to add innovative products, adoption of an eco-system based approach with targeted product offerings, and making relationship managers responsible for cross-selling liabilities and fees. Strong growth opportunity, potential reduction in credit costs and improving profitability would keep stock performance robust, in our view. The stock trades at 2.5x P/BV FY21E.

Year

Net Sales (Rs Cr)

Net Profit (Rs Cr)

EPS (Rs)

PBV (x)

FY19

27,010

3,360

5.2

3.1

FY20E

33,030

9,890

15.3

2.9

FY21E

37,980

18,570

28.8

2.5

Source: 5Paisa Research

Larsen & Toubro (L&T)

CMP: Rs1,291 
Target Price: Rs1,778 (1-year)
Upside:38%

L&T is India’s largest engineering and construction company and is well placed to leverage the uptick in the investment cycle. We believe that the government’s push on infrastructure and widening base of mid-size orders will aid faster execution. L&T's strong order book of Rs303,222cr (2.8x TTM sales) at Q2FY20-end provides healthy revenue visibility for the next 2 years. Further, monetisation of non-core assets will help release capital and improve return ratios. We estimate the company to report revenue CAGR of 19% over FY19-21E with a flat EBITDA margin. PAT CAGR is estimated at 17% over the same period. ROE has been continuously improving from 9.9% in FY16 to 15.8% in H1FY20. Management is confident of achieving ROE target of 18% by FY21E. The stock trades at 14.2x FY21E EPS

Year

Net Sales (Rs cr)

OPM (%)

PAT (Rs cr)

EPS (Rs)

PE (x)

FY19

50,569

19.9%

8779

63.2

20.3

FY20E

56,815

20.2%

9,773

70.3

17.6

FY21E

61,894

20.4%

10723

77.1

14.2

Source: 5Paisa Research

SBI Life Insurance (SBI Life)

CMP: Rs984
Target Price: Rs1180 (1-year)
Upside: 20%

SBI Life is India’s largest private life insurer, with an overall market share of 12.2% on a retail APE basis. The company has a product mix of participating, non-participating and linked policies, with the mix skewed towards linked products. Unlike peers, for which growth is largely driven by one or two product segments, SBI Life has delivered industry leading growth across protection, non-par annuity and guaranteed return products as well as ULIPs, defying the weak sentiment in the capital markets. We believe that it could continue to surprise the street positively via resilient growth in uncertain times driven by a strong distribution franchise and mass customer base. We expect 17.3%/25% EV/VNB CAGR over FY19-21E. The stock trades at 3.2x FY21E P/EV.

Year

New Premuim Income

VNB

VNB margin (%)

PAT

P/EV

FY19

32,890

1,720

17.7%

1,326

4.4

FY20E

43,076

2,169

19.0%

1,659

3.8

FY21E

52,550

2,695

20.0%

2,102

3.2

Source: 5Paisa Research

Quess Corp

CMP: Rs512
Target Price: Rs740 (1-year)
Upside: 44%

Quess Corp is one of India’s leading integrated providers of business services. Quess’ service and product offerings are currently grouped under five operating segments i.e. People and Services, Technology, Facility Management, Industrials and Internet. We expect revenue CAGR of 21.1% over FY19-21E on account of strong outlook in staffing business, consistent client additions and entrance into new service platforms. The company enjoys huge advantage of scale in general staffing in India (largest in India with 240,000 associates & ~41% of group sales). Further, the blend of recently acquired Allsec and Conneqt will make Quess a challenging play in BPM platforms. We expect margins to improve by 110bps over the same period on account of presence in specialized staffing and focus on ramping up high growth sector viz. Facility Management. Expansion of Allsec in newer geographies will also support the margin growth.  We project PAT CAGR of 23.7% over FY19-21E. The stock is currently trading at 19.1x FY21EPS.

Year

Revenue (Rs cr)

OPM (%)

Net Profit (Rs cr)

EPS (Rs)

PE (x)

FY19

8,527

5.4

256

17.5

29.2

FY20E

10,706

6.4

287

19.7

26.0

FY21E

12,495

6.5

392

26.8

19.1

Source: 5Paisa Research

Research Disclaimer

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5 Stocks to BUY in 2020

29 Jan 2020

The Indian stock market continued to rally and gave a positive return for the straight fourth year in the CY2019. For year 2019, Nifty and Sensex climbed 11.5% and 13.8% respectively. The indices touched the historic closing high of 12271.80 (Nifty) and 41681.54 (Sensex) despite the slowdown in the economy. Slashing of corporate tax, the six years high FII flows of Rs1 lakh crore in 2019, significant progress on bankruptcy resolutions, and Govt.’s efforts to address liquidity issues of Real Estate and Infrastructure sector guided the market performance in 2019. On the international front, easing trade war tensions also acted as positive for the Indian markets.

Going forward, market performance will be driven by benefits of low corporate tax, macro- economic tailwinds, implementation of Government policies, interest rate scenario and good monsoon. Hence, based on historical performance, management outlook and earnings growth, we have picked the below mentioned stocks that are likely to offer decent returns in 2020.

Hero Motocorp (Hero)

CMP: Rs2,349
Target Price: Rs3100 (1-year)
Upside: 32%

Hero is the largest 2W company in India. The company currently has ~52% share in the Indian domestic motorcycle market and ~37% share in the domestic 2W market (including scooters). We expect revenue CAGR of over FY19-21E as retail demand has started improving across rural and urban markets from second half of September 19. We expect recovery in rural demand to continue following a good monsoon and expectations of a strong Rabi crop output. Additionally, the recent launches of Xtreme and XPulse are gaining good market share and are expected to do well hereon too. We expect margins to remain under pressure over FY19-21E due to higher promotional expenses related with BS IV inventory. With volume growth in FY21E expected, margins may see an up move on better operating leverage. We expect PAT CAGR of over FY19-21E. The stock trades at 13.3x FY21E EPS

Year

Net Sales (Rs Cr)

OPM (%)

Net Profit (Rs Cr)

EPS (Rs)

PE (x)

FY19

33,650

0.0%

3,384

169.5

13.9

FY20E

31,540

0.0%

3,232

161.8

14.5

FY21E

37,023

0.0%

3,514

176.0

13.3

Source: 5paisa research

ICICI Bank

CMP: Rs525
Target Price: Rs 570 (1-year)
Upside: 8%

ICICI Bank is India’s second-largest private bank with a loan book size of Rs5.9tn in FY19. It enjoyed a ~6.0% market share in system loans as of FY18. ICICI Bank is looking to tap the growth opportunity, through market-share gains across products, fast credit delivery to retail and SME customers by using data analytics and rule-based engines for pre-approved loan offerings, relentless focus on cross-sell to affluent/own customers, partnership with Fintechs to add innovative products, adoption of an eco-system based approach with targeted product offerings, and making relationship managers responsible for cross-selling liabilities and fees. Strong growth opportunity, potential reduction in credit costs and improving profitability would keep stock performance robust, in our view. The stock trades at 2.5x P/BV FY21E.

Year

Net Sales (Rs Cr)

Net Profit (Rs Cr)

EPS (Rs)

PBV (x)

FY19

27,010

3,360

5.2

3.1

FY20E

33,030

9,890

15.3

2.9

FY21E

37,980

18,570

28.8

2.5

Source: 5Paisa Research

Larsen & Toubro (L&T)

CMP: Rs1,291 
Target Price: Rs1,778 (1-year)
Upside:38%

L&T is India’s largest engineering and construction company and is well placed to leverage the uptick in the investment cycle. We believe that the government’s push on infrastructure and widening base of mid-size orders will aid faster execution. L&T's strong order book of Rs303,222cr (2.8x TTM sales) at Q2FY20-end provides healthy revenue visibility for the next 2 years. Further, monetisation of non-core assets will help release capital and improve return ratios. We estimate the company to report revenue CAGR of 19% over FY19-21E with a flat EBITDA margin. PAT CAGR is estimated at 17% over the same period. ROE has been continuously improving from 9.9% in FY16 to 15.8% in H1FY20. Management is confident of achieving ROE target of 18% by FY21E. The stock trades at 14.2x FY21E EPS

Year

Net Sales (Rs cr)

OPM (%)

PAT (Rs cr)

EPS (Rs)

PE (x)

FY19

50,569

19.9%

8779

63.2

20.3

FY20E

56,815

20.2%

9,773

70.3

17.6

FY21E

61,894

20.4%

10723

77.1

14.2

Source: 5Paisa Research

SBI Life Insurance (SBI Life)

CMP: Rs984
Target Price: Rs1180 (1-year)
Upside: 20%

SBI Life is India’s largest private life insurer, with an overall market share of 12.2% on a retail APE basis. The company has a product mix of participating, non-participating and linked policies, with the mix skewed towards linked products. Unlike peers, for which growth is largely driven by one or two product segments, SBI Life has delivered industry leading growth across protection, non-par annuity and guaranteed return products as well as ULIPs, defying the weak sentiment in the capital markets. We believe that it could continue to surprise the street positively via resilient growth in uncertain times driven by a strong distribution franchise and mass customer base. We expect 17.3%/25% EV/VNB CAGR over FY19-21E. The stock trades at 3.2x FY21E P/EV.

Year

New Premuim Income

VNB

VNB margin (%)

PAT

P/EV

FY19

32,890

1,720

17.7%

1,326

4.4

FY20E

43,076

2,169

19.0%

1,659

3.8

FY21E

52,550

2,695

20.0%

2,102

3.2

Source: 5Paisa Research

Quess Corp

CMP: Rs512
Target Price: Rs740 (1-year)
Upside: 44%

Quess Corp is one of India’s leading integrated providers of business services. Quess’ service and product offerings are currently grouped under five operating segments i.e. People and Services, Technology, Facility Management, Industrials and Internet. We expect revenue CAGR of 21.1% over FY19-21E on account of strong outlook in staffing business, consistent client additions and entrance into new service platforms. The company enjoys huge advantage of scale in general staffing in India (largest in India with 240,000 associates & ~41% of group sales). Further, the blend of recently acquired Allsec and Conneqt will make Quess a challenging play in BPM platforms. We expect margins to improve by 110bps over the same period on account of presence in specialized staffing and focus on ramping up high growth sector viz. Facility Management. Expansion of Allsec in newer geographies will also support the margin growth.  We project PAT CAGR of 23.7% over FY19-21E. The stock is currently trading at 19.1x FY21EPS.

Year

Revenue (Rs cr)

OPM (%)

Net Profit (Rs cr)

EPS (Rs)

PE (x)

FY19

8,527

5.4

256

17.5

29.2

FY20E

10,706

6.4

287

19.7

26.0

FY21E

12,495

6.5

392

26.8

19.1

Source: 5Paisa Research

Research Disclaimer