5 stocks to buy post Union Budget 2018

The last full Union Budget 2018 of the Modi Government declared on February 1 have disappointed a few classes, leaving investors to reconsider their investment decisions. The Government has imposed Long Term Capital Gain Tax (LTCG) tax on equity gains above Rs1lakh at the rate of 10%, without indexation benefit. In addition, the government has proposed to implement Dividend Distribution Tax (DDT) of 10% on Equity Mutual Funds. These announcements in the budget was not at par with the market expectations. This adversely impacted the index performance. However, the declaration of LTCG and DDT is likely to be a short term negative for D-Street.

Post correction phase, the attention will be back on earnings outcome. Further, the budget largely focused on development of infrastructure, healthcare and rural economy. Stocks from agri, auto ancillary, healthcare and infrastructure are likely to be next big triggers. Based on the fundamentals, unique product portfolio and management outlook, following are the stocks that offer a promising return.

Godrej Agrovet

Godrej Agrovet (GAL) is a diversified agri-business company having presence in segments like animal feed (~53% revenue contribution in FY17), vegetable oil (~10%), crop protection (~16%) and dairy products (~21%). It enjoys advantage over its peers through established brand image. We expect revenue CAGR of 14% over FY17-20E backed by increase in market share of organized sector in animal feed and vegetable oil segment. Besides GAL focus on export market for expanding its crop protection segment by launch of new generic chemicals backed by Astec Life Sciences (~57% stake) will also aid revenues. Improving consumption of dairy and rising share of organized market in dairy business also augurs well for the company. We see EBITDA margin to expand by ~157bps over FY17-20E backed by utilization level of ~47% (FY17) which provides operating leverage. We expect PAT CAGR of 20% over FY17-20E. We see an upside of 30% from CMP of Rs563 over a period of 1 year.

Year

Net Sales (Rs Cr)

OPM (%)

Net Profit (Rs Cr)

EPS (Rs)

PE (x)

FY17

4,911

8.9

266

14.4

-

FY18E

5,652

9.6

311

16.8

33.5

FY19E

6,356

9.9

373

20.1

28.0

FY20E

7,293

10.5

464

25.0

22.5

Source: 5paisa Research

Tejas Network

Tejas Networks Ltd (TNL) is the second largest company in the Indian optical equipment market. It sells products to internet service providers and telecom, defence companies and Government entities. TNL would be a beneficiary of increased data traffic for telecom operators, thus requiring continuous optical capex in a bid to remain competitive in an increasing competition environment. It also stands to benefit from being the only Indian optical network equipment company. Government’s capex under initiatives like BharatNet Project should aid its revenues as project SPV, Bharat Broadband Network Ltd, is a key contributor to TNL’s revenues. Allocated spends of Rs 10,000cr on the project in this Budget would also support revenue growth. TNL has advantages vs. global companies owing to low cost manufacturing. Higher revenue growth and resultant operating leverage should aid EBITDA margins. Overall, we estimate revenue CAGR of 19.8%, EBITDA margin expanding by ~411bps and PAT growing at 33.5% CAGR over FY17-20E. We estimate an upside of 32% from CMP of Rs368 over a period of 1 year.

Year

Net Sales (Rs Cr)

OPM (%)

Net Profit (Rs Cr)

EPS (Rs)

PE (x)

FY17

878

19.8

88

9.8

37.4

FY18E

1,099

22.3

128

14.3

25.7

FY19E

1,298

23.2

172

19.2

19.2

FY20E

1,510

23.9

209

23.3

15.8

Source: 5paisa Research

JK Tyre & Industries

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). After reporting operating losses in H1FY18, JKTIL is expected to perform better in H2FY18 due to stable rubber prices and cost control initiatives. Rubber (RSS-4) prices peaked at Rs150/kg in March 2017 and have stabilized in the range of Rs130-135. We expect company to post positive EBITDA in FY18, however, rising crude prices are a concern.  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 Rs167 over a period of 1 year.

Year

Net Sales (Rs Cr)

OPM (%)

Net Profit (Rs Cr) (before EO)

EPS (Rs)

PE (x)

FY17

7,689

14.7

306

13.5

13.0

FY18E

8,151

8.8

94

4.1

42.2

FY19E

9,129

13.7

440

19.4

9.0

FY20E

10,224

15.4

684

30.2

5.8

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. The company’s business mix spans a large spectrum—from complex engineering, procurement and construction (EPC) contracts in the hydrocarbon, process, metals and cement sectors to development of infrastructure projects in sectors like ports, roads, metro rail and airports. Infrastructure formed 65%, Hydrocarbon 15%, Heavy engineering 7%, Power electrical & Auto 7% and Others 6% as of Q2FY18. 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 2QFY18 stood at Rs2,575bn. The order inflow is likely to increase from H2FY18 led by recovery in economy.  We estimate revenue CAGR of 12% over FY17-20E. We believe that L&T’s focus on improving profitability will lead to PAT CAGR of 15% over FY17-20E.  We project an upside of 15% from CMP of Rs1,354 over a period of 1 year.

Year

Net Sales (Rs Cr)

OPM (%)

Net Profit (Rs Cr)

EPS (Rs)

PE (x)

FY17

109,311

10.1

6,041

43.2

31.4

FY18E

121,729

11.0

7364

52.6

25.7

FY19E

135,891

10.8

7825

55.9

24.2

FY20E

152,477

11.1

9260

66.2

20.5

Source:5paisa Research

Apollo Hospital

Apollo is one of the leading private sector healthcare services provider. Apollo has two businesses i.e. hospitals and pharmacies. As of September 30, 2017, it had 70 hospitals with total bed capacity of 9,957 and 2,742 pharmacies. In Q2FY18, hospital business contributed 55% of its business, while pharmacies contributed 45%. The outlook on Apollo’s business is positive owing to its favorable demographics, rising insurance penetration, strong brand and pan-India presence. We estimate CAGR of 13% and 28% in revenue and PAT over FY17-20E. Company has improved ARPOB/day (average revenue per operating bed) from Rs21,724 in FY13 to Rs32,474 in H1FY18. The pharmacy business too has seen improvement in EBITDA margins from 2.7% in FY13 to 4.3% in H1FY18. Company is expected to reap benefits of the capacity expansion that it completed over FY14-16. Company has expanded its capacity by 30% (addition of ~2,500 beds) over FY14-17. Its 11 new hospitals are yet to breakeven, while existing hospitals have a ROCE of 19.3% and they continue to show higher efficiency. The faster breakeven at the Navi Mumbai hospital is positive for the company. We expect ~190bps EBITDA margin expansion during the forecast period. We forecast an upside of 17% from CMP of Rs1125 over a period of 1 year.

Year

Net Sales (Rs Cr)

OPM (%)

Net Profit (Rs Cr)

EPS (Rs)

PE (x)

FY17

7,254

10.0

221

15.9

70.8

FY18E

8,241

10.11

180

12.9

87.1

FY19E

9,340

11.03

328

23.6

47.7

FY20E

10,400

12.0

468

33.7

33.4

Source:5paisa Research

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