Stocks that one should own in 2018

The Indian stock market has seen many peaks and valleys in the first half of CY18. Notably, Indian equity markets touched a new high in January 2018. Both the benchmark indices Nifty 50 and Sensex, on January 29, 2018 touched a closing high of 11,130 and 36,283 for the first time respectively. This was supported by pick up in macro-economic numbers like inflation, GDP and gradual pickup in corporate earnings.

However, in the next three to four months, market has corrected sharply and is highly volatile on account of implementation of LTCG from April 1, 2018 and speculation of trade war emerging between China and United States. Moreover, increasing crude oil prices and depreciating Indian rupee have hurt the market sentiments.

Selecting good stocks for investment in such a volatile market is difficult. Therefore, based on the fundamentals, business prospects and management outlook, below mentioned are some stocks that offer consistent return potential in the long-run.

Persistent Systems Ltd (PSL)

PSL, a technology services company focuses on helping clients build and manage software driven businesses. Its business strategy is aligned around Digital (24% of revenues, Q4FY18), Alliance (24%), Services (46%), and Accelerite (6%). North America accounted for 81% of the revenues as on Q4FY18 while Europe, India and RoW accounted for 8%, 8% and 3% of revenues respectively. The company has a robust business model with multiple growth drivers such as Digital (EDT and IP), IBM Alliance (IoT), Services (OPD for ISVs) and Accelerite (own IPs). Its two-pronged strategy involves collaborating with ISVs and enhancing its digital products and capabilities. We expect USD revenue CAGR of ~12% over FY18‐20E driven by 29% revenue CAGR in the digital business. Growth will be supported by IoT Platform deal with IBM. Overall, we estimate revenue CAGR of 13.4% and EBITDA CAGR of 18.8% over FY18-20E aided by improving IP-led revenues. We project PAT CAGR of 18.7% over FY18-20E. We expect an upside of 15% from CMP of Rs.810 over a period of 12 months.

Year Net Sales (Rscr) OPM (%) Net Profit (Rscr) EPS (Rs) PE (x) P/BV (x)
FY18 3,034 15.4% 323 40.4 20.1 3.0
FY19E 3,455 16.3% 383 47.9 16.9 2.6
FY20E 3,891 17.0% 455 56.9 14.2 2.2

Source: 5 Paisa Research

Powergrid

PGCIL is India’s Central Transmission Utility with a transmission network of ~1,48,327ckm and 236 substations. The company operates ~85% of ISTS Transmission network. PGCIL is a PSU with 56.91% shareholding by the government. It also operates telecom and consulting businesses, both of which contributed less than ~4% of FY18 revenue. Total Works in hand for PGCIL stands at ~Rs.1.1 lakh cr, which is likely to be executed over the next 2-3 years. Of this, Rs.75,000cr are allotted towards ongoing transmission projects. The company’s consulting business also has an outstanding order book of ~Rs.16,00cr. We estimate revenue CAGR of 12.7% led by (a) commissioning of ~Rs.25,000cr of assets per annum over FY19-21E and (b) new opportunities in intra state and railway projects. EBITDA margins are likely to recover to 88.2% in FY20E, as CERC is likely to approve cost pass through for employee pay revision. PAT CAGR is anticipated at 16.6% over FY18-20E. We see an upside of 26% from CMP of Rs.197 over a period of 12 months.

Year Net Sales (Rscr) OPM (%) Net Profit (Rscr) EPS (Rs) PE (x) P/BV (x)
FY18 29,941 87.9 8,198 15.7 12.6 1.9
FY19E 34,261 88.4 9,534 18.2 10.8 1.5
FY20E 38,053 88.2 11,148 21.3 9.2 1.4

Source: 5 Paisa Research

Greaves Cotton (GCL)

GCL is a leading manufacturer of diesel and petrol engines (~75% market share in 3W diesel engines), gensets and farm equipment in India. GCL derived majority of its revenue from automotive segment (~51%) followed by after-market (25%), and the rest from others (farm equipment, gensets and trading) in FY18. The growth in the automotive segment will be driven by replacement demand emanating from BS-VI norms and launch of BS-VI compliant ‘leap engine’. The launch of other fuel agnostic products and solutions would also boost auto segment’s growth. The government’s thrust to double farm income over next five years augurs well for farm equipment businesses. Further, average decline in farm holding size and increasing mechanization are demand drivers. GCL plans to grow high-margin (20%+) aftermarket business (19% of sales) by leveraging its brand and extensive service & dealer network. Its sales and earnings will grow at 11% and 19% CAGR respectively (FY18-20E), while EBITDA margin will revert to erstwhile ~16% (FY20E). We project an upside of 15% from CMP of Rs.132 over a period of 12 months.

Year Net Sales (Rscr) OPM (%) Net Profit (Rscr) EPS (Rs) PE (x) P/BV (x)
FY18 1,792 14.3% 202 8.3 15.9 3.5
FY19E 1,971 15.3% 237 9.7 13.6 2.8
FY20E 2,208 16.0% 287 11.8 11.2 2.3

Source: 5 Paisa Research

Tata Motors (TML)

TML is market leader in CVs in India with 45.1% market share. PV market share has improved from 4.6% in FY16 to 5.7% in FY18. At a consolidated level, it derives ~80% of its revenue (Q4FY18) from JLR. Financing arm, Tata Motors Finance, improved its market share to 25% in FY18 (22% in FY17). GNPA has gone down from 18% in FY17 to 4% in FY18. After a 4% yoy volume decline in Q4FY18, April 2018 JLR volumes provided solace with 12% yoy growth led by new launches. However, Q4FY18 results disappointed due to higher impairment provision and weak performance by JLR as it faced difficult operating environment in UK, Europe. The management has put forth a long term revival plan with focus on cash flows, exiting non-core and less profitable businesses, higher dividend from JLR and new launches in India to gain market share among other initiatives. We forecast consolidated revenue, EBITDA and PAT CAGR of 13%, 20% and 22% respectively over FY18-20E. The turnaround strategy is long term in nature, and hence, investors need to be patient with the stock. We see an upside of 21% from CMP of Rs.305 over a period of 12 months.

Year Net Sales (Rscr) OPM (%) Net Profit (Rscr) EPS (Rs) PE (x) P/BV (x)
FY18 294,619 12.5% 8,988 26.5 11.5 1.1
FY19E 338,668 13.8% 10,167 29.9 10.2 1.0
FY20E 373,370 14.4% 13,379 39.4 7.7 0.9

Source: 5 Paisa Research

Larsen & Toubro Ltd (L&T)

L&T is India’s largest engineering and construction company with current order book of ~Rs.263,100cr. The order book comprises – Infrastructure (74%), Power (4%), Heavy Engineering (5%), Hydrocarbon (10%), Electrical & Auto (1%) and Others (6%). Further, Q4FY18 order inflows (ex-services) increased by ~2% yoy to ~Rs.42,600cr led by pick-up in tendering activity post GST related headwinds during H2FY18. Pick-up in domestic execution and ordering momentum improves revenue visibility and sustainability of growth for L&T. Higher share of shorter-cycle water and T&D projects in the order book is expected to lead to faster execution in coming quarters. We expect revenue and PAT CAGR of 13% and 14% over FY18-20E respectively, with a strong order book and healthy domestic execution. We estimate an upside of 20% from CMP of Rs.1,326 over a period of 12 months.

Year Net Sales (Rscr) OPM (%) Net Profit (Rscr) EPS (Rs) PE (x) P/BV (x)
FY18 119,683 11.3% 7,370 52.6 25.2 3.3
FY19E 135,192 10.9% 8,095 57.8 23.0 2.9
FY20E 152,032 11.4% 9,601 68.5 19.4 2.5

Source: 5 Paisa Research

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