Remain stock-specific; 3 midcap plays that could return 10-30%

Akash Jain of Ajcon Global advises investors to remain stock specific and consider companies with earnings visibility


Here is the list of 3 stocks that could give return 10-30 percent by FY19-end:

Cera Sanitaryware: Buy | Target – Rs 3,500 | Return – 30%

The Company enjoys market leadership position in the industry. The Company is transforming itself from from a traditional sanitaryware player to a complete bathroom solutions provider. The government’s emphasis on affordable housing is a boon for the Company’s growth in the coming years. Implementation of GST also helps the Company indirectly as it minimises unhealthy price competition.

The Company is upgrading its technological edge by inducting new technologies into production processes. The use of 3D printing, robotic glazing, trap glazing, etc. are just few improvements which are helping in quality and productivity in the Sanitaryware plant. In the faucet plant too, robotic grinding and polishing, low pressure and high pressure die casting machines, automatic chrome plating units, etc. have helped in quality.

Sanitaryware is expected grow at high single-digits. The management has guided to a 100-150 bps margin improvement for FY19 on account of product premiumisation and price hikes. At CMP of Rs. 2,674 (Face value: Rs. 5), the stock trades at a P/E of 35x on FY18 EPS. We recommend a “Buy” with a target price of Rs. 3,500 (35x on FY19 EPS of Rs.100) implying an upside of 30 percent.

L&T Finance Holdings: Buy | Target – Rs 180 | Return – 16%

The Company had made a strategic decision to improve its ROE and exit low RoE business. After the appointment of Mr. Dubhashi as MD & CEO in July 2016, LTFH redefined its business strategy to achieve top quartile return on equity (RoE) by FY20 or earlier. Accordingly, the Company has restructured its lending business and exited from number of segments that were a drag on overall profitability.

The substantial progress of the restructuring process is reflected in the improved return ratios with RoE increasing from 9.78 percent in Q1FY17 to 18.45 percent in Q1FY18. Improvement in earnings is achieved despite accelerated provisions in FY18, especially on impaired wholesale loans. The Company is well on track to deliver on its stated objective and see further RoE improvement driven by loan book growth and decline in the cost-income ratio.

Having reached steady state RoE, the Company’s focus will be on:

• Responsible growth

• Maintaining steady state RoE

• Minimising sigma through tightly managing all families of risk

Cost to Income ratio improved to 23.4 percent in Q1FY19 as compared to 24.07 percent in Q1FY18. The Company’s costs were under control despite considerable investments in Digital and data analytics, branch infrastructure and manpower.

Asset Quality performance Q1 FY19 vs. Q1 FY18

• Gross Stage 3 levels have gone down to 7.93 percent from 11.70 percent

• Net Stage 3 levels have gone down to 3.17 percent from 6.13 percent

• Provision coverage increased to 61.99 percent from 50.74 percent

At CMP of Rs. 155, the stock trades at P/BV of 2.59x of Q1FY19 Book Value. We recommend a Buy with a target price of Rs. 180 (2.59 x of FY19estimated Book Value of Rs. 69.4) by FY19 end implying an upside of 16 percent.

RBL Bank: Buy | Target – Rs 635 | Return – 10%

In Q1FY19, the net advances grew by 36 percent year-on-year to Rs 42,198.09 crore. “The growth in the corporate & institutional segment and commercial banking (wholesale portfolio) was pegged at 31 percent, while that of other segments (retail assets and development banking & financial inclusion – non-wholesale portfolio) was 43 percent.”

Asset quality remained stable in Q1 with gross non-performing assets as a percentage of gross advances were unchanged at 1.4 percent on sequential basis while net NPAs were lower at 0.75 percent against 0.78 percent in previous year.

Net profit during the quarter stood at Rs 190.04 crore, increased from Rs 141.02 crore in corresponding period last fiscal. The growth was backed by net interest income, other income and operating income.

RoA stood at 1.26 percent for Q1 FY19, RoE at 11.16 percent for Q1 FY19. For FY18 (RoA stood at 1.21 percent and ROE of 10.95 percent)

At CMP of Rs. 576 (Face value: Rs. 10), the stock trades at a P/BV of 3.5x at FY18 Book Value of Rs. 164. We recommend a Buy with a target Rs. 635 (3.5x of FY19 estimated Book Value of Rs. 181).

Disclaimer:-The views and investment tips expressed by investment experts are their own. Ripples Advisory advises users to check with certified experts before taking any investment decisions.

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