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Stocks to watch out for in 2017

India stock market failed to surpass 2015 high of 9119 and drifted towards 6825 mark just before the Union Budget 2016. Going forward as market failed to deliver major gains in the last year, so potential of performance is rising in equity market amid big-bang reform by the government. We look at stocks to watch out for in 2017.

BT Online | January 5, 2017 | Updated 19:01 IST
Stocks to watch out for in 2017

India stock market failed to surpass 2015 high of 9119 and drifted towards 6825 mark just before the Union Budget 2016. Going forward as market failed to deliver major gains in the last year, so potential of performance is rising in equity market amid big-bang reform by the government. We look at stocks to watch out for in 2017.

1. Voltas : Consumption theme and rising standard of living will support the business activities. It has made base near to Rs 300 and might head toward Rs 400 mark and recent decline is supporting to the attractive risk - reward ratio.

2. YES Bank: Strongest Bank in last 3-4 years which have given four times result. It will continue to outperform after the recent profit booking decline. It has support near to Rs 1100 zones while having the potential to head towards Rs 1350- Rs 1400 zones.

3. TVS Motor and Maruti Suzuki: These two are the outperformed stocks and may continue to do the same. Maruti is all set for Rs 5800 zones with multiple support near to Rs 4800 mark.

4. Arvind Ltd: It has come to an attractive levels so might attract buying interest as its now turning in to e-commerce space. Support near to Rs 320 and it may head towards Rs 390 and Rs 420 zones.

5. Zee Entertainment Enterprises Ltd: Media stock ZEEL has been moving upwards and strong market presence would keep it as a preferred stock. Support near to Rs 430 while on upside may retest to Rs 530 and higher levels.

Recommended by Chandan Taparia, Derivatives and Technical Analyst. Taparia does not hold any stake in the above stocks he is suggesting them to his clients.


JB Chemicals

The company plans to launch new products and improve coverage of the existing products by penetrating into Tier-II cities and the rural markets. It expects to improve productivity index without any expansion in the field force (current 1000 MRs). Further, increased registrations in the contrast media segment are likely to rev up growth in the ensuing quarters. We expect sustained growth in India led by focused portfolio (chronic) over FY2017-18E;

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The new capex plan of about Rs 140 crore is being incurred for the creation of additional capacity for the formulations business including tablets, liquid, ointments, vials, eye drops and lozeges and for the creation of additional capacity for the API business is progressing well.

As per the latest results and also based on its FY2016, we estimate its net cash level (net of debt) at over Rs 315 crore. Net of cash, JB Chem trades at EV (Enterprise Value) to annualized sales of 2.2x, which is quite attractive as compared to many small pharma companies which trade more than 3 times its annualized sales.

The company accords high priority to domestic formulations business almost 37% of the total revenue is derived from the domestic formulation business. During the current year, the company also plans to continue to pursue focus on harnessing potential of the existing products, launch new line extensions and achieve increased productivity. The stock currently trades at attractive valuation of 12.6x its FY2018E EPS of Rs.27. Its business would be relatively least impacted by the demonetization. Hence, we continue to recommend a buy on the stock with a target price of Rs 440.

Polaris Consulting

The stock price of Polaris has got corrected by 8 percent in the last 1 month and is down by 30% from its 52 week high of Rs 217. The promoters made an offer-for-sale (OFS) of 18.9 lakh equity shares at a floor price of Rs.130 per share and still have a greenshoe option of another 18.9 lakh shares.

It is quite surprising to us to see Virtusa (new promoter) making an Offer to sell shares at Rs.130 per share when they had earlier acquired the shares at an average price of Rs.213.88 per share in an open offer. In the last 3 years, the stock price of Polaris became highly volatile - however, we have observed that those investors, who utilized the opportunity to accumulate the stock after substantial fall in its price, could make impressive returns. Considering the attractive valuation, we believe that the price correction gives an opportunity to accumulate the stock in phases.  

We believe that OFS does not change the fundamentals of the company. The current OFS was made to meet the minimum public shareholding norm. According to SEBI norm, all listed companies should have minimum public shareholding of 25%. As of September 30, 2016, the promoters held 78.61% stake in the company.

The stock trades at 0.6x its EV to H1FY2016 Annualized Sales which is quite impressive as compared to many mid and small cap IT stocks. The stock at the current market price trades at 8.8x its FY2017E EPS of Rs.17 and at 7.2x its FY2018E EPS of Rs.21. We reiterate our BUY on the stock at the current market price with a target price of Rs 186.


ALSO READ: 2016: Stocks win some, lose some, global triggers hold the cards

Bharti Infratel

Tower is emerging a precious resource in this country and this business model is akin to rental revenue stream of real estate - these tower rentals will keep on rising over the years in future. Hence, this stock would remain as one of the safest defensive stocks in the long-term;

The stock price of Bharti Infratel has got corrected by 9% in the last one month. We believe that this correction is an opportunity to accumulate the stock at the current market price as we believe that Bharti Infratel will relatively remain least affected by demonetization as most of its clients are institutions where transactions through cash are almost NIL Hence revenues won't be affected by under recoveries or fall in revenues.

In our view, Bharti Infratel, with a 20 percent share of towers in India, pan-India coverage (>95% of the population) with a tenancy of 2.2x, and leading telcos as incumbent tenants for its consolidated tower portfolio, remains well entrenched to capitalize on the data-growth led network capacity requirement of telcos.

Bharti Infratel has reported an impressive performance during the September 2016 quarter:
Net profit for the quarter grew by 31% y-o-y to Rs 774 crore whereas consolidated revenues for the quarter grew by 8% y-o-y. EBITDA for the quarter grew by 30% y-o-y to Rs 401.3 crore;

The Operating free cash flow during the quarter was Rs.932.1 crore, an increase of 30.4% as compared to the quarter ended Sep 30, 2015 led by higher operating income;
Infratel remains a key play on rising demand of telecom towers emanating from ballooning data growth and opportunity owing to the huge quantum of spectrum and its subsequent roll out. We reiterate a BUY on the stock with a target price of Rs.405, based on 26x its FY2018E EPS of Rs.15.3.


ALSO READ: Sensex, Nifty close lower on 1st trading day of 2017

KCP Sugars

The stock price of KCP Sugar and Industries has got corrected by around 33% from its peak. The fundamentals of KCP Sugar haven't changed to such an extent to warrant such a steep fall in the stock price.

As of September 30, 2016, KCP Sugar's net debt is just 7.5% of total capital employed (Net Debt: Rs 24 crore and Capital Employed: Rs 318 crore). While many sugar mills finance 3/4th of sugar inventories through borrowed capital, KCP Sugar finances 3/4th of them through own funds;

We expect the domestic sugar price to remain firm on account of lower production in Maharashtra and Karnataka on account of cane scarcity. Though prices are down from their recent peak, sugar prices are up by 26% on y-o-y basis.

KCP Sugar has around surplus land on Mount Road in Chennai which is, in our view, significantly higher (in value) than the companies' market cap of about Rs.330 crore. Apart from this, the company owns several residential properties in Chennai, Hyderabad and Industrial site with buildings in Industrial Estate TADA, Andhra Pradesh. The company has also invested in the equities of other leading sugar mills and corporate.

At the current market price the stock trades at 7.3x its FY2018E EPS of Rs 4.20.

We believe that the stock can easily reach our target price of Rs 45/ and in the long run this stock is a potential multi bagger, if it could unlock value from its surplus land bank.


Axis Bank


Axis Bank's Q2 FY2017 performance was quite below our expectations as dismal asset quality (multi-fold rise in slippages) took the sheen off an otherwise operationally stable Q2FY2017. However, we suggest a BUY on the stock as:

a.     The stock price has fallen 26% from its 52-week high which, in our view, largely priced in recent spike in non-performing assets;
b.     The bank has become cheapest stock among its peers after the recent correction;
c.    We believe that, within a couple of quarters, it is likely to stabilize the NPAs;
d.    Bank continues to grow its credit base about two-times the industry credit growth - hence, we believe that the current price is fairly a rock bottom for the stock;

Advances continued to grow above industry average-up 18.5% yoy (albeit, lower than run rate of 22% over past 6 quarters). The spurt was largely due to healthy momentum in retail. The retail piece (including retail agriculture segment) continued to clock good performance (up 25% yoy) across segments, with higher growth in auto loans (up 41% yoy) and high-return businesses like personal loans and credit cards (up 50% yoy).

Focused branch network strategy has helped Axis garner steady accretion in the retail segment.

Management highlighted that the bank will continue to focus on higher-return businesses and expects these segments to remain on growth path. Corporate and SME loans also clocked healthy growth of 14.1% yoy and 14.4% y-o-y, respectively.

Management expects loan growth to be in the 18-20% range, driven by the retail segment. The bank at the current market price trades at 1.8x its FY2018E adjustable book value of Rs 254.

We continue to reiterate our BUY recommendation on the stock at the current market price with a revised target price of Rs 625 looking at the banks attractive valuation and its strong core business and rapidly growing franchise business.
 
Lupin

Lupin has received 7 ANDA approvals in last two months and 23 ANDA approvals from USFDA till date in FY2017 (including tentative approvals). The approval pace has picked up after receiving EIR (Establishment Inspection Report) for its Goa plant from USFDA. The approval pace would continue in coming quarters as well, considering strong pipeline of 142 ANDAs pending approval (as per Q2FY2017 results press release) including 45 FTFs.

With $915 million revenues in FY2016, Lupin is the fifth largest generic company in the US by prescription. It has grown at 16-17% CAGR over the past five years and is likely to grow over 20% CAGR over the next two years. With 142 filings, the company has one of the largest ANDA pipelines among Indian peers. Pending filings and additional 250 projects under development represents a market size of $ 70 billion for the company;

From being the largest supplier of anti-TB products in India to becoming one of the fastest growing companies in chronic therapies (like CVS, anti-diabetic, respiratory and CNS), Lupin has come a long way. Currently, it ranks 8th in the Indian pharma market, according to the July AIOCD data. Lupin continues to rank first in TB products (53% market share) and third in CVS and respiratory therapies.

We believe the long-term growth outlook for Lupin remains strong and we expect the company to regain premium multiples (vs. peers) with pick up in US approvals. We value Lupin at 22.6x its FY2018E EPS of Rs 85.4 and reiterate our BUY on the stock at a current price of Rs 1,483 with a target price of Rs 1930.

Tata Sponge

Globally precious and base metal prices have rallied anywhere between 85% to 7% YTD with Iron Ore gaining the most amid a broad rally in commodities on expectations of a pick-up in global manufacturing and infrastructure spending. Following the global trend domestic prices have also rallied - with sponge iron prices gaining 36% from its May 2016 lows and gaining 9% in last 2 weeks. We believe that this rise in the domestic sponge iron prices will improve Tata Sponge Iron's performance in the coming quarters.

The stock has got corrected by around 18% from its 52W High of Rs.685 and trades at attractive valuations of 13.4x its FY2017E EPS of Rs.42 and at 9.4x its FY2018E EPS of Rs.60. Its Net Cash as of September quarter stands at Rs.522 crore which is ~60% of the current market cap.

For Q2FY2017, the company reported an over two-fold jump in its consolidated net profit at Rs.16.06 crore for the quarter ended September 30. The company had clocked a net profit of Rs 5.70 crore in the year-ago period. The company reported an operating profit of Rs.13.67 crore as compared to a loss of Rs1.99 crore reported in the same quarter last year whereas qoq it grew over 2 fold from Rs.5.10 crore reported in the previous quarter. Total consolidated income of the company, however, fell by 8% to Rs.153.55 crore in the July-September quarter from Rs.167.51 crore during the same quarter in 2015-16;

The company has also zero debt status and high cash balances, which makes its balance sheet stronger. At CMP of Rs.563 the stock is trading at 9.4x its FY2018E EPS of Rs 60/. We firmly believe that the prospects of sponge iron industry would improve substantially and hence, we reiterate our 'BUY' on the stock with a revised target price of Rs 730/-.


Bombay Burmah Trading Company

The stock price of BBTC has got corrected by around 10% in last 3 months and is down by around 24% from its 52W High of Rs.673 and trades around Rs.510 which is quite attractive. Consequent to this correction the valuation discount to its investment in Britannia has expanded to 79% vs. a 70% discount earlier. While the Enterprise Value of BBTC stands at Rs 3,684 crore, the market value of its investments in Britannia is at whopping level of Rs.17,520 crore (i.e. 50.75% of Britannia's market cap of Rs 34,524 crore). This results in BBTC's Enterprise Value being at about 79% discount to its investment value in Britannia! Many holding companies enjoy discount to enterprise value as low as 45% to 50%. We firmly believe that BBTC deserves much lower discount to its investment value.

The predominant portion (almost 95%) of BBTC's total investment value comes from a single company i.e. Britannia. For many other holding companies, generally they come from several group companies - theoretically speaking, unlocking possibility from a single investment is more than what one would think of from several group companies;
 
While many holding companies are shell companies on standalone basis, BBTC has diverse businesses on its own like plantations and automobile components. Further, being a 150-year old company it holds a lot of surplus land bank;

Moreover, BBTC, on consolidated earnings, trade at 9.3x FY2016 EPS of Rs 55/. Hence, we suggest our short term and long terms investors to accumulate the stock with a target price of Rs 650/- for short term, while our long term target price of Rs 1,130 remains intact.  This target price is highly conservative in our view as at this target price also, BBTC offers a discount of 79% to its investment value of Britannia holding.

G.Chokkalingam and Equinomics hold shares of JB Chemicals. They do not personally hold any other shares mentioned above directly or indirectly through friends, relatives or any proxies. However, their clients hold most of the stocks suggested above.


 

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