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Diwali picks 2018: HDFC Securities bets on ICICI Bank, Apollo Hospital, Dr Reddy's Labs and seven others for Samvat 2075

The brokerage is concerned about patchy monsoon, election season, rising twin deficits, high crude prices, weak INR, slowing Chinese economy, trade wars, etc.  It wonders whether the market will recover at all or whether a bear market is the next phase?

twitter-logo BusinessToday.In        Last Updated: October 31, 2018  | 17:39 IST
Diwali picks 2018: HDFC Securities bets on ICICI Bank, Apollo Hospital, Dr. Reddy's Labs and seven others for Samvat 2075
Diwali picks 2018: HDFC Securities bets on ICICI Bank, Apollo Hospital, Dr. Reddy's Labs and seven others for Samvat 2075

Cummins India, ICICI Bank, Apollo Hospitals, Dr. Reddy's Labs and Cyient are among the top Diwali picks by HDFC Securities for Samvat 2075.

The brokerage is concerned about patchy monsoon, election season, rising twin deficits, high crude prices, weak INR, slowing Chinese economy, trade wars, etc.

It wonders whether the market will recover at all or whether a bear market is the next phase?

On the other hand, steady GDP growth (5.5-8% under most circumstances), a huge consuming population with rising aspirations/incomes, improving infrastructure and business conditions, rising urbanization, formalisation, job creation and tax compliance unleashed via pragmatic policy mix can take India to the next level of economic prosperity, the report noted.

In its report, HDFC Securities said, "Retail investors should learn from market moves, and may also want to upskill themselves regarding the ways of the markets, and individual stocks' financials/valuations. A staggered investment in direct equities/mutual funds may result in lowering their risks in an era when the world is witnessing a paradigm shift in business models and the valuations assigned to them."

Here's a look at the brokerage's top picks for Samvat 2075 this year. The time horizon of the below stock picks is till next Diwali.

Apollo Hospitals Enterprise

Target price: Rs 1368

A leadership position and multi-pronged healthcare delivery model make Apollo one of the stronger healthcare stocks. The new hospital cluster has begun to contribute positively, led by an improvement in the Navi Mumbai unit. Post a phase of weak earnings, consolidated profitability could improve led by

(a) continuing growth in existing hospitals

(b) contribution from new hospitals

(c) continuing growth in ASAP

(d) reduction in AHLL's operating losses

We expect gradual improvement in the average length of stay (ALOS) and ARPOB, along with improving return ratios. We feel investors could buy the stock at the last traded price (LTP), and add on dips to Rs 974 - 982 (14 times FY20E Enterprise value (EV) to earnings before interest, tax depreciation and amortisation (EBITDA) for a target of Rs 1,368 (18.5 times FY20E EV/EBITDA).

Cummins India

Target price : Rs 817

Cummins India is well placed to capture the broad revival in industrial and infrastructure capex in India, with its best in-class product portfolio, wide distribution reach, and technological leadership.

Despite a 7% decline witnessed in domestic revenues in Q1FY19, the company maintains a domestic sales growth target of 8-10%, indicating a 13-14% growth in the remaining part of the current fiscal in domestic business. Exports, which have witnessed an upward trajectory in Q1FY19, may continue and help it improve its OPM on an overall basis.

A number of cost optimisation measures, combined with increasing capacity utilisation and newer products, are expected to add to the operating profit margins by 150 bps over the next two fiscals. With the kind of technological leadership CIL has in the Indian market, along with a healthy balance sheet and strong parentage, it deserves a premium over its peers in terms of valuation. We feel investors could buy the stock at LTP and add on dips to Rs 597 - 605 (19.5x FY20E EPS) for a target of Rs 817 (26.5x FY20E EPS).

Dr Reddy's Laboratories  

Target price: Rs 2952

DRL has a promising complex generics pipeline. A key factor for is the resolution of the Duvvada plant and approvals of generics of Suboxone, Nuvaring and Copaxone. The management indicated FY19 as a challenging year, with price erosion prevailing in the US generic business. Strong growth in the domestic market and other non-US markets should lend support to revenue growth.

The company plans to capitalise on the first-mover advantage in China, increase the filing tempo, and break into the Top-10 (from No 16) in the Indian branded market. The stock price could reverse the underperformance witnessed in the last three years. We feel investors could buy the stock at the LTP and add on dips to Rs 2210-2230 (21x FY20E EPS) for a target of Rs 2952 (28x FY20E EPS).

ICICI Bank

Target price: Rs 411

Now that the pressure regarding leadership has mitigated, asset quality concerns are being addressed, various measures to improve retail asset growth and return ratios are being taken, the stock looks attractive. With the return of long-term visibility, the bank, with its segment-leading subsidiaries may undergo a gradual rerating.

Return ratios could witness an improvement over the next two years (mainly led by falling credit costs), pushing analysts/investors to take a relook at the stock. We feel investors could buy the stock at the LTP and add on dips to Rs 290-295 (based on 1.2 times Sept20E Core ABV) for target of Rs 411 (based on 1.95 times Sept20E Core ABV).

Cyient Ltd

Target price: Rs 748

Cyient's niche engineering services, strong client relationships, timely acquisitions to support its product solutions profile, strong financial profile with minimal debt, and healthy debt protection metrics and liquidity makes a case for investment in its stock. It has some deals in the negotiation phase, and the overall deal pipeline remains good. We feel investors could buy the stock at the LTP and add on dips to Rs 545 - 555 (11x FY20E EPS) for a target of Rs 748 (15x FY20E EPS).

Sun Pharmaceuticals

Target price: Rs 690

We believe that FY19 may witness a gradual comeback for large-cap pharma companies, driven by (1) actual and likely regulatory resolutions, (2) moderating price erosion and (3) several product launches across generic and specialty categories in the medium term. Sun Pharma trades at 22x FY20E earnings, which is compelling given strong earnings growth of 84% expected over the next two years. We estimate 15.5% revenue CAGR and 39% PAT CAGR over FY18-20E. We recommend Buy on Sun Pharma at Rs 573 and add on dips to Rs 520 for Target Price of Rs 690 till the next Diwali.

Parag Milk Foods

Target price: Rs 329

In FY18, Parag Milk Foods registered 12.9% revenue growth. Consumer products revenues registered 15.7% growth. Value-added products comprised the maximum share with 65.6%, followed by fresh milk at 19.9%. EBITDA margin stood at 9.9%, while PAT margin 4.5%. PMF has the vast range of value-added products, which constituted 66% to its sales. Parag Milk is popular in the branded dairy theme. We expect robust growth from value-added products in the coming years.

We estimate 19% revenue CAGR, led by 18% growth from value-added products. We assume 80 bps margin expansion over FY18-20E. Strong revenues and better operating profit would lead to 33% PAT CAGR over the same period. The stock trades at 13.9x FY20E earnings and 8x EV/EBITDA. We recommend BUY on Parag Milk at Rs 258, and add on dips to Rs 227 with TP of Rs 329 till next Diwali.

Exide Industries

Target price: Rs 304

We have valued Exide on a SOTP basis. Standalone EPS for FY20E is Rs 13, and giving 20x multiple the value per share came in at Rs 267, and valuing the insurance business at 2 times the book value came in at Rs 37 per share. We recommend a BUY for Exide Industries at LTP of Rs 254, and add on dips to Rs. 228 for the Target Price of Rs 304 till next Diwali.

Everest Industries

Target price: Rs 558

Over the time frame of FY18-20E, sale is expected to post 12% CAGR, while PAT is expected to grow at 24% CAGR. Currently, the stock is trading at the 8.9x P/E of FY20. We recommend a BUY for Everest Industries at LTP of Rs 465, and add on declines to Rs 410 for the target price of Rs 558 till next Diwali.

Hindustan Oil Exploration

Target price: Rs 177

The company is debt free, with net cash balances of Rs 35 crore and Rs 53 crore invested in its subsidiary. Over the next two years, company expects significant ramp up in volumes which would ensure growth visibility going ahead. Company had done capex of Rs 60 crore last year. In the current year, it is expected to be Rs 60-70 crore. In H1 FY19, company has posted stellar numbers, with Rs 99 crore revenues and PAT at Rs 66 crore. In FY18, revenues were at Rs 49 crore and PAT at Rs 38 crore. We expect growth momentum to continue in the second half of FY19 as well. We estimate that the company will post Rs 208 crore revenues and Rs 133 crore PAT in FY20. It trades at 12.7x FY20 earnings and 10x EV/EBITDA. Given strong management, a robust balance sheet and stellar growth expected over the next two-three years, we recommend BUY on Hindustan Oil Exploration (HOEC) at Rs 130, and add on dips to Rs 108 with TP of Rs 177 till next Diwali.

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