Patanjali Foods, Akzo Nobel, UPL, Ujjivan Financial are JM Financial's 2023 picks that can deliver up to 46% returns

Patanjali Foods, Akzo Nobel, UPL, Ujjivan Financial Services and Gokaldas Exports are among a list of 14 stocks that JM Financial recommended for 2023.  Price targets on these five stocks suggest 30-46 per cent potential upside in the next 12 months.

Patanjali Foods | Target Rs 1,800

JM Financial said the main story of Patanjali lies in the merged food business of Patanjali with Ruchi Soya. This is where growth as well as valuation trigger lies it said, The food business of the merged entity is estimated to be in Rs 10,000-11,000 crore range by FY25 and is estimated to grow 15-20 per cent annually for the next decade.

As per management guidance, Ebitda margins for the food business are likely to remain in the range of 18-20 per cent.

The acquired food business with 530 SKUs is spread across product categories. The company has strong brand equity across this product range and also uses its distribution muscle in terms of its presence to more to 50 lakh outlets across the country, JM Financial said.

It expects strong brand equity & expanding distribution muscle to lead to strong growth in food business and forecast category expansion. The company's foray into nutraceutical business, a highly profitable segment, is seen positive.

"We expect Patanjali’s food & nutraceutical business to be major growth driver for next decade. Edible oil business is expected to grow in single digit and Palm oil business will start contributing from 5th year onwards. Currently stock trades at 44 times FY23E & 27 times FY24E," the brokerage said.

Akzo Nobel | Target Rs 3,200

JM Financial said Akzo Nobel has filled the portfolio gaps in its product range in last four years and accelerated its tinting machine presence with dealers. In FY22, it had presence across 20,000 dealers and 75 per cent of the dealers have tinting machines. The brokerage said Akzo Nobel's product availability has increased 2.5 times in the same period, with presence across 5,000 towns now. The company plans to expand distribution to 30,000-35,000 dealers. It is adding 600-800 retail outlets every quarter. It will continue to add 2,000 tinting machines each year.

At present, the company has 5 per cent market share by revenue. JM Financial believes it can improve its market share to 7-8 per cent in the next 3-4 years with the ongoing expansion.

"In Q3FY23, Akzo reported revenue growth of 25 per cent & PAT growth of 17 epr cent. Its revenue growth was stronger to peers AP, Kansai & Indigo consecutively for last 4 quarters. now. We believe with fall in input prices, the company’s margins will improve in H2FY23. Also, price hikes taken in first half should help. At Rs 2,300, it trades at 29 times its FY23E earnings which is more to 60 per cent discount to industry leader Asian Paints. With volumes improving due to measures taken to improve market share & margin headwinds receding, we believe stock is likely to re-rate significantly in FY24," the brokerage said.

Ujjivan Financial Services | Target Rs 400

While shares of Ujjivan Financial Services have run up by 60 per cent in the last six months on the back of steadily improving asset quality and return metrics, JM Financial believes a sustained delivery on performance along with a gradual improvement in liability franchise are critical for further rerating of the stock.

Given cyclical benefit of improving microloan collections, it values Ujjivan SFB at 1.8 times FY24E book value per share with a market cap of Rs 6,640 crore level. As per the scheme of reverse merger, Ujjivan SFB would issue and allot 115 equity shares of the bank for every 10 equity shares to the shareholders of Ujjivan Financial Services (holding company).

"We value the holding company at a 30 per cent holdco discount arrive a target of Rs 400 per share," it said.

JM Financial said Ujjivan SFB's collection efficiency for the overall book remains stable at 100 per cent for September quarter and that the collection efficiency for restructured book continues to be strong at 88 per cent. The management indicated that the asset quality issues are now behind and expect FY23E to be a normalised year.

It also indicated that FY23E will be a normalised year for Ujjivan SFB with growth and asset quality parameters reverting back to normalised levels.

Gokaldas Exports | Target Rs 500

Gokaldas Exports, in line with near term demand headwinds, is likely to witness lower revenues/margins during the second half of FY23, given high inflationary pressure. Despite near term headwinds, JM Financial said Gokaldas Exports, backed by it’s strong customer engagement operational excellence and superior business infrastructure, is likely to fare relatively better against competition. The company’s growth capex of Rs 370 crore over FY22-24 will ensure strong double digit growth CAGR in revenues, JM Financial said adding that increasing scale, focus on cost optimisation will improve margins for Gokaldas Exports further.

India is seeking to secure free trade agreement (FTA) with the UK/EU after successful agreement with Australia and UAE. FTA with UK looks likely to be completed ahead of EU. UK imports $21 billion in apparel with India’s share a mere $1.1 billion.

"Indian players have lower market penetration in UK due to tariff disadvantages. However, FTA will allow duty free exports to UK, improving India’s competitiveness. Effective implementation of FTA could provide a clear runway for growth," JM Financial said.

Gokaldas Exports, it said, is well placed to ride the growth in India’s apparel sector after regaining the confidence of global retailers (GAP, Columbia & Banana Republic).

UPL | Target Rs 1,060

JM Financial said UPL's net debt at end-September stood at Rs 28,512 crore against Rs 18,900 crore in March 2022. During the September quarter, net working capital days was higher at 124 days against 114 days in the year-ago quarter, due to higher inventory days of 141 days, which offset the lower receivable days of 130 days and higher payable days of 147 days.

"This was primarily due to short-term inventory build-up led by strong demand and uncertainties in the supply chain," it said.

The management expects inventory days to fall sharply in H2FY23. On the debt front, factoring will be curtailed in certain countries like Brazil where interest rates have spiked. At end-FY23, net debt levels are expected to decline from $2.5 billion to $2 billion.

"The company has maintained its guidance of 12-15 per cent revenue and 15-18 per cent Ebitda growth in FY23E. Hence, with the reduction in working capital in H2FY23 and robust Ebitda growth, we believe UPL should be able to meet its $400-500 million net debt reduction guidance in FY23. We have kept our estimates unchanged and maintain BUY with target of Rs 1,060 per share as we believe UPL stands to benefit from robust crop protection demand," JM Financial said.

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