Focus on companies that maintain robust earnings performance: Anand Rathi

Siddharth Sedani

Anand Rathi Shares and Stock Brokers

As we enter 2019, there are a number of risks as well as positive triggers for the market. While the outlook for the global economy has deteriorated as the World Bank cuts the global growth forecast, the Indian macros stand strong.

India’s Gross Fixed Capital Formation (GFCF) has increased by 12.5 percent YoY during Q3FY19, the third consecutive quarter of double-digit growth. The high GFCF growth suggests increase in aggregate demand and production capacity which will in turn boost the corporate earnings.

Also, as per RBI’s Financial Stability Report the Gross Non-performing assets of banks have decreased from 11.5 percent in March 2018 to 10.8 percent in September 2018 and is further expected to decline to 10.3 percent by March 2019. These positives will aid in the equities rally going ahead.

However, worries over unfavourable general election outcome and risk on account of monetary condition globally may make market volatile. But, since markets have now entered into the earning season, the results will be a key factor in deciding the directions in the short term.

Regardless of international or political set up on the national front, investors should focus on companies which can give earning prominence, and have a high margin of safety with high corporate governance standard.

Here is the list of three stocks which could give 14-38% return:

Havells India: Buy | Target: Rs 788 | Return: 14%

Havells India Limited is one of the leading Fast Moving Electrical Goods (FMEG) companies and a key player in power distribution equipment manufacturing.

With a robust global presence in over 52 countries, the company offers a wide range of products, including Industrial & Domestic Circuit Protection Devices, Cables & Wires, Fans, Modular Switches, Luminaires for Domestic, Commercial and Industrial Applications.

In its latest quarterly results, Havells recorded net revenue growth of 23 percent at Rs 2,190.9 crore as against Rs 1,777.4 crore in same quarter previous year. Net Profit increased 4 percent to Rs 178.6 crore from Rs 171.1 crore in the previous year quarter.

With solid fundamentals and favourable macro traits, we believe the company is well positioned for long term growth and recommend a BUY rating and a target price of Rs 788 per share.

JB Chemicals: Buy | Target: Rs 416 | Return: 38%

Ranked 35th in the Indian pharmaceutical industry, the company’s four brands brings 80 percent sales to its domestic business. Its brands (Rantac, Cilacar, Metrogyl) each have Rs 1,000 crore-plus revenues.

The company recently restructured its domestic division so as to have more therapy-focused divisions. With the restructured divisions, the company has created capacity to handle more products efficiently. It plans to expand its domestic business through intensive MR training, product promotion and introducing products.

The company has 6-7 active products in the US, with 11 approved ANDAs filings and five pending approval. The US market revenue was Rs1.07bn and, following launches.

We expect a 12 percent revenue CAGR over FY18-21, to Rs 1,600 crore. Growth in the domestic market is expected to be chiefly driven by the recently-added field force and rapid growth in brands in Cilacar, Rantac, Metrogyl and Nicardia. In exports, growth is expected mainly from South Africa led by sharper focus on the private market with new product launches, and continuous momentum in the US business.

NOCIL: Buy | Target: Rs 210 | Return: 26%

An Arvind Mafatlal Group enterprise, Nocil is India’s largest rubber chemicals manufacturer, with four decades’ experience and long-term business relations with major tyre companies.

The plants are fully automated through Programmable Logic Controller (PLC)/Distributed Control Systems (DCS) which ensure not only product quality and consistency but also built-in safety features in all operations.

It is confident of controlling nearly 10 percent of the global market in rubber chemicals. It is investing Rs 4,500 crore in three phases, expected to be operational from H2 FY20.

Being recognised for its technical capabilities, it enjoys an edge over others in this business. It has built a broad customer base in India and has operations in over 40 countries.

We like the company, its positioning in the industry it operates in and the management. Nevertheless, the industry’s myopic reliance on only the auto and logistics sectors, the concentrated dependence of the end-product pricing on China’s operational capacities and duties imposed by our government render us cautious. Assuming all these factors to be constant (ceteris paribus), we recommend a buy in NOCIL.

(The author is Vice President – Equity Advisory at Anand Rathi Shares and Stock Brokers.)