Top 11 Stocks To Buy Now To Profit From Opportunity In adversity (Sharekhan Special Report)

“There are decades when nothing happens; and there are weeks when decades happen.” In the last two weeks we have witnessed a once-in-a decade event, when the stock market went into a turmoil led by the synchronised sell-off globally, amid the Coronavirus outbreak. The last time we saw such a sell-off was during the 2008 Global Financial Crisis (GFC), but what has surprised market participants in 2020 is the pace of sell-off as the market lost more than 20% in a month.

Governments across the world are putting their best efforts to restrict the spread of the pandemic, but because of the lockdowns and demand-supply restrictions there would be a global economic impact and it goes without saying that India will also face the brunt (and sting) of the Coronavirus. Nevertheless, we have learnt from the GFC 2008 that the stock market will ultimately react to economic signals and recover. Thus, it is important to stay invested to gain from market recovery over next 12-15 months, but the caveat here is to invest in the right stocks, which have their long-term structural story intact and are strong enough to withstand the crisis and emerge much stronger than before to ride the economic recovery.

It is difficult to predict a bottom for the market, but history suggest us that market correction always provides an opportunity for long-term investors to create wealth by accumulating the right quality stocks at the right valuation. In times of market turbulence, it’s advisable to use the accumulation route for investing in stocks to beat volatility and have patience to invest for the long term, as the probability of negative returns decreases as the investment horizon increases.

The current market correction offers a great opportunity for long-term investors as well as first-time investors to start investing in high-quality stocks in a staggered manner. We have identified ten high-quality companies across sectors, where investors could start a stock SIP and build a healthy long-term portfolio.

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Best 11 Stocks To Buy Now

Stock

CMP (Rs)

Market Cap (Rs Cr)

Asian Paints

1,594

1,52,901

Bajaj Finserv

4,824

76,777

Bata India

1,130

14,524

HDFC Bank

856

4,69,123

IPCA Labs

1,311

16,561

Kotak Mahindra Bank

1,294

246,737

Mahanagar Gas

745

7,360

Reliance Industries

1,081

6,85,433

SRF

2,668

15,337

TCS

1,752

6,57,493

Titan

884

78,436

Asian Paints

Asian Paints Limited (APL) is a market leader in the domestic paint industry with 55% market share. Unlike other paint majors, the company has de-risked its business model with more than 80% of its revenue coming from decorative paints. The company has a strong portfolio of brands straddling the pyramid.

The spread of the Coronavirus would affect sales volumes of decorative paints due to deferment of spends on home refurbishing by consumers. However, the recent sharp correction in the crude oil prices would help in mitigating the impact to some extent as 30% of key inputs are crude link.

Rising per capita income, growing urbanisation, a shift from organised players to branded players and infrastructure development are some of the key growth drivers for paint industry in the long run. This along with new product addition, distribution expansion (network of over 65,000 dealers and more than 6 lakh retailers) and gaining market share from small players would help APL to achieve consistent high to low double digit volume growth in the long run. The improvement in the profitability would be function of operating efficiencies and better revenue mix.

The stock has corrected by 13% in last one month and is currently trading at discounted valuations of 39.7x (at a ~15% discount to its last five years’ average multiple). The company has sturdy balance sheet with strong return profile in the upwards of 20%. With consistent improvement in the cash flows it is one of the good dividend payers (last 4 years average dividend payout stood at 53%). In view of the long-term structural story of domestic paints industry, the recent correction provides for a good accumulation point in Asian Paints.

Bata India

Bata India (Bata) is India’s largest retailer and manufacturer of footwear in India with a retail network of 1,400 stores selling ~ 47 million pairs of footwear every year. Its revenue and PAT grew at a CAGR of 6% and 26%, respectively over FY2016-19.

The lockdown in India due to spread of the Coronavirus will affect the footfalls of Bata in Q4FY020 and Q1FY2021 due to the closure of retail stores as well as malls. Bata has wedding-related products in its portfolio and the postponement of weddings will also have an impact on sales in the near term.

However, long-term growth prospects are intact as the company is focusing on re-branding itself from a conventional footwear player to a branded footwear player by reducing the pace of store addition and focusing more on growing into different segments. This, along with consistent store expansion, innovation, focus on the women’s footwear category (growing by 20-25%) and premiumisation strategies (about 50% product portfolio) would help Bata to achieve same-store-sales growth (SSSG) of 6-8% and low-double-digit revenue growth in the long run.

The stock has corrected by ~34% from its recent high (in line with a correction in broader indices and is currently trading at 25x its FY2022E earnings (at a ~27% discount to its last five years historical average multiple of 34x). We believe Bata is one of the best plays in the domestic branded footwear space with a lean balance sheet and stable cash flows. We believe the recent correction provides good entry point for investors.

Bajaj Finserv

Bajaj Finserv has consistently seen strong performance from its lending business over a period of time. Among its insurance subsidiaries, both its Life and General Insurance subsidiaries’ operating matrices continue to be healthy.

The recent Covid-19 outbreak is an unprecedented global event which raises health and livelihood concerns. Initial signs indicate that the Coronavirus outbreak may result in higher delinquencies and lower credit offtake for BFSI players, including the lending subsidiary, which we believe may see slower credit offtake in Q4 and Q1 if the lockdown measures persist.

All three of Bajaj Finserv’s businesses are strong franchises in their respective fields and are well-poised to deliver sustainable profitability going forward. Long-term outlook for the life insurance business has brightened with the large banking partner joining hands for distribution.

While there may be near-term headwinds, we believe that the long-term positives of a strong franchise (comprising a strong and consistent financing segment performance) and strong insurance subsidiaries form an attractive business franchise. Due to current market weakness, the stock has corrected by ~50% over the course of nearly two months and at present valuations, it is attractive for long-term investment.

HDFC Bank

HDFC Bank stands out with its earnings visibility, consistent growth (10-yr CAGR growth in advances of 23.5%, networth of 26% and PAT of 25%) and robust quality of assets (GNPA/NPA% maintained at sub 2% / 0.8% levels respectively consistently) over a long period, which we believe still hold strong.

The recent Coronavirus contagion has dragged down equity markets globally and India has been no exception. It is expected to impact growth as well as asset quality of banks and NBFCs, and result in higher delinquencies across sectors.

HDFC Bank derives its strength from its retail loan portfolio (~48 % of total loan book), which despite tepid overall system-wide credit growth, has been growing well. Moreover, since 80% of its SME portfolio has additional collateral to cover the outstanding loans, 80% of wholesale is rated AA+ and above and, 80% of SME portfolio is self-funded indicates its book quality is more resilient to the risks of slowdown.

HDFC Bank currently trades at reasonable valuations and the recent market weakness has dragged down the stock price by more than ~33% in the last three months, so much so that at present, the stock is available at below its long term average 1-yr forward PBV multiple of 3.7x. We opine any further weakness in the stock could be an opportunity for investors to add it to their long-term portfolio.

IPCA Labs

IPCA is a fully-integrated Indian pharmaceutical company, manufacturing more than 350 formulations and 80 APIs for various therapeutic segments. IPCA is a therapy leader in India for anti-malaria with a market share of around 34% and has fast-growing presence in the international market as well.

The outbreak of the novel Coronavirus (COVID-19) has led to a lockdown in countries across the globe, including India. There are various anti-viral drugs, immunotherapies and vaccines that are being tested and developed to treat COVID-19. However, HCQS (hydroxychloroquine sulphate) and chloroquine are among key drugs identified so far to fight COVID -19 and the results have shown efficacy.

IPCA is one of the largest and vertically integrated manufacturers of HCQS and could potentially benefit from the opportunity. Though currently the company has not received any orders yet, an elevated level of enquiries for HCQS points at likely strong inflow of orders in the near to medium term.

The stock price has corrected by almost 13% in the last three months. At CMP, the stock is trading at a valuation of 20.7x/17.4x its FY2021/FY2022 EPS, which is at a discount to its long term historical average multiple. We believe this is good opportunity for investors to accumulate the stock.

Kotak Mahindra Bank

We believe Kotak Mahindra Bank (KMB) continues to be an attractive business franchise, with well-rounded products and services, shaping up well for the long term. Consistent performance across interest rate and asset cycles is a key differentiator and indicates the management’s quality and strength of the franchise. Its subsidiaries are shaping up well and while at present, the insurance subsidiary is comparatively small, we believe it is well on its way to be a significant value contributor to the consolidated business in medium to long term.

The recent Coronavirus contagion has impacted the domestic economy as India was just barely able to emerge from its weak asset quality cycle phase. The pandemic has real implications, directly and indirectly for the financial services sector, including Kotak Mahindra Bank and is expected to impact growth as well as asset quality of banks and NBFCs, resulting in higher delinquencies across sectors.

We believe that a healthy retail asset base along with industry best margins and well-maintained asset quality provide the bank with a strong and latent margin lever and an opportunity to explore other assets with lower risks.

Kotak Mahindra Bank has corrected to the tune of ~25% from its highs and we believe valuations are now reasonable considering the bank’s strong operating metrics as well as quality of its subsidiaries, which are formidable players in their own segments. We opine that at present valuations, the stock is attractive for long-term investment.

Mahanagar Gas

Mahanagar Gas Ltd (MGL) is a dominant city-gas distribution (CGD) player in and around Mumbai with CNG/PNG sales volumes of 2.2 mmscmd/0.8 mmscmd in FY2019.

MGL’s CNG sales volumes are expected to get impacted in the near term as most vehicles have gone off-road amid the lockdown in Mumbai given concerns of Coronavirus outbreak.

We believe Q4FY2020E-Q1FY2021E gas sales volumes could remain weak but could recovery sharply to 6-7% led by a higher adoption of CNG-fitted four-wheelers and increased penetration of PNG. The margin outlook remains strong with anticipation of a further cut in domestic gas prices for H1FY2021E and already weak spot LNG prices.

The sharp correction of 32% in MGL’s stock price makes its valuation attractive at 8.6x FY2022E EPS given industry leading EBITDA margin of Rs. 9-10/scm and a superior RoE of 24-25% as compared to peers.

Reliance Industries

The recent sharp correction of 33% in Reliance Industries Limited’s stock price from recent highs, seems to be factoring in a prolonged weakness in refining & petrochemical margins, no improvement in the telecom business from potential hike in average revenue per user (ARPU) and low valuation for the retail business.

Likely ARPU hike in telecom business and a weak Indian rupee could mitigate earnings volatility from decline in refining margin and petrochemical margins to some extent amid weak demand in times of the Coronavirus outbreak.

Potential induction of a strategic partner for telecom and retail businesses could act as a key catalyst for value-unlocking from the consumer business.

The company’s aim to increase the share of EBITDA from the consumer business to 50% (from ~37% in Q3FY2020) seems in the right direction to tide over margin volatility in cyclical business.

SRF

Established in 1970, SRF is a chemical-based multi business entity engaged in businesses such as technical textiles, chemicals (Fluorochemicals and specialty chemicals) and packaging films. The company has delivered a revenue and earnings CAGR of 18.8% and 14.3% over FY2016-2019.

The chemical business has been delivering healthy performance owing to robust growth in speciality chemicals however slowdown in automobiles industry has been impacting the performance in fluorochemicals and technical textiles. Further, the Coronavirus outbreak in China and its spread in the rest of the world resulting in lockdown in various countries is likely to lower the demand offtake and impact the company’s performance in short to medium term.

We believe that though FY2021 performance would be impacted owing to COVID-19, the company’s long-term growth prospects remain intact as it has been making the right capital allocations in high sustainable growth areas (expanding capacities in chemicals, especially the speciality chemicals).

The stock has corrected by 35% in the last month (in line with a correction in broader indices and is currently trading at 12.6x its FY2022E earnings. We believe that the stock can be considered for accumulation at current levels, as the company has been investing in the right areas and delivering a healthy and sustainable performance, which is likely to continue.

Tata Consultancy Services

Tata Consultancy Services (TCS) is among the pioneers of IT services outsourcing business in India and is the largest ($20,913 million revenue in FY2019) IT services firm in terms of export revenue. TCS is one of the preferred IT vendors for most Fortune 500/Global 1,000 companies.

With the rapid spread of the Coronavirus in western countries, the potential impact on IT companies would be (1) a delay in allocation of funds owing to deterioration of performance of clients, (2) risk with service and delivery execution due to lockdowns, and (3) fewer deal wins and new account openings. In addition, TCS has higher exposure to BFSI vertical (30.4% of total revenues), which could impact the company’s growth owing to recent interest rate cut in the US.

We understand the implications of the Coronavirus on the economy and near-term disruption to delivery from lockdowns, which reflects our downward revision of earnings estimates. However, we also believe that even though FY2021E is going to be a weak year for TCS owing to the Coronavirus and lower spending by BFSI clients, the growth for the sector would bounce back in FY2022E once recent issues get normalise.

The stock has corrected by ~23% in last one month (outperformed with the correction in CNX IT index) and is currently trading at 17x its FY2022E earnings (`18% discounts to its last three years historical average multiples). We believe that recent correction in stock prices is partly factoring in a weak FY2021E and advice investors to start accumulating the stocks at current level given its strong business model, improving payouts and large deal wins.

Titan Company

Titan Company (Titan) is one of the leading the brands in the domestic retail space with strong presence in the branded jewellery and watches segment with close to 1800 stores spread across 2.3+ million sq. ft of retail space. Its revenue and PAT grew at CAGR of 16% and 31% respectively over FY2016-19.

The lockdown in India due to the spread of the Coronavirus will affect Titan’s Jewellery and Watches business in H1FY2021 as the company has shut down all its retail shops coupled with postponement of the wedding season due to curb on social gatherings.

Though FY2021 will be affected by the Coronavirus, the long-term growth prospects are intact as a large shift happening from non-branded to branded jewellery players, sustained new innovation in jewellery and watches segment and the thrust on expanding into tier-II and tier-III towns due to improving demographics would help Titan to achieve consistent double-digit revenue growth and gradual improvement in margins in the long run.

The stock has corrected by 30% in the last one month (in line with the correction in broader indices and is currently trading at 34x its FY2022E earnings (25% discounts to its last five-year historical average multiples). We believe this a good entry point in the large retail play like Titan, which has a lean balance sheet as compared to its peers.

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