Fiscal 2019 was a year of recovery from the disruption caused by events such as demonetization and implementation of the Goods and Services Tax. Supported by the public investments the economy is likely to register 7.2% growth even though the private investments have disappointed. Export market performed well thereby providing buoyancy to the manufacturing sector.
On the capital market front, the 30-stock benchmark index, Sensex closed at 38,672.91, and Nifty 50 closing at 11623.90 as on March 31, 2019. The Bulls retained their charge on the D-Street for the third consecutive fiscal year with the indices rallying about 17 percent and 15 percent respectively during the fiscal.
The next 12 months is likely to be exciting as we enter the polling session in a week now. On the global front, the response of central bankers to global economic slowdown is likely to be monitored. India’s growth outlook for fiscal 2020 will necessarily have domestic drivers with critical support coming from private consumption and investment.
Projections for the economy
Source: CSO, RBI, CRISIL
Following is the list of stock picks for fiscal 2020 that promise strong fundamentals and reasonable valuations:
Bata India Ltd (Bata) is the largest retailer and a leading manufacturer of footwear in India. The company operates over 1300 retail stores as of Dec 2018. For the third quarter of fiscal 2019, the company reported strong earnings growth of over 50% year-on-year with revenue growth of 16% year-on-year. The margins expanded by nearly 4.5% and crossed the 20% mark. The rising share of premium brands aided the improvement in margins.
Also, the company has strategically managed its store expansion vis-a-via franchisee to curb the rental cost and to control the fixed cost. The company plans to add ~300-350 stores via franchise route in the next couple of years.
Bata is likely to benefit from the reduction in the GST rate on footwear products below Rs1,000 and is thus expected to see growth in the market share.
Asian Paints is one of the leaders in the paint industry with substantial market share in the industrial and international business segment. The company has delivered healthy numbers supported by mid 20s growth in volume. The volume growth was supported by the low base, festival season and reduction in the Goods and Services Tax (GST).
Marico Limited is an Indian consumer goods company providing consumer products and services in the areas of Health and Beauty. The company has invested in the core international markets to strengthen the brand recall and capability to handle growth. The company has witnessed a sound speed of new product launches and has good traction in new product development.
Thus, the company is well positioned to capitalize on the market opportunities and is likely to witness volume growth in the range of 8-10% over the next few years. This growth could translate to ~15% topline growth.
Pidilite Industries Ltd (Pidilite) is a leader in consumer and specialty chemicals in India. The company has a diversified product portfolio including adhesives and sealants, construction chemicals, hobby colors, etc.
The company’s brand has a market share of ~70 percent in its category. The revenue grew at a healthy pace during the third quarter and was supported by strong volume & mix growth and robust performance of domestic subsidiaries.
Escorts Ltd (Escorts) is the third largest Agricultural tractor manufacturer in India and has a strong market in northern India and Western India. The company commands for 11% of the market share in India as of fiscal 2018.
The company is likely to benefit from the rural theme as it continues to report a consistent rise in monthly sales. Also, the Government’s tractor subsidy schemes towards farm mechanization and development over monsoon will be the critical factors to define sales growth in coming years.
Lastly, product innovation is expected to add volume in the coming few quarters.
Kajaria Ceramics Ltd. (Kajaria) is one of the largest manufacturers of ceramic and vitrified tiles in India. The company reported a double-digit rise in its net profit during the third quarter of the fiscal. Morbi based organized and unorganized players are likely to implement price hikes in Ceramic and Vitrified tiles by as much as 10% as these players are facing cost headwinds due to the ban on coal gasifier usage by the National Green Tribunal’s (NGT).
The company is likely to benefit from reducing cost differential with Morbi-based units when they switch to PNG; better visibility on volume growth and working capital discipline. Also, the company is likely to benefit as the government is inclined towards upgrading rural infrastructure.
The company’s business looks attractive given strong growth backed by a capacity ramp-up, and robust order book, and improving operational efficiency.
The company recently announced the acquisition of Aurangabad Electricals (AEL). Established in 1985, AEL is a leading domestic player in manufacturing aluminum die-casting products (body, brake, engine parts) for the automobile sector with expertise in the two-wheeler segment. The company accounts for 79% of market share in the segment with Bajaj Auto being its key client.
Crompton Greaves Consumer Electricals Ltd. (Crompton) manufactures of consumer products ranging from fans, light sources and luminaires, pumps and household appliances. The company posted a 10% YoY growth during the third quarter. Profit after tax rose at a much pace with support from other income.
The Electric Consumer Durable (ECD) segment’s revenues grew at a healthy pace supported by decorative fans, pumps, and geysers.
The company aims to sustain healthy growth and margin in the ECD segment led by premiumization of fans, volume growth in pumps and the revamped portfolio of geysers.
The company has also started a cost reduction programme in the lighting segment where it has seen some volatility in the topline growth. The company has also lined up innovative anti-bacterial LED lighting to premiumize its portfolio.
Sonata Software Ltd (Sonata) is a Global IT services company. The company provides services in business intelligence, and analytics, application development, mobility, cloud, social media, and enterprise services. The company’s revenue grew at a healthy pace during the third quarter primarily by growth in domestic – product & services business.
Also, the company intends to scale the IP led revenues over the next two to three years by higher cross-selling and increase in traction from its IP products. Also, the company’s digital revenues are likely to gain traction over the coming years led by its platform action and alliance driven strategy.
Lastly, the company has a strong deal pipeline and has won $1.5 million new deals in H1FY19E. Strong pipeline coupled with the acquisition of Scalable in Australia and Sopris in the US shall lead to healthy revenue growth.
Bharat Electronics Ltd (BEL) is a Navaratna enterprise that accounts for 37% market share in Indian Defence Electronics. The company’s core capabilities are in radar & weapons systems, defense communication & electronic warfare. For the third quarter of fiscal 2019, the profit after tax grew at a healthy pace despite lower than expected revenue growth due to the execution of high margin orders & cost rationalization.
Lastly, the company has an order backlog of Rs 48,000cr (5x FY18 sales) provides strong earnings visibility for the next three years.
UPL Ltd (UPL) is India’s largest agrochemicals company present across the crop protection chemicals (CPC) and seeds chain. The company is present in 133 countries with 79% revenue coming from overseas markets. The company is set for robust growth after it bought out its global competitor Arysta LifeScience Inc. at US$4.2bn all-cash deal.
The synergy is likely to provide healthy growth in the range of 30-40% to the top line. Also, the increase will be supported by the Government’s focus on farmers.
Reliance Industries Ltd (Reliance) is an Indian conglomerate with business interest in energy, petrochemicals, textiles, natural resources, retail, and telecommunication sector. The stock has tripled in five years outperforming the Nifty by over 120% on a cumulative basis.
The company is likely to see improvement in the petrochemicals segment with Refinery off-gas cracker (ROGC) that is being commissioned and strong demand for polyester & fiber intermediates.
Also, the International Maritime Organization (IMO) regulation is expected to aid diesel demand that shall benefit complex refineries like RIL.
Further, the company’s largest petcoke gasification unit at Jamnagar is under commissioning and is likely to bring full benefit of bottom-of-the-barrel conversion to its refining business.
Lastly, the telecom giant Jio is likely to continue with its surprise thereby adding subscriber at a steady pace.
Kotak Mahindra Bank Ltd (Kotak) is one of the leading private banks in the country. The bank’s margins improved due to improving pricing power and rise in the share of low-cost deposits. Healthy asset quality, lower exposure to stressed sectors along with strong management quality and a high degree of governance practices reckon premium valuations.
Dislclaimer: the views expressed here are of the author and do not reflect those of Groww.