The benchmark indices have been in a volatile phase for a while now but will soon enter a pre-election rally, according to analysts. Most experts suggest a more stock-specific approach in the current market scenario.
The benchmark indices have been in a volatile phase for a while now but will soon enter a pre-election rally, according to analysts.
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Most experts suggest a more stock-specific approach in the current market scenario.
The inherent high volatility in the markets, Centrum Broking believes, keeps making risk-reward favourable for some high-quality stocks.
The brokerage recommends looking at stocks with sound businesses characterised by high operating and free cash flow generation coupled with a good return on equity (RoE) and high dividend payout ratios.
In the last one year, the S&P BSE Sensex has gained 10 percent while the Nifty50 index advanced nearly 8 percent. However, on the year-to-date basis, Sensex and Nifty have gained just 1.5 percent each.
In such a highly volatile environment, Centrum Broking has come out with a list of top five high conviction ideas for the current quarter.
ACC, DCB Bank, Federal Bank, Mindtree and Tata Metaliks are the brokerage's top picks as it remains confident in the value creation capability of these five stocks from a medium to long term perspective.
ACC - Buy | Price: Rs 1,531 | Target Price: Rs 1,820 | Upside: 18.8 percent
According to the brokerage, ACC has a very attractive valuation amid healthy cash flow generation and return ratios. The recent announcement for a major capacity increase of 6 MTPA after a long pause of almost a decade, affirms the promoters focus on growing India business, the report said.
Rising industry utilisation should bolster pricing power, said the report, which added that the recent material supply agreement with Ambuja and sustenance of recent correction in diesel and petcoke prices should further provide profit tailwinds.
The brokerage estimates ACC's return on equity (RoE) to firm up to 12 percent in 2020 from 10 percent in 2017.
DCB Bank - Buy | Price: Rs 191 | Target Price: Rs 230 | Upside: 20 percent
DCB Bank, with the well-defined product portfolio and customer segment, stands to gain from the under-penetrated and under-served retail (self-employed) and SME segment, its key area of presence, said Centrum Broking.
The newly added branches have started to break-even and will aid in containing the overall cost/asset ratio. While the brokerage sees risk to margins, the operating leverage benefit and limited asset quality risk will translate into an improved return on assets (RoA) of 1 percent and 14 percent RoE by FY21.
The consistency in earnings has seen stock trade at a valuation premium to its peers and they expect the trend to continue.
Federal Bank - Buy | Price: Rs 89 | Target Price: Rs 135 | Upside: 52 percent
Federal Bank is evolving to a more prolific private banking franchise on the back of its balance sheet size, quality growth trajectory, pan-India expansion strategy, branch light–distribution heavy model, digital architecture and senior management pedigree, the report said.
Another important point is the talent arbitrage, that earlier existed between larger private banks and its regional peers, no longer holds for the bank as it has hired several senior persons across various businesses, said the brokerage.
Productivity in network-2 locations will also enhance overall operating efficiency. Capital adequacy is at healthy levels and stressed asset ratio has substantially declined. The brokerage expects credit costs for the bank to also to recede over FY18-21. All these levers will enhance RoA and RoE by 41bps and 520 basis points over FY18-21E to 1.1 percent and 12.7 percent, respectively.
Mindtree - Buy | Price: Rs 916 | Target Price: Rs 1,030 | Upside: 12.5 percent
According to Centrum, Mindtree has a well spread vertical mix with a strong presence in technology, media, travel and retail verticals. With revenues almost reaching $1 billion for FY19 (estimate), the company is well poised to break into the big league.
They expect Mindtree’s dollar revenue to grow by 17.8 percent in FY19 and estimate EPS of Rs 54.5 per share for FY20.
Microsoft is the largest account of Mindtree and contributed 20 percent of total revenues as on Q3FY19, and is growing at a scorching pace. Expect the Microsoft account to grow at 43 percent year-on-year in FY19 (estimate), said the report.
Tata Metaliks - Buy | Price: Rs 631 | Target Price: Rs 865 | Upside: 37 percent
The company has seen a paradigm shift from a commodity company to a niche ductile iron (DI) pipe player with a current market share of 11 percent and the brokerage is very positive on the company's DI pipe business.
With commissioning of pulverised coal injection (PCI) project by Q4FY19 coupled with several other productivity improvement initiatives, the company is expected to deliver steady earnings growth of 12 percent compound annual growth rate over FY19-21 (estimate).
The recent announcement of DI pipe capacity expansion and equity infusion will also provide a growth trajectory, in turn, improving margin profile and substantially lowering its debt. The brokerage sees attractive valuations at FY21E price to earnings ratio of 9.0x with reasonable scope for a re-rating given the strong balance sheet and attractive return rations.
Disclaimer: The CNBCTV18.com editorial team does not engage in speculative or active trading in stock markets and follows its Code of Conduct on securities trading and investment. Any investor/ viewer is advised to carry out necessary diligence on their own or through a certified registered financial advisor for investment decisions.
First Published: Mar 8, 2019 12:55 PM IST