Prospective stocks of 2018

'Disclaimer: This story is for informational purposes only and should not be taken as investment advice.'

Despite many disruptions in the domestic markets due to goods and service tax (GST) and note ban, benchmark equity indices rose over 30% in 2017. In the last 12 months, Sensex gained 31.8%, while Nifty added 33.34%.
 
Now, 2018 is calling us. Based on the fundamentals, business prospects and management outlook, various market research firms have suggested some prospective stocks.
 
Below are some of the stocks that have good growth potential in the long run:
 
IIFL picks
 
1-Petronet LNG
 Petronet is a gas distribution company, which imports, stores and regasifies LNG from its two terminals at Dahej and Kochi. The company is in the process of expanding capacity of the Dahej LNG terminal from 15 million metric tonnes per annum (MMTPA) to 17.5 (MMTPA). The expansion in the facility is likely to be operational by Q1FY19. The company is also looking to expand its network by setting up LNG terminals in South Andaman as well in Bangladesh and Sri Lanka.
 
The company’s revenue is likely to increase over the next few years as the completion of the Kochi-Mangalore pipeline will expand utilization of the Kochi terminal. Expansion of gas pipeline networks by distribution company's like GAIL and Mahanagar Gas would significantly increase demand for industrial and retail users. Due to the long-term nature of the projects, the stock can be looked at as an investment for a long-term basis. We recommend BUY on the stock with a target price of Rs312.
 
2-Music Broadcast Ltd
 MBL operates a network of 39 radio stations across 12 of the 15 largest cities in the country. As on March 30, 2017, the company runs the number 1 radio station in Bengaluru and the number 2 radio station in Mumbai. The total listenership of the company stood at 52.5 million. The annualised average utilisation level for the company stood at 60-70% in FY17 and is likely to improve going forward.
 
The company is targeting to improve utilisation levels at both newly acquired and legacy stations. The company will also benefit from improving pricing in the radio advertising industry. All of these reasons give strong visibility on the earnings of the company. Also, as the major part of capex is already completed, the company would also be generating a large amount of free cash flow. We recommend BUY on the stock with a target price of Rs482.
 
3-Gabriel India Ltd
 Gabriel is a well-diversified company that derives 57% of revenues (H1FY18) from 2-wheelers and 3-wheelers, 31% from Private vehicles (PVs) and 12% from commercial vehicles. With respect to the channel, it derives 86% from sales to original equipment manufacturer (OEMs), 11% from aftermarket segment and 3% from exports. The company has outlined a strategy of increasing export focus, inorganic growth and debt reduction to boost its topline and profitability.
 
Gabriel is poised to benefit from recovery in 2-wheelers, 3-wheelers and PVs. It has strong balance sheet metrics such as low debt on books, return ratios (ROCE and ROE) in excess of 20% and steady working capital cycle. This leaves ample scope for the company to go in for acquisitions to grow its size, product portfolio and geographical presence. We expect revenue, earnings before interest, taxes, depreciation, and amortisation(EBITDA), profit after tax (PAT), and compound annual growth rate (CAGR) of 16%, 17% and 18%, respectively, over FY17-19E. At the current market price, the stock is valued at 23x FY19E EPS. We recommend ACCUMULATE on the stock with target price of Rs199 (25x FY19E EPS).
 
4-Emami Ltd
 Emami has created new categories with its products, thus it enjoys low competition and high pricing power. Its products Fair & Handsome and Navratna cooling oil are leaders in their category. Management has guided for 17% sales growth in H2FY18 due to strong winter stocking and continued traction in non-winter brands. We expect Kesh King range to recover, as GST related issues are sorted out. New launches (recent and planned) would keep revenue momentum strong.
 
Revenues for Emami are projected to grow at 11% CAGR over FY17-20E led by a recovery in Kesh King, stable export momentum and new launches. The company will invest in promotional activities, hence we project EBITDA margin to expand less than 200bps over the period. Adjusted PAT will grow at 13% CAGR. We expect the company to post revenue, EBITDA and Adj PAT CAGR of 11%, 14% and 13% respectively over FY17-20E. At CMP, stock is richly valued; hence, we foresee that near-term upside is capped. We recommend ACCUMULATE on the stock with target price of Rs1,353 (40x FY19E EPS).
 
5-Godrej Agrovet
 Godrej Agrovet, a leading Godrej group entity is present in animal feed, crop protection, oil palm, dairy and poultry & processed foods. An expansion in product portfolio, capital efficient & asset light business model are the key strengths of the company. Its flagship animal feed, a high return business, would gain market share through product differentiation (i.e. use of biotechnology and enzymes). In crop protection, market share expansion through products for new crops coupled with increasing geographic presence will enhance sales and profit performance. The growth in vegetable oil segment will be driven by new revenue streams from oil palm biomass. In dairy, the company plans to increase its market share by expanding in South India and broadening its value-added product portfolio.
 
Over FY17-19E, we expect sales to grow at ~16% CAGR and operating profits to register~19% CAGR driven by increasing capacity utilization (currently at ~50%). Further, a decline in finance costs would assist net profit expansion at 31% CAGR (FY17-19E). The stock currently trades at reasonable valuation of 27xFY19E, hence, we recommend BUY for the long term with a target price of Rs 647 (32xFY19E).
 
6-Trent
 Trent primarily operates stores across three formats i.e. Westside, Landmark and Star. Westside is Trent’s flagship format, which offers apparel, footwear and accessories along with furnishings and home accessories.
 

Trent's aggressive expansion of Westside by adding 20-25 stores in the next two years bodes well for its long-term growth. Trent is well poised to tap the retail opportunity in India (retail industry to reach $ 1.3 trillion by 2020) given its dominance in Women’s apparel, restructuring of Star Bazaar business and focus on private labels. Trent’s increasing scale through store additions in Westside along with better product mix in Star Bazaar is likely to increase its profitability. We expect sales and PAT to grow at a CAGR of ~17% and ~61% over FY17-20E, respectively. Trent’s PEG ratio (based on earnings CAGR FY17-20E) at 0.75 is lesser than Avenue Supermarts and Shoppers Stop. On a relative basis, Trent has more upside potential given stronger earnings prospects, hence, we recommend Buy, valuing it at 56xFY20E with a target price of Rs416.
 
7-Indian Bank
 Indian Bank is a mid-sized public sector bank with best return ratios among PSBs. Pre-provision operating profit (PPOP) is expected to register ~24% CAGR over FY17-19E, led by potentially higher net interest income (NII). Moreover, higher other income and lower cost-to-income ratio will drive pre-provision operating profit (PPOP). The return on assets(RoA) and return on equity (RoE) of the bank for FY19E is projected at 1% and 13.1%, respectively. Despite higher return ratios, Indian Bank is trading at 0.93x FY19E P/ABV valuations. We recommend BUY on the stock with a target price of Rs505 (1.4x FY19E ABVPS).
 
We forecast its total loan book to expand by 15.4% over FY17-19E. The bank’s strong capital adequacy ratio at 13.6%, with Tier-1 capital at 12.2% (FY17) coupled with branch expansion initiatives, will boost the loan book for next couple of years. We believe GNPA would decline further by 225bps to 5.2% over FY17-19E. The bank’s NIM is likely to improve by 41bps to 3% over FY17-19E due to its focus on retail loans and moderation in slippages. Further, the CASA ratio would surge 248bps to 39% over FY17-19E led by a focus on recomposition of loan book.
 
8-Federal Bank
 Federal Bank is a private sector bank with strong presence in Kerala. We expect the bank’s advances growth at 23% CAGR for FY17-19E led by growth in Corporate, SME and retail portfolio, besides strong margins bode well for higher net interest income (NII). Going forward, management’s focus on containing slippages from its corporate book, reduce its cost of borrowings and increases lending towards retail and SME, which augurs well for NII expansion. The stock is attractively trading at a valuation of ~1.7x FY19E P/ABV. We recommend BUY on the stock with a target price of Rs130 (1.7x FY19E ABVPS).
 
We expect ~23% loan CAGR over FY17-19E due to healthy and diversified loan mix. We see NII to grow at 22% CAGR over FY17-19E. Bank continues to maintain its Kerala dominance while also gaining share outside Kerala. Moreover, rising CASA share to 32.3% would expand margins by marginal 10bps to 3.3% by FY19E due to low cost of funds. Thereby, we see contraction in GNPAs and NNPAs by 20bps and 30bps by FY19E, respectively. Therefore, we see PAT to grow at a 38% CAGR over FY17-19E. Further, the bank looks well capitalized at capital adequacy ratio of 12.3% as of FY17 (RBI requirement of 9%).
 
9-Skipper Ltd
 Skipper Ltd is one of the world's leading and India’s largest manufacturers of Transmission & Distribution Structures (Towers & Poles). It is the largest producer of Plastic Pipes & Fittings in West Bengal, the fastest growing and second largest in Eastern India. Engineering Products which cater to power T&D sector accounts for ~84% of revenue.
 
Higher spends on sub-transmission network bodes well for Skipper which already has a comfortable order book position with revenue visibility of 18-24 months. Skipper intends to capitalize on opportunities arising from 100% electrification of Indian Railways and ramp up in solar capacities in India which will drive revenue growth. Its other business, Polymer products, is slowly recovering post-GST and will remain high growth vertical. It is currently trading at attractive valuations of ~13x FY20E EPS. We recommend BUY on the stock with a target price of Rs352.
 
10-Escorts Ltd
 Escorts is one of the leading tractor manufacturers in India with a capacity of 100,000 tractors per year. Its construction equipment products include cranes, compactors and backhoe loaders. It derives revenue from the agri-machinery segment (80%), construction equipment (14%) and railway products (6%).
 
Escorts is expected to benefit on account of favourable tractor cycle in India which is expected to sustain in the near term. Newer launches and focus on non-key markets are expected to aid market share gains and sustained cost efficiency measures will aid margins. We expect the stock to get re-rated on significant improvement in profitability leading to EPS CAGR of 43% over FY17-20E. We recommend BUY on the stock with a target price of Rs787.
 
Motilal Oswal's pick
 
Sanghi Industries (SIL)
 
SIL's strength lies in its access to 1 billion tonne of quality marine limestone reserves, which should allow it to sustainably add capacity over the next 15 years.
 
We expect SIL's margins to expand by 8.4% over FY17-20, led by its three-pronged strategy: (i) Commissioning of a waste heat recovery system (WHRS), (ii) Focusing more on the coastal mode of transportation by way of acquisition of ships and (iii) Achieving a favourable revenue mix with higher proportion of Portland Pozzolana Cement (PPC).
In our view, SIL is a strong candidate for a re-rating, led by likely increase in its capacity from 4.1 million tonnes (mt) now to 8.2 mt over the next 30 months and anticipated scale benefits led by diversification into new higher-priced markets.