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Tuesday, 3 December 2019

Tata Motors, L&T Fin among top 10 brokerage picks for mid to long term

The BSE mid-cap index added 2.35 percent, while the small-cap index rose 1.55 percent and the BSE large-cap index was up 1.20 percent in the past week.

After remaining subdued for the last three weeks, the Indian benchmark indices rose 1 percent in the week that ended on November 29 despite profit booking having dragged the market down after hitting fresh record highs.

In the past week, the Sensex rose 437.12 points (1.07 percent) to end at 40,793.81, while the Nifty rose 141.6 points (1.18 percent) to end at 12,056.

The Sensex and Nifty index touched a fresh record high of 41,163.79 and 12,158.80 respectively on November 28.

"As expected Q2 FY20 GDP has dropped to 4.5 percent, which is the lowest level since six years, as compared to five percent in Q1 FY20. India’s manufacturing and industrial sectors have been witnessing a slowdown, along with fall in consumer demand, private investment and global slowdown. Thus, to revive growth, we expect RBI to again cut repo rate by 25 bps on December 5 policy," said Rahul Gupta, Head of Research-Currency, Emkay Global Financial Services.

The BSE mid-cap index added 2.35 percent, while the small-cap index rose 1.55 percent and the BSE large-cap index was up 1.20 percent in the past week.

"We expect the index to trade with a positive bias above 11,900. It is likely to eventually move up to 12,300. The contracting IV is likely to attract further OTM Put writing," said Amit Gupta, Head – F&O, ICICI direct.

"The open interest in Nifty futures is still low at 14 million shares. Previously, we have seen this reaching even 19 million shares. Hence, there is still room for open interest to be added in the Nifty, which can drive further upsides.

Here are the top 10 stocks wherein brokerages expect upto 26 percent upside in medium to long term:

ICICI Securities

Sunteck Realty | Rating: Buy | Target: Rs 487 | Upside: 24 percent

The company recently launched its Avenue 4 residential project at its Oshiwara District Centre (ODC) mixed-use township in Goregaon, Mumbai.

The two launched towers in Avenue 4 can potentially generate Rs 12-13 billion revenue for the company over the next 3-4 years at current selling prices.

The Avenue 4 launch, along with the expected launch of Naigaon affordable housing Phase 2 in Q4 FY20, and the possible launch of the recent Andheri (W) project acquisition either in Q4 FY20 or Q1 FY21, is expected to provide the much needed sales momentum for the company in H2 FY20.

L&T Finance Holdings | Rating: Buy | Target: Rs 130 | Upside: 8 percent

The company's rural finance book grown by 2.5x in 2.5 years. A key driver of this has been microloans. The company has expanded into 17 states and its book now accounts for 48 percent of the total rural lending book compared to 35 percent in FY17.

The AMC business has witnessed 44 percent AAAUM CAGR over the past three years, with the share of equity increasing from 41 percent to 55 percent. With improving profitability, Motilal Oswal believes this business is on track to deliver INR 2b+ PAT in FY22.

Over the coming years, the company's management has outlined a clear set of goals – stable ‘NIM + fee,’ healthy asset quality, revitalization of the balance sheet, and prudent ALM management.

With the gradual run-down of the DCM book, volatility in fees is likely to reduce, while the AMC business is on a track for improving profitability.

Aegis Logistics | Rating: Buy | Target: Rs 247 | Upside: 26 percent

The company has been a key beneficiary of the government’s thrust on increasing LPG penetration in the country. In FY19, the company handled 2.5mmt (19 percent) of the total 13.2mmt LPG imports in India.

Over FY19-21, the company is expected to post a logistics volume CAGR of 25 percent with a logistics EBITDA CAGR of 40 percent. Logistics enhancement is expected to help the company ramp up its market share to 30-33 percent in the near to medium term.

Its logistics segment is expected to contribute 64 percent to the gas division’s total EBITDA in FY20-21, led by improving utilization at the Mumbai and Pipavav LPG terminals.

The company plans to fund its entire capex through internal accruals.

The broking house expects a strong cash flow generation of Rs 6.5 billion over FY20-21 and return ratios to likely hover above 20 percent over the same period.

Ultra Tech Cement | Rating: Buy | Target: Rs 5,050 | Upside: 18 percent

Due to weak cement demand and the dismal performance of its Century Cement assets that it acquired in 2QFY20, the company has under performed the Sensex by 10 percent over the past three months.

With limited capex needs going forward, strong free cash flow (FCF) generation will likely drive deleveraging and 550 bps improvement in RoE over the next two years.

However, the broking house maintains its positive stance on the company as it remained one of its top picks in the sector.

Broking house forecasts Century's EBITDA to increase to Rs 1.6 billion in 4QFY20 and Rs 7 billion in FY21, contributing 5 percent and 6 percent, respectively to the company’s consolidated EBITDA.

Profitability improvement will primarily be driven by lower costs with better fixed cost absorption, reduced energy costs and freight cost savings.

Realization will likely improve in 4QFY20 as most of Century’s capacities will transition to the UltraTech brand by December 19, bettering pricing by INR12-15/bag, it added.

Tata Motors | Rating: Buy | Target: Rs 195 | Upside: 21 percent

The broking house believes that the JLR’s volumes are expected to stabilize in FY20 with several upgrades and refreshes coming over the next 12-18 months and the completion of inventory de-stocking.

It expects JLR's volumes (including JV) CAGR of 5 percent over FY19-22, coupled with the possibility of an improvement in the mix, and a reduction in variable marketing spend, would drive an improvement in realizations.

JLR’s targeted transition from ‘push’ to ‘pull’ strategy for volumes, particularly in China, would be a critical variable for margin expansion.

Kotak Securities

Engineers India | Rating: Buy | Target: Rs 130 | Upside: 23 percent

The stock is trading at reasonable valuation of 14.9x and 11.4x for its FY20E and FY21E core earnings.

The broking firm places the value of its FY21 core earnings of Rs 5.5 per share (excluding other income adjusted for tax) at PER 15x and the add back cash per share of Rs 46 per share in FY21.

The management has guided for EBIT margin of 23-30 percent in consulting and 5 percent in LTSK projects.

The company is expecting to close the current fiscal with an order intake of Rs 16-18 billion. The company's management believes that this is achievable as it receives several smaller size orders which should help it reach there.

SPA Securities

Escorts | Rating: Buy | Target: Rs 784 | Upside: 23 percent

The company's farm equipment segment performance shown signs of recovery in last couple of months, while construction equipment segment volumes are expected to pick up in FY21.

Improving margins in construction equipment division and increasing contribution of railway division is expected to partly offset margin pressure due to fall in volume in farm equipment segment.

Research house expect revenue/EBITDA/PAT to grow at a CAGR of 9.3 percent/5.7 percent/ 11.1 percent from FY19 to FY21.

The stock is trading at 11.6x its FY21E earnings and as most of the negativity is factored in the price it maintain buy with a revised fair price estimate of Rs 784 in 12-18 months, 14x its FY21 EPS.

Reliance Nippon Life Asset Management | Upside: 12-15 percent

The company's retail segment contribution to the total assets under management (AUM) is 26 percent, which is a positive, as it is considered a relatively sticky segment. The company also has lower concentration risk as no distributor has more than 5.5 percent contribution in AUM.

The recent acquisition of a 75 percent stake of the company by its foreign owner removes ownership overhang.

With a new brand name and a strong and stable owner, the broking house expects the company to improve its flows and/ or curb outflows. It maintained a positive view and expected a potential upside of 12-15 percent.

However, the rise in distributor commissions and increased competitive intensity to grab market share may impact profitability.

Geojit Financial Service

Minda Industries | Rating: Accumulate | Target: Rs 388 | Upside: 12 percent

Geojit Financial Service lowers its revenue/PAT estimate for Minda Industries' FY20 by 4 percent, and upgrade FY21 PAT estimate by 4 percent to factor in a tax benefit.

The company's product diversification and increasing growth from new products gives better visibility on the revenue front. Implementation of BSVI norms and enhanced safety features will further lead to increase in Kit value per vehicle across the auto segment.

The broking house believes that the stock will trade at a premium valuation owing to the Haritha seating merger with company that is expected in Q4 FY20. It values the company at 26x for FY21E EPS and arrived at a target price of Rs 388, and upgraded its rating to accumulate.

Deepak Nitrite | Rating: Accumulate | Target: Rs 396 | Upside: 17 percent

The stock with revised target of Rs 396 (previous target Rs 332) based on 10x FY21e earnings.

The stock currently trades at 9.5x FY20e EPS of Rs 36.37 and 8.7x FY21e EPS of Rs 39.64.

The company is planning to increase its basic chemicals capacity by some 20 percent in the coming period.

Despite record margins of performance in the company's products business in the first half of the current fiscal, there is little chance for the sustainability of current margins of over 50 percent.

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