Motilal Oswal names Maruti, ICICI Bank among top 10 Diwali picks

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Hindalco, Maruti Suzuki and ICICI Bank are among the big Nifty names that Motilal Oswal is placing its bet on, this Diwali.

Hindalco, Maruti Suzuki and ICICI Bank are among the big Nifty names that Motilal Oswal is placing its bet on, this Diwali. The brokerage house has recommended a total of 10 stocks as its Diwali bets.

Maruti’s pick is based on expectations of gain in market share and strong earnings growth, while Hindalco is a recommendation based on multiple factors, including a strong balance sheet.

Meanwhile, ICICI Bank remains a pick based on focus on growth in core portfolio.

The Indian stock market has had a challenging year, marred by incidents of PNB scam, levying of long term capital gains tax, introduction of additional surveillance measures, reclassification in mutual funds as well as liquidity crunch in the NBFC segment. Challenging global and domestic marco environment, including weak rupee, higher crude prices and US-China trade war also weighed on sentiment.

In fact, the recent correction has been a rather sharp one, with the Nifty and the Sensex falling around 12 percent after scaling an all-time high in August.

Going forward, expect some rangebound moves till dust around elections settles. Here are the Motilal Oswal’s top bets for Diwali:

Maruti Suzuki: Target: Rs 8,484, Return: 26%

We are positive on Maruti Suzuki, considering its multi-year favourable product lifecycle, improvement in product mix, aiding realisations and consequently margins, reducing JPY exposure,lower capex intensity, improvement in FCF conversion and sharp improvement in RoIC.

We believe the company would gain further market share, driven by 10 percent volume CAGR over FY18-21. We expect the earnings growth to remain strong for Maruti, driven by higher volumes and margins.

Hindalco Industries: Target Rs 338, Return: 46%

Hindalco’s India business is generating strong FCF, despite factoring in lower margins in the aluminum business led by lower LME and 3-4 percent higher cost of Production. Copper business is benefitting from strong by-product prices. It has a very strong balance sheet, with a net debt-to-EBITDA ratio of 2.9x.

We expect EBITDA and EPS CAGR of 15 percent and 20 percent, respectively, over FY18-20, driven by growth at Novelis and the acquisition of Aleris. By FY20, RoE is expected to improve by another 70bp to 13.5 percent, while RoCE (pre-tax) is expected to increase by 110bp to 10.4 percent.

LIC Housing Finance: Target Rs 550, Return: 31%

The mortgage market has been in a hyper competitive mode leading to increased balance transfers and moderation in growth. Yet, with significant under-penetration and improving home affordability, this segment is expected to grow at 15 percent CAGR over the medium term. We believe the worst is over on the spread front and it should stay stable/improve going forward. This should result in NII and PAT growth being in line with balance sheet growth.

We estimate an EPS growth of 28 percent over FY18-20 with RoEs expanding to 16 percent in FY20 from the current 13 percent.

PVR: Target Rs 1650, Return: 21%

PVR is expected to report a strong 23 percent revenue CAGR over FY18-20 driven by acquisition of SPI Cinemas, 84/100 screen additions in FY19/20 in PVR portfolio, healthy content pipeline driving footfalls and stable ATP and SPH.

We expect 30/36 percent consol. EBITDA/PAT CAGR over FY18-20. Besides, mid-double-digit growth in advertising revenue bodes well. Going forward, an upbeat earnings outlook and a fillip in return ratios augurs well for PVR.

Oberoi Realty: Target Rs 574, Return: 34%

Oberoi Realty has one of the strongest balance sheets among Real estate companies, with negligible net debt. As of FY18, the company had net debt to equity of 0.3x. With strong monetization visibility from its ongoing and upcoming projects, Oberoi is expected generate healthy free cash flow over FY18-20.

We believe such financial strength offers the company with an opportunity for value-accretive land acquisitions to drive growth potential beyond the existing land bank. OBER plans to multiply its annuity portfolio from 1.6msf to 4.2msf resulting in leasing income increasing by 4x over the next five years.

Infosys: Target Rs 800, Return: 20%

Infosys is building a base for improved revenue growth – in its three-year roadmap; while favorable currency provides a tool to effectively address attrition, among other headwinds to business.

For 2QFY19, it’s consolidated revenue/EBITDA/PAT grew 17/14/10 percent YoY. 2QFY19 revenue was largely driven by digital which grew 33.5 percent YoY CC. The company signed USD 2 billion worth of deal wins in the quarter. Thus visibility on revenue growth lent by 2Q execution and deal wins is likely to drive growth going ahead.

Indraprastha Gas: Target Rs 373, Return: 33%

We are positive on IGL due to IGL’s consistent operational outperformance, the government’s thrust on gas usage, and sustainable high-growth market. Led by the strong focus on curbing pollution in the NCR, CNG sales volume is likely to grow strongly. The expected restriction on the usage of dirty fuel would propel volume further for the company.

We expect 12 percent volume growth in FY19/20 and EBITDA/scm at Rs 5.9scm. IGL has received permission from the Haryana government to lay a city gas distribution network in a part of the Gurugram district. We believe more such permissions in other areas of Gurugram can boost IGL’s prospects.

ICICI Bank: Target Rs 400, Return: 13%

ICICI Bank reported better than expected set of numbers for Q2FY19. ICICI is in the midst of an improvement in the operating environment and is showing healthy signs of earnings normalization. With challenges related to management transition getting addressed, the bank is now focusing on growing its core operating profits.

Britannia Industries: Target Rs 6,870, Return: 23%

Rapidly expanding distribution, continuing investment in R&D, rapid pace of new launches and significant expansion of its own manufacturing indicate the immense confidence that management has on growth prospects. Opportunity beyond biscuits is also substantially high. Continuing premiumization, significant incremental cost savings and a favorable commodity cost outlook mean further EBITDA margin expansion prospects are bright as well.

Exide Industries: Target Rs 314, Return: 24%

OEM and replacement demand remains healthy in both automotive and industrial segments. Also, there is a gradual shift away from unorganized to organized players. We believe that the battery industry should benefit the most and grow at a CAGR of 10-12 percent over the medium-to-long term.

We expect Exide to continue gaining market share, backed by new product launches for existing and new applications, and a sharp focus on customer service and marketing infrastructure.

Research firm Religare Broking has also come out with top stock ideas for Diwali

Ashok Leyland: target Rs 144, Return: 27%

The domestic CV industry’s healthy growth is expected to continue led by increased spending on infrastructure, pick up in private capex, agriculture and allied activities. We believe all stands to benefit from the upcycle in the CV industry given its strong position in the M&HCV and LCV segment. Further, implementation of BS-VI emissions norms from April 2020 would also lead to pre-purchases in H2FY20.

Further, the proposed implementation of CV scrappage policy reduces concerns of volume growth post FY20 as it is likely to create an additional demand of ~2-2.5 lakh vehicles. Although rising raw material prices and depreciating currency are headwinds to ALL’s profitability, we believe the same would be mitigated by price hikes as evident from its stable gross margin levels in the past and low competitive intensity. We recommend a buy on the stock with a target price of 144.

Asian Paints: Target Rs 1378, Return: 15%

The Indian paints industry is estimated to grow at a healthy pace of 13 percent CAGR over the next two years to Rs 70,875 crore, led by Government’s initiative towards promoting the growth of housing sector, rising disposable income and reduction in average repainting cycle. Further, the recent rationalization in the GST rates in paints could benefit the organized players in the long run. Moreover improved product mix and operating leverage should provide cushion to margins which would mitigate concern of rising crude oil price.

We estimate revenue and PAT to grow by 10.9 percent and 12.2 percent CAGR respectively over FY18-20E, driven by steady capacity addition, wide distribution reach and continued efforts towards innovative launches. APL is well placed to capitalize on the available opportunities. We recommend a buy on the stock with target price of Rs 1,378.

Britannia Industries: Target Rs 6519, Return: 23%

Britannia Industries is one of the largest biscuit makers in the country and the Indian biscuit industry is estimated to grow at a healthy pace. We believe BRIT would be able to gain market share and sustain its leadership position on the back of benefits from GST to organized players, new launches and increasing distribution in states were it has a weaker presence.

Further, we estimate revenue and PAT to grow by 13.6 percent and 19 percent CAGR respectively over FY18-20E, driven by steady capacity addition, improved product mix (more products in premium category), wide distribution reach, continued efforts towards renovating & innovative products, and cost saving. We recommend a Buy on the stock with target price of Rs. 6,519.

Cummins India: Target Rs 835, Return: 25%

Cummins’ strong parentage and technological capabilities gives it an edge over competitors. Its innovative products and solutions, market leadership particularly in HHP in domestic market, rising optimism for export recovery and margin expansion make us positive on its prospects. Cummins trades at a significant discount of around 30 percent to its 5-yr historical average of 30xP/E (1 year forward).

We recommend a buy on Cummins with a target price of Rs 835 assigning a P/E of 26xFY20E EPS.

Godrej Consumer Products: Target Rs 897, Return: 28%

Led by demand uptick and company led initiatives towards constant focus on product innovation, increasing penetration & distribution reach and sustained brand building efforts, we estimate GCPL’s consolidated Revenue and PAT to grow by 12.8 percent and 16.8 percent CAGR respectively over FY18-20E. Volume offtake in the domestic business is likely to remain healthy. There is enough room for penetration led growth in categories like HI, Hair Colour and Air Fresheners in the coming years.

Strong brand equity, low leverage, robust cash flows and healthy dividend pay-outs justify premium valuation. We recommend a Buy on the stock with target price of Rs 897.

Voltas: Target Rs 697, Return: 32%

Led by revival in the consumption and Capex cycle and company’s efforts towards brand building, enhanced product offerings and widening distribution reach, Voltas’ consolidated net revenue and PAT are estimated to grow by 12.5 percent and 13.5 percent CAGR respectively over FY18-20E. The growth is likely to be driven across business segments.

Improving mix and operating leverage should result in steady EBITDA margin gains for the company. Leverage free balance sheet, healthy cash flows & steady dividend payouts should provide valuation comfort. We recommend a Buy on the stock with target price of Rs 697.