Portfolio picks: Emkay Global handpicks these 10 conviction buys

2018 started on a buoyant note but the momentum fizzled out post-January with small and midcap stocks witnessing a double-digit cut up to 80 percent.

Stock picking has become difficult even after the strong correction seen in the first six months of 2018. Failure of a meaningful pickup in earnings growth, high valuations, as well as selling by foreign institutional investors in the past two months are some factors which aided the decline.

So, the moot question is whether there is more pain left in the sector. Experts believe there could be further downside in this space but see plenty of opportunities arising out of the selloff.

Manish Sonthalia of Motilal Oswal AMC is bullish on midcaps. He told CNBC-TV18 that he sees ‘plethora of opportunities’ after the recent correction. “One could pick and choose stocks from this segment. In some cases, valuations have halved too.”

Among sectors, Sonthalia is currently downbeat on the IT space but remains bullish on consumer names, especially in the organised retailing side. "While valuations in some consumer names could be higher, their growth potential may justify them."

Here is a list of top 10 stocks handpicked by Emkay Global that could return 13-85 percent over the next 12-18 months:

Ashok Leyland: Buy| Target Rs 186| LTP 145.10| Return 28%

Ashok Leyland has gained a significant market share in the domestic MHCVs, increasing it from 26 percent in FY14 to 34 percent in FY18, driven by product launches and network expansion.

Going forward, we expect it to sustain this market share and clock volume CAGR of 10 percent over FY18-20E, led by up cycle in domestic MHCVs on account of strong sales of construction tippers, overloading restriction, proliferation of hub & spoke model (due to GST/E-way bill implementation) and gradual improvement in industrial production.

Aurobindo Pharma: Buy| Target Rs 690| LTP 609| Return 13%

Despite a weaker 2HFY18, Aurobindo Pharma continues to enjoy amongst the highest return on equity (ROE’s) which stood at 18 percent is the highest amongst its comparable peer set (< 16%).

Aurobindo Pharma is set to make significant inroads into the a) Biologics b). Capabilities in complex orals as reflected in approvals like gRenvela etc. Overall with a).EPS CAGR over FY18-20 and b) ROE/ROIC >18/28% for FY20E makes Aurobindo top pick in the generic space.

HDFC Bank: Buy| Target Rs 2306| LTP 2037| Return 13%

Emkay sees HDFC Bank as the best quality bet in the prevailing environment. The bank has continued to maintain a dominant market leadership in retail assets. The brokerage firm expects HDFC Bank to continue gaining market share due to lower continued lending opportunity in retail assets and weakened competition from PSBs in the mid-corporate space.

Though the bank’s asset quality has slipped a bit recently due to volatility in agri portfolio, we expect it to stabilize going forward.

Overall, the bank’s robust distribution network, excellent liability franchise, a wide range of products, and scalable digital infrastructure will continue to help deliver over 20 percent business growth and a high teen RoE going forward

ICICI Bank Ltd: Buy| Target: Rs 392| LTP: Rs 284.65| Return 38%

ICICI Bank’s asset quality looks cleaner after Q4FY18, as significant slippages (Rs150bn+) came from known stressed assets leading to a decline in the bank’s watch list to just Rs49.8bn.

Outstanding stressed loans now comprise 2.6 percent of the net advances (Rs134bn). Emkay expects the declining exposures to low rated corporate book and a high share of retail loans to improve operating profit of the bank.

Insecticides India Ltd: Buy| Target: Rs 1,080| LTP: Rs 717.05| Return 50%

From a generic agrochemicals player, the company has developed a three-pronged growth strategy, which focuses on R&D, Manufacturing, and Marketing.

Through its in-house R&D efforts, the company is working on developing 4-5 new innovative products to be launched in the domestic market next year. Insecticides India is ready to launch 1-2 off-patent products for the first time in India under 9(3) registration.

KEC International Ltd: Buy| Target Rs 502| LTP Rs 369| Return 36%

Apart from having an entrenched presence in the domestic T&D business, KEC International also has a strong presence across many countries in the Middle-East, SAARC region, Far East Asia and the Americas.

The presence across multiple verticals (T&D, Cables, Railways, Civil, Solar etc.,) and geographies would enable KEC International to successfully endure regional or sector-specific slowdowns and continue on its growth path. Order backlog across all business segments stands at Rs173bn to be executed over the next 24-30 months.

NBCC Ltd: Buy| Target: Rs 158| LTP: Rs 85.30| Return 85%

Bestowed with the “PWO status”, NBCC has built a niche business model, backed by strong credentials, vast clientele and exceptional track record on execution. Emkay believes that NBCC’s growing significance among the government agencies and the open book tendering process safeguard operating margin the range of 6-8 percent with minimum downside risk.

The distinct business model is underpinned by a negative working capital cycle and robust return ratios (25%+), which along with minimal capex lend solidity as the entire construction work is outsourced to private players.

Petronet LNG Ltd: Buy| Target: Rs 305| LTP Rs 217.60| Return 40%

Emkay Global like Petronet LNG as a steady business model de-risked by term contracts (on 100%+ capacity) with the annual escalation in tariffs embedded.

The brokerage expects a 6-7 percent LNG regas volume CAGR during FY18-20 and coupled with 5 percent tariff escalation in its Dahej terminal implies 12 percent earnings CAGR. The business generates over 20 percent ROE and 7 percent FCF yield with higher dividend potential.

SBI Life Insurance (SBIL): Buy| Target: Rs 894| LTP: Rs 689.60| Return 29%

Emkay Global expects SBIL’s premium growth to outpace peers, largely on the back of its sharp focus on the retail franchise (40% of SBI’s 25,000 branches are yet to be activated).

SBIL’s strategy to tap parent company’s savings account holders based on internal filters (currently sells only to less than 0.5 percent on the annualized basis of savings accounts with a target to tap 15% customer base) will result in higher conversion from the low-cost bancassurance channel.

Ramp-up of agent network will further aid in boosting sales. It is also looking at 8-10 new tie-ups in the current fiscal (in advance talks with one of the prominent player).

SRF: Buy| Target: Rs 2305| LTP: Rs 1880| Return 22%

SRF’s speciality chemical could deliver high double-digit revenue growth on the back of an expected pick-up in speciality chemical and ongoing robust performance in refrigeration gas segments.

In FY18, the segment contributed 33% to revenues and 37% of EBIT. This segment had contributed 51% to EBIT margin in FY16. Hence, Emkay Global expects a significant uptick in EBIT margin post revenue recovery in Speciality chemicals.

Sterlite Technologies Ltd: Buy| Target: Rs 500| LTP: Rs 297| Return 68%

Amongst 8 fully integrated Optic Fibre (OF) manufacturers globally, only one in India. Domestic market leader 40 percent share (global share is 6%).

Almost 13 percent cost advantage over domestic peers. Optic fibre capacity increase from 30m KM to 50m KM by FY20 (capex of Rs12bn in 3 yrs via internal cashflows). Revenue visibility for two years backed by strong demand (foreign and domestic clients).