Festive season to be next trigger for consumption demand-driven economy; 3 stocks to bet on

Anand Rathi Shares and Stock Brokers

Auto companies reported strong sales numbers in the commercial vehicles’ (CVs) segment for August 2018. Two-wheelers and passenger vehicles sales growth were modest and can expect good growth in the upcoming festive months.

We believe the upcoming festive months will be next trigger for our consumption-demand driven economy. Consumption and discretionary demand has always been high in India due to economic growth and demographic of young population. Strong demand has been seen in consumer durables, FMCG, retail & auto among others.

Export-oriented companies in IT, pharma & other sectors are seeing more investor interests; due to positive factors like favorable rupee, buy backs & reasonable valuations.

However, the rising bond yields & weak rupee are a concern for the market’s overall.

The stocks we like are -

Sundaram Fasteners | Rating: Buy | Target: Rs 760

The firm’s revenue from operations improved by 22.4% year on-year to Rs 971 crore. It achieved the reported PAT of Rs 106 crore, a growth of 17.8% year-on-year with a net margin of 10.9%.

The company is also significantly adding capacity and incurred Rs 200-300 crore capital expenditure in FY18.

Further, the management is expecting to invest Rs 350 crore in FY2019.

The company is expanding its capacity and making concentrated efforts to improve the product mix with focus on high-value products and increased contribution of exports. It is a quality ancillary player with robust return ratios and is poised to further improve its earnings growth momentum.

Anticipating the future growth potential of the auto component industry and the positioning of the company as a multi-product and multi-location company, it has huge growth potential and thus we maintain BUY with target price of Rs.760 per share.

Voltas | Rating: Buy | Target: Rs 680

Voltas being a strong brand in the room air conditioner (RAC) segment has maintained its market leadership position in India despite rising competition. It reported a growth of 10.5% in its consolidated revenue at Rs 2,148 crore in Q1-FY19 as against Rs 1,944 crore in Q1FY18.

Out of Rs 4,623 crore worth of the total order book, the international order book was at Rs 1,914 crore while domestic order book was at Rs 2,709 crore.

The joint venture company, Voltbek, will be launching new products in refrigerators, washing machines, micro waves and other white goods/domestic appliances under the brand name of Voltas-Beko. There will be a capacity of 1 mn refrigerators and washing machines and 0.5mn micro wave ovens.

With continuous improvement in operating performance, we expect a healthy up side in the near-term too. We continue to maintain Buy with target price of Rs.680.

Persistent Systems | Rating: Buy | Target: Rs 960

The firm believes that Persistent can stage a strong recovery in FY19. Over the last two years, the company’s focus has been on Digital, which has helped it build capabilities in key technology areas as it transforms to software-driven businesses. The company is investing more in sales & marketing in FY19.

In FY19, part of the revenue shortfall is likely to be reversed and margins may be supported by currency/tax breaks.

With its cash balance now, of USD 175m, it will be seeking more acquisitions to expand its geographical reach, mainly in non-US markets, and is not keen on acquiring legacy businesses.

Levers to improve margins expansion

1) Better business mix,

2) Incremental IP revenue.

3) Greater utilization ratio

4) Pricing

5) Favorable currency factor.

Q1FY19 revenue of USD 123.6 million was up 5.7% QoQ, 9.4% YoY, driven by IP-led revenue, up 30% QoQ, 10% YoY.

The 16.8% EBITDA margin was better than anticipated. The 16.8% EBITDA margin was up 203bps QoQ, 245bps YoY, as IP sales came at higher margins.