Here are 5 fundamental picks from Centrum Broking to tap mispricing opportunities

A strong rally on D-Street pushed benchmark indices above their crucial resistance levels, but the big question remains where should investors deploy their money?

Investors’ focus should be on stocks that are fundamentally sound, are displaying earnings momentum, have a margin of safety and good corporate governance standards.

Keeping the above parameters in mind, Centrum Broking has come out with its top five high conviction ideas to highlight favourable mispricing opportunities for investors.

Needless to mention, these long ideas continue to be consistent with the investment philosophy of recommending sound businesses characterized by high operating and free cash flow generation coupled with a good return on equity (ROEs) and high dividend payout ratios, the brokerage added in its note.

All the five ideas that we showcase in our current top picks note are a reflection of our investment philosophy and we remain confident in their value creation capability from a medium to long-term perspective, Centrum added.

Here are top five stock picks and rationale behind each pick as given by Centrum Broking:

ACC: Buy | Target: Rs 1,820

We like ACC owing to its attractive valuations amid healthy cash flow generation and return ratios. The recent announcement for a major capacity increase of 6 MTPA after a long pause of almost a decade affirms the promoters focus on growing India business.

Rising industry utilisation should bolster pricing power, recent material supply agreement with Ambuja and sustenance of recent correction in diesel and petcoke prices should further provide profit tailwinds.

We estimate ACC to deliver 11.5 percent/15.8 percent EBITDA/PAT CAGRs during CY17-20E and its RoE to firm up to 12 percent in CY20E from 10 percent in CY17.

DCB Bank: Buy | Target: Rs 230

DCB bank with the well-defined product portfolio and customer segment stand to gain from the under-penetrated and under-served retail (self-employed) and SME segment, which is its key area of presence.

Strong capital position and deeper product understanding augur well for a sturdy 24 percent CAGR in loans over FY18-21E. Centrum Broking calculation suggests that the newly added branches have started to break-even and will aid in containing overall cost/asset ratio.

While we see risk to margins, the operating leverage benefit and limited asset quality risk will translate into an improved RoA of 1 percent and ~14 percent RoE by end-FY21E. The stock trades at 1.7x FY21E ABV.

The consistency in earnings has seen stock trade at a valuation premium to its peers and the trend is likely to continue in the near future.

Federal Bank: Buy | Target: Rs 135

Federal Bank is evolving to a more prolific private banking franchise on the back of its balance sheet size, quality growth trajectory, pan India expansion strategy, branch light–distribution heavy model, digital architecture and senior management pedigree.

The talent arbitrage that earlier existed between larger private banks and its regional peers no longer holds for Federal Bank, since in the recent past, it has hired several senior persons across various businesses.

Productivity in network-2 locations will enhance overall operating efficiency. Capital adequacy is at healthy levels (CAR-13 percent). Stressed asset ratio has substantially declined over FY14-Q3FY19 (best among regional peers) and we expect the credit costs to recede over FY18-21. Valuation at 1.1x FY21E ABV looks attractive.

Mindtree: Buy| Target: Rs 1,030

Mindtree has a well spread vertical mix with a strong presence in technology, media, travel and retail CPG vertical. With revenues almost reaching $1 bn for FY19E, the company is well poised to break into the big league.

We expect Mindtree’s US dollar revenues to grow by 17.8 percent/14.1 percent/14.3 percent for FY19/FY20E/FY21E. The EPS estimates are Rs 54.5/64.5 for FY20/FY21E.

Mindtree trades at 14.4x FY21E EPS (LTI trading at 16x FY21E EPS). The domestic brokerage firm values the stock at 16x FY21E EPS.

Tata Metaliks: Buy| Target: Rs 865

We like Tata Metaliks (TML) as its DI pipe business boasts of an industry-leading cost structure, solid demand drivers and strong entry barriers.

With commissioning of PCI project by Q4FY19E coupled with several other productivity improvement initiatives, TML is expected to deliver steady earnings growth of 12 percent CAGR over FY19-21E.

The recent announcement of DI pipe capacity expansion and equity infusion will provide a growth trajectory, in turn, improving margin profile and substantially lowering TML’s debt.

We find attractive valuations at FY21E P/E of 9x with reasonable scope for a re-rating given the strong balance sheet and attractive return rations.