Quality picks: Brokerages bet on these 10 stocks, expect 14-37% upside

With rising hope for economic & earnings recovery, especially after Q1FY21 corporate results, and liquidity boost by global central banks, the equity market generated healthy returns in last four months.

The benchmark indices gained more than 45 percent each from March lows, while the broader markets also largely traded in line with frontliners. BSE Midcap index rose 42 percent and Smallcap index gained 50 percent during the same period.

Given the stellar rally in short period of time and most of the positive things in the price, experts feel the market is overvalued in terms of fundamentals and ratios. Hence, they expect some correction but they believe investors should use the expected correction to add more quality stocks.

"Currently, markets seem to be pricing in normalization of economic activities over the next few quarters despite the recent increase in COVID-19 cases in India. Therefore, we are likely to witness increased market volatility from here on given recent slowdown in economic activities. The volatility may continue for some time until the markets are not sure about the durability of the recovery," Jyoti Roy, DVP Equity Strategist at Angel Broking told Moneycontrol.

Given that India will remain a growth market in the long-term one cannot neglect growth stocks for a prolonged period of time, he advised.

Therefore, he believes that an investor's portfolio should be a mix of both growth and values stocks. "Investors can use corrections to buy into high-quality growth stocks as they will generate significant alpha over the long run."

Moneycontrol collated a list of top 10 quality stocks that could return 14-37 percent in next one year:

Brokerage: KR Choksey

HDFC Bank: Buy | Target: Rs 1,427 | Return: 37 percent

HDFC Bank's Q1FY21 results reflected strong balance sheet growth despite a challenging macro environment and improved cost income ratio on the back of decent loan growth. The bank's strategy is to increase its retail footprint and network of branches (336 added YoY). We see room for further cost efficiencies which will facilitate pre-provision operating profit (PPoP) growth while NIMs are expected to hold steady given its shift in lending mix towards wholesale business lately. The succession uncertainty subsided with the RBI approval for Sashidhar Jagdishan as MD and CEO of HDFC Bank.

We expect the premium valuation of the bank to continue, owing to its high ROE and satisfactory provision level. We reiterate buy rating on the shares of HDFC Bank.

HDFC Asset Management Company: Buy | Target: Rs 3,020 | Return: 27 percent

HDFC AMC is a strong retail brand with unique investor base of 5.6 million as on Q1 FY21. The AMC's Q1FY21 numbers reflected weakness on topline, supposedly to continue for the next 1-2 quarters as the ground numbers from the COVID-19 crisis are still not encouraging. However, we continue to stay positive on the company's fundamentals, market leadership position (around 14 percent of total industry AUM), diversified product portfolio, and several strategies focused on digitization of the business channels for improvement in efficiency. HDFC AMC will be able to generate growth once normalcy returns and retail investors resume the investment theme.

We expect the premium valuation of the AMC to continue, owing to its higher operational efficiency and industry leading AUM metrics. We reiterate rating to a buy on the shares of HDFC AMC.

Bajaj Finserv: Buy | Target: Rs 8,203 | Return: 30.4 percent

Amid lockdown, Bajaj Finserv enhanced its digital capabilities and continue to offer superior services to its customers. Both subsidiaries – BAGIC and BALIC recruited agents and POSP personnel in decent numbers (together around 4,000 agents hired in Q1FY21). Overall, the group managed the crisis well amid uncertainties. We expect Bajaj Finserv to deliver strong revenue growth at a CAGR of 11.7 percent from FY20-FY22.

Besides, BAGIC and BALIC, both the insurance arms, are solvent with 280 percent and 760 percent solvency ratio, respectively – which will enable to sail the crisis smoothly.

Minda Industries: Buy | Target: Rs 336 | Return: 19 percent

Minda Industries is one of the leading auto ancillary player with diversified product portfolio and having strong presence in 2-wheeler and 4-wheeler. MIL is expected to grow better than the industry on account of its diversified set product portfolio which includes switches, lighting systems, sensors, air bags, infotainment, batteries, alloy wheels, blow molded parts etc.

MIL reported 10 percent decline in revenue for Q4FY20 as compare to 20 percent decline automobile industry. The disruption due to COVID-19 added to slowdown worries, we believe new business and cost control measures to bring some respite. We expect overall Revenue/EBITDA to increase at a CAGR of 8/16 percent for the year FY20/22.

At CMP stock is trading at PE of 23x FY22E EPS of Rs 12.43 which is at a discount of 23 percent compared to its average 5-year P/E and we see attractive opportunity at current price. We apply a P/E multiple of 27x to FY22E EPS of Rs 12.43 to arrive at a target price of Rs 336 per share. Accordingly, we maintain a buy rating on the shares of Minda Industries.

CreditAccess Grameen: Buy | Target: Rs 684 | Return: 16 percent

CreditAccess Grameen is a leading NBFC MFI offering credit to its micro borrower base of 40.11 lakh across 14 states and an Union Territory. Gross Loan Portfolio (GLP) of Rs 11,720 crore has grown by 53.9 percent YoY. In our opinion, company's major business is in rural (82 percent of rural borrowers); and hence it has a wider scope to get back to normalcy post lockdown due to COVID-19.

We expect gradual recovery in disbursements on the back of steady demand and adequate liquidity. Accordingly, we assign P/ABV multiple of 2.43x to FY22E consolidated adjusted book value of Rs 281.6 per share to arrive at a target price of Rs 684 per share and maintain buy rating on the stock.

ITC: Buy | Target: Rs 228 | Return: 17 percent

We like ITC for its diversified operations across non-cyclical sectors, strong brand leadership position in cigarette business and focus towards establishing itself as a FMCG major. Despite the ongoing COVID-19 related slowdown, we see recovery signs in recent months and the current valuation attractive. Using SOTP valuation, we arrive at a target price of Rs 228 per share; and maintain a buy rating on the shares of ITC.

For FY20, ITC reported revenue growth of 2.2 percent YoY with major revenue coming from cigarette business and FMCG/Agri business. It is to be noted that the share of FMCG & Agri business improved to a significant around 45 percent in FY20 versus 27 percent in FY16 through continuous ramping and acquisitions. However in terms of profitability, it will take some time for FMCG business to contribute to overall profit (FMCG & Agri segment contributed around 7 percent to EBIT) which will lead to further valuation upside.

Brokerage: Angel Broking

Alembic Pharma: Buy | Target: Rs 1,400 | Return: 29 percent

Alembic is expected to gain market share from the current market share of 1.5 percent of Indian Pharmaceutical market (IPM). We expect Alembic Pharma to grow its topline by 15-17 percent in the upcoming years. Company has incurred large capex in infrastructure in the last couple of years.

ICICI Bank: Buy | Target: Rs 410 | Return: 14 percent

The ability to raise sufficient liquidity at low cost would be the key criteria for banks to navigate the current situation. ICICI Bank is clearly better positioned in the liability side (in Q4FY20, deposit grew 18 percent YoY and CASA ratio of 45 percent). ICICI Bank is trading (core banking business – 1.1x FY22ABV) at a significant discount to historical average valuations and offers favorable risk reward from current levels given global tailwinds.

HDFC: Buy | Target: Rs 2,075 | Return: 16 percent

The sufficient liquidity at low cost would be the key criteria for NBFC/Bank to navigate the current situation, as asset side inflow is limited due to moratorium. HDFC is able to raise fund at competitive rate owing to strong operating metrics, experienced Management and industry's best credit rating. HDFC is trading (Core Banking Business – 1.42x FY22ABV) at a significant discount to historical average valuations and offers favourable risk reward from current levels given global tailwinds.

L&T Infotech: Buy | Target: Rs 2,838 | Return: 15 percent

We expect the company to post revenue/EBITDA/PAT growth of 6.7/8.4/4.8 percent between FY19-FY22 despite COVID-19 outbreak impacting FY21 numbers. We expect limited impact of COVID-19 outbreak on L&T Infotech as most IT companies have already shifted around 90 percent of employees to work from home.