The S&P BSE Sensex has run up about 34 per cent over the past one year; This rally is fuelled by the formation of a new, stable government at the Centre and hopes of macroeconomic recovery, some signs are already visible.
More, many market gurus expect the Sensex to reach 30,000 levels by December and 40,000-45,000 in three to four years.
The steps taken by the Reserve Bank of India in a year are bearing fruit, with the rupee-dollar exchange rate stable, current account deficit reducing and inflation inching lower.
The government has taken steps (more are desired). Over a period, these should result in higher gross domestic product (GDP) and earnings growth rates. While the GDP growth for 2014-15 is pegged at over 5.4 per cent versus 4.7 per cent in 2013-14, earnings are expected to grow 12-15 per cent in 2014-15, with stronger growth after that.
The softening of global crude oil and metal prices should help the country. The flip side is the worsening of geopolitical events, sharper-than-expected rise in US interest rates and higher-than-estimated slowdown in Europe and China, among others. While most large- and mid-cap stocks have rallied this year, there are still some that offer good upside from current levels and enjoy strong earnings visibility.
Though large-cap stocks will continue doing well, if the expected run continues, mid-cap stocks should deliver better returns.
Here is a list of 10 such stocks within the BSE 500 that have high upside potential and are expected to deliver healthy earnings growth over FY14-17.
Tribhovandas Bhimji Zaveri (TBZ)
TBZ is a jewellery retailer. Strong brand equity, established presence in the west and south and in-house design and manufacturing are its key strengths.
The company, which has large-format stores, plans to open 25 to 30 by FY17 and expand its presence nationally from the current strength of 27. FY14 has been tough for the company, with demand moderating and stringent regulations on the sourcing of gold, its key input.
However, with the partial easing of sourcing norms (such as the removal of the ban on gold on lease) and likely improvement in the consumption demand, TBZ’s performance in FY15 is expected to improve.
Further reduction of import duty on gold will be a key trigger. While rising competition is a key risk, TBZ’s record should.
With lower revenue growth and higher interest costs on account of high debt, HCC’s profit growth has been hit in recent years.
Analysts, however, expect its debtcutting efforts to pay off. They expect its business to pick up on the back of an economic recovery.
HCC’s efforts over 18 months to speed the liquidation of receivables is already paying dividends. It also plans to divest non-core assets.
Analysts expect HCC to repay about 60 per cent of its restructured debt by end-FY17. Importantly, its order intake continues to grow, something not many construction and engineering companies have managed.
While the core business is steady, order inflows are also likely to improve at a compound annual growth rate (CAGR) of 17 per cent over FY15-17.
Den Networks is a multi-system operator (MSO) in India, with 13 million subscribers. Of these, eight million will be digitised in Phase-III and -IV, pushing its subscription revenues threefold to 1,200 crore or Rs 12 billion by FY16/FY17, estimate analysts. Den also has a strong balance sheet, with net cash of around 110 crore or Rs 1.10 billion.
This is crucial and will enable Den to invest in digitisation, broadband and the Indian Soccer League. Den is the first national MSO to turn profitable and its new ventures will further improve its profitability. High competition from direct-tohome and MSO companies is a key risk and can lead to subscriber churn and limited average revenue per user growth, but Den’s record and strong management inspires confidence.
The scrip trades at 6.5 times FY16 estimated enterprise value/Ebitda, at a 46 per cent discount to Hathway. Analysts expect this valuation gap to narrow as Den realises benefits of digitisation.
Firstsource Solutions is among India’s top-three business process management services companies.
The company has turned round after its acquisition by RP-Sanjiv Goenka Group-led CESC in 2012.
The new management not only paid off the $237-million foreign currency convertible bond (FCCB) obligations, but also restructured the business to do away with nonprofitable clients and focus on higher mining of existing profitable ones.
This has improved the deal pipeline and led to higher Ebitda margin.
Analysts expect the Ebitda margin to improve by 230-250 basis points to 14.1 per cent over FY14-16 as the company focuses on cost optimisation and gains.
The recovery in the automobile segment should help the company as the domestic business makes up 62 per cent of overall revenues and 80 per cent of operating profit.
The domestic business, which has seen a strong increase in the profit in recent quarters, will see growth on higher auto sales, localisation efforts of original equipment makers and vendor rationalisation.
The trigger, however, remains deleveraging (getting rid of debt).
The company’s debt is ~15,000 crore, translating into a net debt to equity ratio of just under two and net debt to earnings before interest, taxes, depreciation, and amortisation (Ebitda) of 4.3. The company also has to improve its single-digit return ratios.
While there is an upside to the stock, investors should track the pace of the debt reduction and turnround in international operations, to provide further boost to the financials.
Analysts see strong earnings growth for Indiabulls Power over FY15-17, likely to be driven by complete commissioning of all its power generation units at Amravati and Nashik.
The recent Supreme Court order on coal-block allocations does not impact the company, which does not have any mines.
It has domestic coal linkages from Coal India for its entire planned capacity of 5,400 megawatts.
The Maharashtra Electricity Regulatory Commission’s compensatory rate to power plants facing shortage of supplies from Coal India will apply to both its plants.
The promoters’ plan to infuse ~350 crore in the company should strengthen the balance sheet.
Motilal Oswal Financial Services (MOFS) stands to be a key beneficiary of a revival in Indian capital markets.
Weak markets, declining cash volumes and the National Spot Exchange Limited (NSEL) scam had pressured the scrip since January 2012.
While the scam outcome is awaited, an adverse ruling could hurt MOFS. Meanwhile, the company has forayed into housing finance.
This should boost growth rates and profitability in the long run. Asset management and private equity businesses also enjoy higher returns on equity (RoE), and improving sentiments in the capital markets should lead to stronger growth. Also, RoE of the financing and investment banking businesses (closely linked to the broking business) should improve as the broking growth gathers momentum.
MOFS has a strong balance sheet, with cash of around Rs 200 crore or Rs 2 billion and zero debt.
Growth prospects hang on the traction recent generic launches in the US (sales potential of $800 million a year) will get, and market share gains from Strides Arcolab’s existing basket.
Setting up a manufacturing base and a focus on the branded and tender businesses for Africa, and the acquisition of Bafna Pharma in India should aid growth in these markets.
While Strides has a robust US pipeline, the near-term trigger will be the nowshortened $150-million payout expected from Mylan. Of this, Strides will invest $20 million in biotechnology and the rest will be given to shareholders.
The stock, which fell on the Mylan payment haircut, has recouped losses, given the new payout plan, robust earnings growth (21-29 per cent over FY15-17), strong balance sheet and attractive valuations.
The turnround in the economy is likely to boost Sintex Industries’ moulded products’ segment (64 per cent of total revenues) and other businesses.
The new spinning project in Gujarat is expected to drive growth from the June 2015 quarter.
The profitability, too, is expected to improve 150-200 basis points over two years led by better working capital cycle, growth in prefabricated business and niche product offerings in the custom-moulding business.
Better cash flows and low capital expenditure intensity will lead to higher surplus cash flows and earnings as the conversion of FCCBs takes care of debt.
But some dilution is expected which may limit upsides.
The company’s bottling problems in Tamil Nadu are getting resolved and the volume growth is likely to resume in a couple of quarters.
The logistics-related issues in Andhra Pradesh and Telangana are getting over. Tilaknagar Industries has changed its policy to focus on profitability and not volumes.
Its focus on premium brands such as White House rum will boost profitability.
It is also developing new brands.
It has five millionaire brands and analysts estimate its Courrier Napoleon brandy to also become a millionaire brand in FY15.
Better volume growth in FY16 and improved profitability have the potential to drive earnings.
Analysts at Phillip Capital feel that with the focus on organic growth, premiumisation and canteen stores department segment, and price rises in various states, there is potential for share