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Should you invest in these 5 stocks?

By Shreepad S Aute and Ram Prasad Sahu
August 26, 2020 08:48 IST
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These five stocks, which have lagged the markets over the last two years, have doubled in value since March 23, observe Shreepad S Aute and Ram Prasad Sahu.

Stocks

Illustration: Dominic Xavier/Rediff.com
 

Mid- and small-cap stocks are witnessing a rally outperforming their larger peers since March 23.

The BSE MidCap and SmallCap indices have gained around 49 to 56 per cent, outperforming the Sensex, which has risen nearly 46 per cent since then.

Experts say growth prospects and reasonable valuations are among the reasons for investor interest.

Within this universe, there have been a few stocks that underperformed the broader markets over the last two years until March 20.

Since then, they have witnessed a sharp recovery.

We have picked up five stocks in the small- and mid-cap space (sub Rs 25,000 crore market cap) which have sound prospects over the medium term and should deliver robust pre-tax profits over the next two years.

Most picks should also deliver good returns at lower levels.

Emami

Besides sharp reduction in promoter pledge, analysts see an improved earnings outlook for Emami.

Analysts at IIFL Securities have revised their FY21 and FY22 earnings estimate upward by around 6 per cent each.

Higher rural exposure of around 50 per cent of the business, coupled with strong traction for health and hygiene products (43 per cent of revenues) and cost control, bodes well.

The firms expects around Rs 50 crore cost savings in FY21.

Some also expect the stock to see re-rating, given attractive valuation.

 

Escorts

With over 75 per cent tractors's share in the revenue mix, Escorts is well placed to cash in on the benefits of a demand revival in the tractor sector.

Analysts also expect Escorts to gain market share in the high horsepower tractor segment, which should support margins.

Analysts at ICICI Direct believe tractor demand trajectory will continue to remain healthy in coming quarters amid positive farm sentiment, backed by a good Rabi harvest, remunerative crop prices, adequate water table levels, ongoing normal monsoon progress, and expectations of a strong kharif output.

A pick-up in the construction equipment segment, which is anticipated on account of the government's infra push, is a key monitorable and could provide further triggers.

 

Jindal Steel & Power (JSPL)

Besides capacity expansion and balance-sheet deleveraging, the better operating margin outlook, led by improved realisation, availability of iron ore inventory from Sarda mines, and benign coal prices, bodes well for the stock.

International steel prices have seen a sharp recovery and reached pre-COVID-19 levels after coming under pressure during April-May amid the COVID-19-triggered lockdown.

JSPL continues to deleverage and has reduced its net debt by Rs 1,300 crore to Rs 34,621 crore as of June 20.

This is expected to go down further with a likely divestment of Oman steel assets.

This should allay the concern of lumpy debt repayments, say analysts.

 

Laurus Labs

A leading manufacturer of active pharmaceutical ingredients (APIs) for antiretroviral (ARV) and hepatitis C formulations, the company has increased the share of formulations from single digits a couple of years ago to 29 per cent now.

While a large part of the growth has been led by ARV orders, non-ARV APIs, and contract research and manufacturing are expected to support revenue growth.

The company, which posted its highest-ever net profit in the quarter, is expected to sustain growth on the back of a diversified portfolio, higher customer base, new capacities, and operating leverage as the plants come on stream.

Analysts at Motilal Oswal Research expect net profit to grow by 2.7 times in FY21, led by a doubling of formulation sales, 30 per cent growth each in API and CRAMS, and supported by a 780 basis point margin expansion.

 

Tata Communications

The pandemic has unfolded new opportunities as corporates embrace the work-from-home culture.

The firm with its suite of products is enabling corporates to move to a digital environment, ensure security and improve productivity.

On the operating front, less loss in growth services, cost optimisation, and automation are expected to boost margins and the overall profit.

The company is witnessing a margin improvement, which should sustain as the data services pie increases and product sales gain traction.

A healthy order book across verticals and key markets and deleveraging plans should help it post a 30 per cent-plus earnings growth in FY22.

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Shreepad S Aute and Ram Prasad Sahu
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