Indian equity markets have tumbled ~7.2% (Nifty) and ~6.8% (Sensex) from its all-time closing high of 11,738 and 38,896 respectively in August 2018. Fluctuating oil prices and weakening rupee were the key reasons for the fall in the markets. Further, the liquidity crisis in the NBFC sector and fear of upcoming state & general election have affected the markets.
Post correction, some fundamentally strong stocks are now trading at attractive valuations. Investors can think to enter the market that could fetch good returns in the long- run. Therefore, based on fundamentals, management and earnings outlook, IIFL suggests some stocks to pull from Santa’s socks for investment.
Apollo Tyres (ATL) is the largest Truck and Bus Radial (TBR) manufacturer in India. ATL has outlined capex of Rs6,500cr over FY19-21E for expanding capacity at various plants. Chennai TBR capacity will be ramped up to 12,000 tyres/day in Q4FY19 from ~10,000 tyres/day currently. Total TBR capacity at all plants will be raised to 35,000 tyres/day from 32,000 tyres/day by year-end through de-bottlenecking. ATL continues to dominate TBR (Truck and bus radial) market in India with a 30% market share and has 15% market share in PCR (Passenger car radial) segment (Q2FY19). Company reported 26% yoy volume growth in India in Q2FY19 led by TBR, PCR, two wheelers and agricultural segments. Despite softening in OEM demand, outlook remains strong as majority sales are derived from after-market. Capacity at Hungary will ramp up from 7,500 PCR tyres/day currently to 12,000 by end-Q4FY19. Price hikes taken in September 2018 and November 2018 coupled with cooling oil prices will help improve gross margins. Soft rubber prices, continuing strength in after markets and attractive valuations compared to peers make ATL an attractive investment bet.
Tata Chemicals (TCL) is the second largest soda ash player globally. TCL has business interests across basic chemicals (64% revenue contribution in H1FY19), consumer products (~15%) and specialty products (~21%). TCL has announced a capex plan of Rs2,400cr at Mithapur unit towards soda ash (2,00,000TPA), salt (4,00,000TPA), cement (3,00,000TPA), specialty sodium bicarbonate (35,000TPA) and other upgradations. This project is expected to be completed in 4 years with an IRR of ~25%. The global market for soda ash is expected to stabilize leading to firmness in soda ash realizations with full absorption of additional capacities in Turkey. TCL’s international business is likely to recover during H2FY19 with full utilization level in North America and recovery in UK business. The management aims to increase consumer business revenue from ~Rs2,000cr currently to ~Rs5,000 by FY23E. The company's nutritional solutions project (5,000 tonnes) with an investment of ~Rs270cr is expected to be completed by FY20E. Considering the above positives, the stock looks attractive at current valuation with favorable risk-reward ratio.
Biocon is a fully-integrated biopharma player and has API manufacturing facilities, strong capabilities in biologics, innovative drug development and a branded generics business in India. In India, it is the largest biologics company and has products like INSUGEN, BASALOG, CANMAb, ALZUMAb, etc. Biocon’s early entry in the biosimilars business is a long term positive for the company. Biocon-Mylan has recently received an approval for Trastuzumab and Pegfilgrastim in US and we expect approval to 3-4 more biosimilars in 2019/2020 across US and EU. This will help Biocon to grow its profit 6x over next five years. The extension of Bristol-Myers Squibb contract and agreement with GSK is a positive for its research business. We project 33.4% and 61.3% CAGR in revenue and PAT over FY19E-20E respectively. Biocon is expected to improve EBITDA margins by 1,200bps during FY19E-21E and increase profitability by 4-5x over next five years.
Have a Merry Christmas!