March ended on a flat note but was a volatile month for the market. The banking crises in the US and Europe had an impact on the equity market in the early part of March, however, the market recovered in the latter half of the month to end on a muted note. While uncertainty is expected to remain the theme for the market for a significant part of 2023, there will certainly be stock opportunities. Amidst the risk of a slowdown in major economies, high-interest rates, sticky inflation and other global macro concerns, investors are now likely to focus on the March quarter earnings season which will be driven by BFSI and auto stocks.
Amid this backdrop, brokerage firm HDFC Securities has come out with 2 fundamental picks with a time horizon of 2-3 quarters. Let's take a look:
Godrej Consumer Products: As per the brokerage, the base case fair value of the stock is ₹1,056 (42x FY25E EPS) and the bull case fair value is ₹1119 (44.5x FY25E EPS). Investors can buy the stock at ₹958-974 band (38.4x FY25E EPS) and add more on dips in ₹859-873 band (34.5x FY25E EPS) for a time horizon of 2-3 quarters, it recommended.
After consecutive quarters of subdued performance with runaway raw material inflation, demand slowdown and mounting troubles in Indonesia, turbulence seems to have stabilized in Q3FY23, as the company witnessed volume growth in its India business despite the macro issues, noted the brokerage. It believes, with the inflation pressure abating, a recovery in consumption and gross margin is expected.
"To our satisfaction, GCPL continues to gain share in most categories. Africa business is likely to improve on better growth prospects and strategic initiatives like simplifying business and improving governance while reducing pipeline inventory and media spends in Indonesia business to improve performance from Q3FY23 onwards. H1 growth is likely to recover after the recent volatility with increasing penetration, marketing spends and category innovation; share gains should continue in soaps and other categories should see steady growth," it explained.
The brokerage further sees the management’s target of double-digit volume growth achievable, given: a) increasing investments to drive penetration levels, b) rising marketing spends, and c) reduction in current complexity caused by a large portfolio. Palm oil and its derivatives prices, the key raw material in soaps, rose by 60 percent in FY22 and impacted the gross and operating margins, which was one of the main reasons for the 220 bps fall in operating margins in FY22. While healthy correction in palm oil prices from its peak led to some recouping of margins in Q3FY23, HDFC believes that the full impact of lower RM would be felt in the ensuing quarters and expects revenue recovery to be gradual but margin recovery to be faster.
The stock has gained 20 percent in the last 1 year and around 11 percent in 2023 YTD. It has given positive returns in 3 of the 4 months of 2023. It has fallen around half a percent in April so far after a 4.8 percent rise in March, 1.1 percent in Feb and 4.5 percent in Jan.
Ganesha Ecosphere: Considering the company’s strong financial profile, led by healthy profitability levels and return indicators, volume growth from the commissioning of new facilities and a comfortable capital structure, HDFC Securities has a positive view on the stock. "Investors could buy in the ₹917-935 band and add more on dips to ₹821-837 (16x FY25E EPS). The base case fair value of the stock is ₹1,010 (19.5x FY25E EPS) and the bull case fair value of the stock is ₹1,088 (21x FY25E EPS) over the next 2-3 quarters. At the CMP of ₹925.50, the stock trades at 17.9x FY25E EPS," suggested the brokerage.
The brokerage noted that GEL has an experienced promoter and management team along with a dominant position of the company in the RPSF business with its presence in both fibre and yarn, leading to integrated nature of operations. It also has an efficient raw material procurement system, an established relationship with a diversified customer profile and an established product distribution network resulting in increased penetration in the export market, added the brokerage.
Ganesha Ecosphere Ltd. (erstwhile known as Ganesh Polytex Ltd), is engaged in the manufacturing of regenerated polyester stable fiber (RPSF), dyed yarn and recycled spun yarn. The main raw material for RPSF is waste PET bottles. GEL has established strong relations and a collection network across the country based on which the company mobilises 350 tons of PET waste every day. GEL expects export will continue to grow further; export sales contribution to the total sales is 13 percent in FY22 versus 8 percent in FY21. HDFC Securities expects that the company could see incremental growth due to the expansion of plants and the inclusion of new production facilities and export demand going forward.
The stock has advanced 23 percent in the last 1 year and 5 percent in 2023 YTD. It has given positive returns in just one of the 4 months of 2023. The stock has rallied 10 percent in April so far after a 5 percent decline in March, 1.3 percent in Feb and 2.5 percent in Jan.
