Indian markets have been in a recovery mode, rising for 9 straight sessions. The turnaround in the markets has been on the back of moderation in inflation and commodity prices. Also, US Fed's commentary was less aggressive than anticipated, which also turned the sentiment positive across the globe.
Amid this backdrop, brokerage house HDFC Securities has listed 2 of its fundamental picks. Let's take a look:
Bharat Electronics: The first fundamental pick of the brokerage is a defence PSU. BEL is the dominant supplier of radar, communication and electronic warfare equipment to the Indian armed forces.
The stock has performed pretty well in the past 1 year, rising 65 percent as against an 8 percent rise in Nifty. It has added 36 percent in 2022 YTD despite weak global and domestic trends. The scrip has given positive returns in 5 of 8 months in 2022 so far. It had gained around 20 percent since July.
According to the brokerage, the government ownership in the firm leads to a sizeable inflow of orders on a nominated basis, providing a steady earnings stream to the company. State-of-the-art internal processes/systems and thrust on R&D / localization give unique competitive strength to BEL, it added.
"We feel investors can buy the stock in the ₹288-294 band and add more on dips to ₹261.50 band (22.5x FY24E EPS) for the base target of Rs. 319.50 (27.5x FY24E EPS) and bull case target of ₹342.5 (29.5x FY24E EPS) over the next two quarters," HDFC Securities said. It currently trades at around ₹286 per share.
Given the healthy growth outlook and expectation of strong order intake, the brokerage has revised earnings and increased the target price for the stock.
"Over the past, India has been among the top importers of defence equipment. To modernise its armed forces and reduce dependency on imports, several initiatives have been taken by the government to encourage the ‘Make in India’ policy, Vocal to Local and Atmanirbhar Bharat.
We expect that BEL could play an important role in India’s defence theme, given its indigenization capabilities, healthy order book, promising order inflow pipeline, and strong execution capabilities. BEL continues to enjoy an advantage over its competitors due to its dominant market position, proven track record and association with the armed forces, established infrastructure and manufacturing facilities, along with strong R&D capabilities. Bharat Electronics (BEL) has reported impressive Q1FY23 earnings, and has started FY23 on a strong note," the brokerage stated explaining its positive view.
In the June quarter, BEL's numbers were above expectations. Its revenue grew 91 percent YoY to ₹3,141 crore supported by strong executions during the quarter. Q1FYY22 was largely impacted by the second wave of COVID and a shortage of chip supply. EBITDA stood at ₹522 crore in Q1FY23 vs ₹70 crore in Q1FY22 and Adjusted PAT (profit after tax) came in at ₹356 crore in the quarter under review vs ₹24 crore in Q1FY22.
The company has maintained its revenue growth guidance of 15 percent and EBITDA margin guidance of 21-23 percent for FY23E. The chips supply situation is better now than the previous year. Therefore, the brokerage expects better FY23E revenue growth and margin than the given guidance.
Faze Three: The second fundamental pick of the brokerage is Faze Three ltd (FTL), which is engaged in the business of manufacturing and export of technical and home textiles products supplying to top retailers across the globe.
The stock has more than doubled investor wealth in the past 1 year, surging 109 percent in this period. It has risen nearly 30 percent in 2022 YTD and 14 percent just in August so far.
"We arrive at a base case fair value of ₹437 (15x FY24E EPS) and bull case fair value of ₹466 (16x FY24E EPS). We feel that investors can buy the stock on between ₹393-405 (13.7x FY24E EPS) band and add further on dips to ₹350 (12x FY24E EPS) band," the brokerage said.
HDFC noted that FY22 was a remarkable year for the company as it was able to add significant capacities, management bandwidth, new products, customers & substantial value across all stakeholders. Even after a sharp rise in prices of raw materials, Coal/Fuel costs, shipping costs, etc., the company was able to report the highest ever revenue, it added.
Margins also improved resulting in strong net profit growth and the company is currently running at peak capacity level, highlighted the brokerage. It has zero long-term debt in the balance sheet since FY18, however recently the short-term debt has risen due to inflated raw material and transportation costs as well as ongoing capex, it noted.
Management has indicated that there is huge unfulfilled demand among the existing customers and this could be met with increased capacity.
The brokerage has envisaged 16 percent and 18 percent CAGR in the top line and the bottom line between FY22P-24E.
"We will remain watchful on the margin front as select raw material, as well as crude prices, are at elevated levels. The return ratios are estimated to remain north of the 19 percent level at least for the next two years. The company is currently trading at 13.6x FY24E earnings," stated HDFC.
Rinsing raw material prices, high client concentration, as well as lingering fear of US and Europe recession, are the key risks for the company, it added.
In the June quarter, the company reported strong earnings growth. Revenue reported was the highest ever Q1FY23 revenue at ₹146.5 crore, up 47 percent YoY and down 5.7 percent QoQ. EBITDA margin improved sequentially at 16.7 percent in Q1FY23 vs 15.5 percent in the last quarter as the raw material prices are cooling off.
However, Polyester prices are yet to cool off given the crude rise and currency depreciation impact. Due to higher depreciation and interest costs, the net profit declined by 8 percent QoQ, while it was still up by 60.5 percent YoY due to a lower base, noted the brokerage.
Further, management has informed that the capex spends are going as per plan and the order visibility has settled from euphoric levels last fiscal to positive/realistic this year across all legacy products, it added.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.