The year 2022 was marked by multiple headwinds for the market. While the market remained volatile due to geopolitical tensions, rate hikes, and slowing economic growth, there were pockets of opportunities. While uncertainty is expected to remain the theme for the market for a significant part of 2023, there will certainly be stock opportunities. Brokerage firm HDFC Securities has come out with 3 fundamental picks with a time horizon of 2-3 quarters.
The brokerage recommends investors to buy Marksans in the band of ₹68.8-69.5 and add more on declines to ₹59.5 (9.25x Dec-24E EPS) for a base case target of ₹75.5 (11.75x Dec-24E EPS) and bull case target of ₹83.6 (13x Dec-24E EPS) over the next 2-3 quarters.
"Marksans is concentrating on regulated markets of the US and UK with a focus on higher margin soft gels and over-the-counter (OTC) products. Also, its strong balance sheet is likely to support inorganic growth through acquisitions of ANDAs, product licenses and capacities. With a focus on backward integration, operating margin is expected to improve in the coming quarters," says the brokerage.
For 9 months of FY23 (9MFY23), the EBITDA margin slipped 140 bps to 16.8 percent as the product mix tilted towards the OTC segment vis-a-vis prescription segment, noted HDFC, adding that FY21 base was high due to COVID-19 panic buying. Also, the freight costs more than doubled due to the container shortages and increase in crude oil prices.
But going ahead, HDFC expects Marksans margin to improve led by i) normalisation of operating expenses, ii) balanced focus of both OTC and prescription segments and iii) backward integration (API business). The company also has a strong balance sheet with cash and equivalents of ₹417 crore as on Dec-2022 and including money received from warrants it would be around ₹696 crore, it informed. It estimates a 17 percent CAGR in revenue led by strong growth from UK and Australia and New Zealand and healthy growth from the US market over FY22-25E. It expects a margin of around 17-18 percent over the next two years.
The company has risen over 37 percent in the last 1 year and around 15 percent in 2023 YTD. All 3 months of the current calendar year including March till date have been in the green.
The brokerage advises investors to buy the stock in the band of ₹98-100 and add more on dips to ₹86-88 band (7x Dec’24E EPS). At CMP, the stock trades at 8.1x Dec’24E EPS. "We think the base case fair value of the stock is ₹112 (9x Dec’24E EPS) and the bull case fair value is ₹120 (9.75x Dec’24E EPS) over the next two-three quarters," it said.
According to the brokerage, the company has a well-diversified order book, robust execution capabilities, a strong focus on debt reduction and improvement of working capital. Segment diversity across building, mining, railways, electrical, water & environment is one of the key differentiators at NCC, it noted.
In the recent Budget, the FM shifted the gear on capex front with a major thrust on National Infrastructure Pipeline (NIP) targets and various infra-related schemes, hence it expects revenue, EBITDA, and PAT of the firm to grow at a CAGR of 15.9 percent, 17.8 percent, and 30.4 percent over FY22-25E.
"NCC has proven skill set in core infrastructure areas and executed projects for various central and state level agencies. Diversified capabilities and wider geographic presence further enhance its addressable opportunities. The company has a strong track record of handling and completing large projects with multiple clients which brings qualification of bidding for large projects," said HDFC Securities.
The company jumped over 65 percent in the last one year and over 23 percent in 2023 YTD. It has rallied over 17 percent just in March so far.
HDFC Securities believes the base case fair value of the stock is ₹179 (6.25x FY24E EV/EBITDA) and the bull case fair value of the stock is ₹195 (6.85x FY24E EV/EBITDA). Investors can buy the stock in ₹160-163 band (5.6x FY24E EV/EBITDA) and add on dips in ₹144-147 (5x FY24E EV/EBITDA) band, it said.
As per the brokerage, a change in the top management last year proved effective in turning around the company in FY22. Also, rise in prices of international coal prompts users to shift to cheaper sources like lignite, thereby raising demand. Further, the Russia-Ukraine war has shot up coal prices and global coal prices are expected to remain robust in the medium term as natural gas has become scarce due to export cutbacks by Russia, it noted.
The management’s focus is to diversify the revenue base of the company from lignite and in the coming years, it aims to earn at least 50 percent of revenue from the non-lignite portfolio. This will help the company to mitigate the risk of dependence on a single commodity and also improve the ESG rating of the company, stated the brokerage. The company is planning to develop 6 new mines over the next 1.5-2 years to ensure that production stays above 10 million tons per annum (mtpa), it added.
The stock has fallen over 17 percent in the last one year and around 6 percent in 2023 YTD. The stock has gained 2 percent in March so far after a 5.5 percent and 3.5 percent fall in February and January 2023, respectively.