Consider stocks with target price upgrades: 5 stocks with up to 20% one-year upside potential
The domestic markets continue to scale new highs. This has been led by a strong buying interest from domestic institutional investors and HNIs (high net worth individuals), optimism in the IT sector on hopes of increased tech spending in the US and expected rate cuts by the Fed. After slipping over 4% in the first week of August due to the impact of unwinding of the yen carry trade, the benchmark Nifty 50 index recovered 5.2% by the end of August.#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;} Looking at the market performance since the start of 2024-25, the Nifty 50 index has outperformed most of the global market benchmarks. While the Indian benchmark registered 12.3% gains between 1 April and 30 August 2024, the equity benchmarks of Asia (China, Hong Kong, South Korea), Australia, UK, South America (Brazil, Mexico), Canada, Europe (Germany, France, The Netherlands, Switzerland) and the US (Nasdaq Composite) delivered returns between -13.4% and 8%. The growth is broad-based, with all the market segments registering strong gains. Nifty Midcap 100 and Nifty Smallcap 100 indices delivered 21.2% and 22.4% returns, respectively, in the first five months of the current financial year.
However, this broad-based increase in share prices has made the current entry prices unattractive for most stocks. In other words, the sharp price rise has eroded the price potential for most of the stocks, which is measured as the difference between the one-year target price and the current price.
There are 403 companies for which Reuters-Refinitiv compiled target prices for more than five analysts. Of these, 290 (or 72%) stocks have current price potential in single digits, including stocks that are trading above their target prices or offering a downside. In other words, most of the stocks are either close to or have surpassed their fair values, which is derived from the fundamentals like revenue, profit margins, assets, cash flows, future growth rates, etc. Moreover, headwinds could increase risks. Slowing demand/consumption, as evident from the tepid growth of corporate India in the June quarter, higher market valuations, moderation in the first quarter GDP growth, slowdown in credit growth and escalation of geopolitical tensions in the Middle East and Ukraine are some such headwinds.
Experts have raised concerns about the high valuations and weak earnings. The 12-month forward PE of the Nifty 50 index at 21.9 times is at 21% premium to its 10-year average, according to the Reuters-Refinitiv data.
On the other hand, the aggregate net profit of the benchmark grew by 4% year-on-year in the June quarter, which is the lowest since the June 2020 quarter (or the pandemic quarter), according to the earnings review report by Motilal Oswal.
A report from CareEdge Ratings states that the current market optimism may be misplaced if companies cannot demonstrate substantial improvements in their financial performance in the coming quarters. Also, a Nuvama report states that demand is critical for earnings. However, the outlook on the same remains dull. The slowing earnings and weak demand amid record high valuations warrant caution. The impact of high valuations is also visible on FPI inflows. The inflows moderated in August compared to June and July. According to the data compiled from the NSDL website, the FPI inflow in equities was Rs.7,322 crore, compared to Rs.26,558 crore and Rs.32,359 crore in the previous two months, respectively.
“The fundamental reason for the poor FPI interest is the high valuations in the Indian market. India is the most expensive market in the world now, and FPIs have opportunities to invest in cheaper markets,” says V.K. Vijayakumar, Chief Investment Strategist, Geojit Financial Services. As the markets are seeing both positives and negatives, it is important to identify stocks that enjoy strong analyst or expert backing. To identify such stocks, we have considered those that have seen an upgrade in their target prices since the end of June.
The stocks for which the target prices have been compiled for a minimum of five analysts, and those with a 10% target price upgrade between 30 June and 30 August have been screened. Only stocks that have reported net profits higher than estimates (in June quarter) have been included. An upgrade in target prices indicates analysts’ confidence in the performance momentum of the company.
Following are five such stocks that are currently offering a double-digit price potential.
FEDERAL BANK
THE PRIVATE SECTOR BANK’S net profit surpassed Reuters-Refinitiv estimates by 7.1% in the June quarter, and grew by 18% year-on-year. The performance was supported by higher recoveries and controlled provisions. The business growth was healthy, with 20.3% and 19.6% y-o-y growth in advances and deposits, respectively.
The traction in retail, business banking and commercial banking supported the growth in advances. The share of high-yielding segments improved during the quarter, which is expected to aid margins in the future. The management is confident of 18-20% loan growth in 2024-25. The asset quality continues to remain strong, with stable GNPA/ NNPA and PCR ratios on a sequential basis. The cost-to-income ratio remains elevated at 53.2% due to investments in technology and processes. However, the management expects it to bring down to 50% in the medium term. Moreover, the appointment of the new MD & CEO removes the overhang associated with management uncertainty and will support valuations. The bank has improved its RoE to 15% in the past two financial years.
A recent Ambit Capital report expects the average RoE to moderate in the future, though this moderation will be the least among mid-sized banks. The report reiterates Federal Bank as a top pick among mid-sized banks.
CMS INFO SYSTEMS
THE BUSINESS SERVICES company reported 17% and 8% y-o-y growth in revenue and PAT, respectively, in the June quarter. While revenue met Reuters-Refinitiv estimates, PAT surpassed estimates by 4.9%. The performance was supported by a decent growth in the managed services segment and healthy growth in the cash management segment.
Despite lower activity due to the elections, the company sustained growth momentum and won orders worth Rs.200 crore in the managed services segment during the quarter. The management has retained its revenue guidance of Rs.2,600-2,700 crore for 2024-25. While the growing share of organised retail is aiding the cash management business, scaling up in AIoT remote monitoring is supporting the growth of the managed services segment.
The likely jump in ATM base amid PSU bank additions and an improvement in the ATM/ branch bank ratio, coupled with the expectations of a hike in interchange fee (discussions are on), is expected to boost the cash management services segment.
A recent DAM Capital report is bullish on the stock and lists growth prospects of existing core verticals, sharp focus on capital allocation and a cash-rich balance sheet as key positives.
ZOMATO
THE RESTAURANT AGGREGATOR and food delivery company reported a sequential, or quarter-overquarter (q-o-q), revenue growth of 18.1% in the June quarter, and surpassed Reuters-Refinitiv estimates by 7.1%. The performance was supported by growth across segments. While Hyperpure and Blinkit registered revenue growth of 27.4% and 22.5% q-o-q, healthy order volumes aided the food delivery business, which reported a revenue growth of 11.7%.
The management expects the GOV (gross ordering value) of the food business to be more than 20% in the near term. For Blinkit, the management expects GOV per store to grow in the future as the existing stores are underutilised from the capacity perspective. It continues to exploit market opportunities through aggressive store expansion.
The recent announcement by Zomato on the acquisition of Paytm’s entertainment ticketing business is expected to boost its ‘going out’ business, which will act as an additional growth driver, as per an Emkay report. This segment includes dining out and ticketing events in India. The management estimates the post-acquisition GOV of this business to be over `10,000 crore in 2025-26. The growth will be led by the improving lifestyle and consumption patterns of the consumers. Moreover, the company’s plan to launch a new app, ‘District’, will complement the benefits of the acquisition.
TIMKEN INDIA
THE ENGINEERED BEARINGS and industrial motion products manufacturer registered 9.2% and 3.8% growth in revenue and EBITDA, respectively, on a y-o-y basis in the June quarter. Despite muted export growth (amid the Red Sea issue) and higher raw material costs, the domestic markets supported the overall performance.
The domestic segment was driven by the railways, industrial, and process and distribution verticals. The demand for bearings is expected to jump as the railways growth will be supported by an increase in dedicated freight corridors, metro expansion in tier II cities and Vande Bharat train coach conversions. On the other hand, the aftermarket and industrial segments are the key growth drivers for the process and distribution vertical. While the mobility segment is facing headwinds due to muted demand for heavy trucks in the export markets, the management expects a revival in the second half of the current financial year.
A JM Financial report is bullish on the company and believes that robust demand from the railway industry, strong capex in the process industries like steel, cement and infrastructure, new opportunities like windmill and solar, and ‘China plus one’ strategy will support revenue and earnings growth in the future. The company is also expanding its capacity (ramp-up of the Bharuch plant) to cater to the tailwinds in both domestic and export markets. It expects revenue and PAT CAGR of 18% and 23%, respectively, over the next three years.
ADANI PORTS AND SPECIAL ECONOMIC ZONE
THE COMMERCIAL PORT operator reported a consolidated revenue growth of 11% y-o-y in the June quarter. While the revenue was in line with estimates, the EBITDA surpassed Reuters-Refinitiv estimates by 17.2%, aided by a higher share of containers and liquid cargo. Overall, the cargo volumes grew by 8% y-o-y. Compared to India’s overall cargo volume growth of 4% y-o-y, the company’s domestic cargo volumes grew by 9% y-o-y during the quarter.
In 2023-24, the company’s port volume was 408.3 MMT (million metric tonne) and the management expects it to range from 460-480 MMT in 2024-25. The logistics business is also poised for growth as the company is strengthening its capabilities in various segments, such as ports, warehousing, last-mile delivery, and inland container depots. The management is also focusing on debt optimisation. It has cut the net debt to EBITDA ratio from 3.6 times in 2022-23 to 2.4 times in 2023-24.
A Motilal Oswal report is bullish on the company and expects it to outpace India’s overall growth, driven by a balanced port mix along India’s western and eastern coastlines, and a diversified cargo mix. Further, the logistics business will serve as a value addition to the domestic port business, with focus on enhancing last-mile connectivity. The report estimates revenue and PAT CAGR of 14% and 22% over 2023-24 and 2025-26.
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This story originally appeared on: India Times - Author:Faqs of Insurances
