15 Best Stocks for 2020 - 30th Dec 2019

Returns are calculated based on the closing price of December 30:

Brokerage: Jefferies

IndiaMart InterMesh: Buy | Target: Rs 2,500 | Return: 21 percent

We initiate on IndiaMart with a buy rating and price target of Rs 2,500. It is the dominant B2B classified platform in India with strong moats to defend it against competition. We expect 20 percent revenue CAGR over FY20-22E despite macro headwinds related to economic slowdown; this in turn should drive sharp margin expansion to 28 percent by FY22 versus 16 percent in FY19 given strong economies of scale. It is also free cash flow positive helped by upfront collections and low capex.

Brokerage: Haitong Securities India

Finolex Industries: Buy | Target: Rs 700 | Return: 28.70 percent

Finolex Industries (FNXP) enjoys a dominant position in India’s agri pipe market due to its competitive edge in backward integration (PVC resin), established brand image, and strong distribution network in the rural market. Its share in the agri pipe market is projected to improve in the near future due to market consolidation (Jain, Kisan). Moreover, the opportune alliance with Lubrizol (unlisted) in March 2017 for CPVC pipe could lead to rapid market share gains in the high-margin plumbing pipe segment.

With an expected slight improvement in agri pipe margin due to industry consolidation and rising revenue share from high-margin plumbing pipes, FNXP’s pipe segment EBITDA margin is projected to rise from 8.5 percent in FY19 to 10 percent by FY22. While EBITDA is projected to remain relatively stable over FY19-FY22 (0.9 percent CAGR), we believe the quality of profit could improve due to rising contribution from product business (from 36 percent in FY19 to 59 percent in FY22), which would result in a re-rating of the stock over the medium-term.

We initiate coverage on FNXP with a buy rating and target price of Rs 700, based on our SoTP model valuing the PVC resin business at 6x FY21 EBTIDA, the Pipe business at 22x FY21 EBITDA (its three-year average), and the stake in group listed entity Finolex Cables (FNXC IN) at a 50 percent discount to market value.

Brokerage: Axis Securities

Embassy Office Parks REIT: Buy | Target: Rs 495 | Return: 18.3 percent

Embassy Office Parks REIT, is the owner of premium office portfolio in India that serves as corporate infrastructure to multinational tenants. It is the largest REIT in Asia and the first REIT to get listed in India. Its primary source of revenue is through long term rental contracts from world class tenants which makes the cash flows for the company quite stable. Embassy REIT’s business has multiple growth levers (discussed in detail in later sections) that is supported by a strong services sector and a growing, tech-savvy, low cost human capital.

Embassy REITs operational execution is one of the best amongst REIT’s the world over due to its highly experienced management team that has global experience in property management. Embassy REIT is backed by strong sponsors; Blackstone LLP, the largest alternative investment firm in the world and Embassy Group which is a local expert and has developed 45 msf of real estate in India. Additionally, REIT as an asset class has shown comparable returns to broad equity markets (and low correlations) with downside protection during recession making it an attractive investment class.

KEC International: Buy | Target: Rs 367 | Return: 22.8 percent

An engineering, procurement, and construction (EPC) major, KEC has delivered several iconic infrastructure projects in more than 100 countries. The company is delivering projects in key sectors such as power transmission & distribution (T&D), railways, civil, solar, smart infra, and cables. The company is investing in a host of digital initiatives across the EPC value chain to re-imagine and re-engineer business operations, realize quantum leap in productivity, improve estimation accuracy and enhance compliance to processes.

We estimate KEC to post Revenue/PAT growth of 14/21 percent respectively over FY19-21E. Focus on non-T&D verticals, geographical diversification and continuous infrastructure push by governments across the globe is expected to augur well for KEC.

We value KEC at 13x FY21E given the growth prospects on the back of strong order book (around 1.9x FY19 revenue), consistent financial performance, comprehensive range of services in its offering and arrive at a target price of Rs 367.

Brokerage: ICICI Securities

DB Corp: Buy | Target: Rs 155 | Return: 15.5 percent

Entertainment Network: Buy | Target: Rs 300 | Return: 18.4 percent

We reinitiate coverage on DB Corp and Entertainment Network (ENIL) with buy rating on each, though ENIL is our preferred pick in the sector. We are factoring in advertising revenue recovery in FY21 for key advertisers in print and radio on low base.

Print media is losing ad revenue market share to digital, but we still see scope for earnings growth through higher circulation (via loss reduction on hardcopy and higher contribution from e-paper subscriptions). This could be key for upturn in the intrinsic value for Indian print media.

Radio can benefit from rise in utilisation, consolidation in large stations and integration of the solutions business. We see FCF generation stave off any material downside risk for both the companies.

Spandana Sphoorty: Buy | Target: Rs 1,400 | Return: 17.2 percent

We initiate coverage on Spandana Sphoorty (Spandana), one of the most profitable microfinance institutions (MFI) in India, with FY19 RoAuM at around 8 percent (calculated) versus the industry average of 5/6 percent. In a business where geographical diversification is of paramount importance, Spandana scores high with presence across 17 states with no single state contributing more than around 19 percent to the total AuM.

Customer-centric business model, deep rural distribution and >20 years of experience in running a MFI business has enabled the company to re-emerge from the aftermath of Andhra Pradesh crisis in CY10. Improvement in cost ratios in parallel with strong AuM growth has been the key feature of Spandana’s turnaround. Though the journey from a negative net worth in FY12 to one of the most profitable MFIs in FY19 is remarkable, sustainability of the current high RoAuM is crucial.

Lower direct assignment income (around 30 percent of PAT in Q2FY20) and higher credit cost owing to current protests in North-East are key risks to RoAuM.

Brokerage: Anand Rathi

Varun Beverages: Buy | Target: Rs 862 | Return: 20.5 percent

Given Varun Beverages' healthy execution capabilities with several production facilities and strong distribution network, sound financials and expansion of footprint with the recent acquisition of franchise rights in South and West regions, we believe the company is well positioned for continued growth and initiate coverage on the stock with a buy rating and target price of Rs 862 per share.

Relaxo Footwears: Buy | Target: Rs 744 | Return: 21.4 percent

With deep penetration and excellent brand recall, Relaxo has established itself in both, rural and urban India. We believe Relaxo will be the best performer in the listed footwear space.

We initiate coverage on Relaxo Footwear with a buy rating and a target price of Rs 744 per share.

Dixon Technologies: Buy | Target: Rs 5,822 | Return: 50 percent

Ideally placed to cater to mounting demand across multiple categories in the rapidly growing Indian consumer durables sector, Dixon's scale and size give it an edge. It has the largest manufacturing plants in
India for LED TVs, LED bulbs and washing machines. Among the top-five globally with manufacturing capabilities for LED bulbs, its export capabilities are on the threshold of exciting opportunities, aided

possibly by one of its customers with global operations.

Besides, its original design and manufacturing (ODM) solutions based on R&D across many product categories should help keep it in the forefront of innovation across product categories.

Brokerage: Ambit

Motherson Sumi Systems: Buy | Target: Rs 176 | Return: 18 percent

Free cash flow would sharply rise in FY21-22 given margin revival at SMP+India business and limited capex of around Rs 2,000 crore. We expect Motherson Sumi Systems (MSS) to deploy the cash to diversify into high-growth, high-RoCE areas like car electronics/car connectivity/EV parts and cut dependence on low-RoCE plastics.

Already powertrain-agnostic, MSS is well-placed to scale up with improving RoCE and justify premium valuation vs global peers. MSS is set for 20 percent EPS CAGR over FY10-20E with financial leverage unchanged at around 0.5x and just one equity dilution by around 6 percent in FY17. RoCE would improve by around 500bps to around 16 percent with earnings CAGR of 38 percent over FY20-22E. Target price of Rs 176 implies 20x FY22E EPS versus around 18x for domestic peers.

Brokerage: Reliance Securities

V-Mart Retail: Buy | Target: Rs 2,060 | Return: 24 percent

We initiate coverage on V-Mart Retail with buy recommendation and target price of Rs 2,060. We expect V-Mart to deliver healthy revenue growth, going ahead driven by: (1) aggressive new store addition; (2)
mid- single-digit SSSG; (3) creeping value retail concept in Tier-II/III/IV cities of Northern India; (4) superior store economics even amid challenging business environment; and (5) healthy financial

strength with sound management philosophy.

Like other retail operator, V-Mart is expected to be a beneficiary of high operating leverage once spending in non-metros picks up. Leveraging the knowledge of consumption patterns in selective clusters, V-Mart has been able to master retail supply chain and build sustainable long-term business model. V-Mart's investments in technologies and focus on improving merchandise (in newly opened stores) differentiates it from

traditional value retailer to pan-India fashion chain.

Brokerage: KR Choksey

Bandhan Bank: Buy | Target: Rs 667 | Return: 32.3 percent

We believe around 19 percent correction in stock price from mid Oct’19 due to protest against micro lenders and current unrest in Assam offers a good buying opportunity for investors, given Bandhan's market leading position in the microfinance industry. Strong capital, superior asset quality and attractive fundamentals along with high unexplored market potential makes it a strong bet amongst the current available players in this segment.

The bank has shown remarkably high growth in it’s NII and fee income at a CAGR of 69 percent and 92 percent from FY16 to FY19, respectively. Merger with Gruh Finance gives it a more diversified product / geographic portfolio along with quick inroads into the lucrative affordable housing segment. We expect the bank to perform well with continued robust growth in its advances going forward. We expect the valuation of the bank to improve going forward with robust growth in advances followed by maintaining its asset quality.

Brokerage: Spark Capital

Polycab India: Buy | Target: Rs 1,173 | Return: 18.5 percent

We expect Polycab to deliver healthy growth in the foreseeable future driven by the following – 1) Being a market leader in cables segment, the company is benefiting from overall cable and wires industry growth (driven by commercial and residential projects) and demand shift from unorganized to organized market post GST, 2) It has been on a dealer/distribution reach increase trajectory and plans to double its reach over the next 5 years, 3) Increased focus on certain categories like extra high voltage (EHV) category and optic fiber cables should add to overall growth 4) Focus on higher share of wires, EHV and better margin in FMEG should improve overall blended margins 5) Given the end of major capex plans, sufficient capacities and efforts to improve working capital should lead to better cash flows.

We initiate coverage with an buy rating on the stock assigning 18x multiple on Sep-21 earnings to arrive at a target of Rs 1,173.

Brokerage: IDBI Capital

Jubilant Foodworks: Buy | Target: Rs 1,836 | Return: 12.74 percent

We initiate coverage on Jubilant Foodworks (JUBI) with a buy rating and target price of Rs 1,836 based on 40X FY22E EPS. We have done survey of 5,000 brands/restaurants (both online and offline) in the top 16 cities (represents 65 percent of Dominos revenue in India) and note that; (i) optically, cloud kitchen retailers are posing competitive threat to JUBI by expanding aggressively in cities where Dominos has maximum presence (ii) in reality, JUBI outperforms competition at menu level (product, price and variety) (iii) benefit of economy-of-scale and control over entire value chain enables JUBI to remain anti-fragile to competition.

Foray into Chinese cuisine with high focus on value pricing (40 percent of the menu is priced between Rs 100-200) under the brand Hong’s Kitchen is a next Rs 15,000 crore opportunity (3x the size of pizza market). We expect revenue/ EBITDA/EPS to grow at 14/19/23 percent CAGR over FY19-22E.