By S Ranganathan, Ashwin Patil, Anusha Raheja
With the formalisation of the economy helped by Government of India's linking of Jan Dhan Accounts with mobile numbers and Aadhaar cards to plug leakages in subsidies; GST; and Insolvency and Bankruptcy Code, market share and profitability are trending towards fewer companies operating in several sectors, a research by LKP Securities has found. As India marches towards its goal of becoming a $5 trillion economy in the coming years, LKP Securities has recommended six stocks that are likely to benefit the most in the process, helped by the reforms undertaken by the government.
With a strong and diversified balance sheet, the bank is well placed to participate in the multi-year strong credit growth. The bank has a highly visible upside in earnings growth on the back of lower credit costs (1.8% in FY 20 and 1 in long- term), gradual margin improvement and robust credit growth. We expect PAT to grow at a CAGR of 144% in FY20e, 58% in FY21e and 21% in FY22e i.e. at a CAGR of ~69% for FY19-22e. We foresee the asset quality of the bank to improve as slippage ratio is expected to shrink to ~2.2% in FY20e and 1.8% in FY21e.
State Bank of India
Expect SBI to clock record profits beginning current fiscal (Rs 146 bn) despite slippages and credit costs shooting past management guidance. PBT and PAT will see a healthy CAGR of 36% and 66% respectively during FY20-22e on the back of lower NPLs compared to previous years. Lower overhead costs will bring down cost ratios to 50.9% in FY22e from 55.7% in FY19. Stable branch count at 21,900 and higher retirals will keep the capex under check for the next two years.
Rural recovery to drive volume growth and profitability as mirrored in YTD positive growth in retail and wholesale volumes. 80% of portfolio converted to BS VI attracting equally good demand as BS IV. Early bird advantage in BS VI segment to keep market share at 50% levels and new launches of petrol variants will drive up market share. Margin improvements coming from lower discounts as BS IV inventory shrinks. Also the company has benefitted immensely from corporate tax cut.
L&T Finance Holdings
Retalisation of balance sheet is a key long-term positive leading to build up in profitable assets. Diversified pan-India footprint will drive retail loan book growth and profitability. The NBFC has ROE ~30% in rural finance, ~20% in housing loans and ~15.5% in infrastructure financing. Blended ROE are ~18% (Q2FY20) which falls in the top quartile of return ratios in the NBFC space.
Sun TV Network
Advertisement revenue is poised to stage a recovery in FY21 on the back of strong economic rebound. Improved content increased viewership during the last two quarters. Sustained growth in market share in key geographies including Tamil Nadu market will drive up ad revenue going forward. Operating leverage will help improve revenue and margins. Digitalisation will help Sun Network to sustain subscription revenue growth at 12-15%. DTH revenues will see a growth of 5%.
Garden Reach Ship Builders & Engineers Ltd (GRSE)
Leading PSU in the defense space and the first company to complete the supply of 100 warships to Indian Navy. Mammoth order book of Rs 275 billion to power revenue growth going forward. Prestigious new projects such as P17A stealth freighters to drive top-line growth. Bunching up of revenues from milestone payments to bump up financials from FY22. Modernisation of facilities to prune liquidity damages.
S Ranganathan is Head of Research; Ashwin Patil is Senior Research Analyst (Media); Anusha Raheja is BFSI Research Analyst at LKP Securities. Views expressed by the authors are their own. Financial Express Online does not take responsibility for the stocks recommended. Please consult your investment advisor before investing.