Stock markets have now surged a massive 30% in the last six-month period, even after taking into account the correction over the last several days. Valuations are not exactly cheap as they were almost a year ago when global markets witnessed a sell-off and though earnings have been stellar for India Inc, some analysts still advise caution. However, one thing that Dalal Street agrees on is the opportunity in the smallcap and midcap space. Keeping that in mind, domestic brokerage firm HDFC Retail Research has picked one midcap and two smallcap stocks that they believe could help investors earn massive returns over the next two quarters.
Security and Intelligence Services
Bull case fair value: Rs 471
The company is a market leader in security, cash logistics and facility management services with services in India, New Zealand, Australia, and Singapore. Having a strong presence across India and a 21% market share in Australia, HDFC Retail Research sees little competition risks for SIS. “Over FY15-20, SIS has registered 19% revenue CAGR led by the organic and inorganic route. Margin has remained in the range of 5-6% in the same period,” said HDFC. Going forward, the brokerage firm expects an 8% revenue CAGR over FY20-23E led by growth across verticals for SIS.
The report adds that investors can add the stock at the current price where it trades at 16.5x FY23E earnings and further on dips to Rs 360-364 band. The base case fair value of SIS is pegged at Rs 435 per share and the bull case fair value is Rs 471 apiece.
Bull case fair value: Rs 1,127
eClerx expects business to pick up in the second half of this fiscal year. “Deal pipeline is better YoY, with 50% deal in financial services and the remaining in Cable and Digital. In Financial services, management is seeing more and more projects moving to a managed services model, which should aid productivity,” HDFC Retail Research said. In the fiscal third quarter, the company’s performance reflects rising demand. Over the coming years, banking, telecom and hi-tech clients are expected to aid eClerx growth.
The base case fair value of the stock is estimated at Rs 1,040 per share, while the bull case fair value of the stock is Rs 1,127 apiece. Buying on dips till Rs 905-915 and further till Rs 820-828 has been advised. Currently, the stock trades at Rs 966 per share, translating to an upside of 16% to the bull case fair value.
Bull case fair value: Rs 107.5
The midcap firm is on path to become e a dominant player in infrastructure and tractor businesses, according to HDFC. L&T Finance’s improving capital allocation by exiting/partial selldown of its non-core assets/unprofitable businesses and redeploying it to RoE accretive businesses and DCM (Debt and Capital Markets) operations are said to be supportive of its RoE expansion. Focus on rural India has surged over the years.
L&T Finance Holdings has surged 70% since the beginning of October last year. “We feel investors can buy the stock at the current price (1.04xFY23E ABV) and add further on dips to Rs 73-76 band (0.90x FY23E ABV) for sequential targets of Rs 99.5 (1.2x FY23E ABV) and Rs 107.5 (1.3x FY23E ABV) in 2 quarters,” HDFC Retail Research said.