Diwali Picks: Coal India, Escorts Kubota, Titagarh Rail, Newgen Software are among SBI Securities 12 stock ideas

SBI Securities has recommended 12 stocks namely Macrotech Developers, Snowman Logistics, Bharti Hexacom, Escorts Kubota and Chalet Hotels among others, which are likely to deliver good returns by next Diwali.  The brokerage also mentioned reasons behind its buy rating and listed out key risks these stocks may face ahead. 

Here’s a look at Top Diwali Picks 2024. 

Coal India 

Price Target: Rs 593 

During FY24, CIL achieved highest ever production/offtake of 773.6 mnt/753.5 mnt. For FY25/FY26, the company has set an ambitious production target of 838 mnt/1 billion tonnes (bt). Total production/dispatches during Apr’24-Aug’24 stood at 290.4 mnt/310 mnt (+3.2% YoY/1.4% YoY), of which 81% was supplied to the thermal power industry. The company expects favourable demand from key sectors such as power and steel.

At current price, the stock is trading at FY25E/FY26E EV/EBITDA multiple of 5.7x/5.2x of its Bloomberg consensus earnings estimate. CIL’s dividend yield is 5.2%, which offers cushion during significant correction in the stock price.

Key Risks: Regulatory challenges; Increase competition from private players 

Macrotech Developers 

Price target: Rs 1398 

The company generates strong operating cash flows in the range of Rs 2,500-2,700 cr which gives ability to grow and deleverage. Ove the last five years, the company has reduced its gross debt by Rs 15,683 cr from Rs 23,363 cr in FY19 to Rs 7,680 cr in FY24. The company aims to have a conservative leverage with net
debt/equity ceiling of 0.5x.

The company aims to grow its pre-sales by 20% CAGR over FY24-26E to Rs 21,000 cr and grow RoE by 300 bps to 20% by FY26. The company has a robust launch pipeline of 18 projects for FY25 with estimated Gross Development Value (GDV) potential of Rs 11,980 cr

At current price, the stock trades at FY25E/FY26E Price-to-Presales ratio of 6.6x/5.5x respectively. Looking at he healthy growth guidance, we believe the fair value of the stock lies at Rs 1,398 per share for medium to long term.

Key Risks: Delay in project execution; Slower-than-expected collections and sales velocity; Significantly high debtfunded investments

Bharti Hexacom

Price target: Rs 1,747 

Along with industry, Bharti Hexacom also took up the tariff hike in the prepaid segment. ARPU as of June 24 stood at 205 which is close to it’s parent Bharti Airtel at 211.

During 1QFY25 the company reported 13.6%/5.5%/101.9% YoY growth in Revenue/EBITDA/PAT at Rs 1,910.6 cr/ Rs 875.6 cr/ Rs 511.2 cr respectively. Profit growth was aided by an exceptional gain of Rs 318.3 cr on favourable Supreme Court judgement regarding waiver of interest on the tax treatment of adjusted revenue linked Variable License Fee payable to the telecom department.

Valuation: For FY24-FY26E, we expect Revenue/EBITDA/PAT to grow at a CAGR of 18.9%/23.6%/84.4% respectively to Rs 10,020.7 cr/ Rs 4,673.8 cr/ Rs 1,715.1 cr respectively. At CMP, the stock is trading at a PE multiple of 63.1x/43.9x of its FY25E/FY26E earnings respectively. 

Key Risks: High capex requirement in infrastructure rollout; Price sensitive market (ARPU is one the lowest in the world); Regulatory risks.

GlaxoSmithKline Pharmaceuticals

Price target: Rs 3,195

The company plans to deliver double-digit growth in the upcoming years and plans to impact the lives of over a billion Indians. The company plans to deliver exceptional new launches for driving innovation growth led by the adult shingles vaccine brand Shingrix. The company expects its base business to maintain its EBITDA margin in the range of 28%-29% complemented by its continued momentum in its base business. 

Valuation: For FY24-FY26, we expect Revenue/EBITDA/PAT to grow at a CAGR of 9.6%/14.9%/14.7% to Rs 4,148.2 cr/Rs 1,200.1 cr/Rs 965.1 cr respectively. At CMP, the stock is trading at P/E multiple of 55.1x/47.1x of its FY25E/FY26E earnings respectively. 

Key risks: Shifts in regulatory environments; Sudden increase in raw material prices; Inclusion of key products in NLEM.

Nippon Life AMC

Price target: Rs 825 

The management plans to launch new products, focusing on passive investments such as ETFs and index funds. Internationally, strong equity inflows from various regions are anticipated to continue, while the company is also expanding resources in its alternative investment business.

Reasonable valuation: At current price, the stock is trading at P/E multiple of 34.5x/30.4x of its FY25E/FY26E consensus EPS Bloomberg estimates.

Key Risks: Yield Compression and deterioration in the market share of equity

Escorts Kubota

Price target: Rs 4408 

The domestic tractor industry volumes have been flattish since FY21 due to multiple headwinds such as irregular rainfall, low crop prices impacting farmer incomes and rise in overall tractor costs. All these factors are now expected to reverse in 2HFY25 raising the prospects of a cyclical recovery for the industry. Tailwinds such as bumper kharif output, prospects of a strong rabi season and higher MSPs on all the major crops are expected to boost farmer income and drive tractor demand. The tractor industry is expected to grow in mid to high single digit in FY25E.

Reasonable valuation: At current price, the stock is trading at FY25E/FY26E P/E of 29.6x/25.8x respectively. Multiple
triggers such as expanding product portfolio, strengthening of the distribution network, increased sourcing by Kubota
Corp for its global operations and healthy demand environment are expected to drive 16% CAGR earnings growth
over FY24-26E. 

Key Risks: Delayed recovery in the industry; Slowdown in exports

Chalet Hotels 

Price target: Rs 1106 

Chalet Hotels has demonstrated healthy operational performance with its Revenue/EBITDA/PAT growing at a CAGR of 9.6%/14.8%/29.1% respectively in last four years. EBITDA margin has improved ~700 bps from 34.4% in FY20 to 41.3% in FY24. Post QIP in Apr’24, the company’s D/E has also improved significantly to 0.6x as of Jun’24 from 1.5x as of Mar’24.

Reasonable valuation: At current price, the stock trades at FY25E/FY26E PE multiple of 50.2x/35.5x respectively. 

Key Risks: Cyclicality in hotel revenues; Geographical concentration; Rise in competition

Newgen Software Technologies

Price target: Rs 1475 

The growth outlook for the company is on strong footing. The management expects 20-25% CAGR growth in revenue in the medium term and has set an ambitious target to achieve a $500 million (Rs 4,000 cr) revenue milestone in the next 3-4 years. 

Valuation: For FY24-FY26, we expect Revenue/EBITDA/PAT to grow at a CAGR of 23.8%/24.7%/25.1% to Rs 1,907.7 cr/ Rs 448.3 cr/ Rs 393.5 cr respectively. At CMP, the stock is trading at a P/E multiple of 56.7x/44.8x of its FY25E/FY26E earnings respectively. 

Key risks: Macroeconomic challenges; Cross currency risks; Operates in a highly competitive market.

Titagarh Rail Systems

Price target: Rs 1,510

The JV (47:53) with Ramkrishna Forgings is well on track. The overall capex to be incurred is Rs 1,800 cr, in two phases. The total capacity that is being created by JV is around 2,00,000 wheels. Out of which, the JV has a long-term contract from railways for 20 years to supply 80,000 wheels per year. Balance (1,20,000) will be captively consumed or will be supplied to cater to market requirements. 

Order Book: Total Order book as on Jun’24 consists of orders for 23,000 wagons and 1,592 Metro and Vande Bharat coaches. Order book as on 30th Jun’24 stood at Rs. 14,117 cr, which is 3.7x of FY24 sales. 

Reasonable valuation: At current price, the stock is trading at FY25E/FY26E P/E multiple of 43.7x/31.6x of its Bloomberg consensus earnings estimate. The company is well positioned to leverage on healthy growth prospects backed by (a) Growing demand, (b) Attractive rail value chain opportunities, (c) Higher Infrastructure spend and (d) Policy support. 

Key Risks: Any slowdown in railway capex; Highly dependent on Indian Railways; Higher competitive intensity etc.

PG Electroplast 

Price target: Rs 735 

Strong customer relationships: PGEL is a supplier to leading brands such as Voltas, Daikin, Blue Star, Carrier, Voltas Beko, Whirlpool as well as retailers such as Croma and Reliance Digital. Its customer base in RACs has increased from 12 in FY22 to 30 in FY24 thus significantly reducing the customer concentration.

Valuation supported by high growth: At current price, the stock is trading at FY25E/FY26E P/E of 75.5x/59.7x respectively. Premium valuations are likely to sustain given the high growth phase of the company, potential expansion into other categoriessuch as IT hardware and backward integration benefit.

Key Risks: Decline in consumer demand for ACs, Higher insourcing by OEMs; Supply chain disruptions.

Arvind Fashions 

Price target: Rs 725 

The company has started to focus on its five key brands to make each one of them above Rs 1,000 cr NSV (Net Sell Value) brands in the near future, excluding U.S. Polo Assn. which is already Rs 2,000 cr+ NSV. Also, the company will focus more on retail store expansion and increase its retail share to 50% by FY27 from 44% in Jun’25. AFL is also diversifying into adjacent categories such as kidswear, footwear, womenswear, innerwear and accessories by leveraging its strong brand equity. 

Healthy 1QFY25 performance: AFL reported 10.2%/24.7% YoY growth in its Revenue/EBITDA at Rs 955 cr /Rs 116 cr respectively in 1QFY25 and reported net profit of Rs 14 cr vs. net loss of Rs 5 cr in 1QFY24. Retail LTL (like-to-like) growth was 1.5%. In adjacent categories, womenswear business recorded double-digit growth. EBITDA margin improved 100 bps YoY to 12% through higher gross margins & strong costs control. 

Reasonable valuation: At current price, the stock trades at FY25E/FY26E Bloomberg consensus PE of 62.7x/37.3x respectively.

Key Risks: Weak demand environment; Intense competition; Inability to renew brand license

Kilburn Engineering

Price target : Rs 532 
 
Order book at Rs 371 cr provides healthy revenue viability: The company as of Jun’24 has an outstanding consolidated order book of Rs 371 cr which is 1.1x of its FY24 sales. The overall order enquiry pipeline is Rs 2,000 cr and Kilburn has a strike rate of 25%. The management has guided to achieve Rs 500 cr consolidated revenue in FY25 along with an EBITDA margin of 20% plus. The organic growth for the next 3-5 years is expected to be 20-25% CAGR. 

Valuation: For FY24-FY26E, we expect Revenue/EBITDA/PAT to grow at a CAGR of 36.9%/27.2%/35.4% respectively to Rs 617.8 cr/ Rs 123.6 cr/ Rs 92.7 cr respectively. At CMP, the stock is trading at a PE multiple of 30.4x/24.3x of its FY25E/FY26E earnings respectively. 

Key risks: Geopolitical tension; Slowdown in manufacturing sector; Volatile raw material prices