These 3 stocks to watch out for

Jindal Steel & Power rallied 43% in the past one month. Image source: Reuters

The Indian market has touched a historic high and the valuation of the stocks are at their peaks. Edelweiss has long-term buy calls for these stocks:

Monte Carlo Fashions Ltd

Monte Carlo Fashions Ltd (Monte Carlo) was launched in 1984 by Oswal Woollen Mills Ltd as an exclusive woollen brand and today it leads the woollen wear segment in India.

The company successfully diversified into all-season cotton wear, home furnishing, kids wear and, most recently, sportswear, to mitigate risks. Geographically also, Monte Carlo is transforming from being recognised more in the North and East into a pan-India brand.

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Although the past two years have been challenging for Monte Carlo, we expect strong numbers in Q3FY18 (thanks to a harsh winter) and in the quarters to come.

-- Expected growth FY17-20E
Sales : 14% CAGR
EBITDA margin improvement: 460 points from FY17
PAT: FY20E –Rs 104cr v/s FY17- Rs 39 cr

Pros

Unrivalled winter wear brand; successful diversification into cotton wear, new territories
Macro challenges hit two years of financial performance; turnaround in sight
All negatives factored in
We value the company at 20x FY19E EPS of Rs 40 and initiate “ Tactical BUY” recommendation with target price of Rs 800/share.

GNA Axle Ltd (GNA)

GNA Axle Ltd (GNA) reported revenue of Rs 167 crore in Q3FY18, an impressive growth of 41% yoy. The growth was driven by robust performance in both domestic and exports business during the same period. Strong demand scenario for heavy duty trucks in North American region coupled with modest rise in other export regions like Europe and South America fuelled growth in export business.

While continued healthy growth momentum in tractor demand post minor hiccup caused by GST implementation drove growth for domestic business. EBITDA came in at Rs 27 crore, up 38% yoy, and higher by 6% compared to our estimation, whereas PAT stood at Rs 12.7 crore up 56% yoy and higher by 17% as compared to our estimates.

Management believes growth momentum to be sustaining in both domestic and export market and also confident of enhancing its market presence. With current monthly order inflow of approximately Rs 75 crore, which has increased from Rs 60-62 crore 6-7 months back, instills significant confidence in the company’s growth prospects.

The stock today closed 0.31% down at 453.00. It is trading at a PE of 24x/19x FY18E/FY19E, respectively. We maintain our BUY rating on the stock with the revised target price of Rs 530.

Jindal Steel & Power

Despite an impressive 43% rally in the past one month, we see further steam in Jindal Steel & Power (JSPL) as domestic steel shipments are estimated to jump to 7.5 mt by FY20 with EBITDA at Rs 9,000/t plus.

Oman operations estimated to generate stable $130-140/t EBITDA; and deleveraging is estimated to result in 16% dip in net debt by FY20. Moreover, the stock is trading broadly in line with peers despite superior returns compared to the latter. While certain regulatory uncertainties persist, management believes the company is well equipped to battle them. Maintain ‘BUY’ with revised target price of Rs 350 on unchanged multiples (earlier Rs 235) as we roll over to FY20E, implying an exit multiple of 6.7x.

Key driver: Uptick in domestic steel volume

We peg JSPL’s domestic steel sales volume to jump 31% to 7.5mt through to FY20 following completion of the 3mtpa Basic Oxygen Furnace (BOF) at Angul (refer our note, Jindal Steel & Power - Volume-led growth imminent; company update; Buy). We estimate EBITDA/t upwards of Rs 9,000 in FY19 and FY20 owing to operating leverage benefits and ramp up of downstream facilities.

We believe, the upside potential is higher in the stock as it is more financially leveraged compared to peers.

Deleveraging: Further value enabler

We estimate JSPL’s net debt to fall 16% compared to FY17 due to free cash flow accretion of Rs 75 billion through to FY20E; and cash inflow owing to asset sale. Possible value unlocking in Shadeed Oman, higher capacity utilisation and improved PLF of power division can further pare net debt. Recently, Axis Bank and HDFC Bank have removed JSPL from the NPA list — a reflection of its improving earnings profile.

Outlook and valuations: Further upside anticipated; maintain ‘BUY’

We reiterate our favourable view on JSPL as the operating leverage story is well set to play out. We believe, optimal downstream asset utilisation and cost benefits will enable the company to further improve profitability.

On valuation front, the stock is trading at 5.9x FY20E EBITDA. We maintain ‘BUY/SO’ with revised TP of Rs 350, implying an exit multiple of 6.7x FY20E EBITDA, which is at the lower end of its 10-year historical average. The stock today closed 10.28% up at Rs 290.75.

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