Investment Advice     

Published: May 15, 2023
Updated: May 15, 2023

Four sureshot scrips for investment

Aditya Birla Capital

Aditya Birla Capital’s (ABCL) lending businesses have shown an accelerated growth momentum (+40% YoY) on the back of a simultaneous build-up in the quality of the balance sheet (67% of the NBFC’s AUM is towards Retail + SME + HNI, while 41% of the HFC’s AUM is towards affordable loans) and a substantial improvement in asset quality. This is reflected in a sustained improvement of franchise earnings (the NBFC’s RoA nears the FY24 target, while the HFC’s RoA is above he FY24 target). While the LI business continues to build steady profitability traction (VNB margins at 23%) amid healthy growth, we expect a ~10-12% hit on the FY24E APE due to lower new business sales on account of new regulations.

Moreover, as a strategic initiative, ABCL has formed a wholly owned subsidiary, Aditya Birla Capital Digital Limited, to develop an omni-channel ‘direct to customer’ (D2C) platform. This platform will serve existing customers, acquire new customers and act as a one-stop solution to deliver ‘protecting, investing, financing and advising’ (PIFA) solutions. The stock is recommended to buy at a current market price of Rs 166 with two targets – Rs 184 (+ 10.84%) and Rs 200 (+ 20.48%).

Power Finance Corporation

Power Finance Corporation Limited is an India-based non-banking financial company. It is primarily engaged in providing financial assistance to the power sector. The company also offers consulting and advisory services in financial, regulatory and capacity-building. The fundamental ratings of the company have significantly improved, while its gross margin has been higher than its industry group average for each of the past 5 years. The company currently has a relative valuation of 9, which is significantly above the S&P BSE Sensex index average rating of 4.8. The stock is recommended to buy at a current market price of Rs 172 with three targets -- Rs 182 (+ 5.81%), Rs 194 (+ 19.75%) and Rs 205 (+26.54%).

Federal Bank

The company recently published the latest earnings and a few points should be noted. There were some positives in the results, including strong recoveries and upgrades at Rs 399 crore versus Rs 287 crore QoQ, a healthy loan growth and strong operational performance on a YoY basis. Lower core credit cost at just 19 bps for the quarter also shows an improvement in the structure. There were some red flags found too — CASA growth was muted, and the margins declined higher than expectations on a QoQ basis. The share of retail deposits fell to 85% in FY23 versus 92% in FY22.

The management’s viewpoint on their company is that it is well poised to sustain high mid-teen loan growth in FY24. The bank has guided for ~3.3- 3.35% NIMs and credit cost at ~40-50 bps in FY24. RoA is eyed at ~1.3-1.35%. The focus is on gaining marketshare on retail liability franchise through branch expansion and partnership. The bank is expected to open 100 branches in FY24 versus 75 branches opened in FY23. It is believed that the bank is well-poised to sustain growth and a reversal in return ratios is unlikely, while the asset-quality outlook continues to remain stable. Now, the bank has fewer levers to surprise positively from here on in the form of operating leverage and core fee income. We recommend buying Federal Bank at the Current Market Price of Rs 128 with three targets — Rs 143 (+ 11.7%), Rs 150 (+17.19%) and Rs 167 (+ 30.47%).

UPL

UPL is the largest producer of agrochemicals in India and is among the top five post-patented agrochemical manufacturers in the world. Over the years, UPL has outperformed the industry’s growth rate. Moreover, the company is aiming to reduce its net debt in the medium term, with a focus on bringing the Net Debt/EBITDA ratio below 1x and maintaining its ‘investment grade’ credit rating.

The improvement in marketshare, given its global scale and focus on high-growth products such as differentiated products, speciality chemicals and seeds businesses will drive its volume/revenue growth going forward. The stock is recommended to buy at the current market price of Rs 676 with two targets -- Rs 780 (+ 15.38%) and Rs 848 (+ 25.44%).