Apollo Tyres, JB Chemicals, Cummins and APL Apollo are IIFL Securities’ top four midcap picks for 2023.
IIFL said it likes APL Apollo and Cummins as plays on construction. These stocks are not cheap, it noted, but added that one can see earnings growth visibility as strong government finances enable a period of relatively benign interest rates where housing, building material and construction-linked companies can thrive. For Apollo Tyres, IIFL expects a strong margin and free cash flow (FCF) performance, with upside potential to Street estimates. For JB Chemicals, it believes market share gains through geographic expansion, prescriber overlap and launch of liquid probiotics will the company enhance Sanzyme’s productivity.
JB Chemicals & Pharma
IIFL said JB Chemicals’ continued outperformance in domestic India formulations market, scale-up of the acquired Sanzyme portfolio, and higher CMO business on the back of healthy order book will help deliver 14 per cent revenue CAGR over FY23-25. A strong ramp-up in high-margin (35 per cent) Sanzyme portfolio, improvement in Azmarda gross margins led by in[1]sourcing post patent expiry in early-2023, organic mid[1]teens growth in the base India/CMO business, and PCPM expansion in India will drive 27 per cent EPS CAGR (ex-ESOP) over FY23-25.
Cummins India
Cummins India, IIFL said is the leading player in power-gen solutions in India, with over 60 per cent share in HHP segment. It derives growth from all legs of the economy — Manufacturing, Services (IT, Telecom, DC), Infra and Construction — through its short-cycle portfolio. Consolidation in global ICE supply-chain, portfolio of new cleaner fuel solutions, strong B/S and customer franchise, competitive cost structure and new-age technology access from the Parent — bode well for long[1]term sustainability of the company, it said.
Apollo Tyres
Tyre, IIFL said, is a heterogeneous sector, and the one where stocks delivered OP almost across the board. Incrementally, it expects volumes to moderate. The company said it looked for pockets where idiosyncratic earnings spurts can happen – Apollo Tyres, a sharp beneficiary from likely input cost fall and FY23 onwards becoming FCF positive , besides being attractively priced — is IIFL’s top pick, it said.
APL Apollo Tubes
IIFL expecs APL Apollo Tubes to deliver 27 per cent EPS CAGR over FY22-25 as large diameter tubes gain acceptance for building construction and drive ramp-up of volumes from the new Raipur facility. This, it said, will also increase share of value-added products to 75 per cent by FY25 and aid margin expansion. “While 29 times FY24 PE is rich, volume delivery should steer further rerating,” it said.
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