The Nifty 50 index is now trading at ~20.3x FY24 and ~17.6x FY25 consensus EPS. According to HDFC Securities, valuations look fair now on FY25 basis and risk reward is balanced.

Read here: Nifty crosses 20,000 for the first time since September; 5 key factors driving the rally

Among sectors, the brokerage prefers large-cap banks, industrial and real estate, power, autos, pharma, OMCs, gas, and capital markets. It remains underweight on consumer (staples and discretionary), metals, chemicals and small banks.

However, for a 6 to 9 months perspective, the Retail Research at HDFC Securities have pointed out three fundamental stock picks.

HDFC Securities is bullish on Manappuram Finance, Bharat Dynamics and IOL Chemicals & Pharmaceuticals and advises investors to buy these stocks and add at lower levels for an upside of up to 10% in two to three quarters.

Here are top fundamental stock picks by HDFC Securities:

Manappuram Finance | Buy | TP: ₹168

Despite the slowdown and high inflation, demand for gold loans is picking up steadily and the industry is poised to grow over the long run. HDFC Securities believes there is enough unsatisfied demand for gold loans in India which will ensure that all players can co-exist without major erosion of profitability. 

“We expect the consolidated loan book of the company to grow at a CAGR of ~16% over FY23-FY26. Adj. PAT is expected to grow at ~24% CAGR as provisioning requirements could moderate going forward. We believe Manappuram Finance is available at an attractive valuation (compared to a lot of other NBFCs/Banks having major gold loans AUM) as it has demonstrated its ability to grow in a profitable manner and can be a re-rating candidate,” HDFC Securities said.

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The brokerage firm advises investors can buy the stock in ₹146-150 band and add on dips in ₹131-135 band (0.8x Sep’25E ABV) for base case fair value of ₹168 (1x Sep’25E ABV) and bull case fair value of ₹184 (1.1x Sep’25E ABV) over next 2-3 quarters.

Bharat Dynamics | Buy | TP: ₹1,274

HDFC Securities has initiated coverage on Bharat Dynamics with a ‘Buy’ rating. It believes the company’s intent to leverage its experience to develop new products such as new-generation SAMs, ATGMs, and heavyweight torpedoes would improve its topline. 

“Strong revenue visibility backed by a robust order book, healthy order pipeline, Government’s thrust on defence modernization through indigenization, export focus and internal efficiency is likely to add fuel to earnings growth. Product innovation and MoUs give comfort to the future growth trajectory. We expect revenue/EBITDA/PAT to grow at CAGR of 29.2%/42.5%/41.3% over FY23- 26E,” said the brokerage.

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It has a base case fair value of the stock at ₹1,274 (26.5x Sept’ 25E EPS) and the bull case fair value at ₹1,394 (29x Sept’ 25E EPS) over the next two-three quarters. 

Investors can buy the stock in the band of ₹1,147-1,171 (24.2x Sept’ 25E EPS) and add more on dips to ₹1,023-1,043 band (21.5x Sept’ 25E EPS), the brokerage added.

IOL Chemicals & Pharmaceuticals | Buy | TP: ₹496.50

HDFC Securities estimates IOL Chemicals & Pharmaceuticals’ Revenue, EBITDA and PAT to see a CAGR of 8%, 25% and 25.3% respectively, over FY23-25E, led by steady growth from chemicals business due to pricing and strong growth from API business. 

“With improvement in gross margin and operating leverage, we expect EBITDA margin to see strong improvement in the medium term. We feel investors can buy the stock in the band of ₹452-458 band and add more on dips to ₹403 (10.75x FY25E EPS) for base case target of ₹496.5 (13.25x FY25E EPS) and bull case target of ₹543.5 (14.5x FY25E EPS),” said the brokerage.

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Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.

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Updated: 29 Nov 2023, 01:17 PM IST