HDFC Bank, SBI Cards, Tata Steel and more: InCred lists 24 high conviction picks for June

Indian markets rose over a percent in intra-day deals today, June 6, extending gains after a 3.3 percent jump in the previous session after Narendra Modi-led BJP won crucial backing from two key allies in his coalition, allowing him to form a government for the third straight time. However, on June 4, the day of the Lok Sabha election results, the markets fell almost 6 percent as the Modi-led NDA did not win as many seats as predicted by the exit polls.

Now that the election results are over, the markets are likely to start focusing on fundamentals, central bank policies, global trends, etc.

Amid this current scenario, brokerage house Incred Equities has come out with 24 high conviction picks. It has also made some additions and deletions in its model portfolio.

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Additions to the list include Dabur India and Zydus Lifesciences with ‘add’ calls; and PG Electroplast with a ‘reduce’ rating. Meanwhile, deletions include APL Apollo Tubes, Bharat Electronics, Data Patterns, Camlin Fine, and Titan Company. The brokerage had ‘add’ recommendations on all these stocks as well.

Addition to the list:

Dabur India (ADD): Beneficiary of the recovery in rural markets and the healthcare segment.

Zydus Lifesciences (ADD): Complex generic product launches to be key growth drivers for its US business sales and profitability.

PG Electroplast (REDUCE): Dependence on the new air-conditioner and laptop manufacturing business to scale up sales looks stretched.

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Deletion from the list:

APL Apollo Tubes (ADD): Flattening volume growth and weakness in EBITDA/t is an area of concern.

Bharat Electronics (ADD): Government policy risk unaccounted at a rich valuation of 46x FY26F EPS i.e +2SD above the 5-year mean.

Data Patterns (ADD): A sharp run-up in the stock price has resulted in the stock trading at 45x FY26F EPS, making the risk-reward unfavourable.

Camlin Fine (ADD): Challenges to Vanillin scalability are limiting profitability benefits.

Titan Company (ADD): High gold price impact on demand and competition intensity impact on the EBITDA margin are the areas of concern.

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Apart from these, among its high conviction picks, the brokerage sees maximum upside in Globus Spirits of 127 percent. It has an ‘add’ rating on the stock with a target price of ₹1,562.

Globus Spirits has experienced an expansion in gross profit margin due to increased selling prices of Indian Made Indian Liquor (IMIL) effective from April 1, 2024, following the new excise duty policy. The company also benefited from the normalization of fuel costs and the successful expansion of its plants in Jharkhand and West Bengal. Additionally, the launch of new products in the Indian Made Foreign Liquor (IMFL) segment and higher prices of maize-based ethanol have further contributed to its improved margins, said the brokerage.

It also expects a 97 percent upside in BCL Industries (Add, TP ₹95), 80 percent upside on Spandana Sphoorty Financial (Add, TP ₹1,300), 72 percent in Cyient DLM (Add, TP ₹1,049), and 57 percent upside in Skipper (Add, TP ₹435).

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For BCL Industries, the brokerage noted that it is emerging as an agro-energy giant, with profitability on the rise due to lower raw material and fuel costs. The company is set to drive sales through the launch of new products in the Indian Made Indian Liquor (IMIL) segment, and it is also benefiting from higher prices of maize-based ethanol.

Meanwhile, for Spandana, the brokerage stated that its new management is focusing on diversity-led growth, gradually shifting towards a weekly collection model to strengthen the balance sheet and ensure sustainable growth. They have set a target of a ₹2,800 crore Microfinance Institution (MFI) book by FY28, with plans to diversify into new geographies. Strong customer acquisition in these new locations will be a key focus. With the worst of the asset quality issues behind them, overall collection efficiency is now strong, and the geographically diversified loan book will help protect the company during downturns. The new management's ability to achieve diversified AUM growth profitably bolsters optimism about Spandana's future, given its diversified presence, strong balance sheet, and the management's successful track record.

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However, Incred's high conviction picks also have 5 stocks with 'reduce' calls. These include Clean Science, Tata Steel, Interglobe Aviation, PG Electroplast and SBI Cards.

The brokerage expects a 48 percent downside in Clean Science and Tata Steel, a 41 percent decline in Interglobe Aviation, 29 percent in PG Electroplast, and 26 percent in SBI Cards.

As per the brokerage, Clean Science is encountering increased competition in its base products, MEHQ and BHA, leading to eroding margins. Although hindered amine light stabilizer (HALS) is seen as a potential solution, high entry barriers and the misconception of capturing a 10% market share in a highly competitive market are concerns. The company lacks a sustainable advantage as margins decline and its venture into the competitive TBHQ and PBQ segments indicates limited growth prospects in its current portfolio. The market's optimism about the company's ability to discover new chemicals due to its superior chemistry skills seems misplaced, given its recent product forays. Additionally, incremental margins and return on capital employed (RoCE) for HALS are expected to be lower than for its traditional business, leading to hyperinflated earnings expectations, it said.

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For IndiGo, the brokerage believes that its incremental groundings in Q4FY24 (35 planes; 5 percent of industry fleet) would not impact tariff as (a) IndiGo would lease more planes to meet its capacity target, and (b) competitors are unscathed and their fleet is underutilised. It has factored in that IndiGo’s entire fleet will be operational in FY26F. This will increase the industry capacity by 14 percent and dampen tariffs.

Furthermore, the brokerage is bearish on Tata Steel as in the foreseeable future, it expects the steel market to experience sustained downward pressure, resulting in no improvement in steel spreads. An oversupplied steel market, rising costs, and slowing demand are a recipe for buying steel names at 0.5x book value. Tata Steel is away from that. Its balance sheet will deteriorate (contrary to the consensus estimate), it pointed out.

Meanwhile, Incred's high conviction picks also included some major large-cap names like HDFC Bank, Ashok Leyland, Bharat Forge, Maruti Suzuki, State Bank of India, Shriram Finance, and Tech Mahindra.

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As per the brokerage, HDFC Bank is experiencing strong loan growth driven by merger synergies and the opening of new branches. The bank has aggressively expanded its branch network over the past three years, increasing its total branch count by approximately 56 percent since FY21. This expansion is expected to enhance growth visibility, particularly from new branches in rural and semi-urban regions. Improved profitability and market share gains from early branch expansion and quicker breakeven of new branches compared to peers are anticipated to drive a rerating. Additionally, cross-selling to HDFC customers will further bolster growth visibility. With the HDFC merger nearing completion and new branches established in semi-urban and rural areas, HDFC Bank is poised for its next phase of growth, leading to a potential rerating, it added.

Meanwhile, for the auto major Maruti Suzuki, it noted that the company's ongoing SUV launches aim to fill product gaps, potentially expanding both its addressable market pool and the overall market size, as demonstrated by past successes like the Baleno, which matched Hyundai i20's monthly volume of over 10,000 units within a year of its launch. The superior fuel efficiency of hybrids is expected to encourage customers of larger models like the Swift, Dzire, and Ciaz to upgrade. Additionally, Maruti's strategy of offering multiple fuel options and doubling its capacity provides clear medium-term growth prospects in the low-penetration Indian car industry. With improved production and profitability, the company's earnings visibility has strengthened, while its stock trades near the 10-year mean P/E level.

Here's a complete list of its 24 high-conviction picks for June 2024.

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.