Stocks To Buy This Diwali - Reliance Industries, Dr. Reddy's, United Spirits And More By HDFC Securities

HDFC Securities Retail Research

We expect markets to be volatile till the first half of 2024 even as the outcome of state and Central elections will be watched closely as would be the repercussions of the two geo political events. Though the local fund inflows have remained robust, we would need resumption of FPI flows once the global risk appetite revives.

We continue to favour domestic oriented businesses and favor opportunities in the sectors like materials, pharma, oil and gas, small finance banks, petrochemicals, consumption, power EPC and restructuring plays for the next year.

With a focus on these themes, here are our 10 picks for Samvat 2080. These stocks have robust fundamentals and some margin of safety in their valuation to offer superior returns to investors.

Reliance Industries Ltd.

Key triggers

RIL expects nationwide 5G coverage in India by December 2023 and launched Jio Bharat to gain market share and capitalise on the 2G market. JioFiber and JioAirFiber will accelerate Home broadband offerings to develop AI models and solutions customised for the Indian market.

Reliance Jio added the most number of wireless subscribers over the past and we expect, average revenue per user could increase to Rs 190-195 per month in FY24E from Rs 180.5 per month in Q1 FY24 and Rs 178.8 per month in Q4 FY23.

Reliance retail crossed the milestone of 100 crore transactions and received more than 78 crore footfalls in FY23. The registered customers grew to 25 crore and opened 3,300 plus new stores last year, taking the total to 18,040, covering 6.56 crore square feet. Notably, two-third of these stores were located in T2 and smaller towns in FY23.

As per the market cap, Reliance Retail is ranked among top four/top 10 companies in India/ retailers in the world. Reliance will continue to expand in all categories viz., grocery, fmcg, electronics, fashion, etc. through physical as well as digital platforms. It also plans to launch products internationally.

Reliance’s MJ field in the KG basin is set to reach ~30 million metric standard cubic metre per day of production for FY24E and it will contribute ~30% of the India’s domestic gas production and 15% of the country’s total gas demand.

The company is working on fast-tracking various projects currently underway at Jamnagar’s Dhirubhai Ambani Green Energy Giga complex. Singapore GRMs have recovered back sharply since July’23, stood at $ 9.6/bbl in Q2 FY24 which could also help Reliance to report strong GRMs amid rise in benchmark Singapore GRM in the coming quarters.

The company is working on converting low-value refinery streams to highly specialised products. The company also intends to transition to renewable and bio-energy in order to reach Net-Zero by 2035, while also improving profitability with lower energy cost.

Reliance’s priority is to set up battery Giga factory by 2026. It will manufacture battery chemicals, cells and packs, leading all the way up to energy storage solutions, and will include a battery recycling facility.

Valuation and recommendations

Reliance’s retail, telecom, and new energy are poised to become the upcoming growth drivers over the next two-to-three years, given the large technological advancements and ambitious growth targets.

The company to report a consolidated revenue/Ebitda/profit after tax CAGR of 13.5%/12.3%/10% over FY23-25E. Investors can buy in the Rs 2,075-2,325 band for a target of Rs 2,695 (24.25 times FY25E EPS) till next Diwali.

Dr. Reddy's Laboratories Ltd.

Key triggers

• Dr. Reddy’s reported healthy numbers for FY23 with highest ever sales, strong cash flow generation and improvement in return ratios on the back of gRevlimid (lenalidomide) opportunity in the U.S. Even in H1 FY24, overall numbers remained strong largely led by robust U.S. and Europe business.

• Revenue from U.S. generics stood at ~$ 1.2 billion, growth of 25.3% over FY22. While pricing pressure in the base business persisted, growth was supported by launch of 25 new products during the year, including Revlimid. Ex-Revlimid, U.S. business declined in FY23 due to increased competition and price erosion in the base business.

• Among the large cap pharma companies, Dr. Reddy’s has maintained strong U.S. FDA compliance track record with all its API/formulation facilities having received Voluntary Action Initiated/ No Action Initiated from the US FDA.

• In the domestic business, the company’s focus will be to drive productivity improvement and focus on core therapeutic areas and big brands. In the medium to long term, the company’s strategy would be to build a healthy pipeline of differentiated products in therapies, including biosimilars, expand presence in areas such cardiac, respiratory and over-the-counter and nutraceuticals. Company has recently announced its foray into the trade generics business.

• API business recorded its second consecutive year of revenue decline in FY23 after recording strong growth in FY21 on the back of Covid-related benefits. Sales declined 5% in FY23 on the back of both volume and pricing front, which was partially offset by new launches. It filed drug master files for 130 products during the year, including 12 filings in the U.S.

• R&D expenses were at Rs 1,938 crore or 7.9% of sales for FY23. It has remained around 8-9% of sales in the last three years. Company launched six new products in Q1 FY24 and further guided for 25 product launches in FY24 in U.S.

• Europe business registered 21% CAGR in sales in the last 4 years. It was driven by new launches and volume traction in base business.

• Gross debt declined from Rs 3,390 crore in FY22 to Rs 1,188 crore as on Sep-2023. Company has net cash and equivalents of Rs 5,900 crore as on Sep-2023.

Valuation and recommendations

We expect U.S. business to grow at compound annual growth rate of 11% over FY23-25E including gRevlimid sales. Overall, we estimate 10% compound annual growth rate in sales led by strong growth from U.S. and domestic formulation business.

We expect operating margin to remain at around 26.5-27.5% on the back of niche opportunities in the U.S. piece. Net profit is expected to see 16.5% CAGR led by healthy revenue and strong operating performance over the same period.

We recommend buy on Dr. Reddy’s in the band of Rs 4,850-5,400 for target price of Rs 6,250 (19.5 times FY25E earnings per share) till next diwali.

Godrej Industries Ltd.

Key triggers

• Godrej Industries’ real estate subsidiary, Godrej Properties Ltd.’s revenue has been more than doubled in Q1 FY24, rising 282.6% YoY to Rs 936 crore, led by project deliveries totaling ~4.9 million square feet in four cities. The company also launched three projects/phases in two cities in the quarter. However, the company expects the increase in pace of launches to pick up in Q2 FY24. In long run, the company expects to achieve double-digit market share, it is an opportunity to increase from the current market share of 3.5% to 5% of the real estate industry.

• The revenue of consumer’s products subsidiary of the Godrej Industries grew by 10.4% YoY/ 7.8% QoQ in Q1 FY24. Volume growth was at 10% YoY while revenue in constant currency grew by 15% YoY. Value growth was impacted due to price deflation in soaps and the currency translation impact in Nigeria due to demonetisation.

• The company has recently acquired Raymond Consumer Care Ltd. business, excluding which the organic revenue growth was at 6% YoY. The company has announced to incur capex of Rs 900 Cr over the next 18-36 months.

• On standalone basis chemical business revenue has fallen by 26.8% YoY. Gross margin expanded 30 bps YoY due to lower commodity prices while Ebitda margin contracted 230 bps YoY. Godrej Industries reported net loss of Rs 28.3 crore in Q1 FY24. Chemical industry as a whole is facing strong headwinds which visible in the company’s quarterly performance as well.

• The Godrej family is undergoing a split among brothers and this could lead to value unlocking for Godrej Industries as it is the holding company in the group and currently suffers from a large holding company discount. The timing of the split is uncertain but likely to be completed in the next two-four quarters.

Valuation and recommendations

While Godrej Industries Ltd.'s standalone business faces some pressure in the near term, its consumer product and real estate subsidiaries are doing well and the outlook remains healthy.

We expect value unlocking due to the split between the brothers and holding company discount could narrow too. Investors can buy the stock in the Rs 555-624 band for a target of Rs 735 till next Diwali.

United Spirits Ltd.

Key triggers

• In line with its new strategy, United Spirits focuses on reshaping the portfolio and improving value chain efficiency. Portfolio activation was fully aligned with the strategy.

• Socialising is back with a bang, with more consumers coming to upper segments. United Spirits is also seeing a lot of tourist traffic. These factors will drive demand. Mid-prestige/Upper prestige/ Luxury premium grew 43%/32%/37% in FY23.

• There have been some green shoots in glass prices after a correction in natural gas prices, while ENA prices remain high. Operating deleveraging on account of the sale of popular business will continue until Sep’24. However, operating leverage from the prestige and above portfolio would reduce the impact. Management targets Ebitda margin of ~15% in FY24 and expects it to gradually increase to 16.5% thereafter.

• UK FTA is on the agenda for UK-India talks, but the timing and extent of benefits are not yet clear. If basic customs duty reduces from 150% to 100% or 50%, then there could be 6-7% or 12-13% price reductions respectively, which can boost volumes.

• United Spirits has wiped out all accumulated losses of the past in Q1 FY24 and the company will now look at establishing a dividend payout policy. Regulatory changes in terms of taxes, distribution, marketing ban, interstate moves etc, rise in raw material and packing costs, slowdown in spend on drinking or downtrading are some keys risks faced by the company.

Valuation and recommendations

United Spirits will continue to focus on driving profitable growth, led by-

1. doubledigit topline growth;

2. sustained advertisement and promotion investments;

3. improving pricing and premium mix; and

4. productivity gains.

Investors can buy the stock in the Rs 915-1,040 band for a target of Rs 1,195.

We value United Spritis at 56.5 times price/earning on FY25E EPS (standalone) to arrive at a target price of Rs 1,195 (including Rs 70/share of RCB+ non-core assets).

Click on the attachment to read the full list of HDFC Securities Retail Research's Diwali Top Picks:

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