Diwali Top Picks - Tata Power, Birlasoft, Union Bank of India Among Six Stock Ideas From IDBI Capital

IDBI Capital Report

Ahead of this Diwali, we recommend six stocks which includes an energy and power company, a public sector bank and a leading real estate company that investors can look to Buy and get returns of up to 43%.

Here are six stock recommendations handpicked by us:

Tata Power Company Ltd. (Target price: Rs 339. Upside potential is 43%)

Key triggers:

Power Demand is strong: In India there is strong correlation between GDP and power generation growth and the ratio has increased to 1.1 times. Importantly, India has one of the lowest power consumption per capita. Now, with planned capacity addition, Tata Power will benefit from the GDP growth and thus leading to improved power demand.

Coastal Gujarat Power Ltd. Mundra turning profitable :

In Mundra, losses are restricted due to cost pass-through benefits under Section-11 and thus need to watch for signing of long term power purchase agreement. And this will resolve long pending concern for Tata Power.

Addition of capacity:

Total Installed power Capacity in India currently stands at ~422 giga watt and renewable energy accounted for ~77% of capacity additions in Q1 FY24.

For Tata Power, renewables capacity has increased to 4.1 gw with another 3.6 gw under various stages of implementation. The company aims annual additon of 2.5-3 gw of renewable power, going forward.

New Initiatives:

Company has steady cash flows from its regulated businesses, and is aiming to move to cleaner fuels. In this quest:

1. Tata Power has signed a memorandum of understanding with the Maharashtra Government of Rs 130 billion for pumped hydro storage projects.

2. Solar Cell and Module Manufacturing project of 4 gw remains on track and first module production expected by end of Sep-23.

Birlasoft Ltd. (Target price: Rs 781. Upside potential is 36%)

Key triggers:

Aspiration to achieve $1 billion:

The company aspires to achieve $1 billion (no time from given) from current $595 million. The company aims to achieve the same by increasing contribution from non U.S. markets. The company will also be looking for inorganic opportunities in the long term to build capabilities.

The company will be hiring senior leadership for the non U.S. market and devise a go to market strategy. In terms of service lines, the company is seeing opportunities in the banking, financial services and insurance, and energy and utilities verticals.

On sustained growth path:

Birlasoft reported 4.5% QoQ constant currency growth in Q2 FY24 excluding on off from Invacare which is better than large cap and mid cap peers. In addition, considering the company’s ability to grow in 3-3.5% QoQ range indicates that it is taking the right step to turnaround the business. Birlasoft is also betting big on artificial intelligence and is planning to train all its employees on generative AI.

Further, the company’s focus on top 200 clients, ERP traction, annuity, large deals and incentive linked growth and profits will drive long term growth on sustained basis. Hence, we have a constructive view on the company from long term perspective.

Valuation:

Birlasoft aims to maintain 15.5%-17% margin for medium term leading to revenue and profit after tax compound annual growth rate of 10.5% & 22% over FY23-FY25E. Hence, Birlasoft is our high conviction 'Buy' idea.

Union Bank of India (Target price: 138. Upside potential is 34%)

Key triggers:

Balance sheet growth remains healthy:

Advances grew by 12%/1% YoY/QoQ led by strong disbursement in the corporate segment (up by 15% QoQ) and retail segment grew by 17% YoY. Management has maintained its guidance of 10%–12% loan growth in FY24.

Deposits growth grew by 14%/1% YoY/QoQ, while current account and savings account book de-grew 2% QoQ, resulting in 1.1% QoQ decline in CASA ratio at 34%.

Deposit growth guidance stood at 8%–10% for FY24.

Asset quality improved; NIMs expanded:

Asset quality ratios improved with gross/net non-performing asset ratios at 6.4%/1.3%. Provision coverage ratio improved 90 bp QoQ to ~80.7% in Q2 FY24. Restructured book declined to 1.7% of loans, while special mention account book improved to 52 bp. Net interest margin expanded 15 bps to 3.13% in Q1 supported by re-pricing of assets and 40 bps yield expansion as against 16 bps QoQ increase in cost of deposits. Management maintained its NIM guidance of ~3% for FY24.

Valuation:

Union Bank of India reported 90% YoY growth in Q2 FY24 PAT to Rs 35 billion (higher than market estimates), driven by 57% YoY decline in provisions to Rs 17.7 billion. A low SMA book (0.52%) and controlled restructuring (1.7%) provide a healthy outlook on asset quality. Additionally, the bank's valuation at 0.8 times price/book FY24E is relatively inexpensive compared to its peers.

Macrotech Developers Ltd. (Target price: 1,061. Upside potential is 32%)

Key triggers:

Gross development value addition:

Company has added projects with a GDV of Rs 23 billion during Q2 FY24 and thus in H1 FY24 it has added 82% of its guidance for FY24 of Rs 175 billion GDV addition. Importantly, Lodha aims to add seven-eight new projects with GDV of Rs 120 billion in H2 FY24.

In this large part of GDV addition is happening in MMR at 82%, 10% in Pune, and remaining 8% in Bangalore .

Pre sales growth:

Over mid term Macrotech Developers guides 20% growth in pre sales. In H1 FY24 it has done pre-sales of Rs 69 billion up 15% YoY. With GDV addition from seven-eight new launches , it is on track to achieve pre sales of Rs 145 billion (~20% YoY) in FY24E.

Debt is reducing:

Cash flows are healthy which resulted in balance sheet been lean (debt reduction) and company is on its track to achieve their guidance of debt reduction. Macrotech’s net debt stands at Rs 67 billion, with debt/equity of 0.52 times. It is on track to achieve its target of below 0.5 times of debt/equity.

Target internal rate of return and demand:

Macrotech continues to target 30% plus IRR from joint development agreement projects, and management sees healthy opportunities to acquire projects that can generate the return.

Demand for homes is rising again, strong cash flows and debt reduction are anticipated in the future due to the company's promising start to asset-light business development through the JDA mode. Macrotech's formidable market share in MMR, strong execution abilities, industry consolidation, ready inventory liquidation, and robust business development are key positive in the company.

Click on the attachment for full list of IDBI Capital's Diwali stock picks:

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This report is authored by an external party. BQ Prime does not vouch for the accuracy of its contents nor is responsible for them in any way. The contents of this section do not constitute investment advice. For that you must always consult an expert based on your individual needs. The views expressed in the report are that of the author entity and do not represent the views of BQ Prime.

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