Diwali 2023: These 3 stocks can more than double investor wealth in 3 years, says InCred

Despite the current volatile market scenario, domestic brokerage house InCred Equities has come out with 3 stocks, that it believes will turn multibaggers in the next 3 years. Apart from these 3, it has also listed some ideas for Diwali.

“We do bottoms-up stock analysis to find stock ideas with strong business momentum, healthy ROE/ROCE profile extending over 15 percent EPS CAGR for FY24-26F. We apply valuation filter to improve factor of safety, so as to select stocks with forward PE/PBV valuation near mean/ below mean of last 5-10 years,” said the brokerage explaining its rationale. It believes the combination of strong earnings growth and valuation rerating, can help extend strong returns in the selected stocks.

First, let’s take a look at the 3 stocks that InCred believes can more than double investor wealth in 3 years:

Camlin Fine Sciences (CSFL): The brokerage has an ‘add’ call on the stock with a 1-year as well as 3-year (bull case) target price of ₹300, indicating an upside of 133 percent.

“We bake in vanillin benefits in our FY24F estimates to arrive at an EPS of ₹15.1 for FY24F and ₹21.8 for FY25F. We valued the stock at 20x FY24F EPS to arrive at our higher target price of ₹300 from ₹180 earlier,” it said.

The brokerage noted that as CSFL will start manufacturing vanillin, it doesn’t have to sell catechol at an average loss of $1.5/kg. Therefore, on the likely sales of 3,000t in FY24F, CFSL’s loss on catechol sales can decline by $5 million (CFSL may have lost $9.9 million on catechol sales in FY23). It further stated that Negolyte’s sales to Lockheed Martin also provide an option value of ₹150 crore in EBITDA. However, the brokerage feels it may not materialise over the next couple of years.

Bull-case argument not factored in by Street: The brokerage expects a 3,000t of vanillin sales in FY24F, and consequently the loss from catechol sales to decline to US$5m (vs. US$9.9m in FY23) and lead to an increase in gross profit by ₹300 crore.

Cyient DLM: The brokerage has an ‘add’ recommendation on the stock with a 1-year target price of ₹880 and a 3-year target price of ₹1,413. This indicates an upside of 37 percent and 120 percent for 1 and 3 years, respectively.

“Cyient DLM’s revenue from the defense industry increased to 58 percent in FY23 from 29 percent in FY19 as the company developed the expertise in manufacturing complex defense systems for the Israel Aerospace Industry (IAI) and Rafael (Dassault Systemes), which jointly developed the Iron Dome Air Defence system for Israel. The average order ticket size from IAI is Rs160m, suggesting a high degree of complexity associated with these products. They also present a large revenue pie for Cyient DLM to capture,” explained the brokerage.

Bull-case arguments not factored in by street: InCred expects Cyient DLM’s EBITDA margin to increase from 10.6 percent in FY23 to 11.5 percent in FY26F led by improvement in the product mix. Apart from the defense industry, Cyient DLM also has a very strong client base in other sectors. Cyient DLM’s average relationship with a client is around 8-10 years, giving it a definite edge. Industry giants like ABB, Honeywell and Thales Avionics are some of its marquee clients. Moreover, its entry into the clean energy sector with Nexcer, an electric vehicle or EV battery safety technology start-up, also presents an interesting optionality going ahead, it added.

As per the brokerage, the company is a high-growth company catering to niche sectors like aerospace and defense and medical electronics. Gaining a customer’s wallet share in these sectors is a daunting task, as the relationship requires a long gestation period of more than 10 years. As a result, Cyient DLM has bright prospects of gaining further wallet share from its existing clients, thereby presenting itself with a huge growth opportunity in the coming years, it said.

In a bull-case scenario, InCred expects a revenue CAGR of 42 percent with the average EBITDA margin at 11.8 percent in FY23-26F, which translates into EBITDA and PAT CAGR of 49 percent and 95, respectively.

Globus Spirits: The brokerage has an ‘add’ rating on the stock with a 1-year target price of ₹2,929 and a 3-year target price of ₹3,515. This indicates an upside of 260 percent and 331 percent for 1 and 3 years, respectively.

InCred noted that the firm witnessed an expansion in gross profit margin due to a rise in the selling prices of Indian-made Indian Liquor (IMIL) and softening broken rice and energy costs. Moreover, the stabilisation of its newly commissioned plant in Jharkhand, completion of expansion projects in Bihar and West Bengal, foraying into new markets in the Indian-Made Foreign Liquor (IMFL) segment and launch of new products in the IMFL segment are some key positives for the firm, as per the brokerage.

Bull-case argument not factored in by street: Faster decline in broken rice and domestic energy costs.

Apart from these 3 potential multibaggers, the brokerage has also picked Ajanta Pharma, Bharat Forge, Concor, Data Patterns, M&M Financial Services, Spandana Sphoorty, and Tech Mahindra as its top Diwali picks.

From a 3-year perspective, among these, the brokerage sees the highest upside in Data Patterns (96 percent), followed by Bharat Forge (78 percent), Ajanta Pharma, and M&M Finance (65 percent each). For Tech Mahindra, it sees a 63 percent upside while for CCI and Spandana, InCred sees a 46 percent upside each.

“Data Patterns (India) projects a strong topline growth of around 38 percent CAGR over FY23-26F, driven by execution of its product contracts (repeat and large-volume orders). Further, Data Patterns (India) also plans to focus more on its in-house design and development and expand its product portfolio. The higher EBITDA margin is likely to sustain owing to a greater impetus to in-house development and production,” said the brokerage. InCred has a 1-year target price of ₹3,000 and a 3-year target price of ₹3,850 for the stock.

Here are its top 10 picks for Diwali:

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

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Updated: 10 Nov 2023, 05:44 PM IST