STOCKS TO BUY IN MAY: NIRMAL BANG SUGGESTS EPIGRAL AND SURYODAY SMALL FINANCE BANK – HERE'S WHY

The Indian market rose 1.24 percent in the month of April as strong buying by local fund continued. In March, domestic funds used the correction to deploy excess cash and the buying continued in April as well, absorbing all the selling of foreign institutional investors (FIIs), noted a report by domestic brokerage house Nirmal Bang.

However, the brokerage pointed out initial quarterly results for Q4FY24 are a mixed bag where FMCG, IT and cement are showing weaker numbers as banks and chemical companies are showing stability in earnings. Capital goods continue to outperform the expectations.

It further highlighted that the Indian market is also looking at the General Election outcome expected in June's first week which may keep the market a bit volatile in the near term. Looking at the initial signs of a slowdown in the US, mixed results from corporate India, election outcome expectation, and recent bounce-back due to domestic fund support, Nirmal Bang expects the market to remain in a range.

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The brokerage predicts Nifty to trade in the range of 22,000-23,000 for the May Series.

Amid this backdrop, the brokerage has come out with 2 fundamental picks for the current month (May). Let's take a look.

Epigral: The brokerage has a ‘buy’ call on the stock with a target of ₹1,690, implying a 31 percent potential upside. The stock has risen over 34 percent in the last 1 year and 31.6 percent in 2024 YTD.

"The company's Revenue grew at 33.3% CAGR and PAT grew by 15% CAGR between FY20-24 despite challenges prevailing in the industry due to geopolitical situations and a weak macro environment. The initiation of new projects and volatility in RM prices have led to a decline in overall operating margins; i.e. from 32% in FY20 to 25% in FY24. New project commissioning and a strategic shift towards specialty products is expected to improve the company’s overall margins going forward. The management ensures normalized level of EBITDA should be maintained in the range of 24-26% in the near term on a conservative basis," said the brokerage.

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Furthermore, the management has guided for 15% volume growth in FY25E based on expanded capacity. Also, it aims to achieve ROCE in the range of 24-25%. The management is focusing on strengthening its position in the specialty segment where revenue contribution has improved to 45% in FY24 from 38% in FY23. It aims to increase its share up to 70% over the next 2-2.5 years. In FY25, the same is expected to be in the range of 50-55% of revenue.

Suryoday Small Finance Bank: The brokerage has a ‘buy’ rating on this stock with a target price of ₹280, indicating a potential upside of 37.5 percent. The stock has risen over 74 percent in the last 1 year and 25 percent in 2024 YTD.

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"Like all other MFIs and SFBs, Suryoday also bore the brunt of high defaults owing to Covid. However, the bank’s peak GNPA was at 12%, much higher compared to a range of 6-8% for SFBs like Jana, Utkarsh and Ujjivan. Thus it took a longer period to provide for the bad book compared to peers, which led to depressed return ratios as well as sluggish stock price performance during FY23. However, credit costs are now expected to normalise to 2.2% from 4.4% in FY23," noted the brokerage.

However, post the comprehensive restructuring exercise done by Suryoday with respect to its asset quality over FY20-23, the brokerage expects the bank to shift its focus on growth. It sees advances growing at 31% CAGR over FY24-26E driven by faster growth in secured books at 35% CAGR led by affordable housing, CV and small business; while microloans shall grow at 29% CAGR. Nirmal Bang also expects the gap in ROA between Suryoday and peers to close down from 160 bps in FY23 to just 15 bps by FY26E. Accordingly, it believes the current valuation gap of 35% is unwarranted and expects it to narrow down to 25%.

  

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.

2024-05-07T09:03:05Z dg43tfdfdgfd