Book mild profit at current levels, but these 2 undervalued stocks could give double-digit returns

Manali Bhatia

Bulls reclaimed the lost ground after initial weakness in the previous week and Nifty50 closed with the weekly gain of 1.45 percent. Nifty50 has taken support at 23.6 percent retracement level of latest swing move and bounced back sharply.

We expected a pre-election rally in the market, which was likely in the past weeks. This rally is expected to continue further, though a small correction still persists. Having said that, factoring in factors such as worldwide slowdown scenario, global economy expected to face headwinds and uncertainty over Brexit, therefore, we advice investors to book mild profit in the next week at this stage.

On Friday's session Nifty has formed 'Dragon Doji' candlestick pattern which suggest that mild consolidation could come in for few days before a fresh leg of up move. Momentum indicators on weekly as well as monthly chart are trading in fairly bullish zone and market is trading above all major moving averages.

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The US economy grew at a slower pace only to 2.2 percent in the fourth quarter, lower than expected 2.6 percent. Softening consumer spending, business environment and revised government spending, particularly was the reason for this show. India's fiscal deficit bumped up 134 percent (April-February 2019), as shortfall in revenue collections and higher government spending contributed to this stretch. Going forward, this would further increase concern for Government as it breaks the revised budgeted estimate.

As per the current technical structure, support in coming week exists at 11,480 and 11,291. Thus, these levels should be used as buying opportunity. On an upside we can expect the rally to continue further towards life time high, once 11,710 trades on higher side. Also, as per options data 11,700 CE holds highest outstanding open interest and if the aforesaid level trades on higher then we could again see a sudden spike. Volatility could remain a concern as VIX is trading at 17.18.

We have come out with two contra calls, which are still undervalued:

Yes Bank: Buy | CMP: Rs 274 | Target: Rs 356 | Return: 30% | Period: Medium Term

Investors' confidence in the bank was shaken up in the past months. Uncertainties related to top management and asset quality concerns which were rolling around are now far behind. As a clear divergence report received by RBI and the new MD has taken up charge, namely Ravneet Gill, a positive momentum in the share price is expected.

YBL had posted quite a good numbers for Q3. Bank in its Q3 FY19 earnings had given credit cost guidance of 80bps for FY19 (including any further provisioning related to IL&FS group). Retail Assets improved to 15.2 percent of Total Advances with a target to reach 1,250 branches by 2020. Also, has received SEBI Approval to Launch 2 Funds- YES Liquid Fund & YES Ultra Short Term Fund.

Notably, stressed assets have been worked upon considerably and accelerated provisioning for the same is accounted in the books. Liquidity profile, margins, profitability and asset quality is heading north. Rebalanced balance sheet growth is witnessed. Also, YBL efforts on reducing DHFL's leverage is clearly reflected.

Yes bank is available at attractive valuations and lower P/BV among its peers. Prior also, we have recommended the stock with the target price of Rs 236, which has been achieved. As banks operations has returned to normal, we expect this would help drive the share price further. Also, would enable bank in raising fresh capital. We therefore, re-rate the stock with the revised upward target of Rs 356 in medium term, which corresponds to 2.50x P/BV for FY20Est., quite fair as major concerns are now being wiped out.

Indiabulls Housing Finance: Buy | CMP: Rs 860 | Target: Rs 980 | Return: 14% | Period: Medium Term

Unlike most of the housing finance companies, the share of Indiabulls Housing has fallen dramatically from levels of Rs 1,400.

The fall has largely been on account of the IL&FS wreck and also on account of the worries surrounding DHFL. Though, Indiabulls has often clarified it stating that its liquidity position continues to remain sound (as closed with cash of Rs 21,000 crore in Q3FY19) and has performed well during the quarter.

It has significantly bought down reliance on three-month commercial paper in the process, thereby ensuring a well matched ALM and durability of liquidity levels. It now counts 21 strong banking relationships - 16 with PSU banks and five with private and foreign banks among its securitization investors.

Indiabulls has guided the loan growth of 20-25 percent, profit growth at 17-19 percent and balance sheet growth is expected to be around 10 percent for FY20.

Thus, by conservative leverage through sell-downs, would help Indiabulls in growing the total loan assets and retaining the spread. This strategy would also help to maintain healthy ROE going forward.

Considering, low mortgage penetration, favorable demographics and increasing affordability, combined with the government and regulatory push, the housing finance industry is expected to deliver good growth ahead. We value the stock at an estimated P/BV of FY20E at 2.25x with a target of Rs 980 in medium term.

(The author is Senior Research Analyst at Rudra Shares & Stock Brokers.)

Disclosure: Rudra or its research analysts, or his/her relative or associate do not have any direct or indirect financial interest nor any other material conflict of interest at time of stock recommendation, in the subject company. Also, Rudra or its research analysts, or his/her relative or associates does not have actual/beneficial ownership of one percent or more securities of the subject company. However, Rudra or its research analysts, or his/her relative or associate may have positions In Futures & Options. Any holding in stock – No

Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions. First Published on Mar 31, 2019 09:14 am