Jefferies’ Top India Mid-Cap Bets For 2021

Jefferies’ rationale for the stock picks:

Crompton Greaves Consumer Electricals

• Expects earnings to grow at 20% CAGR
• New launches, product mix optimisation, improved scale and cost rationalisation initiatives can drive 100 basis points upside in operating margins over FY21-23
• Sees overall top line growth CAGR of 13%
• Strong balance sheet and good return ratios to aid navigating current disruption
• Strengthening of reach with go-to-market strategy
• Utilisation of sizeable cash pile for tapping growth opportunities

Dixon Technologies

• Estimates sales and profit after tax to register 38% and 46% CAGR, respectively, over FY20-23
• Sturdy industry opportunity, upside from the government’s production-linked incentive scheme, new launches and client expansion
• Expects consumer electronic sales to grow at 14% CAGR over FY20-23
• Initiatives to boost local production in India and curb on imports on LED TVs
• Strong balance sheet

Finolex Cables

• Faster traction in new products
• Capitalising on established dealer network
• Revival in volumes from auto cables & wires
• Sees revenue from new products to grow higher than 14%
• Expects overall revenue/earnings CAGR of 4% and 5%, respectively, over FY20-23
• Thrust on housing and rural electrification
• Utilisation of existing cash pile for tapping growth opportunities

Finolex Industries

• Expects overall revenue and EPS CAGR of 9% and 14%, respectively, over FY20-23
• Assumed operating margin expansion to 17% by FY23, led by optimising product mix
• Higher traction in volumes, realisation in pipes and fittings, along with PVC resin an upside scenario
• Backward integration into PVR resin alleviates dependence on imports
• Improvement in capacity utilisation to result in better operating leverage

Havells India

• Bullish on the diversified slate, improving mix, premium launches, work from home tailwind in appliances, market share gains and multiple initiatives to improve reach
• Mix optimisation, in-house manufacturing in Lloyd and new launches to drive about 170 basis points upside in operating margins over FY21-23
• Strong balance sheet and good return ratios
• Entrenched reach and strong brand
• At an inflexion point with Lloyd set to drive the next leg of growth

Graphite India

• Share of EAF (electric arc furnace) route of steel production to rise, benefiting electrode industry over the medium term
• Undemanding valuations
• Strong balance sheet marked by minimal debt and sizeable cash balance and investments
• Electrode realisations, needle coke prices and utilisation rates remain a key monitorable

HEG

• Expanding current capacity by 20,000 MT, set to commission by first quarter of 2022
• Inexpensive valuations
• Strong balance sheet with minimal debt
• Needle coke prices and utilisation rates remain a key monitorable

Kajaria Ceramics

• Sees consolidated revenue CAGR of 6-7% over FY20-23
• EPS estimated to register 12% CAGR over FY20-23
• Strong play for housing revival theme
• Exports by Morbi players can help sustain pricing stability in domestic tiles market
• Market leader in organised tiles can help gain traction ahead of peers
• Higher traction in new products — sanitaryware and faucets

Supreme Industries

• Remains bullish due to sturdy industry opportunity, enhanced -added mix, new launches, higher operating leverage with volume traction
• Revival in volumes from construction and infrastructure augurs well for pipes, packaging and industrial segments
• Diversified product slate assuages concentration risk
• Expansive distribution acts as a strong moat
• Improving capacity utilisation to aid operating leverage
• See sales and EPS CAGR of 10% and 18%, respectively, over FY20-23

UPL

• Full impact of Arysta acquisition from FY20
• Expects Ebitda margin improving by about 140 basis points over FY20-23, led by optimising product mix and synergies from Arysta
• Long-term revenue growth ambition of 7-10%
• Diversified across products and regions alleviates risks
• Product registrations a strong moat given high-entry barriers
• Regaining high volume growth and pricing power globally a key catalyst

V-Guard Industries

• The long-term business outlook remains robust
• Confident of 15% sales growth in long-term driven by expansion into non-South markets and introduction of new product categories
• Successful geographical diversification to open new markets as well as de-risk business concentration
• The asset-light model enables the company to optimise capex and working capital