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While there are various methods to pick stocks with strong upsides, one way is to look at the difference between analysts’ target price and the current price. From Bloomberg data, many quote well below their 12-month consensus target price of analysts. In addition to the potential upside, an additional filter was used. Only stocks covered by a minimum of 10 analysts were considered; this ensures these are tracked well.
Some are turnaround stories, others are undervalued. These companies could deliver gains on two counts — earnings revival and valuation re-rating in the coming year. Although there is downside risk as well, due to macro factors or at the individual company level, in most cases the valuations provide some cushion. Here are a few stocks that fit the criteria and where business prospects are expected to improve.
BPCL
Bharat Petroleum Corporation (BPCL) is currently trading at 8.3 times its FY15 estimated earnings and offers a dividend yield of 3.5 per cent. While valuations are reasonable, the Street is also expecting the company to do well on the business front. With the ongoing reforms in the sector in terms of diesel and petrol price deregulation, capping the number of subsidised cooking gas cylinders per household and direct cash transfers, pressure on the company should ease. Importantly, its judicious moves in the exploration & production&P segment should pay rich dividends. “While BPCL’s growth drivers are long lead-time projects, we expect further drilling or reserve updates to provide the near-term trigger for the stock. BPCL’s downstream margins continue to trend above domestic peers, making it relatively resilient to uncertainty about marketing or refining pricing policy,” said SPA Securities in a note.
HT Media
The media sector has seen increased focus, both as a result of a possible economic recovery and general elections in the coming months. In this space, the Street is positive on HT Media, whose advertisement revenue in the Hindi and English segments is expected to improve this year. "We believe the company is well positioned to capitalise on the upturn in the economy. With strong operating leverage expected, cushion of Rs 750 crore in cash and valuations at a five-year low, the stock trades at a steep discount to peers," said Ankit Kedia of Centrum Broking. However, analysts advise keeping an eye on paper prices, as any sharp rise could impact the margins and earnings.
IRB Infrastructure
IRB Infrastructure Developers, among the country’s largest road construction and operating companies, is expected to benefit from higher execution of ongoing projects and strong revenue growth from existing BOT (build-own-operate) projects as a result of higher collections. Its construction division is also expected do well because of the strong order book and the industry’s emphasis on faster clearances. Besides, analysts believe there could be a re-rating of the stock, as at the current market price, the valuations do not reflect the earnings visibility and growth potential because of overall concerns over the sector. IRB’s stock at Rs 92 currently trades at about five times its FY15 expected earnings and offers a dividend yield of 4.5 per cent, reasonable for a company generating return on equity of about 18 per cent.
Jaypee Infratech & Jaiprakash Power Ventures
Two group companies of JP Associates, namely JP Infratech, which is into infrastructure, and JP Power Ventures, which is into power, have found favour of the Street. Analysts are positive on the debt reduction and improving cash flows. The share prices of both were hammered because of excessive debt in the books. However, hopes are now building.
For instance, in JP Infratech, the company's biggest project, Yamuna Expressway, has started stabilising (improving cash flows). Second, it is aggressively monetising its real estate portfolio, which to some extent has started helping in managing cash flows. Similarly, JP Power is in news because the company was able to improve its cash flows as it securitised the Karcham (power project) receivables. Further, the company is monetising hydro assets of about 1,300 Mw. This sale alone can add Rs 6 (33 per cent) to its current market price of Rs 18.15 a share.
Reliance Capital
The Street is counting on stability returning in the asset management, and consumer and commercial finance businesses. Its mutual fund business has again seen the assets under management rise to over Rs 1 lakh crore. The better than expected performance in the general and life insurance businesses also instills confidence.
Analysts value the company at Rs 450-520 a share, based on sum of the parts valuation, wherein a large part of its value comes from the asset management company and the commercial finance business. In FY14, the earnings are expected to grow by 14-15 per cent to Rs 38 a share. Considering that, even on the basis of price to earnings valuations, the stock price looks reasonable at nine times.
