Two stocks to buy now for huge gains

[Srilata Rao]

SBICaps has recommended two stocks with good potential for gains.


India, the world’s second most populated country, is one of the major developing countries. Being the fastest growing economy in the world there has been steady rise in the disposable income of a growing middle-class consumer. However, in comparison to other major countries, the market penetration of air conditioners is as low as just 3% in India, which offers a huge opportunity for leading air conditioner (AC) players. As per conservative industry estimates, ACs are expected to grow at CAGR of 15%-18% for next five years. The Room AC sales are expected to cross 10mn units in 2022 from 4mn units currently. By 2021, the air conditioner market in India is expected to cross Rs 41000 crore (cr), which currently stands at ~Rs 10000 cr.

We believe top 5 players will benefit significantly from this explosive growth and are positive on Johnson Controls-Hitachi Air Conditioning India Ltd (HHLI) and Lloyd Electric & Engineering Ltd (Lloyd) due to growth prospects, current valuations, state-of-the-art technology and parent support.

We thus bring 2 companies for investment:

Lloyd Electric and Engineering: [Tgt Price : Rs 330 + 31%]

Engaged in the manufacture of condenser coils and evaporator coil, Lloyd has grown significantly at a CAGR of 19.3% in last four years. The company recently sold its consumer durable business to Havells for Rs 1550 cr. While the management has guided to use the proceeds for reducing its debt, we believe the company will be left with significant cash post paying off majority of its debt and hence cannot rule out a one-time special dividend for shareholders. Being a consistent performer, we believe Lloyd is available at significant discount to peers at ~10x FY18E P/E ratio. We expect the company to continue its growth momentum for next two years and have a BUY rating on the stock for a price target of Rs 330 valuing the company at 13x FY18 P/E multiple, indicating an upside of 31%.

Johnson Controls-Hitachi Air Conditioning : [ Tgt Price : Rs 1760 +16%]

Being one of the earliest companies to set up Air conditioning Manufacturing in India, Hitachi Home & Life Solutions has a legacy that is over 30 years in the making. The company joined hands with Johnson Controls in Oct 2015. We believe this JV will help the company to improve its efficiency over next few years due to strong parent support. Hitachi’s topline has grown at a CAGR of ~20% in the last four years however the bottomline has improved significantly growing at a CAGR of 98% during the same period. With 11% market share currently in room AC, we expect the company to post double digit growth going forward by increasing their product portfolio and penetration of their distribution network. At current market price, the stock appears to be at rich valuation, however given its growth prospects, we believe the company has potential to continue the path of bottomline growth at a CAGR of 44.5% over next three years and thus we value the company at 43x one year forward P/E and have a target price of Rs 1760, indicating an upside of 16%.

[Pee Vee]

Thanks. Both stocks are looking good.