Here Are The Top Investment Ideas For May 2023 Recommended By Motilal Oswal

Motilal Oswal Report

M&M - Demand sustains amid macro uncertainties (Potential Upside- 22%)

Key Rationales-

• Demand for both the divisions (automotive and tractors) remains healthy; however, with multiple industry-wide challenges emerging in foreseeable future, we expect lower volume growth for both the divisions versus earlier expectations.

• However, Mahindra and Mahindra Ltd. is not witnessing any signs of demand moderation for its SUVs. Its order book is steady amid uncertain macro environment.

• M&M has ambitious plans to grow its nascent farm equipment business by 10 times in FY27. It will invest Rs 10-15 billion over next few years for: acquisitions and, expanding capacities.

Concerns-

• Commodity price inflation; supply side issues escalates again

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• We expect M&M’s revenue/ Ebitda/profit after tax to post 15%/20%/20% compound annual growth rate over FY23-25. M&M sees scope for margin expansion from Q3 FY23 levels in both auto and farm equipment segment businesses.

• This coupled with a healthy improvement in return on capital employed (up 200 bp over FY23- 25E to 18.2%) and cheap valuations preserves attractiveness of the stock.

ONGC - Strong guidance for production growth (Potential Upside- 34%)

Key Rationales-

• Oil and Natural Gas Corporation Ltd. would start producing its first oil from KG Basin from May 2023, which would reverse its declining oil and gas production. At peak level by FY25, this would add 10%/20% to it’s domestic O&G production.

• The recent Kirit Parikh recommendations of ceiling price at $6.5 and float price at $4 per metric million British Thermal unit for domestic natural gas, render the much needed respite from low gas prices, as the average gas production cost of ONGC currently stands at ~$3/mmBtu.

Concerns-

• no end to the windfall tax in sight despite decline in oil prices.

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• ONGC is top pick of 2023 given increased visibility in earnings. Further, dividend payout stood at ~33% over last three years and we expect this trend to continue. We expect dividend yield of 13.6%/10.5% for FY23E/FY24E.

Godrej Properties - Sharp improvement in operating cash flow driven by healthy collections (Potential Upside- 21%)

Key Rationales-

• Godrej Properties Ltd. exited FY23 with the highest ever bookings of Rs 122 billion and believes demand traction to continue aided by favorable affordability. Management has good visibility on the launch pipeline and intends to launch ~20 million square feet in FY24E and expects to deliver Rs 140 billion of sales bookings in FY24 (up 15% YoY).

• Over the medium term, management expects the sector to witness robust growth backed by under-penetration of home-ownership in India. The branded players such as Godrej Proerties will be the key beneficiary of this trend.

Concerns-

• slowdown in residential absorption and delay in launching new projects impacting sales growth adversely.

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• On a pre-Covid equity base, the company is not far from its 20% return on equity target. Godrej Properties has done strong business development in FY23 and if these projects are launched on a timely basis, its return on equity profile will improve notably as these projects hit profit and loss in three-four years.

APL Apollo Tubes: Robust volume growth drives revenue (Potential Upside- 22%)

Key Rationales-

• APL Apollo Tubes Ltd. has continuously gain market share in the industry and is currently the market leader in the Indian Structural tubes with a market share of ~55% in FY22 versus 27% in FY17.

• It is set to capture industry opportunity by adding capacity and expanding applications.

• Adjusted profit after tax will require an additional ~Rs 4 billion of capex to reach ~5 metric million tonne of capacity. Except the upcoming Dubai and Kolkata plant, all incremental capacity will come from debottlenecking of the existing plants.

• The management has guided for sales volume of ~2.3 mmt in FY23. It aims to achieve sales volumes of ~3.2 mmt for FY24 with Ebitda/metric tonne of ~5,000.

Concerns-

• If the product mix deteriorates.

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• The addition of high-margin products from the Raipur unit and growing share of added product is likely to result in margin improvement. We expect a revenue/Ebitda/profit after tax compound annual growth rate of 17%/24%/31%, respectively, over FY22-25, as the company is expected to maintain its growth trajectory on a strong demand outlook.

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