1 Midcap IT and 1 Financial Stock to Consider

  • Stock Market Analysis

After a topsy turvy ride, benchmark indices created a fresh record high on August 17. Sensex touched an intraday high of 55.854.88 before settling at 55,792.27. Nifty managed to stay afloat and close above 16,600. As the industrial indicators and external demand environment improve, we can hope for normalized economic activities from September onwards. Cyclical recovery could support domestic GDP growth in fiscal 2022. However, potential risks might crop in from the slow pace of vaccine rollout, new virus variants, skyrocketing inflation, debt overload, uneven trends in monsoon, and not-so-enthusiastic sowing activity that may hamper India's economic recovery. We have shortlisted two stocks—one in the stockbroking and the other is a midcap IT company.

1. Edelweiss Financial Services Ltd. (NS: EDEL )

Edelweiss Financial Services Limited is an Indian diversified financial services behemoth. It offers a broad spectrum of financial products and services. The company's services include asset and wealth management, retail and corporate credit, advisory, capital market, and insurance services. Edelweiss's clientele includes corporations, institutions, and individuals. Raising capital denotes confidence in the management of future business prospects. Edelweiss Wealth Management is a subsidiary of Edelweiss Financial Services. The former recently launched the next series of its pre-IPO Edelweiss Crossover Opportunities Fund to garner Rs 1,500 crore. EFSL's 5-year revenue CAGR was 39%, and 5-year net profit CAGR stood at 36%. Notably, EWM reported a solid 55.7% rise in Q1FY2022 revenue and a mind-blowing 155.4% net profit growth. India's retail investors have traditionally invested in property, gold , bank deposits, and Government-run pension funds. However, the work-from-home culture pushed by Covid-19 pushed lacs of retail investors into the markets. Notably, Robinhood (NASDAQ: HOOD ) investors had jumped from one million in 2016 to 13 million in 2020. The trend is likely to continue directly benefiting established broking houses such as Edelweiss Financials.

EFSL's consolidated total income declined 14.1% to Rs 1649.25 crore in Q1FY2022 from Rs 1919.68 crore in the corresponding quarter of fiscal 2021. However, the net profit zoomed 107.4% to Rs 18.09 crore from a net loss of Rs 245.08 crores in the June 2020 quarter. Strong growth in mutual fund AUM, recoveries in ARC, increased customer base, and solid growth in life and non-life insurance should be a tailwind for the company. The scrip returned 18% in a year, 33% in six months, 6.2% in the last five days, and 5.4% on August 17. It is trading at a 14.7% discount to its 52-week high of Rs 100.9.

2. Sonata Software Ltd (NS: SOFT )

Sonata Software Limited provides software products, IT consulting, development services, and various business solutions services. The company's primary clientele is located in the USA, Europe, and Asia. Sonata Software's outsourced product development, retail, and commodity business continue to grow. Going ahead, we should witness robust revenue growth driven by demand improvement for its travel client and Microsoft (NASDAQ: MSFT ) dynamics. A potential revival in manufacturing along with non-essential retail and manufacturing should further push revenue growth. In addition, Sonata's domestic business home currency-dominated revenue is likely to increase at 20% CAGR in the next two years. Sumptuous cash on the balance sheet also provides scope for inorganic growth. On the bottom line side, its international IT services margins have displayed a healthy trend and are expected to continue in the near term. The downsides to operating margins remain in increased hiring costs, higher travel & facility cost. However, it should get subsidized by revenue growth and margin improvement in international business.

Sonata's consolidated revenue CAGR stood at 17%, and consolidated EBITDA CAGR remained 31% for ten years. It is almost a debt-free company and has a solid 3-year return on equity of 34.46%. The company's average collection period has come down to 53.2 days from 73.8 days. Most notably, FIIs/FPIs and DIIs have increased their holding by 1.57% and 1.34% in June 2021 quarter. The scrip fetched 186.1% in a year, 125.9% in six months, 13.1% in a month, and 6.5% in the last five days. At present, it is trading close to its all-time high.

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  • P Rajagopalan Iyer @P Rajagopalan Iyer
    Congratulations to the author,for his views on the above stocks.I have noted the above two companies,in my watch list. Thanks.
    Like 3
    • Vinayak Mhetre @Vinayak Mhetre
      most os stocks by S sir are strong fundamentals and for positional trades. wish if he starts any channel for intraday
      Like 0
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  • Vinayak Mhetre @Vinayak Mhetre
    Sir plz suggest multi baggers stock in mid and small cap for long term at least 1 year
    Like 3
    • Abhishek Mishra @Abhishek Mishra
      Kellton techInfibeamCybertech
      Like 1
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