Sensex unlikely to close 2017 above 30K; these 6 stocks can give up to 52% returns
The Nifty too is dependent on earnings to cross the psychological 9300-mark and has been consolidating in a 200-point range.
Sunil Shankar Matkar
After consolidation, the market started inching towards its record highs on hopes of improvement in January-March quarter earnings that will begin with Infosys numbers on April 13.
With this rally, experts feel valuations already stretched and even a lot of midcaps are at peak levels. According to them, the earnings season is expected to be the only driver for the market from hereon.
Hence, the Nifty crossing the psychological 9300-mark is entirely dependent on earnings and that is why the index has been consolidating in a range of 200 points. For the time being, it is least bothered about global cues that are not likely to hit sentiment in Indian markets, experts say.
If earnings figures surprise the Street then only the Sensex can cross the 30,000 level decisively; otherwise it may remain in a consolidation mode for some more time.
Experts believe there is a possibility of the index crossing the 31000 level as well on consistent inflows of foreign money but it is likely to settle the current calendar year below 30,000 level.
"Consensus on earnings expectations for FY18 are on the higher side and to that extent, our sense is that until we see an earnings expansion, it is difficult for the market to re-rate. We have a December-end target of 29,000 on the S&P BSE Sensex," Abhay Lajiawala of Deutsche Equities said in an interview with CNBC-TV18.
In the last couple of months, D-Street made revisions in FY17 numbers on account of various factors but they have not touched FY18 forecasts which made numbers look inflated, he feels.
He said, "In the next 12 months we will witness a transition from a developing world system to a better than developed world system and that will have some impact which could lead to near-term disruptions."
Bank of America Merrill Lynch also reiterated its December 2017 Sensex target of 29,000.
"On the back of a favorable base and modest recovery in macro, we expect aggregate profit growth for the Sensex to recover in FY18-19 to 12/14 percent (against 0-5 percent over FY15-17). However, consensus forecasts of 16/20 percent growth for FY18/19 seem too optimistic; implying further earnings cuts. This coupled with high valuations (17.3X 1-year forward PE; long-term average of 15.5X) suggests the current risk-reward is unfavorable," it explained.
Here are top six investment picks that may give 15-52 percent returns:-
Motilal Oswal - Tata Motors
The research firm has maintained its buy rating on the stock, with a target price of Rs 609 for ordinary shares and Rs 426 for DVR after analysing March sales data.
Jaguar Land Rover's wholesale volumes in March 2017 grew around 11 percent YoY (up 31 percent MoM) to 71,609 units, exceeding Motilal Oswal's estimate of 68,155 units.
Jaguar volumes grew around 53 percent YoY to 20,492 units, driven by F-Pace and XE. Also, XF long-wheel base exhibited good growth in China JV. Land Rover (LR) volumes were flat YoY at 51,117 units with continuing strong sales of Discovery Sport, Evoque and Range Rover Sport offset by the run-out of Defender and Discovery.
JLR retail volumes grew around 21 percent YoY (up 122 percent MoM) to 90,838 units, driven by an increase of 83 percent in Jaguar volumes and around 5 percent in LR volumes.
Region-wise, UK sales grew around 27 percent YoY, followed by North America (21 percent), European Union (21 percent) and China (19 percent), led by high demand for F-Pace, and XF long-wheel base in China. Rest of world sales grew around 8 percent YoY.
Its FY17 wholesale volumes grew 10 percent YoY to 6,00,731 units.
Edelweiss Financial - Ashok Leyland
Edelweiss says it is enthused by the technological prowess displayed by Ashok Leyland in managing the transition to BS-IV as the least cost manufacturer.
Company's BS-IV design is based on exhaust gas recirculation (EGR) technology, which is better suited to Indian conditions versus peers, who use selective catalytic reduction (SCR) based on European technology, which also entails higher costs. Ashok Leyland is the only domestic original equipment manufacturer using EGR technology above 130HP.
This, along with granular focus on widening product basket and distribution reach, will propel the current 15-year high market share and industry leading margin/return on equity, it feels.
The brokerage house estimates EPS CAGR of around 26 percent over FY16-19 and return on equity to improve around 830bps to 26.4 percent in FY19 (18 percent in FY16).
Ashok Leyland did not panic during the transition phase (post Supreme Court's March 29, 2017, order banning sale of BS-III vehicles from April 1, 2017) due to a well chalked out strategy to handle BS-III stock.
Edelweiss has maintained a buy rating on the stock, with a target price of Rs 125 and assigned Rs 6 to the Hinduja Finance stake.
Axis Direct - Westlife Development
Axis Direct says it remained positive on Westlife as it continues to innovate and prepare itself for an uptick in consumer sentiment. Despite upgrading consumer experience, it continues to deliver strong value proposition. It built in net sales CAGR of 18 percent over FY17-20 and estimates operating profit margin increase of 220 bps over FY17-20.
Westlife Development operates a chain of McDonald's restaurants in west and south India through its subsidiary Hardcastle Restaurants (HRPL).
After the recent slowdown in QSR (quick service restaurants) space, the company has launched various initiatives to grab a greater share of consumer wallet through brand extensions, and according to the research house, it should benefit from recovery in consumer sentiment. It estimates 9 percent same-store-sales growth in FY18-20.
Westlife's same-store-sales growth declined for 9 successive quarters from Q1FY14 but has been reporting positive same-store-sales growth from Q2FY16.
It has launched the 'Experience of the Future' restaurant platform, in line with the global strategy at McDonald's, making greater use of technology to elevate customer experience.
The brokerage house has maintained a buy call on the stock, with DCF-based target price of Rs 260.
LKP - Lakshmi Vilas Bank
Lakshmi Vilas Bank's focus to reduce costs, decrease slippages & write-offs and grow the retail base will be key drivers to improve profitability, says the brokerage house, adding sustained branch productivity with aggressive expansion, implementation of innovative technology and continued focus staff training along with brand building signify healthy growth for LVB going forward.
Its net interest margin has been resilient as the decline in cost of funds has been in tandem with the fall witnessed in yield on advances. As compared to its regional peers, LVB's CASA as a share of deposits is low and thus the management is focused on expanding CASA through customer base enlargement, increasing branch network, competitive interest rates, new services and innovative technology.
About 60 percent of the sectors contributing to LVB's gross non-performing assets exposure make up for only 20 percent of the loan book. Thus, a low percentage of advances are towards the sectors that form a substantial portion of the stressed assets indicating stability in quality of assets, LKP says.
At the current price of Rs 165, Lakshmi Vilas Bank, trading at 1.5x adjusted book value can be accumulated with a one year price objective of Rs 190, LKP says.
Way2Wealth - Engineers India
After posting a high of around Rs 169 during the concluding week of December, 2016; Engineers India stock encountered decent profit booking and corrected towards Rs 140.
The level of Rs 140 coincided with the 50 percent Fibonacci retracement joining from the bottom of Rs 115.70 (weekly low of September 30, 2016) to the top of Rs 169 (weekly high of December 30, 2016) along with the daily 89-EMA. Subsequently, the stock traded within the narrow range & formed a 'Descending Triangle' pattern. Today, stock has confirmed its breakout from the said triangle by surpassing the Rs 154 levels.
Looking at the weekly RSI (14) momentum indicator, Way2Wealth is seeing 'Bearish Divergence' which was followed by 'positive reversal'. The said technical pattern is a bullish set up.
On a monthly chart, 9-EMA of RSI (14) has entered inside the 60 level; hence, it expects the acceleration in momentum. Therefore, it recommended traders to buy this stock at current level of Rs 154 with an upside price target of Rs 190. "Strict stop loss should be placed at Rs 139.50 as any move below this level will negate our bullish view," it says.
Stewart & Mackertich - Mahindra & Mahindra Financial Services
Mahindra & Mahindra Financial Services is one of the largest NBFCs catering to rural and semi urban markets which has a legacy of two decades. It serves more than 4 million customers with 1181 branches across the country. The company provides finance for new and pre-owned autos, utility vehicles, cars, tractors, two and three wheelers and construction equipment. MMFSL is a part of Mahindra group which is one of the largest conglomerate in India.Stewart & Mackertich recommends investment in MMFSL on the following rationales
->Market leader in the rural & semi urban space
->Key beneficiary of growing auto industry in India
->Strong contribution from subsidiaries– Mahindra Rural Housing Finance & Mahindra Insurance Brokers
->No waiver of loans, bets on cars for growth as the rural economy on the verge of turnaround
->Strong parentage, quality service, Strong customer and dealer relationships, diversified product portfolio
->Diversified and broad based liability mix
Despite challenging times for the economy and the company, the Mahindra & Mahindra Financial Services has been able to maintain a return on equity above 10 percent and Stewart & Mackertich expects it to accelerate going forward.
The brokerage house has assigned a price-to-book value multiple of 2.80x to its FY19 book value per share estimate of Rs 155.74 and arrive at a target price of Rs 436.(Target prices mentioned in these recommendations are on the basis of closing price of April 10).