Apr 07, 2017 12:51 PM IST | Source:

Nifty likely @9700 in FY18, risk appetite rising; Top 9 investment picks

ICICI Securities expects the Nifty at 9,700-mark in FY18

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Todays L/H

The market has maintained its uptrend barring small corrections which is a sign that this  bull run is consolidating. Geopolitical tension around US launching missiles into Syria, was also digested by investors on Friday. It indicates rising risk appetite.

In fact, investors looked confident about economic growth in India on hope of policy continuity after recent assembly elections, wherein BJP had a landslide win in UP. It was the main reason apart from FII inflows which had spurred 19 percent rally in Nifty in FY17.

ICICI Securities believes that this has led to a perceptible reduction in country risk (relating to political stability and policy-making) from a global investor perspective – a major worry during the pre-Modi era (policy paralysis and minority government). This is further corroborated by the falling CDS (credit default swap) spreads for India sovereign bonds less US sovereign bonds (a key driver of country risk premium) which dipped from 340 bps in 2014 (pre-Modi win) to 113 bps as on date.

The research firm says alongside country risk premium, the risk free rate (measured by India's 10 year bond yield) has been on a continuous downtrend since 2014, thereby reducing India's discount rate considerably. Nifty implied volatility measured by the volatility index (VIX) has also been on a continuous downtrend suggesting receding fear of loss by equity investors, it feels.

Another reason for holding higher levels by market is earnings recovery that is also likely to happen from FY18 onwards, experts believe, especially after downgrades in last two years.

ICICI Securities says there is a justified optimism around Nifty earnings given the aggressive downgrades over the previous two years and a favourable base effect although sustainability of earnings growth is critical.

The fundamentals of Corporate India have also exhibited clear signs of bottoming out – growth outlook for FY18-19 improves, the additions to financial leverage have slowed and return on equity appears to be bottoming out, it believes.

Enam Holdings is also upbeat on earnings and believes that they will grow 20 percent in the next year as interest rate transmission will help. In fact, earnings going forward will surprise the Street.

Economy is also recovering faster-than-expected from the effect of demonetisation impact as currency in circulation touched Rs 13.1 lakh crore (March 24) and is now comfortable around 9 percent of GDP; manufacturing PMI expanded sharply to 52.7 in March; and improvement in car sales growth in March and growth in retail finance, ICICI Securities says.

Before taking any action on interest rate, the RBI will closely watch the monsoon but experts say that is not a big concern for markets anymore. After Rajya Sabha's clearance to four important bills, GST rollout is on the way to be effective from July 1, 2017.

All these factors will help market hit new highs soon. ICICI Securities expects the Nifty at 9,700-mark in FY18 as it believes Indian equity will trade above long-term average and a sharp correction in Nifty is unlikely anytime soon as FPI flows are expected to persist and DII flows are expected to remain robust.

Here are top 9 picks that will participate in the rally going ahead:-

SMC Global

Prabhat Dairy

Prabhat Dairy, an integrated milk and dairy products company, started its retail business more than 2 years ago and already covers more than 15000 general trade outlets in Mumbai.

Going forward, the company will focus on value-added products (specialty dairy powder, ghee, condensed milk and cheese) and growing core business. It also plans to expand its distribution network from 25 states in b2C segment to be a pan India player.

It is present in both B2B and B2C segment with contribution 70 percent and 30 percent, respectively. It plans to contribute in ratio 50:50 from both by 2020.

SMC recommends buying the stock for a short-term perspective, at around at 124 with a closing below stop loss of Rs 108 level for the target of Rs 150 (implying 21 percent upside).

KEI Industries

The cable manufacturing company continues to remain bullish for FY18 as well given strong order book and visibility. EHV (extra high voltage) cable business will come back strongly in FY18 which will drive further revenue and margin growth. Order inflows during December 2016 quarter was around Rs 500 crore and for 9 months ended December 2016, order inflow was around Rs 2000 crore.

Management expects working capital scenario to improve going forward. As per the management, the business outlook continues to be strong; the company achieved significant new orders in EPC business from various utilities in IPDS (Integrated power development schemes).

The brokerage house recommends buying the stock for a short-term perspective, at around Rs 197 with a closing below stoploss of Rs 180 level for the target of Rs 232.

Minda Industries

It is part of UNO Minda that is a technology leader in auto components industry. The management of the company doing effort to strengthen customer base with focus on increasing customer spend on its products.

Moreover, management retains its target of achieving 20-25 percent CAGR growth in the next 3-4 years. This will be from industry growth and new products introduction. An extra 15 percent topline growth should come from the merger of the companies taking it total to 40 percent.

The brokerage house says implementation of BS4 motorcycles, push for the rural economy in fiscal budget and fading affect on demonetisation should translate in healthy growth for MIL's products.

Buy the stock at around Rs 444 with a closing below stoploss of Rs 409 level for the target of Rs 499.

Blue Star

Air conditioning & commercial refrigeration company is improving its market share and also entering into new segments like water purifier, air coolers, air purifiers etc, which would definitely give support to its long term growth, the brokerage house feels.

Moreover, E-commerce would help the industry to target demand from remote areas. Further, if we look at the interpretation that the AC market is in India, there is a huge scope in terms of the expansion of their share in terms of market size as well as volumes, it says.

As per management expectation, this quarter is going to be one of the strongest quarters for Blue Star and cash infusion from Blue Star Infotech would help to expand its balance sheet.

Buy the stock for a short-term perspective, at around Rs 707 with a closing below stoploss of Rs 655 levels for the target of Rs 801.

JK Lakshmi Cement

The management of the company expects higher capacity utilisation and improved operational efficiency due to its capex almost over, reduction in debt levels due to improvement in cash-flow. Being operationally efficient in the past, it has managed to run its plants consistently at higher capacity utilisation than the industry.

The management has plans to ramp up capacity to 11.5 million tonnes by FY18, while its subsidiary Udaipur Cement Works may add another 1.6 million tonnes at Udaipur, which will take the group's total production capacity to about 13 million tonnes by FY18, the brokerage house says.

SMC recommends buying the stock for a short-term perspective, at around at Rs 461 with a closing below stoploss of Rs 425 levels for the target of Rs 531.

KR Choksey

Minda Corporation

The brokerage house has initiated coverage with a buy rating as it believes the company is on cusp of revival after dismissal Q3FY17 results.

Implementation of BS-4 norms, higher use on cars sensors in future is expected to drive company's topline growth ahead. While company's EBITDA margin is expected to improve by on-going restructuring program the key to success remains in turnaround in its key joint ventures, namely Minda Furukawa, the brokerage house says.

It has valued the company at 14x FY19 of Rs 10 to arrive at a target price of Rs 142 indicating a 36 percent upside from April 6's closing level of Rs 105.

KR Choksey believes, Minda Corp's topline growth is a combination of total volume growth of automobile industry, followed by market share gains in commercial vehicle segment and higher demand for sensors in passenger vehicle segment. Hence, it expects a revenue growth of 15.5 percent CAGR between FY16 to FY19.


Bharat Electronics

While current consensus earnings expectation of 12 percent (FY16-19) seems conservative, the brokerage house believes BEL is well set to surprise Street as execution picks up, given improved revenue visibility & better execution capability in systems integration.

With rising government focus for procurement of strategic systems like SAMs, it expects BEL to benefit materially over 12-24 months.

Edelweiss believes the stock will continue to outperform as triggers abound including BEL's favourable positioning as a lead systems integrator augurs well in light of upcoming large projects; focus on beefing up integration capability is a step towards improving delivery capabilities; and higher throughput of manufactured core products (more than 70 percent of sales) imparts strong margin comfort.

"We have strong conviction on BEL's sturdy earnings growth visibility with a sustainable competitive profile. As we introduce FY19 earnings, we maintain buy with a revised target price of Rs 200 (from Rs 155), based on 23x PE given improving earnings growth profile.

HDFC Securities


MOIL has cut prices for its April deliveries by 15 percent (for grades higher than 44 percent Mn) and 10 percent (for others). This was expected, as its prices were at a premium to global prices. Benchmark (44 percent Mn, CIF China) prices slipped to USD 4.15/dmtu in March-end from more than USD 9 in early January. Further, the strengthening rupee has added pressure on landed parity prices.

The price of global Mn ore has registered a rebound in the past week, and is currently at USD 5.2/dmtu. In any case, we sense USD4-4.5 as a sustainable price, going forward, given that prices at these levels are not remunerative enough for the moth-balled capacity to restart (e.g. Woodie Woodie); and supplies from SA mines in Kalahari are not economical below USD 5, as indicated by South32 in its conference call in February.

With these assumptions (USD 4.0/4.5), MOIL trades at inexpensive valuations. HDFC Securities reiterated its positive stance, advising buy with a target price of Rs 445 post recent corrections in the stock price, driven by headline price cuts by MOIL. We note that the current ore pricing (i.e. post the cuts in April) is still higher by 70 percent against Q1FY17 prices.

Motilal Oswal

Dewan Housing

The company has received all approvals for the sale of stake in its insurance JV to a wholly owned subsidiary. The final valuation for the 50 percent stake has been set at Rs 2,000 (upper end of the range provided earlier).

The brokerage house has upgraded its estimates as well as target price, given significant accretion to net worth without any shareholding dilution. Given the sufficient capital in place, it upgraded assets under management CAGR estimate to around 20 percent over FY17-19 from 18 percent earlier. Accretion of around 25 percent to net worth would drive up net interest margin for FY18/19 by around 10bp.

Motilal Oswal advises buying the stock with increased target price at Rs 500 (from Rs 405 earlier) as it increased FY18/19 PAT estimates by around 5 percent and book value estimates by around 25 percent to factor in the stake sale (higher growth and margin).

Posted by Sunil Shankar Matkar
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