Moneycontrol
Jan 25, 2018 09:49 AM IST | Source: Moneycontrol.com

No high beta but quality to lead rally in 2018; 10 stocks which can give up to 37% return

Any dips towards 10,000 should be used to buy into quality stocks rather than high beta. Largecaps quality stocks underperformed in 2017 and with earnings to bounce back in 2018, most experts see a re-rating in the largecap quality space.

Kshitij Anand @kshanand
 
 
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The year 2017 belongs to high beta stocks which remained in limelight throughout the year but the year 2018 is likely to belong to quality or largecaps stocks, that’s the verdict coming from experts.

The valuations of Indian markets look stretch but after a strong rally seen in the small and midcaps, analysts’ advise experts to either book profits partially or switch part of their holding to largecaps. A rotation trade already started witnessing just last week.

“For Midcap and small cap stocks it is a sell on rallies as their relative strength has been weakening in favour of large caps. In October-January we did see meaningful outperformance of midcaps over large caps but that changed in the last 10 days,” Rohit Srivastava, Fund Manager – PMS, Sharekhan told Moneycontrol.

“After 10-Jan-2018, we have seen midcaps fall and large caps rise. This change was quite significant and should be noted in one’s asset allocation,” he said.

Both Sensex and Nifty touched fresh record highs this week and chances are that the rally is likely to continue but could see some cool-off probably post Budget.

Any dips towards 10,000 should be used to buy into quality stocks rather than high beta. Largecaps quality stocks underperformed in 2017 and with earnings to bounce back in 2018, most experts see a re-rating in the largecap quality space.

The Nifty50 is currently trading at 26.8x its trailing earnings compared to over 100x for the Midcap index. Forward PE of Nifty stocks is 22x while that for the midcap universe is over 75x.

“It is natural that the valuation gap should narrow down over time and this leaves room for upside in frontline stocks. For 2018, we are of the opinion that the largecap index will outperform its midcap peers with the anticipation of a smart recovery in earnings in the immediate quarters,” Atish Matlawala of SSJ Finance & Securities told Moneycontrol.

“Markets will, however, continue to chase growth and momentum stocks. Businesses having growth strategies in place and good cash flow visibility over the next few years will continue to derive premium valuations,” he said.

Matlawala further added that this will be a market for stock-pickers where growth stocks will generate alpha for an investor’s portfolio. Also, any adverse announcement in the Union Budget will hit midcaps more than their largecap peers.

We have collated a list of top 10 quality largecap stocks which can give up to 37% return in the next 12 months:

Asian Paints: Accumulate| Target Rs1278| Return 10%

Prabhudas Lilladher maintains an accumulate rating on Asian Paints with a target price of Rs1278. Asian Paints has given cautiously optimistic outlook on demand as economy post-GST implementation has started stabilising.

The demand scenario looks encouraging as low penetration in small towns/rural India and GOI focus on affordable housing boosts demand for decorative paints in coming years.

The near-term margin pressure looks likely as input costs linked to crude and Tio2 have firmed up. The domestic brokerage firm expects Asian Paints to outperform Kansai Nerolac (30% outperformance over APNT in 12 months) as it has just 5 percent contribution from Auto and Industrial paints (lower pricing power) than 40 percent for Kansai.

Dr Reddy’s Laboratories Ltd: Overweight| Target Rs3133| Return 22%

Morgan Stanley maintains an overweight rating on Dr. Reddy’s Laboratories with a target price of Rs3133. The pharma major raised prices by 5 percent for Sernivo spray and Zembrace in January 2018.

Although price hike is likely to have a small impact but shows confidence in the ramp-up ahead, said the global investment bank. March 2018 will be an important month with three upcoming Target Action Dates.

Axis Bank Ltd: Overweight| Target raised to Rs700| Return 15%

JPMorgan maintains an overweight rating on Axis Bank but raised its 12-month target price to Rs700 from Rs650 earlier. The guidance of 225-260 basis points with normalised credit costs was largely expected.

The global investment bank sees the next 2-3 quarters as challenging given the uncertainty over the timing and quantum of back-book provisioning. At about 2 times price-to-book and an FY20 return on equity estimate of 19.5 percent, Axis Bank is JPMorgan’s top value pick.

Reliance Industries Ltd: BUY| Target Rs1125| Return 16%

CLSA maintains buy on Reliance Industries post Q3 results and raised its 12-month target price to Rs1125 from Rs1080 earlier. A big beat on Jio and standalone EBIT with a stellar Q3 from retail supported sentiment.

The year 2018 may turn out to be the year of monetization. Full utilisation of Off-Gas crackers, stabilisation of gasification project, the ramp-up of JioPhone and start of broadband are key positive factors which could work in favour of the oil & gas major.

Disclaimer: Reliance Industries Ltd. is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments Ltd.

HDFC Bank Ltd: Outperform| Target Rs2676| Return 37%

Macquarie maintains an outperform rating on HDFC Bank with a target price of Rs2676 crore. The private sector lender reported “boringly” consistent 20 percent YoY net profit growth.

The growth momentum is strong, led by retail loans. There is an inward shift in credit costs. The bank expects to gain market share from the bond market.

HDFC Bank is strong, powerful compounding story with no asset quality issues. The global investment bank expects strong earnings visibility and consistent high return ratios.

HCL Technologies Ltd: BUY| Target Rs1125| Return 11%

Edelweiss maintains a buy rating on HCL Technologies and raised its 12-month target price to Rs1125 from Rs1041 earlier. The growth is led by America, Engineering R&D while rest of the world and telecom are key drags.

IMS is down for 2nd consecutive quarter while investments in IP partnership is likely to sustain. Edelweiss see bright prospects in IMS though it has been weak.

ITC Ltd: BUY| Target Rs320| Return 14%

Jefferies maintains a buy rating on Jefferies but raised the target price to Rs320 from Rs302 earlier. The December quarter results were a mixed bag. Cigarettes volumes were soft with resilient margins.

FMCG showed strong all-round show while other businesses, hotels take the lead. The global investment bank expects a gradual recovery in ITC cigarette volumes. It also sees a better recovery in other businesses led by other FMCG.

Bajaj Auto Ltd: BUY| Target Rs3905| Return 17%

Axis Capital upgraded Bajaj Auto to buy from hold earlier and has also raised its target price to Rs3905 from Rs3503 earlier. Three wheelers strong growth is likely to continue. On the other hand, the company is banking on new launches from the Motorcycle segment.

Premium bikes such as Triumph could be a game changer. Exports are also recovering from a low base. Axis Capital expects Volumes/Earnings to grow at a CAGR of 13%/20% over FY18-20 given the better mix

HUL Ltd: Outperform| Target Rs1575| Return 15%

CLSA maintains an outperform rating on HUL and has raised its target price of Rs1575 from Rs1515 earlier. Low demonetisation base helped its strong Q3FY18 results.

The volume growth was ahead of estimate and so was earnings growth. The homecare continued to be a star while personal care growth was modest. CLSA expects punchy valuation to continue.

Infosys: BUY| Target Rs1300| Return 10%

CLSA maintains a buy recommendation on Infosys post Q3 results but raised its 12-month target price to Rs1300 from Rs1230 earlier. The December quarter remained largely in-line with revenue growth and steady margins.

Tax cuts drove up next two financial year’s earnings per share estimates by 2 percent. Client mining stayed strong with solid growth in the top client.

Impressive margin performance continues despite hikes and variable pay. The new CEO is yet to fully sponsor the strategic direction, said the report. The limited gap with peers, stability and improving execution deserves a rerating for the stock.

Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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