One will be better off investing in companies experiencing robust demand, where export revenues support prices, and are not directly linked to interest rate fluctuations
The Reserve Bank of India’s Monetary Policy Committee (MPC) as expected raised the key policy (repo) rate by 25 basis point to 6.25 percent for the first time in four-and-a-half years and a first under the Narendra Modi-led National Democratic Alliance. The last time RBI had raised the repo rate was in January 2014 by 25 bps to 8 percent. Since then, it has either cut rates or maintained the status quo.
"RBI Governor Urjit Patel changed the rate a little higher, as at this juncture that was the best thing to do. India is in a situation where anything sharp can hurt the economy. If we raise the Interest rates too fast and too sharply, and try tightening the money supply, it can hurt corporate earnings, which are just on the cusp of expanding," Motilal Oswal, Chairman and MD, Motilal Oswal Financial Services, said.
At current levels, he finds markets looking a tad expensive on account of expectations of earning momentum kicking in. Oswal finds the midcap correction overdone and it would be a good idea to commit some capital into well-managed midcap mutual funds ‘as the recovery in earnings will bring quick buoyancy’.
In the short term, he sees the Nifty headed towards the 11,000 mark. Based on that premise, he advises investors to look at companies experiencing robust demand, where export revenues support prices, and are not directly linked to interest rate fluctuations. Some such sectors are automobiles, consumer durables, IT stocks, as well as the dairy industry.
The MPC maintained its neutral stance as against expectations of a hawkish stance. It reiterated its commitment to achieving its medium term headline inflation target of 4 percent on a durable basis.
Most analysts expect the central bank to raise rates more than once in 2018 as inflation is unlikely to cool off anytime soon till crude oil price remain at elevated levels.
At its first bi-monthly resolution of 2018-19, the committee had projected consumer price inflation in the range of 4.7-5.1 percent in H1 FY19 and 4.4 percent in H2, including impact from higher house rent allowance to central government employees, with risks tilted on the upside.
Consumer price inflation is revised upwards and is now projected at 4.6 percent in H1 and 4.7 percent in H2. At the post-policy press conference, RBI Deputy Governor Viral Acharya said rising crude oil prices across the globe have pushed domestic fuel inflation higher.
Jayant Manglik, President - Retail Sales, Religare Broking, sees a high probability of ‘more than one’ rate hike in 2018 considering the recent spike witnessed in retail/core inflation and higher interest rates in the US. “In wake of the expected rise in retail inflationary pressures on account of rise in global crude oil prices, depreciation in the rupee against the dollar, higher minimum support prices and strengthening of the domestic economy, we believe the MPC would become relatively hawkish in its upcoming monetary policy. This will reflect in a change in its policy stance,” he said.
Here is a list of top 10 stocks which investors can look at post the MPC meet:
Analyst: Jayant Manglik, President - Retail Sales, Religare Broking
Swaraj Engines (SEL) is engaged in manufacturing of engines for fitment into M&M’s "Swaraj" tractors. It derives 97 percent revenues from the sale of tractor engines. The domestic tractor industry has witnessed a significant turnaround over the past two years, helped by two successive years of a normal monsoon.
This is well reflected in SEL’s strong financial performance in FY17 & FY18. Going forward, IMD has predicted normal monsoon in 2018 as well. This would keep the demand for tractors buoyant and result in healthy volume offtake for SEL. We expect SEL’s net revenue and PAT to grow by 15% & 16% CAGR over FY18-20E, likely to be driven by good monsoon & new launches.
Symphony holds a leadership position in organized Air Coolers market, commanding market share of over 50 percent. Good monsoon would certainly increase the spending power of consumers, especially in the semi-urban and rural areas, Symphony’s key markets.
This would result in improved demand for air coolers and boost the company’s volume growth. GST implementation will help the company to strengthen its market share further in the coming years.
New product launches in premium category and operating leverage should provide a cushion to margins. We remain positive on the company considering its market leadership, cash-rich and debt-free status, superior return ratios and high dividend payouts.
Nilkamal holds a leadership position in Material Handling and Moulded furniture segments, which are key revenue & profit growth drivers for the company. The growth in these segments is largely linked to the macro revival and improved consumption.
We estimate Nilkamal's consolidated revenue and PAT to grow by 10% & 19% CAGR over FY18-20E. Operating leverage and some stability in the crude oil prices should result in a gradual uptick in margins.
Supreme Industries (SIL) holds a leadership position in the organized domestic plastic piping market and is the second largest player in moulded plastic furniture. Further, it has a strong presence across other segments of plastics like packaging products and industrial products.
We expect SIL's consolidated revenue to grow by ~14% CAGR over the next 2-3 years, led by demand revival, steady capacity additions, and enhanced product offerings. GST transition would clearly yield benefits over the medium-to-long-term.
Prabhat Dairy (PDL) is an integrated milk and dairy products company, catering to both institutional (B2B) as well as retail (B2C) customers.
The company’s growth prospects look bright, given the robust outlook of the dairy sector, PDL’s plan to grow its business into new segments, product innovation in the consumer business and strengthening distribution reach across India.
Good monsoon would result in better productivity yield and boost the company’s volume growth and improve its margins trajectory.
We expect PDL’s net revenue & PAT to grow by 13.5 percent and 18.6 percent CAGR over FY18-FY20E. With the company’s plans to reduce debt and improve working capital cycle, we expect a marked improvement in its return ratios also.
Analyst: Sumit Bilgaiyan, Founder at Equity99
PFC has reported de-growth of 42 percent in PAT on YoY terms. Restructured loan book is down almost 1300bps QoQ of which public restructured assets constituted to be around 6.9% of overall loan book, which is down by 870bps QoQ.
The company will remain focused towards the renewable sector due to the commissioning period in these loans is lower and the average yields are 50-100bps lower too.
Admittedly, contribution to loan book is still small. Given that large part of stress pertains to state utilities, where recovery is just a matter of time we believe the stock is available at a throwaway price. It is trading at below band of its historic P/B value band. We are recommending a BUY.
Sheela Foam reported a very good set of numbers. Overall, revenue increased 15 percent YoY on the back of an increase in selling price. India revenue was up 15 percent YoY. Australia Revenue was up 12 percent YoY while volume growth stood in the range of 2-3 percent.
We are expecting strong profit growth in the future led by better volumes and margins which will be backed by strong sales volume recovery. The TDI prices are also expected to cool-off after the new plant in Saudi Arabia is operational.
The earnings will get a boost from pan India launch of mass market brand ‘Starlite’ and mid-market brand ‘Feather Foam’ and EBITDA margin recovery led by softening raw material prices.
Key demand drivers for Sheela Foam’s products are rising population, urbanization, rising number of nuclear families, changing lifestyles and rising income levels. Looking at the revenue drivers and company’s ability to generate FCF we are recommending a BUY.
L&T Technology Services (LTTS):
L&T Technology Services (LTTS) is the third-largest pure play ER&D services provider globally. Its broad-based services portfolio, presence in underpenetrated market segments and deep-rooted client footprint, 43 of the top 100 global ER&D spenders, places it well to address the opportunity emerging from the shifts in global ER&D spend.
Global spend on ER&D services (USD 680bn in 2016; source: PwC Consulting) compares that on IT services. However, the outsourced component is lower and India has a relatively lower share of the global outsourcing market.
We believe LTTS is well set to tap this opportunity and its financials are quite superior compared to others. It has healthy cash conversion plus superior return ratios, 39% RoE, are other positives. We recommend a BUY.
FSL has posted revenue growth of 1.1 percent on a QoQ basis. EBITDA margins expanded by 170 bps QoQ aided by lower-than-expected employee expenses and lower other expenses.
The board has recommended a dividend of Rs. 1.5 per share for the first time and indicated at maintaining a payout ratio of 35-40 percent of PAT, going ahead. Management expects revenue growth to be at the top end of industry growth rates in CC in FY19 despite downward bias in the customer management division, driven by healthy deal pipelines, signing of contracts, and traction in the mortgage business in BFSI.
With a healthy dividend payout and becoming net long-term debt-free company, we believe FSL could witness a massive upside going ahead. We are recommending a BUY.
Bajaj Auto has posted strong earnings driven by good growth in 3 wheeler and export sales. Export markets like Nigeria have seen good improvement. Volumes in Nigeria improved to 33,000 units per month compared to 26,000 in 2017.
Commodity prices are quite volatile but we are expecting management will maintain volume growth. Management is focusing on domestic business to strengthen its presence.
The realization has improved by 1.8 percent QoQ Rs. 64,790, compared to Rs 63,600 due to higher 3 Wheeler and export sales. We are recommending a buy due to expectations of higher realization and better volume growth.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.