Largecaps or sector leaders are the safest bet during a crisis because the recovery momentum generally reflects first in these stocks, say experts.
The market has surprised everyone with a double-digit rally in the last couple of weeks and that gains were largely backed by liquidity. Optimism over the reopening of the economy and upside in global peers also played a part.
But, the rally was not supported by fundamentals. The government has allowed resumption of economic activities but a lot of restrictions are still in place due to the fear of the coronavirus. As a result, companies, barring which have the work from home option, cannot operate at full capacity.
Hence, until the recovery starts reflecting in data points or numbers, the market cannot see any sharp upside in the coming months, experts say.
"Stocks are moving in lock, stock and barrel together, which will sooner or later face a reality check. This seems to be a short-term rally and sooner or later markets should head lower to align with ground-level realities," Jimeet Modi, Founder & CEO, SAMCO Securities & StockNote, told Moneycontrol.
Most top investors and experts insist that one should stick to largecaps or leaders in every sector during a crisis because the recovery momentum generally reflects first in these stocks.
"Investing in mid and small-caps has its own share of risks. Their ability to create long-term compounded wealth is lower than large caps. Also, this pandemic may cause many smaller companies to shut shop. Survival and growth would be deadly challenges for these businesses. Therefore, it would be safer for investors to bet on largecaps rather than risk their capital in the quest of generating alpha," Modi said.
Moneycontrol has collated a list of largecaps and bluechips that can give 14-43 percent returns in the next one year:
Brokerage: Geojit Securities
Bajaj Finance: Buy | Target: Rs 2,940 | Return: 20.3 percent
Bajaj Finance has a strong growth in assets under management (AUM) and net interest income of 45 percent and 39 percent CAGR for the last 12 years. In the present situation, the company's focus is on capital preservation, balance-sheet protection and operating expense management.
The company has a liquidity surplus of Rs 15,725 crore to meet its obligations and grow its AUM. We recommend a buy rating on the stock, with a target price of Rs 2,940.
HDFC: Buy | Target: Rs 2,166 | Return: 22.3 percent
HDFC's AUM grew by 2.3 percent QoQ and by 12 percent YoY in Q4 FY20. Individual loans grew at 18 percent CAGR and consolidated PAT at 21 percent CAGR over the last five years.
Government support for housing has helped in improving the affordability to the best levels due to rising annual income and relatively stable housing prices. The mortgage market in India is still at its infant stage, with the penetration of 10 percent in nominal GDP, implying huge growth potential over the long term aided by fiscal incentives and interest subvention scheme.
We have a buy rating on the stock, with a target price of Rs 2,166.
ICICI Bank: Buy | Target: Rs 420 | Return: 20.4 percent
A better portfolio mix with a high share of the mortgage in the retail book, which is close to 50 percent and above ‘A' rated corporate exposure is 90 percent, which is the best in the industry.
A well-structured balance sheet, with capital adequacy at 16.1 percent with Tier 1 capital at 14.7 percent, well above the regulatory guideline of 10.5 percent.
Macro uncertainties have been factored in as the valuation has corrected close to 55 percent from highs in the last six months. With further easing of lockdown, we believe large banks with better liability franchise will gain. We have a buy rating on the stock, with a target price of Rs 420 using sum-of-the-parts (SOTP) methodology.
ITC: Buy | Target: Rs 260 | Return: 30.9 percent
ITC has been increasing the share of non-cigarette segments to derisk the regulatory risk. The non-cigarette segment's share has increased from 34 percent to 54 percent in the last 10 years.
The recent acquisition Sunrise Foods and tie-up with Amway for ITC’s B-Natural products will support revenue growth while benign crude and agri-commodity prices will support margins.
Attractive valuation, a hike in cigarette prices and the gradual removal of lockdown will help the stock. We maintain a buy rating, with a revised target price of Rs 260 based on SOTP valuation.
State Bank of India: Buy | Target: Rs 240 | Return: 30.1 percent
Digital initiates seems to be strengthening as 90 percent of transactions occur outside the branch (registrations via bank’s technology platform YONO crossed 1.8 crore). Capital adequacy rate stands at 10.2 percent and further capital buffer can be easily managed by diluting stakes in subsidiaries.
A steep fall in valuation--close to 60 percent from highs--in the last six months is because of the overall macro concerns other than the core fundamentals of the bank. Expect a steep cut in deposit rates, stable asset quality post moratorium and better NIM to drive profitability going ahead. We have a buy rating on the stock, with a target price of Rs 240.
Brokerage: Axis Securities
Biocon: Buy | Target: Rs 474 | Return: 24.2 percent
Driven by market share gains and new launches in high-margin biosimilars, the biologics segment is expected to post robust revenue growth (approximately in mid-twenties) over the next two to three years. Biocon management has set an ambitious target to cross $1 billion in revenue for biologics over the next couple of years (from around $300 plus million in FY20).
We expect annual revenue to grow by 21 percent CAGR over FY20-22E, EBIDTA to expand by 25 percent CAGR and PAT by 30 percent CAGR over the same period.
The EBIDTA margins are expected to expand from around 27 percent in FY20 to 29 percent by FY22E, driven by increased contribution from the high-margin biologics segment. Given the prospects of earnings growth, we value the company at 35x FY22 earnings to arrive at a target of Rs 474.
HCL Technologies: Buy | Target: Rs 653 | Return: 13.7 percent
HCL Technologies may see a short-term impact of the COVID-19 outbreak but the company can efficiently manage from remote systems to ensure timely delivery of the outsourced business. It also has a strong product business structure with high-profit margins.
We believe that large transformational deal wins and ramp-up in large deals will help HCL to generate more sustainable revenues as compared to its peers even in uncertain times.
We believe that the coronavirus outbreak will create huge opportunities across geographies for HCL Tech to post strong organic growth over different verticals. We believe HCL Tech has a resilient business structure from a long-term perspective. We recommend buy and assign 13x P/E multiple to its FY22E earnings of Rs 50.3, which gives a target of Rs 653 per share.
Brokerage: Angel Broking
Colgate Palmolive: Buy | Target: Rs 1,620 | Return: 18 percent
We believe that the company will ultimately be able to see sharper market share gain in the toothpaste segment on the back of higher ad-spend and re-launch of Colgate Strong Teeth (decent traction seen in the last quarter.)
Axis Bank: Buy | Target: Rs 500 | Return: 19.1 percent
Axis Bank is trading (core banking business – 1.2x FY22ABV) at a significant discount to historical average valuations and offers a favourable risk reward from current levels given global tailwinds.
Brokerage: KR Choksey
HDFC Bank: Buy | Target: Rs 1,265 | Return: 28.2 percent
We expect the Q1FY21 balance-sheet growth to remain tepid for HDFC Bank, though we are optimistic about the long-term growth prospects that are supported by a strong retail footprint and a network of branches (added 313 branches YoY during FY20).
We expect the premium valuation of the bank to continue due to its high ROE and industry-leading asset quality metrics. We apply a P/B multiple of 3.6x to the FY21 adjusted BVPS of Rs 351 to arrive at a target price of Rs 1,265 per share. Accordingly, we reiterate the buy rating.
UPL: Buy | Target: Rs 614 | Return: 42.8 percent
We expect that UPL to maintain its robust performance on the back of synergy benefits arising from Arysta integration, focus on high-margin portfolio such as bio-solutions (a growth of around 18 percent YoY) and being geographically well-diversified in key export markets.
UPL today is the number one bio-solutions company and the largest supplier of organic portfolio of products in the world. The company has also strengthened its balance sheet with recent debt reduction (net debt reduction of Rs 4,400 crore) and improvement in its working capital.
We maintain the target price at Rs 614 per share and reiterate the buy rating.
Bajaj Auto: Buy | Target: Rs 3,267 | Return: 17.5 percent
Both domestic and export outlook for 2 and 3-wheelers is expected to remain subdued in the near-term due to COVID-19 uncertainty and suppressed purchasing power and demand.
While margins were strong for Q4FY20, the company expects the business to revive in the second half of FY21. We retain our positive stance on Bajaj Auto based on its resilient performance, especially in the export markets and the company's ability to control costs amid plant shutdowns and demand slowdown.
Social-distancing norms will push customers towards 2-wheelers more, thus reviving the demand scenario. In our view, Bajaj Auto is well placed to benefit from the expected demand revival, especially in rural markets post lockdown, and remains our preferred play in the 2-wheelers space.
We apply a P/E multiple of 18.2x to FY22E EPS of Rs 179.5 to derive a target price of Rs 3,267 per share and reiterate a buy recommendation.Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.