Most experts see FII flows moving towards few largecaps in coming year also
Nifty recorded double-digit gains in 2019 despite worries like slowing Indian economy, US-China trade tensions and mixed earnings.
Even the broader markets trimmed losses in the past three months with Nifty Midcap index falling 4 percent and Smallcap index declining 9.5 percent against expected double-digit fall.
Considering the government's consistent target to achieve a $5 trillion economy by 2024 (from under $3 trillion now), experts feel the rally could broaden gradually (though unlike 2017) with expectations of strong performance from quality stocks this year.
"We are constructive on the market performance for 2020 very similar to the way we were for 2019. The key factors impacting the market fortune in 2020 would be: a. Normalization in Indian Corporate Earnings, b. Global sentiments towards risky assets including emerging market equities and c. India’s fiscal conditions," Narnolia Financial said.
Reliance Securities also said with a very constructive market scenario as a backdrop for 2020, prospects remain promising. However, there are critical challenges of fostering an economic recovery while keeping the interest rates low, it added.
Narnolia expects the Nifty50 to end the year at 13,650 (12 percent return from current levels), citing normalization in corporate earnings growth ahead, while Reliance Securities sees the index at 13,900 (14 percent upside from the current levels).
Moneycontrol has collated 17 stocks, as suggested by various brokerages, that could return 10-38 percent by end of 2020:
Brokerage: Nirmal Bang
Ashok Leyland: Buy | Target: Rs 92 | Return: 12.88 percent
Ashok Leyland is focusing on efficient cost management across all the functions. It has saved costs of nearly Rs 200-230 crore in H1FY20 and expects to save costs totaling to Rs 500 crore for the current year. These cost saving measures will be sustainable.
Early green-shoots & potential pre-buying before BSVI could drive volumes in Q4FY20 and scrappage policy could revive replacement demand.
We estimate volume to grow by (-12 percent)/(-5 percent)/5 percent and PAT to grow by (-28 percent)/(-10 percent)/11 percent for FY20/21/22. We value it at 17x to get a target price of Rs92. Target multiple is at 20 percent discount to its last 5 year average PER given the lower volume growth rate.
Eicher Motors: Buy | Target: Rs 24,843 | Return: 10.4 percent
Studio store strategy will be useful to tackle current slowdown by increasing the accessibility which will benefit high margin stores & spares revenue as well. EML intends to track wholesale volume with retail volume, as it wants to ensure that dealer is not left out with BSIV inventory.
EML has adopted more consumer focused strategy in terms of new product offerings with the intend to develop products as per consumer requirements. It has launched 6 new variants of Bullet 350 and Bullet 350ES in new colours which has been very well received.
Target price of Rs 24,843 is 23.5 times September 2021 consolidated EPS, which is at a discount to its 10-year average of 29x mainly as we expect volume growth to be below the historical rate.
Solar Industries: Buy | Target: Rs 1,315 | Return: 23.7 percent
SIIL has strong economic moat with leadership position in the industrial explosives sector which is a highly regulated business with strict licence controls and strong entry barriers.
With a healthy ramp-up in domestic coal production along with strong impetus on housing, roads and infrastructure sectors, the explosives industry is poised for a healthy volume growth over the next three years.
We expect SIIL to register 14/20 percent revenue/earnings CAGR over FY19-FY22E. We see healthy growth outlook in explosives and strong scale-up prospects in overseas markets as well as defence segment in a regulated industry having strict licencing controls.
Gujarat State Petronet: Buy | Target: Rs 303 | Return: 38 percent
Buy call is based on sustained long term growth outlook in transmission volume, supported by India’s booming natural gas market; huge leverage to a step surge in future volume; and compelling valuation that offset concerns over tepid growth over FY21E-22E as well as regulatory/policy issues and execution risk.
Petronet LNG: Buy | Target: Rs 336 | Return: 25.4 percent
Petronet LNG is India‘s market leader in liquefied natural gas (LNG) import and distribution, and dominates Indian gas market with 40 percent share in gas supplies and 80 percent in LNG imports.
Company growth drivers include 16.5 percent increase in LNG imports/re-gasification capacity at Dahej from 15-17.5 million tonne/year in June 2019. Capacity will be enhanced by another 2 million tonne by end-FY24 at a cost of Rs 2,300 crore (on additional tanks, jetty) and also there is a potential upside in utilization of its 5 million tonne per annum Kochi LNG terminal from 10-30 percent in 3-4 years.
Hindustan Unilever: Buy | Target: Rs 2,490 | Return: 29.5 percent
We believe that HUL will be the largest beneficiary of the premiumisation trend (current contribution of premium portfolio estimated in the range of 25 percent) considering the strong brand equity enjoyed by its mid and premium segment brands such as Dove, Ponds, Surf and Brooke Bond.
Although, the ongoing rural slowdown has caused the rural growth rate to moderate but given government’s impetus on improving farmer income and measures to increase liquidity in the market the company is most geared among peers to face disruptive product, distribution and competitive challenges of the consumer goods industry.
After incorporating GSK Consumer Healthcare merger, the opportunity become even more attractive, as we see earnings to grow at a CAGR of 23 percent over FY19-22, without assuming any synergy benefits in our margin estimates. Volume delivery has been ahead of its much smaller peers and margins visibility could help sustain such premium valuations in the current environment, supported by best earnings growth visibility in the Indian FMCG space with the highest return ratios.
Marico: Buy | Target: Rs 425 | Return: 24.4 percent
Marico has delivered strong earnings growth over the last five years at around 13.9 percent. Going forward, we build in earnings growth of 16.4 percent over FY19-22, with topline growth of 10.5 percent led by led by – (1) Increase in the pace of market share gain from unorganized players in the Parachute portfolio (2) Premiumization of VAHO portfolio (3) Diversification of domestic portfolio (we expect success in at-least one out of the three future categories (4) Headroom for growth in outlet reach (currently 5mn outlets) (5) Technological edge over peers especially in distribution (6) Target of increasing rural contribution from 32 percent to 40 percent and (7) Faster growth in alternate distribution channels. EBITDA margin to expand by 300bps to 20.5 percent over FY19-FY22 driven by operating leverage, cost efficiencies and mix improvement unless there is significant commodity inflation.
While the near term performance has been below the company’s medium-term aspirations, it is taking corrective measures to spur growth in its core business. Marico has delivered consistent return across time periods similar to other consumer staple peers. The stock trades at around 35x/30x FY21E/FY22E EPS, which is at around 16 percent discount to our coverage consumer staples universe.
Inox Leisure: Buy | Target: Rs 450 | Return: 18 percent
We believe that Indian multiplex industry is an oligopoly (top four players control around 70 percent of screens) and will remain so as entry barriers are quite formidable and there are no substitutes. This industry’s structure will deliver steady revenue growth, and improve margins as well as RoIC over a long period of time. The multiplex players deserve premium valuations, considering the longevity of earnings compounding and good RoICs.
Keeping the Q2FY20 ad revenue slowdown aside, Inox has been trying to bridge the gap with PVR across various operating parameters. The gap with PVR in ATP/SPH/ad revenue per screen has improved from -8 percent/-25 percent/-52 percent in FY18 to -7 percent/-18 percent/-46 percent in FY19 and we see this compressing further.
V-Mart Retail: Buy | Target: Rs 2,283 | Return: 38 percent
V-Mart remains a strong player despite rising competition. The ASP of large competitors is still 20-30 percent higher than that of V-Mart's. It is focusing on revenue growth by delivering double digit growth almost every quarter.
It has focused on increasing its market share by expanding in Tier- III and Tier-IV cities where it sees a huge gap and headroom for growth.
The management has guided for a full year EBITDA margin of around 8 percent in FY20 which we believe will continue in FY21 and FY22. In FY20, margin will improve in Q3FY20 as important festivals (Durga Puja, Diwali and Chhath) will come bunched up along with marriage season (which is for a longer time this year) and onset of winter sales. Management is aiming for a full year SSG of 5-8 percent, EBITDA margin of arounds 8 percent along with 20 percent plus revenue growth.
Natco Pharma: Buy | Target: Rs 747 | Return: 26 percent
Natco pharma will launch gRevlimid in end of FY22 as per a settlement agreement with innovator. Revlimid annual sales in the US is $7.5 billion and still continues to grow. At a risk adjusted cost of capital of 18 percent, the NPV of the gRevlimid cash flows comes to Rs 450 per share. We currently do not ascribe any value to the agrochemical initiative, which itself can be a very large earnings driver if successful.
Sun Pharma: Buy | Target: Rs 517 | Return: 19.5 percent
The US business for SPIL (excluding Taro Pharmaceuticals and Dusa Pharmaceuticals) should start growing as 120 ANDAs (abbreviated new drug applications), which are pending approval, gradually start reflecting in incremental revenues. Price erosion in base business is unlikely to be painful as the same is now commoditised with a median competitive intensity of eight players across its marketed ANDA portfolio.
In addition to complex ANDAs, SPIL is also aggressively developing value-added generic drugs which are targeting the following segments: 1) Patients suffering from dysphagia. 2) Dosing convenience. 3) Improved health care administration. The domestic business should deliver a low double-digit growth and outpace the Indian pharmaceutical market driven by its large exposure to the chronic segment.
Brokerage: Motilal Oswal
UltraTech Cement: Buy | Target: Rs 5,050 | Return: 24.8 percent
UltraTech is the largest manufacturer of grey cement, Ready Mix Concrete and white cement in India with an installed capacity of 95mt. The acquisition of Century’s cement asset and Binani increased its capacity to 109.4mt and took its pan-India market share to 24 percent.
Given limited capex needs, strong free cash flow generation of more than Rs 7,500 crore per annum (7 percent yield) from FY20, should drive deleveraging and stock price appreciation. North/Central are structurally the preferred regional markets for us, where UltraTech has highest exposure. We forecast a CAGR of 26/48 percent in EBITDA/EPS over FY19-21, driven by a 6 percent CAGR in volumes and better margins. We expect RoE to improve 550bps to 13.8 percent by FY21.
Brokerage: Globe Capital
Bharat Dynamics: Buy | Target: Rs 340 | Return: 15.4 percent
Increased thrust on defence indigenization under the 'Make in India' policy has thrown up more opportunities for Bharat Dynamics. The company is the exclusive service provider for indigenously developed guided missiles such as Akash surface-to-air missiles and Konkur anti-tank guided missiles.
The order book position of the company as on 01 April 2019 is around Rs 7,258 crore comprising mainly of Akash, MRSAM, ATGMs, Export of LWT and other products. BDL expects Akash-II missile order worth about Rs 14,000 crore in the next couple of years from the central government.
We maintain positive view with the target price of Rs 340 in medium to long term.
DCB Bank: Buy | Target: Rs 210 | Return: 22.3 percent
With stable margins, improving operating leverage and improved asset quality, we believe DCB Bank has the potential to grow at faster rates. At the CMP, the stock is trading at TTM P/BV multiple of 1.7x with the ttm book value of Rs 97. Hence, we maintain positive view with the target price of Rs 210 in medium to long term.
HCL Technologies: Buy | Target: Rs 725 | Return: 27.6 percent
The company has raised its revenue growth outlook to 15-17 percent in constant currency for the financial year 2019-20, from its previous forecast of 14-16 percent growth. The operating margin (EBIT) range is expected to be between 18.5-19.5 percent.
At the current price, the stock is trading at TTM P/E multiple of 15.03x which lower than its historical average. Hence, we recommend a buy rating for the target price of Rs 725 in 12 months perspective.
Larsen & Toubro: Buy | Target: Rs 1,595 | Return: 22.8 percent
With a robust order book, strong balance sheet, diversified business portfolio and proven execution capabilities are acting as an economic moat for the company in the current volatile and challenging economic environment.
At the CMP, the stock is trading at TTM P/E multiple of 19.28x with a TTM EPS of Rs 67.40. Hence, we recommend buy for the target price of Rs 1,595 in medium to long term.
Mahindra & Mahindra: Buy | Target: Rs 750 | Return: 41 percent
We believe the industry slowdown is cyclical in nature and the long-term potential for automotive segment in India is huge and strong demand is expected to come from both urban and rural areas because of very low penetration and rising disposable income.
At CMP, the stock is trading at TTM P/E multiple of 12.33X with an TTM EPS of Rs 42.75. Hence, we recommend buy for the target price of Rs 750 in medium to long term.Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his 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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