Given current market sentiment and high perceived risk towards corporate governance issues, it is best to avoid poorly governed mid and smallcap companies with question marks on their financials, Rusmik Oza advised.
The renewed buying interest after government measures, including corporate tax rate cut to boost economic growth and stable global cues, helped the market close Samvat 2075 with more than 9 percent gains.
Also, the slightly better-than-expected earnings growth in September quarter 2019 with an improvement in asset quality of major banks and hope of revival in auto demand boosted market sentiment.
In addition, now there is a hope that the economy could pick in the second half of FY20 with marginal fiscal imbalance, above-normal monsoon and repo rate cut of 135bps in 2019.
As a result, experts expect the market to hit new record highs and to give another 7-12 percent return by next Diwali 2020 or end of Samvat 2076, with gradual pick up in broader markets after underperformance for last 18 months. But if earnings failed to come through then there could be consolidation instead of the rally, they said.
"We have turned optimistic on the long term outlook of the market after the government's cut corporate tax rates. Investors would now look to ‘buy on declines’ as compared to earlier thinking of ‘sell on rise’. The key drivers for the market from this Diwali to next Diwali will be revival in consumption spending led by higher rural income (on the back of better rabi crop output) & falling interest rates, enhanced earnings (due to steep cut in corporate tax rate) and lower base effect playing out from Mar’20 quarter," Rusmik Oza, Head of Fundamental Research, Kotak Securities told Moneycontrol.
"We can expect better FPI flows in India in the next one year on the back of better earnings visibility and bolder reforms like Privatisation taking place. Based on one-year forward earnings estimates we expect Nifty-50 to touch 13,000 based on 17-18x Fw PE valuations," he said.
Given current sentiment and high perceived risk towards corporate governance issues, it is best to avoid poorly governed mid and smallcap companies with the question marks on their financials, he advised.
Here is the list of 15 stocks which could return 15-53 percent by Samvat 2076:
Brokerage: Motilal Oswal
ICICI Bank: Buy | Target: Rs 550 | Return: 17 percent
ICICI Bank is better placed in a challenging macro environment, given that it has limited exposure to the newly surfaced stressed names and is well on track to see earnings normalization. "We expect the bank to deliver loan CAGR of 17 percent over FY19-21 and core return on asset (RoA)/return on equity (RoE) to improve to 1.5 percent/15.5 percent. Maintain buy with a target price (TP) at Rs 550," said Motilal Oswal.
State Bank of India: Buy | Target: Rs 350 | Return: 24 percent
Motilal Oswal believes that SBI is well poised for an earnings recovery led by a steady operating performance at the pre-provision operating profit (PPoP) level, recoveries from NCLT resolutions and normalization in credit cost to 1.9 percent/1.3 percent over FY20E/FY21E.
HDFC: Buy | Target: Rs 2,600 | Return: 24 percent
HDFC is well placed in the current tough liquidity environment, given that it is able to raise money comfortably at lower rates and gain market share. "We expect HDFC to deliver 14 percent AUM CAGR over FY19-22, with largely stable NIMs and core RoA/RoEs of around 1.7 percent/14 percent over the medium term," said Motilal Oswal.
Ashok Leyland: Buy | Target: Rs 88 | Return: 18 percent
Unlike the previous cycles, AL is currently on a strong footing (lean cost structure and net cash balance sheet) and is focused on adding new revenue/profit pools. Valuations are reasonable in view of the downcycle in earnings.
Larsen & Toubro | Target: Rs 1,900 | Return: 33 percent
For L&T, Motilal Oswal expects an adjusted consolidated EPS CAGR of 23 percent over FY19-21. Consolidated RoEs should expand to 17.6 percent by FY21 from 14.6 percent in FY18. Adjusted for valuation of subsidiaries, core E&C business is trading at FY20/21E P/E of 19.6x/16.1x, which is at a significant discount to its long-term one-year-forward trading multiple of 23 times.
Mahindra & Mahindra Financial: Buy | Target: Rs 400 | Return: 19 percent
Despite a slowdown in original equipment manufacturer (OEM) volumes, M&M Financial Services has been able to deliver strong AUM growth, driven by its diversification into new product segments (such as pre-owned vehicles and CV/CE) and increasing share in different OEMs. Motilal Oswal expects AUM growth to moderate to 14 percent YoY.
Indian Hotels: Buy | Target: Rs 176 | Return: 17 percent
The Indian hospitality industry is set to enter into an upcycle, led by favourable demand-supply dynamics. Given a strong presence in high-demand, high-occupancy micro-markets, Indian Hotels is well placed to capitalize on the growth opportunities. Motilal Oswal expects consolidated revenue/EBITDA CAGR of 9 percent/25 percent over FY19-21, supported by ARR growth of 8 percent.
Aditya Birla Fashion & Retail: Buy | Target: Rs 250 | Return: Rs 23 percent
The accelerated pace of store addition under Pantaloons is likely to drive a healthy 13 percent revenue CAGR over FY19-21. Motilal Oswal expects Pantaloons' EBITDA margin to improve 150bp YoY, and Innerwear losses to reduce to Rs 30 crore by FY21. Expect PAT CAGR of 68 percent over FY19-21. This coupled with its healthy FCF and RoCE profile, should allow ABFRL to garner superior valuations.
Colgate Palmolive: Buy | Target: Rs 1,750 | Return: 15 percent
A few factors are in Colgate's favor from the medium-term perspective - (a) the toothpaste market share hemorrhage appears to have abated after three years, (b) there is evident traction driven by herbal and other launches and (c) valuations are relatively less expensive at nearly 35 times FY21E EPS. With return ratios likely to improve further due to better utilization of expanded capacity, the discount to consumer peers should reduce.
Petronet LNG: Buy | Target: Rs 336 | Return: 24 percent
Higher gas adoption from industries and the power sector will likely support volume growth for PLNG. Motilal Oswal believes that, due to the Kochi-Mangalore pipeline and Dahej expansion, PLNG's total volume could grow by around 9/7 percent in FY20/21. "We estimate Revenue/EBITDA/PAT CAGR of 15 percent/22 percent/23 percent over FY19-21. Maintain buy with a TP of Rs 336," said the brokerage firm.
Brokerage: BP Equities
Bajaj Finance: Buy | Target: Rs 4,750 | Return: 19 percent
Over the years, Bajaj finance has built a diversified NBFC that remains driven by its strong fintech platform, which not only helps in acquiring new customers but also simultaneously aids in cross-selling to them, helping in lowering customer acquisition costs. The company’s technology platform is scalable, which provides room for capturing future growth opportunities.
This coupled with the strong brand franchise and execution ensures that profitability would also sustain going ahead. BFL’s asset quality is also strong providing further comfort. "For these reasons, we recommend the stock with a target price of Rs 4,750," BP Equities said.
Brokerage: Rudra Shares and Stock Brokers
ITC: Buy | Target: Rs 332 | Return: 34 percent
The company trimmed down its dependence on core tobacco business to less than half (45.8 percent) & now diversified into consumer business, a big milestone achieved. It aspires to achieve Rs 1 lakh crore revenue from FMCG by FY2030.
It recently launched Fabelle chocolate, commands the most expensive chocolate at Rs 4.3 lakh a kilo. With this, ITC is focusing on branded products and value creation.
It is continuously improving the distribution footprint in terms of adding more markets and outlets. With the new management & product launches, stable growth combined with profitability is expected ahead. Scaling manufacturing infrastructure, an investment outlay of Rs 25,000 crore has been envisaged.
Amber Enterprises India: Buy | Target: Rs 1,210 | Return: 22 percent
By October 2019 end, it is acquiring a 70 percent equity stake of EVER Electronics Private Limited in one or more tranches. It will acquire the balance 30 percent stake in IL Jin and EVER for a combined consideration of Rs 20-25 crore by FY22.
It announced the acquisition of an 80 percent stake in Sidwal Refrigeration and balance 20 percent over the next two years for a consideration of Rs 202 crore through a staggered buyout. Rudra Shares envisages acquisition would be EPS and ROCE accretive from FY20 onwards given Sidwal’s higher-margin, asset light business, almost NIL debt and better return ratios.
It plans to expand its footprint in South India by setting up a new plant at Tirupati, earmarked Rs 40 crore for land acquisition & is expected to commission in FY21.
Bandhan Bank: Buy | Target: Rs 715 | Return: 20 percent
With successful merger completion with Gruh, the bank will now have housing finance as the third business vertical. The merger will help diversify its loan portfolio of Rs 45,400 crore. In addition, expects the share of microfinance business to come down to 62 percent and later to about 50 percent.
It partnered with Standard Chartered Bank for launching three variants of credit cards. It reported a remarkable Q2 show, loan portfolio grew 92.33 percent YoY. Net profit inched higher by 99.18 percent.
Gross non-performing assets reduced at 1.76 percent in Q2FY20 against 2.02 percent in Q1FY20. The bank is finding out ways for the reduction in promoter's holding, soon would submit the plan to RBI.
SpiceJet: Buy | Target: Rs 160 | Return: 53 percent
The company moved towards capturing its lost market share as Jet Airways discontinued operations. It is planning to onboard over 60 aircraft in FY20 with fleet size jumping nearly 2X to 136 by FY20, as taken planes of the now-defunct Jet Airways.
It consistently maintained a load factor above 90 percent, which is commendable. Currently, it operates 550 flights on an average per day. During the winter schedule, it would operate 4,316 flights every week (around 612 a day), an increase of 46 percent compared to year-ago.
Its operations of Boeing 737 MAX aircraft will expect to resume by January 2020. The company converted 11 aircraft to mono class, while 20 more are to be converted. When all the aircraft are converted, the airline will add 2,529,890 ASKs per day, taking the domestic capacity up by 40 percent.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.