From February 19 to April 3, Nifty50 rallied 1,100 points, or more than 10 percent, to hit fresh record high of 11,761 levels.
The rally was supported by strong FII inflows of more than Rs 58,000 crore since February on rising hopes of stable government post elections, fears of global slowdown, stable crude oil prices, rate cut by RBI and expectations of a revival in banking & financials earnings.
The rally is likely to be broad-based as earnings are expected to be improve FY20 onwards and the market has more room to go up considering current valuations, experts said.
"We believe the ongoing 2019 rally will remain more broad-based in comparison to last year's rally focused on select few largecap companies," Centrum Research said.
The market had recently gone down to 19x earnings on rising uncertainty on election outcome, NBFC crisis and poor demand scenario. However, decline in crude prices, rising chances of NDA coming to power in 2019 and strong FII inflows have resulted in PE rising to 21x.
"Against earnings contraction of 3.8 percent in FY18, FY19 Nifty EPS is expected to increase 8.4 percent. FY20 and FY21 Nifty EPS is expected to grow by 16.9 percent and 16.8 percent to Rs 553.6 and Rs 646.7, respectively, which is 11.4 percent and 11.6 percent,respectively, lower than consensus. Nifty is currently trading at 21x 1-year forward earnings which shows 16.6 percent premium to long-term average of 18," Prabhudas Lilladher said.
"Hence the current PE of 21x is still below 23x achieved post 2014 victory of BJP and 25x touched in January 2018," it added.
According to Prabhudas Lilladher, any adverse political outcome in elections and global volatility can take P/E multiples to pre-rally levels of 19x which means strong market support at 10,500 levels whereas rally post a stable NDA government can make markets test 24-25x earnings which gives a target of 13,272-13,825.
Hence, in either case, investors should be prepared for quality stocks as brokerages believe that there are ample opportunities in the market considering expected broad-based rally.
The two brokerage houses have put out a list of mid and smallcap stocks that investors can add to their portfolio. They include Shriram Transport Finance, Ashok Leyland, IDFC First Bank, VIP Industries, Can Fin Homes, Tata Elxsi, ICICI Securities and Varroc Engineering.
9 stock ideas by Prabhudas Lilladher that can give double digit return:
Centrum recommends these 6 stocks with upside of 19-33%
Centrum believes FPI flows into Indian debt and equity markets may remain robust on the back of dovish stance of global central banks. "Despite current ongoing economic slowdown, one can believe that things may improve sooner than later on the back of RBI’s accommodative monetary policy."
Centrum said they believe India will emerge as an 'investors’ paradise' in 2019.
Indian corporate financial health is also improving as the long-awaited earnings pick-up is unfolding with Corporate-Profits-to-GDP ratio moving up to 3.1 percent in FY18, and is expected to touch 3.3 percent in FY19, from a multi-year low level of 2.9 percent in FY17, it added.
During FY05-FY17, this ratio was at an average of 5.3 percent.
"Investors can keep the buffer of dry powder ready, to take advantage of volatility in the run up to the election. On a crucial note, if there is a repetition of positive political surprise in the ensuing Lok Sabha election with a single party winning full majority, the current market meltdown is a God-sent opportunity for wealth creation," Centrum Research said.
The brokerage advised that stock selection has to be predominantly high quality stocks backed by strong fundamentals such as low (or zero) debt, high profit margins and top quartile return ratios.
"Stay away from companies with corporate governance challenges as markets have become quite unforgiving for stocks having even a minor taint."
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