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Last Updated : Jan 16, 2020 02:41 PM IST | Source: Moneycontrol.com

Earnings downgrade key risk in 2019; Standard Chartered picks 13 stocks to bet on

Nifty trades at a 12-month forward P/E of 17.2x, a 13 percent premium to its 10-year average of 15.2x. At current prices, investors are advised to invest in a staggered manner in stocks

 
 
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The macro concerns for Indian equities got sidelines sue to forecast of easing global liquidity, crude oil softening and domestic currency (INR) gaining strength against USD. But in 2019, earnings downgrade will be the greatest risk as stock valuations are still above reasonable levels, Standard Chartered Securities (India) said in a note.

Nifty trades at a 12-month forward P/E of 17.2x, a 13 percent premium to its 10-year average of 15.2x. At current prices, investors are advised to invest in a staggered manner in stocks using every dip as an opportunity to add to equity exposure.

In terms of earnings, the combined net profit of 1,889 companies across the sectors in Q2 FY19 was up 16.2 percent, YoY, growing at the fastest pace in the last seven quarters, but was at the base of earnings, which de-grew 10.8 percent in the same quarter of the previous year.

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The Nifty50 free float (FF) PAT growth was c.8 percent for Q2 FY19, resulting in H1 growth of c.6 percent compared to FY19 consensus expectations of a 19 percent. “This raises the hurdle rate for H2 FY19 considerably. Earnings downgrade remains the greatest risk for valuations of stocks still trading above reasonable levels, in our view,” said the note.

Standard Chartered handpicks stocks in its equity research report of ‘India Top Picks’ which provides a list of quality stocks with leadership positions in their business fields — a strong moat that helps generate above average return ratios than peers.

Maruti Suzuki (MSIL):

Standard Chartered Securities is positive on consumer discretionary spending increases, with higher growth coming from the rural sector. MSIL has been a market leader and has outperformed the industry historically.

Its market share increased to 50 percent in FY18 and further to 52 percent in H1 FY19 from 47 percent in FY17. However, management commentary suggests margins may remain muted in H2 FY19, primarily tracking the impact of the INR depreciation on input costs, which comes with a quarterly lag.

MSIL saw a rise in sales of 6 percent during the festive season this year against anticipated double-digit growth by the company. MSIL has seen 9.1 percent growth in domestic sales in April-October to 1.04m vehicles.

Metro markets are under pressure, along with concerns such as traffic congestion and the impact of shared mobility, as per the company. The global investment bank is positive on the new launches and MSIL’s ability to surpass the interim macro volatility in the long term. Electric vehicles could be the next big trigger for growth in MSIL.

Mahindra & Mahindra:

M&M is a pure play on rural growth via the tractors segment (38% of total volumes in H1). It is expected to grow within 11-13 percent in FY19, as per management’s revised guidelines. Management has indicated that rural sales contribute 51 percent of total sales.

Standard Chartered Securities are also positive on its auto division with the launch of its new product, Marazzo, which has a waiting period of 6-8 weeks despite MM scaling up to full capacity.

Its September results were broadly in line with consensus estimates, and the revised volume guidance by management is well priced in the stock valuations, in our view. The recent softening of commodity prices is an added positive.

The global investment bank also like the company’s aggressive growth strategy of launching new models in new segments (Jawa [premium two-wheeler segment], XUV700 [luxury SUV segment], Blazo [heavy duty truck segment] and Treo [three-wheeler electric segment]).

ITC:

ITC posted strong revenue growth in the July-September period, led by a recovery in consumer demand, especially in rural areas. In the second quarter, along with the hotels and agri businesses, FMCG-others posted double-digit revenue growth.

Revenue growth in Q2 was also led by staples, snacks, meals, and biscuits in packaged foods, fragrance, liquid hand wash and body wash in personal care, and notebooks in education and stationery.

Q2 cigarette volume growth was supported by a favourable base, along with the absence of price hikes and regulatory blows (no upward tax revision recently).

Going ahead, the next few quarters too should see growth in volumes at a healthy pace, aided by a favourable base effect (flat-to-negative volume growth in the previous three quarters).

The global investment bank is bullish on the FMCG-others non-cigarettes segment that management is increasingly counting on to de-risk its business model, given the reasonable valuations.

IndusInd Bank:

IndusInd Bank (IIB) is among the fastest-growing private sector banks (loan book grew 2.3x in the last three years to INR 1.6trn). It has been consistently delivering 25 percent growth in its loan book for the last 14 quarters, with deposits growing at a similar pace.

IIB has created a strong low-cost deposit franchisee with a CASA of 44 percent as on H1 FY19. Loan growth stood at 32 percent y/y in Q2 FY19, led by robust growth in the corporate segment. IIB expects demand for vehicle financing to remain healthy in the near-term.

Meanwhile, the closure of the BFI merger could strengthen its presence in micro-lending and benefit yields. Ongoing efforts to widen its branch network and leverage its digital capabilities may drive CASA growth and limit operating expenses.

HDFC Bank:

Many banks continue to face pressure on asset quality, liquidity constraints and lending restrictions. HDFCB has demonstrated growth on all fronts at a steady rate. The bank’s wholesale loan growth has outpaced other lenders by a wide margin.

HDFC Bank is leveraging its digital offerings, wide geographical reach, and suite of products to widen its reach to new and existing customers.

HDFC Bank could leverage the proceeds from its recently completed equity raise of c.INR 236bn to grow its market share in the high-yielding retail loan segment.

ICICI Bank:

Asset quality improvement is shown by ICICI Bank in the September quarter (Q2) has been viewed as positive by consensus. Provisions fell 11.3 percent on a YoY basis owing to lower slippage.

The gross and net non-performing asset (NPA) ratios improved 27bps QoQ and 54bps QoQ to 8.54 percent and 3.65 percent, respectively, in Q2 FY19. Regulatory efforts to stimulate funding of non-bank financial corporations (NBFCs) amid market liquidity constraints could provide

ICICIBC opportunities to lend at higher rates.

The liquidity crunch may also lead to ICICIBC capturing some loan demand from NBFCs. Meanwhile, its recent rate increase on the marginal cost of funds-based lending rate-linked loans may help cushion its net interest margin (NIM) in the near-term.

SBI Life Insurance Company:

Standard Chartered Securities have been upbeat on life insurance players on the background of high underpenetrated life insurance in India. Monthly data issued by the regulator also indicates that growth momentum for the business remains intact.

For many years, private sector insurers have been eating into the market share of public sector Life Insurance Corporation of India. Their market share went up 3.9ppt in October.

SBI Life continued its trend of healthy growth in individual annual premium equivalents (APE) of 17 percent in October 2018. SBI Life has an advantage due to its tie-up with SBI, which has a network of ~22,000 branches and is one of the largest agency networks, which adds to the distribution strength – a key basis for the global investment bank to add SBI Life to the India Top Picks list.

Larsen & Toubro:

L&T posted a 23 percent YoY jump in its consolidated net profit at Rs 22.30 bn in the September quarter (Q2 FY19). The company witnessed strong growth of 46 percent YoY, with order wins worth Rs 419 bn at the group level in Q2 FY19, due to a pick-up in domestic ordering activity.

Its order book stood at Rs 2.81tn, as of 30 September, of which the international order book constituted 22 percent. RoE expansion, through a combination of balance sheet de-leveraging, incremental operating margin gains and a focus on an asset-light pure play EPC model, should sustain valuations for L&T.

Cipla:

Cipla is expected to participate cautiously in global tenders to protect margins after reporting muted revenue growth in Q2. Despite US sales rising 23 percent, domestic operations' revenues remained flat.

The tender business (c.20% of consolidated sales) was under pressure on aggressive pricing and intense competition. Domestic business growth remained flat owing to a higher base of restocking created by the implementation of the GST last year. The firm has been filing aggressively to build a product portfolio in the US market in the past three years.

RIL:

All segments of the conglomerate RIL are doing well, and all segments of the business are doing well. The market is ascribing full value to its telecom venture Jio, while giving a fair valuation to its refining and petchem business, in our view. RIL's major investments are likely to deliver though improved margins and boosted cash flows.

At present, RIL is facing concerns with the scaling up of its ambitious petcoke gasification project. According to management, there have been technical challenges in the continuous synchronised operations of petcoke gasifiers.

The company hopes the problem will end by March next year. The project, once fully operational, is expected to add USD 2/bbl as GRMs for the company.

The recent correction in oil prices is likely to improve the outlook for the refining business. However, RIL’s integrated model helps it ride commodity uncertainties, which should continue.

Disclaimer: Reliance Industries Ltd. is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments Ltd.

Asian Paints:

Asian Paints Ltd is the largest paint company in India (50%+ market share in the domestic industry) and figures among the top 10 players in the world. Historically, the company has seen an increase in market capitalisation of 14x in the last 10 years and a rise in capacity of 5x to generate annual operating cash flow, which continues to add to shareholder wealth.

The global investment bank has added Asian Paints in the India Top Picks list at a time when the company is undergoing consolidation in its business operations and valuations have discounted the higher crude oil and raw material prices.

The company is also on the verge of completing its capex in South India, which would lead to logistical cost savings and incremental revenue growth.

Infosys:

The global cyclical recovery has caught our attention of the IT sector. We are noticing signs of recovery in key divisions of IT companies. Additionally, a surge in the number of total contract values (TCV) is expected to help the sector post better earnings going ahead.

In Q2 FY19, Infosys reported 4.2 percent constant currency growth q/q (the highest among the large peers). It has been facing a key leadership crisis for the past 2-3 years but is emerging out of an uncertain phase, with the new management, led by CEO and MD Salil Parekh, trying to catch up with market leaders using the new strategy set in place.

Infosys has maintained its guidance of 6-8 percent growth for the full year. EBIT margin guidance has also been maintained within 22-24 percent.

TCS:

After a gap of three years, TCS is expected to hit double-digit growth in FY19. The company stated it would end FY19 with double-digit growth, breaking the tradition of the last few years of not providing any guidance.

TCS also ticked all boxes on fundamental parameters – EBIT margins, deal wins, digital revenues, and attrition rate as well as client addition.

Led by strong growth in its two big verticals — banking, financial services and insurance (BFSI), and retail — which account for 48 percent of revenues, TCS posted CC growth of c.3.7% in Q2 FY19 after posting CC growth of c.4.1% in Q1 FY19.

In recent news, a California jury cleared TCS of a class action lawsuit that claimed it discriminated against American professionals in favour of staffing its US offices with Indian professionals.

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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First Published on Dec 13, 2018 11:51 am
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