We would suggest investors to have a look at Pharma MNCs and Private Insurance Companies at the current moment.
The past week witnessed a lot of action on the political front and change in RBI chief. BJP was voted out of power in Chhattisgarh, Rajasthan and Madhya Pradesh where a tight battle saw the Congress manage to emerge victorious with the support of allies. However, in Mizoram – MNF outperformed both Congress and BJP. Telangana too was dominated by TRS.
To our surprise, domestic bourses have not been affected much after the assembly election results. On a weekly basis, Sensex gained 0.81 percent while NSE's Nifty added 1 percent.
On the other hand, the new RBI chief – Shaktikanda Das was appointed. Strong IIP and better WPI and CPI lent some support to the market.
India's WPI inflation, which is calculated on wholesale prices, fell to 4.64 percent in November 2018, from 5.28 percent in October on lower power and fuel inflation and food deflation.
However, November WPI core inflation was at 4.8 percent against 5.1 percent, MoM. On a weekly basis, the rupee depreciated 1.53 percent (Rs 1.09) against the dollar as it ended at 71.89 on December 14 against December 07, closing of 70.80 against the dollar.
With the state election results and uncertainty at RBI being over, the market would now track global cues. We believe Q2FY19 earnings season has been a mixed bag but Q3FY19 could be much better. Event-wise, the upcoming FOMC meeting on December 20 has become the most important meeting in a long while.
Domestically, with CPI inflation hitting 17th-month low, the new RBI Governor, may take interest in cutting interest rates to boost market sentiments.
We do expect volatility as the Central Government may resort to populist measures to gain back popularity amongst the rural community which may be negative for the economy in the long term.
With crucial assembly elections results out, the question now comes to our mind as to which party manages to win the General Election. It may be difficult for both major parties BJP and Congress to get a majority. Street participants would not prefer a coalition government as decision-making and execution becomes difficult in coalition regime for obvious reasons.
The strategy at present should be to invest in a phased manner only in companies which are not connected to any political party and have a robust business model backed by quality management especially on the corporate governance front. We would suggest investors have a look at Pharma MNCs and Private Insurance companies at present.
Security and Intelligence Services (SISL) | Target: Rs 995 | Upside: 30 percent
Established in 1974, SISL, a New Delhi-based company, is one of the largest private manpower security solution providers in India and Australia. The company serves a diverse range of renowned clients across all sectors. The company offers services like electronic systems surveillance, security consulting and pre-employment verification, facility management, and cash/bullion logistics
Today, the company has a dominant presence across three attractive business services segments - Security, Cash Logistics and Facility Management.
We believe the company is a proxy for the India consumption story. Security service markets typically growing at 1-1.5x of GDP in developed and at 2x-3x of GDP in developing markets. Low per capita spend on security services in India gives significant headroom for sustainable future growth.
We recommend a buy with an upside of 30 percent for investors with a horizon of 12 months. At CMP of Rs. 765, at a P/E of 34x on trailing 12 months EPS, the stock may look expensive but it is a structural strong story and we believe it is enjoying scarcity premium. Investors who have patience and ready to hold for 3 to 5 years should gradually accumulate this stock in a phased manner on declines.
ICICI Prudential Life Insurance Company | Target: Rs 403 | Upside: 30 percent
The company’s performance in HIFY19 was bit subdued. To elaborate, PAT witnessed a fall of 30 percent on YoY basis owing to an increase in operating expenses and lower investment income.
We were encouraged by the fact that there was strong growth of 77 percent on YoY basis in its protection annualised premium equivalent (APE - a measure of ascertaining business sales in the life insurance industry).
Persistency or the quality of renewals across all the different brackets saw an improvement. The 13th month persistency stood at 85.2 percent (by premium) as on H1FY19 as compared to 85.7 percent a year ago.
In terms of valuation, the company is well placed against its peers SBI Life Insurance and HDFC Standard Life as it is trading at a discount in terms of Market Capitalisation/Embedded Value. ICICI Prudential's stock is currently trading at Market Cap/EV of 2.3 times, which is at a significant discount to HDFC Life’s (Market Cap/EV of 4.3 times), despite RoEV improving from 16.5 percent in FY17 to 22.7 percent in FY18 which is highest in the sector.
Housing Development Finance Corporation (HDFC) | Target: Rs. 2,100 | Upside: 10 percent
HDFC Ltd. is India's leading mortgage lender and a well-established financial conglomerate. We believe HDFC is the best play in the Housing Finance space. The company has garnered around 16 percent market share. The recent mayhem in NBFCs led by IL&FS crisis has pushed back several HFCs but HDFC has been rock solid. We believe the NBFC crisis will augur well for a company like Housing Development Finance Corporation due to its ability to manage liquidity well.
HDFC in line with its vision for providing affordable housing to all has been partnering with the government wholeheartedly to take the scheme, 'Pradhan Mantri Awas Yojana' to the real beneficiaries i.e. EWS, LIG and MIG category. In Q2FY19, HDFC approved 37% of home loans in volume terms and 18% in value terms to customers from the EWS and LIG segment.
HDFC witnessed 17% growth in the overall loan book on an Assets Under Management (AUM) basis as on Sep. 2018.
The company is expected to grow at 16 percent compounded annual growth rate (CAGR) over the medium-term. We can expect an upside of 10 percent from CMP.Disclaimer: The author is Vice President – Equity Research, Ajcon Global. 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.