The recent rally has lifted the market to supreme valuation, which limits the headroom for key indices to perform well in the short-term, Vinod Nair of Geojit Financial Services says.
The market has had a spectacular run in the last three months, especially after the government announced several measures, including a cut in the corporate tax rate, to boost a slowing economy.
Benchmark indices rallied more than 9 percent and the BSE Small-Midcap indices gained 7-11 percent in the last three months. Frontline indices jumped 13 percent since September 20, when the corporate tax rate cut was announced.
The market has seen some correction after the Nifty hit a record high of 12,132 towards the end of November.
India's economy grew at 4.5 percent in the July-September quarter (lower from 5 percent in Q1FY20) following which experts lowered their growth forecast for the full year to below 5 percent, causing selling pressure in the market.
In its policy meeting on December 5, the Reserve Bank of India lowered its FY20 growth forecast to 5 percent from 6.1 percent, as various high-frequency indicators pointed to weak domestic and external demand conditions.
Retails sales have failed to pick up after the festival season, as was seen in November numbers.
"After three continuous months of rally, some consolidation would be normally expected. If the government is able to do some large divestment, the market would take that very positively," Vineeta Sharma, Head of Research, Narnolia Financial Advisors, told Moneycontrol.
Vinod Nair, Head of Research at Geojit Financial Services, said the recent rally lifted the market to supreme valuation, which will limit the headroom for key indices to perform well in the short term.
According to him, the premium valuation is unlikely to stay for a long time as the economy improves and risk-taking ability enlarges.
Markets will broadly be influenced by macro events rather than stock-specific news, experts say.
"Expectations and hopes would be pinned on events such as Trump impeachment, Union Budget, trade war, progress of IBC post the Supreme Court judgment and the recent reforms announced by the government to kickstart the economy. Overall, markets will remain subdued with a downward bias," Umesh Mehta, Head of Research, Samco Securities, said.
Vinod Nair feels the market will shift its focus on value, cyclical and quality mid-small caps which are likely to outperform in the next two to three years.
"The market will have to handle transitory pain of shifting allocation from highly valued stocks which may take some time and add volatility in the short-term. We feel that rising foreign inflows and confidence that the government will address the fiscal gaps through divestment will maintain the buoyancy of the market in the long term. As a result, we may have a cautious momentum in main indices in the month of December," he said.
Analysts listed out 8 stocks that can give strong returns in next 12-18 months:
Vineeta Sharma, Head of Research, Narnolia Financial Advisors
Kotak Mahindra Bank | Target: Rs 1,946 | Return: 18 percent
Kotak Bank has been able to maintain healthy loan growth and has been able to manage delinquency despite the slowdown faced by the industry. Loan growth is expected to remain in the mid-teen supported by better NII and NIM.
Liability franchises continue to be the best in the industry with 52 percent CASA ratio. Strong liability franchise with the diversified product profile place the Kotak Bank to cash the growth opportunity in India. The 18-month price target is Rs 1,946.
Can Fin Homes | Target: Rs 495 | Return: 17 percent
Can Fin is well-placed given the demand in the lower ticket size segment and growth coming in by improvement in the Karnataka region. The decline in cost is expected to help the margin to expand.
Due to pressure on the economy and the slowdown in the SME segment, industry - assets quality remained under stress, especially in the self-employed segment. But, the asset quality for Can Fin remains high as no major impact due to pressure in the real estate segment as Can Fin's book is mainly towards the retail segment. The 18-month price target is Rs 495 per share.
Vinod Nair, Head of Research at Geojit Financial Services
LIC Housing Finance | Target: Rs 495 | Return: 10 percent
LIC Housing Finance's Q2FY20 net interest income (NII) rose 15.8 percent/5.1 percent YoY/QoQ backed by around 14.5 percent/2.7 percent YoY/QoQ growth in loans & advances, while net interest margin improved to 2.42 percent. Also, the management expects to maintain loan growth in the range of 14-15 percent for FY20.
The company expects the cost of funds to reduce as NCDs worth Rs 17,500 crore, with higher borrowing costs, will be refinanced in the second half of FY20 by NCDs at a lower rate.
Despite deterioration in the asset quality over the last few quarters, we remain positive on LIC Housing Finance, given the company's extensive distribution network, strong brand value and reducing competition from NBFCs in housing finance.
SBI Life Insurance | Target: Rs 1,060 | Return: 10 percent
In Q2FY20, gross written premium grew 33.3 percent YoY driven by new business and renewal premiums which grew 33.8 percent and 32.8 percent YoY, respectively. For the first half of FY20, new business margin, calculated as the value of new business (VONB), which measures the profitability of new business underwritten during the period, grew 33 percent YoY to Rs 9,400 crore.
In first half of FY20, SBI Life's market share increased 200bps YoY to 21.8 percent in terms of NBP (new business premium) among the private insurers. AUM increased 22.7 percent YoY to Rs 1,54,760 crore. Given the continued strong performance of the company, we increase the target price to Rs 1,060 based on 3.2 xs FY21E Embedded value (EV) and maintain buy rating on the stock.
KEC International | Target: Rs 330 | Return: 22 percent
Q2FY20 revenue grew by 17 percent YoY to Rs 2,809 crore, which is better than expected, owing to healthy pick-up in T&D revenue (21 percent YoY to Rs 1,621 crore), SAE tower business (95 percent YoY to Rs 356 crore) & railway (35 percent YoY to Rs 568 crore). Execution of three large international EPC orders supported SAE tower business to outperform.
We expect railway and SAE business to continue to outperform due to improved traction in order inflow and approvals for EPC projects. International T&D opportunity is picking up from SAARC and the Middle East region which could mitigate the muted trend in domestic T&D orders. Additionally, continued traction in railway, solar, civil & cable business will drive the top line. We value KEC at a P/E of 12 xs on FY21E EPS and maintain buy rating.
Ait Mishap, VP Research, Relegate Broking
Marico | Target: Rs 451 | Return: 29 percent
We believe Marico has the potential to post double-digit revenue growth driven by a) product mix and innovating new products b) improvement in demand c) expansion in international markets d) maintaining leadership in key brands and e) gaining market share in core categories over the next 2-3 years. Hence, we recommend a buy on the stock, with a target price of Rs 451.
Subros | Target: Rs 321 | Return: 41 percent
We expect the passenger- vehicle industry volumes to recover gradually. Further, we believe that Suborns is well placed to outperform the industry given its strong relationship with Marti and Denso, increased share of businesses from OEMs, increased revenue share from non-PV business and adequate capacity in place. We recommend a buy on the stock, with a target price of Rs 321.
Havells India | Target: Rs 795 | Return: 19 percent
Hovels is strengthening its leadership by constantly expanding its product portfolio, increasing market reach and brand positioning. We believe it is best placed to leverage the opportunities in the FMEG space, given the strong market share and distribution network.
It also has a strong balance sheet (low debt, low working capital), robust return ratios and healthy cash flows. We recommend a buy, with a target price of Rs 795.Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.