As fundamentals will take time to turn positive, investors should stick to quality largecaps rather than midcaps or smallcaps.
The market has picked up momentum in the last more than a month, with the benchmark indices gaining more than 37 percent from their March lows, largely driven by liquidity as the economy reopens in a staggered manner.
Globally, central banks have pumped in trillions of dollars to get their economies back on track. The United States alone has come out with a $2.5-trillion package and looking at another $3 trillion relief.
Banking and financials, often called the backbone of the economy, have led the rally, surging more than 27 percent from March lows.
Experts say the street will read the result of first unlock and then decide the trend, as the market has already rallied 14 percent on hope alone with fundamentals still weak.
"With the unlock 1.0 due to be reviewed at the end of this month, we expect further easing in a majority of states and especially in Mumbai, Maharashtra. The government is clearly moving towards local-area containment strategies as well as home management for mild cases. Hence, our base case is that the economy shall complete reopening by the end of Q2FY2020," Dolat Capital said.
While the momentum may continue in the near term, fundamentals continue to be weak and valuations seem to be expensive at around 21x FY20 P/E, Motilal Oswal said ." Hence, going ahead, the brokerage believes, if the situation continues to constantly improve, the Nifty50 may reach 11,000 in a span of 2-3 months along with the support from the global liquidity."
The broader markets also traded in line with benchmarks. The Nifty Midcap index surged 35 percent and Smallcap index gained 41 percent. Fundamentals will take time to turn positive, investors should stick to quality largecaps rather than thinking of midcaps and smallcaps, say experts.
Moneycontrol has collated a list of largecaps that can return 11-51 percent:
Bharti Airtel: Buy | Target: Rs 660 | Return: 18 percent
Dolat Capital expects one more tariff increase of another 20-25 percent in the second half of FY21. "In our view, more buckets of price architecture with additional benefits for higher ARPU customers is likely to evolve thereafter. In addition to tariff increase, Infratel-Indus merger and potential stake sale in Infratel is likely in our view," the brokerage said.
"Bharti's stake in the merged entity would be around 37 percent (54 percent currently) worth around Rs 22,500 crore," it added. It will further strengthen the balancesheet. The brokerage has a "buy" rating on the stock, with target of Rs 660.
HCL Technologies: Buy | Target: Rs 630 | Return: 14.6 percent"HCL Technologies has recovered sharply from the lows in March’20 on positive news flow on WFH status (92 percent in Q4), better-than-expected earnings commentary and potential gains in cash flow generation profile (this will drive rerating). Current valuations of
12.7x on FY22E earnings are compelling and implies 8 percent on free cash flow yield in FY22E and thus maintain HCL Tech as our preferred pick amongst Tier I names with target of Rs 630," said Dolat Capital.
HDFC Bank: Buy | Target: Rs 1,300 | Return: 26.3 percent
HDFC Bank's strong earnings profile along with superior underwriting and high standard provisioning buffers should result in a limited risk to earnings, said Dolat Capital, which built-in return on assets (RoA) of 1.5 percent/1.8 percent for FY21/22.
"Consequently, reversion of valuation multiples to mean is likely to be fastest in the case of HDFC Bank. Across banks, we factor in full consumption of any excess standard asset provisions in FY21E, excluding which FY21E RoA would be lower by 0.2 percent for HDFC Bank," it added.
The brokerage has a "buy" recommendation on the stock with a SOTP-based TP of Rs 1,300.
ICICI Bank: Buy | Target: Rs 470 | Return: 33.8 percent
"Though we expect weak macro-economy to meaningfully affect financials for BFSI sector, large private banks like ICICI with lower asset side risks, stronger liability franchise and higher ability to raise capital are better placed versus others. Though weak recovery prospects and any residual pain from lower rated corporate book could pressurize profits for ICICI, its strong subsidiary profile, high provisioning buffers (0.7 percent of loans) and best-in-class liability franchise provide significant valuation comfort," said Dolat Capital.
"Across banks, we factor in full consumption of any excess standard asset provisions in FY21, excluding which FY21 RoA would be lower by 0.3 percent for ICICI. We currently have a buy recommendation on the stock and value the standalone bank at 1.7x FY22E ABV, with a SOTP-based target of Rs 470 implying 2.4x of FY22 P/ABV," it added.
NTPC: Buy | Target: Rs 145 | Return: 50.7 percent
NTPC is ring-fenced with most of its capacity under regulated tariffs, which allows it cost pass through, while current regulated return on equity (RoEs) of 15.5 percent will be maintained until FY24. While it has a fuel supply agreement with Coal India, incremental coal from its mines should address shortages, Dolat Capital said.
"NTPC has faced short-term issues in the recent quarter in terms of deferment of SEB payments as well as a one-time rebate that they have given at the behest of the government. Its receivables position from State Electricity Boards (SEBs) should incrementally improve following the line of credit given to SEBs through PFC/REC," it added.
"There is significant valuation comfort at a P/BV of 0.8x FY22 and a 6.5 percent dividend yield; valuing the stock at 1.2xFY21EP/BV gives us a target of Rs 145," said the brokerage.
UPL: Buy | Target: Rs 620 | Return: 40.1 percent
Dolat Capital likes UPL's geographic diversification and said a volume growth of 29 percent in Q4FY20 is impressive, considering a challenging market scenario. "UPL is likely to enjoy low cost of borrowing due to diverse currency borrowing profile (44 percent: USD, 40 percent: EUR, 10 percent JPY)," said the brokerage which believes UPL will continue to grow above industry average with a strong product portfolio after Arysta’s acquisition.
"UPL's long term prospects of growth are intact with a strong post patent & proprietary pipeline. We value UPL at 8.5x EV/EBITDA and have a target price of Rs 620 per share," said the brokerage.
ITC: Buy | Target: Rs 225 | Return: 11.2 percent
Though pre-lockdown cigarette volume growth was improving, during lockdown it is expected to remain under strain due to supply constraints. "We expect mid-to-high single-digit volume growth in cigarette over FY20-22 (11 percent volume decline in past three years). Furthermore, a decrease in the contribution of legal cigarettes in overall trade is most likely to force the government to go slow on excise hikes in the ensuing years," said Dolat Capital.
Stable pricing and expected improvement in the economy, a consumer shift from bidis to cigarettes is most likely in the long run. "Moreover, the packaged food business, which accounts for 76 percent of ITC's non-cigarette FMCG business is expected to drive growth," it added.
The brokerage believes that the pace of duty increase would moderate, helping the volume growth to improve. "With the improvement in ITC's cigarette volumes, we expect positive sentiments to come back. The EBIT margin in the segment is likely to remain high, with moderate price hikes. At CMP of Rs 184, the stock trades at 13x FY21E earnings – attractive compared to other consumer companies (valuation 35-50x). Buy on dips."
Larsen & Toubro: Buy | Target: Rs 1,093 | Return: 15.9 percent
"L&T is India's largest EPC company with a strong presence across various verticals including infra, hydrocarbon and services segment. The company has a strong order backlog of around Rs 3 lakh crore," Angel Broking said. The majority of the orders are from the Centre, state government and PSU, where risk of cancellation is low. The stock is trading at a significant discount to historical average valuations and offers favorable risk-reward from current levels given global tailwinds, it said.
Axis Bank: Buy | Target: Rs 500 | Return: 18.7 percent
Axis Bank is trading (core banking business – 1.2x FY22ABV) at a significant discount to historical average valuations and offers favourable risk reward from current levels given global tailwinds, Angel Broking said.
Avenue Supermarts: Buy | Target: Rs 2,735 | Return: 18.6 percent
Avenue Supermarts owns and operates the supermarket chain 'D-Mart' which offers a wide range of fast-moving consumer (food and non-food) products, general merchandise and apparel. Angel Broking expects D-Mart to report consolidated revenue/PAT CAGR of 18 percent/26 percent, respectively over FY2019-22.Disclaimer: The views and investment tips expressed by experts 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.