HCL Technologies, Escorts, UPL can be growth stocks for the next 1-2 years

A) Well, in the short-term the outlook is looking positive whereas, in the medium-term, the intrinsic value of equity as an investment asset is under evolution.

Factors which will define the trend in the long-term are global trade war situation, the pace of interest rate hike in the global market and slowdown in the world economy.

A) Well, looking at the short-term basis, the market has cut the earnings growth of FY19 from 20 percent to 15 percent. In spite, the actual growth of Nifty EPS in H1FY19 has been around 5 percent with further risk of a downgrade in Q3 and Q4 given the headwinds in the domestic and global economy.

At the same time, the market performance has been muted due to which valuation has also got rationalized. The one-year forward P/E has reduced from 19x to 16.5x.

Given the fall in quality of earnings during the year, results are unlikely to surprise the market positively, but given correction in valuation, the extent of impact may be limited in the short-term.

A) Given the thin structure of the market with lack of liquidity and skewed movement, forecasting the broad market with the real world has become difficult and inaccurate.

Currently, we have a one-year forward base-target of 10,250 for Nifty50, which was reduced from 10,400 in Q1FY19.

This is based on 12.5 percent earnings growth in FY19 and 15 percent earnings growth in FY20, which is lower than the market forecast of 15 percent and 20 percent respectively.

A) Here is a list of three stocks which are a good buy for the next 1-2 years:

Escorts Ltd:

We believe that the long-term fundamentals of the tractor industry is robust. Though in the near-term the pace of central and the state government’s policy may slow down due to elections and fiscal shortage.

But, we expect the status-quo on the government's fiscal discipline in the long-term and 25 percent earnings CAGR over FY18-20E, inducing confidence in the stock.

HCL Technologies Ltd:

We believe the healthy outlook for IMS, strong deal signings and growth momentum in mode 2 and 3 are expected to be the drivers for the long-term growth.

In addition, HCL has a lower onsite risk as 65 percent of its workforce in the US is locals. On a one-year forward basis, the stock is currently trading at 12.5x which is a 28 percent discount to IT bellwethers (Infosys & TCS).

UPL Ltd:

We expect EBITDA / PAT to grow at a strong CAGR of 24/31 percent over FY18-20E led by backward integration & shift in product mix towards biologics.

Continuous improvement in global market share of UPL will further facilitate the momentum. Further, the recent acquisition of Arysta life Science will create significant strategic value for UPL in the long run.

A) The chance of emerging markets (EMs) to do better will depend on the three factors; trade war situation and pace of interest rate hike in the global market and slowdown in the world economy.

Within which India will have an edge given lower crude prices and a positive outlook in the long-term story. The outcome of ongoing states and the upcoming national election will have a say in the short-term.

A) The Reserve Bank of India (RBI) is likely to keep the key policy rates unchanged at the monetary policy review meet next month.

Robust agriculture production, softening of vegetables and fruits prices and the government's new procurement policy will help in keeping the food inflation under check. Risk emanating from crude prices has eased, CPI inflation is expected to be under the control range.

The return of foreign investors in Indian markets, stability in the rupee, strengthening of industrial production and benign inflation have supported expectations of economic growth revival in the future.

However, bad assets and tightening of non-banking regulations might lead to disruptions in the short-term.

A) We have an optimistic outlook on major IT companies owing to continued momentum in core verticals and scale up in the ‘Digital’ business.

The industry is expected to deliver double-digit growth in H2FY19 buoyed by a recovery in BFSI (especially in North America) due to a structural improvement in demand and strong order book.

On a 1-year forward basis, the Nifty IT index is trading at 15x which we expected to be reasonable compared to its 3-year historical average.

Pharma sector also looks positive given improving compliance practices in the industry and stability in price erosion in the US. In general, we are hopeful to see current earnings momentum to continue in the second half of FY19.

However, on a 1-year forward basis, the Nifty Pharma is trading at 22x which is indicative of fair valuation and H2FY19 might witness some negative sentiments if the rupee appreciates further.

We can expect further consolidation in rupee owing to crude market situation and positive inflows from FIIs.

A) Yes, we believe that large-caps provide a better chance of investment in the long-term given a healthier risk-reward ratio. Whereas mid and small caps have a higher risk of a downgrade in earnings and valuation in the future.

A) Certainty and stability in business will be the key for the market, hence sectors which can outperform better are FMCG and consumption oriented, IT and possibly pharma too, assuming that the worst is over in terms of pricing issues in the US market.

At the same time, we also feel that export-oriented stocks and sectors like chemicals and auto ancillaries also will do well. The sectors which are likely to be under pressure are ones with a lack of financial stability such as financials, NBFCs, and infrastructure given the current situation.