As most brokerages said the economic recovery is likely in 2020 given the NPA resolution and several government measures including sharp cut in corporate tax rate, Yes Securities also looks agreed.
The market seems to be on a strong footing now as the Nifty50 surpassed its earlier record high on January 10 and touched a new milestone of 12,300 backed by hopes of sops in Budget 2020, and favourable global cues.
The broader market has consistently and gradually been participating in the run since the announcement of the government measures in September 2019.
Most brokerages said the rally would spread to midcaps and smallcaps in 2020, though it will be unlike the scenario in 2017 when the BSE Midcap and Smallcap indices had surged 50-60 percent.
"Mid-to-late 2020 or early 2021 will mark a fresh secular journey for Indian equities. Many headwinds should recede in 12-15 months," said Yes Securities which expects the Nifty50 to hit 12,915-13,000 in 2020, with rising possibility of a sudden and steep fall.
In case of fall, the index may take support at 11,000, the brokerage feels.
"A gradual recovery in economic growth, so also an improved access to credit in the months to come, a pickup in bad asset resolution following the Essar Steel settlement, a bumper Rabi crop and swift government measures pertaining to ease of doing business, structural reforms and less government in business, would take shape," said Yes Securities.
The brokerage expects the RBI to act more than government going forward.
"While scope for demand-side stimulus through fiscal policy is limited, measures from RBI to support growth, given the circumstances, cannot be ruled out. RBI has already engaged in 'operation twist', to buy long-dated paper, while selling short term securities, an exercise which has not been rupee neutral totally, so far," it said.
"Further, once existing rate cuts are fully transitioned and with, holding of rates at low-to-mid levels, as long as core inflation is under control, would have a sizeable positive rub-off, it added.
The GDP growth in September quarter fell to 4.5 percent, the more than six-and-half-year low and is expected to fall further to around 4 percent in the December quarter, which could be the bottom, feel most brokerages.
The Reserve Bank of India cut repo rate by 135 bps through 2019, but kept the same unchanged in December meeting as inflation is likely to be higher in coming months.
Apart from gradual economic recovery and RBI support, Yes Securities said other positives for equities are an attractive earnings yield, lackluster alternate asset classes, benign long-term oil prices and a supportive global risk-on trade.Hence, the brokerage presented an updated model portfolio in January with six high-conviction ideas for 2020 which are Ashok Leyland, Polycab India, KNR Constructions, Birla Corp, Cochin Shipyard and Repco Home
Ashok Leyland: Buy | Target: Rs 100 | Return: 24.5 percent
The brokerage expects a cyclical recovery in medium/heavy commercial vehicles (MHCV) starting 2HFY21. "Ashok Leyland (AL) should be an early cycle beneficiary as the only pure-play CV OEM in India."
It forecasts FY20-22E EBITDA/EPS CAGR of 26/38 percent.
"Current valuations are close to peak (1-yr forward EV/EBITDA of 13.5x on downcycle earnings). History indicates that Ashok Leyland stock appreciates 30-200 percent in a 12-18-month window after a cyclical peak in multiples (as earnings recover)," it said.
Polycab India: Buy | Target: Rs 1,094 | Return: 13.9 percent
Yes Securities feels introduction of new products and rising exports to drive double digit revenue growth in cables and wires, with leveraging its brand, distribution network, customer base, and manufacturing capabilities.
It expects FMEG revenues to double over FY19-22E and would account for 11.4 percent of revenues. "Earnings CAGR of 21.8 percent expected over FY21-22 on the back of 13.3 percent revenue CAGR, stable margins and lower interest costs."
Even post an annual capex of Rs 250 crore, total free cash flow generation is expected at Rs 1,150 crore over the next three years, it said, adding strong earnings growth, robust balance sheet (Rs 670 crore net cash), healthy return ratios and increasing share of B2C business would reduce the valuation gap between the diversified FMEG players and Polycab.
Cochin Shipyard: Buy | Target: Rs 545 | Return: 36 percent
The brokerage expects EBITDA/PAT CAGR of 16/13/16 percent over FY19-22.
Cochin Shipyard (CSL) has order book of Rs 16,100 crore (around 5x TTM sales) owing to phase-III contract of IAC & ASW SWC project. "It gives high execution growth visibility & hence we expect Shipbuilding (SB) to deliver healthy 20 percent CAGR over FY19-22," said the brokerage.
Shipbuilding order pipeline of over Rs 10,000 crore comprising next-gen missile vessels, solar research vessels & costal shipping vessels which are likely to be finalized by FY21, it said, adding CSL is targeting to increase its ship repairing (SR) market share through new initiatives like repairs of oil rigs and merchant vessels at Mumbai Port Trust, Andaman & Nicobar admin, Kolkata port trust and Hooghly Cochin Shipyard JV.
Unlike other shipyard companies, CSL has been profitable, as it has delivered a consistent performance with 17 percent PAT CAGR over FY12?19, which is commendable as the shipping industry witnessed multiple headwinds during same period, Yes Securities said.
Birla Corporation: Buy | Target: Rs 990 | Return: 64 percent
Birla Corp enjoys a strong capacity share of around 14 percent in Central India, a market with favorable demand-supply scenario. "Further, the company has around 85 percent volume exposure to North and Central markets where we expect pricing scenario to remain favorable over the long term," said the brokerage.
Huge land bank (around worth Rs 825 crore) and limestone reserves post acquisition of Reliance Cement provides growth visibility over the longer horizon and will ensure incremental capacity addition at lower cost, relative to peers, it added.
BCORP has lined up capacity addition plan of around 5.2 MTPA in UP and Maharashtra by FY21 which will translate into growth of around 33 percent in capacity to around 20.5 MTPA, making it the fifth largest cement group in India, it said.
KNR Constructions: Buy | Target: Rs 295 | Return: 16 percent
KNR has a robust order book (3.3x FY19 revenues) across roads and irrigation segment.
"Execution set to pick up with expected receipts of appointed dates for pending HAM projects over next few months. We expect topline CAGR of 18 percent during (FY19-21)," Yes Securities said.
"KNR commands superior operating margins (around 17 percent). Margin is likely to be at around 15-17 percent levels going forward," it added.
Recent sale of BOT assets will improve balance sheet position and allow company to bid for more projects, it said, adding with government’ focus on water segment, KNRs presence in the irrigation space would provide strong business opportunity in the near to medium term.
Comfortable balance sheet position allows KNR to capitalize on the industry opportunity, Yes Securities said, adding KNR is well placed to participate in NHAI bidding that's likely to pickup from Q4FY20.
Repco Home Finance: Buy | Target: Rs 402 | Return: 21.3 percent
"We note that most investor concerns over HFCs/NBFCs don't apply to Repco. Comforting peculiarities of the company being healthy ALM profile, moderate growth since FY16, zero exposure to wholesale funding, substantial liquidity buffer, falling incremental funding cost, unimpaired credit rating, robust capital position and demonstrated high recoverability of NPLs," said the brokerage.
Sharp divergence exists in Repco’s perception amongst the debt providers and equity investors, it added.
Yes Securities feels the company has contained asset quality risks by tightening underwriting process, enhancing focus on salaried and documented income customers, infusing granularity in disbursements, augmenting collection capability with sharpened focus on early defaults and fine-tuning of the recovery process. "Repco has thus conservatively allocated capital over the past couple of years."
Meanwhile, the brokerage added SBI Life, HPCL and Mahanagar Gas into its model portfolio, but excluded HUL, Asian Paints, Marico, Ipca Labs and PNC Infratech in January. It has increased weightage of Birla Corporation by 1 percent.
It has overweight call on financials (HDFC Bank, ICICI Bank, Kotak Mahindra Bank and SBI), capital goods & infra (L&T), diversified (Reliance Industries), insurance (SBI Life), and oil & gas and utilities (Mahanagar Gas and HPCL) along with above six high conviction ideas.
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