COVID-19 has shaken the market worldwide. Investor sentiment is unusually low as experts fear the economic impact of the lockdown and widespread coronavirus.
Global brokerage JP Morgan expects about 60 percent of the GDP to be significantly hit by the lockdown.
Deutsche Bank thinks India's GDP growth will collapse in April-June and maybe a negative print of 5 percent year-on-year (YoY) or even more. It said there is a possibility that the July-September real GDP will also be negative.
The gains of the last two consecutive sessions have given bulls some support. However, experts say the market will see a sustained rise only if the cases of coronavirus show a continuous decline going forward.
"The rally was driven by expectations of stimulus measures to support the respective economies and not because of any change in ground realities. A much more stable rally can happen only after any news regarding the virus containment comes in," said Vinod Nair, Head of Research at Geojit Financial Services.
During times of uncertainty, have a prudent approach in stock picking. A well-calculated move will maximise the chances of gains and minimise the risk if one has a long-term approach, say experts.
Brokerage firm Kotak Securities suggests following 10 large-cap stocks for accumulation. Take a look:
ICICI Bank | Buy
As per Kotak, the company has seen no major signs of stress in any other retail segment. Corporate slippages of Rs 2,470 crore (nearly 4.2 percent of corporate loans) were mainly from outside the ‘BB and below’ book (nearly 70 percent of corporate slippages) and were largely driven by stockbroking account (fully provided during the quarter) and a South India-based industrial account.
The estimates of Kotak shows ICICI Bank's net NPL may reduce to about 1 percent by FY22E with slippages of nearly 1.7 percent in FY21-22E. Loan growth may improve to nearly 17 percent by FY21-22E while it expects CASA CAGR of nearly 13 percent over FY19-22E and stable CASA ratio of nearly 46 percent. Calculated NIM may stand at nearly 3.6 percent over FY20-22E.
Kotak believes ICICI bank's RoE is well-positioned for nearly 15 percent or even more in medium term. They have a positive value and value the bank at Rs 615 implying 2.4 times book and 15 times December FY21 EPS.
Bajaj Finserv | Add
With increasing share of protection business (6 percent of APE in FY2019) and non-par savings (18 percent of individual APE in Q3FY20, up from 4 percent in Q2FY19), VNB margins will likely expand, said Kotak.
Kotak has retained its fair value of Rs 10,200 for Bajaj Finserv. Bajaj Finance, valued at its RGM-based fair value, adds 74 percent to the SoTP. It values the general insurance business at 4.5 times book, similar to the valuation multiple assigned to ICICI Lombard. It values Bajaj Life at 1.5 times EV, significantly lower than its peers, as it expects its operating RoEV to remain at 11-12 times.
HDFC | Buy
Kotak believes HDFC's gross stage-3 loans will remain stable around about 1.5 percent over FY21-22E (up from 1.4 percent in FY19) with 49 percent coverage, 17 percent CAGR in AUM over FY21-22E, core NIM to increase to 2.6 percent in FY22E from about 2.4 percent in FY20E.
Moreover, Kotak expects HDFC to deliver 17 percent core earnings CAGR in FY20-22E on the back of 11 percent YoY growth in FY20E. At its fair value of Rs 2,680, HDFC will trade at 2.6 times core book December 2021E (juxtaposed to medium-term RoE of 19-20 percent even as near-term RoE may be lower).
HDFC Life Insurance Company | Add
In Q3FY20, HDFC Life reported a 25 percent growth in VNB on the back of 19 percent APE growth and moderate VNB expansion to 24.7 percent from 23.4 percent in Q3FY19.
HDFC Life remains a highly profitable life insurance company with about 20-21 percent operating RoEV and 20 percent EVOP CAGR during FY2019-22E; this is supported by VNB margins of nearly 26 percent.
Colgate Palmolive (India) | Add
Kotak highlighted that selective price hikes and favorable RM environment cushioned the impact of continued aggression on promotions.
"It is encouraging to note that Colgate has continued its brand investment in Q3FY120 where several of its peers pulled back sharply. Ad spend effectiveness remains low, however," Kotak said.
Lower revenue growth, as well as margin assumptions, drive a 6-7 percent cut in our FY20-22E EPS forecasts. "We keep the faith and retain 'add' even as the street may now prefer waiting for evidence," said Kotak.
ITC | Buy
National Calamity Contingent Duty (NCCD) hikes in the Budget, different for different stick lengths implies a portfolio level weighted-average tax/stick increase of around 10 percent, Kotak said.
"Weak 9-months FY20 numbers, NCCD hikes and ability to protect volumes in a poor macro backdrop prompt us to lower our volume assumptions and now bake in a 5 percent EBIT growth for the cigarette business in FY21E versus 9.7 percent earlier," said Kotak.
"Valuations are cheap, especially on a relative basis, but unlikely to act as a trigger. We remain buyers; fair Value revised to Rs 300 per share," Kotak said.
Titan Company | Add
Even assuming Titan’s addressable market is around 50-60 percent of the total jewellery market in India, Titan’s share of the addressable market is in the 10-12 percent range, Kotak said.
After Q3FY20 results the company had maintained its guidance of 11-13 percent revenue growth for Q4FY20.
Kotak has now lowered the cost of equity assumption in its DCF by 50 bps to 10.75 percent and also taken up terminal growth rate assumption by 50 bps to 5.75 percent. "These two changes, plus rollover, drive an increase in fair value estimate to Rs 1,475," said Kotak.
Cipla | Buy
Kotak highlighted that Cipla’s Goa facility had received a warning letter but its earnings impact is limited given limited new product dependence on Goa.
The impact of the warning letter is not material to FY21 earnings, considering that single source products from the facility account for less than 10 percent of US revenues (nearly 20 percent of US in total) and limited (single digit) approvals linked to the facility over the next 12-18 months.
Cipla management has been highlighting its renewed commitment to the domestic business, which accounts for more than 50 percent of EBITDA. Kotak believes the domestic business should grow in line or slightly higher than the market over the next few years.
Moreover, Kotak sees a strong US generics build-out over FY21-23, given Q4CY20 launch for ProVentil and Q4CY20 partner launch for CiproDex.
Kotak expects the momentum to continue in FY22/23 with potential launches of generic Advair (March 2019 filing) and Abraxane.
Reliance Industries (RIL) | Buy
RIL turned FCF positive for the first time since Q3FY13, with capex declining by 27 percent QoQ to Rs 14.020 crore.
Kotak reiterates a 'buy' notwithstanding a bleak downstream outlook, as the company may benefit meaningfully from plausible consolidation in telecom, the culmination of key transactions, rising FCF trajectory and sustained growth in the retail segment.
Kotak believes higher crude discounts, weaker rupee and potential hike in ARPUs may mitigate lower downstream margins.
Bharti Airtel | Buy
"Bharti is extremely well positioned to benefit from whatever direction industry dynamics take from hereon, in our view. From an execution standpoint, there is ample evidence to suggest that the company is now operating in top gear," said Kotak.
"Sharp run up in the past year or so notwithstanding, Bharti remains a solid multi-year compounding play as long as the company and R-Jio resist the alpha-male tendencies in the forthcoming spectrum auctions," Kotak added.
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