Going forward though, market experts see earnings as well as monsoon to be the next big triggers.
Benchmark indices have had a subdued year so far, returning 3-5 percent on a year-to-date basis. Going forward though, market experts see earnings along with the monsoon to be the next big triggers.
“With medium to long term perspective, markets will be stock specific and will reward those companies which have sustainable earnings with robust business outlook and quality management,” Siddharth Sedani, Head & Vice President - Equity Advisory, Anand Rathi Shares and Stock Brokers told Moneycontrol’s Uttaresh Venkateshwaran. Edited excerpts:
Q. What is your review of Q4 earnings? Which sectors have stood out and which sectors have been the pain points?
A. Q4 earnings were broadly a mixed bag and as per expectations. Good earnings growth was seen in private banking and financial services, auto and infrastructure. Pain sectors remain PSU banks and telecom.
Q. Could you provide an outlook on the market from a mid- to long-term perspective?
A. Monsoons and Q1FY19 results will be the next triggers for markets to take direction forward. With medium to long-term perspective, markets will be stock specific and will reward those companies which have sustainable earnings with robust business outlook and quality management.
Q. Could you give us a view on the downside in the midcap segment? Stocks in this segment are trading lower. Is there more downside expected this year?
A. Due to lower-than-expected earnings in Midcaps, where prices were running ahead of fundamentals, there has been a correction. New Additional Surveillance Mechanism (ASM) by exchanges and SEBI added fuel to fire. I believe monsoons and Q1FY19 results will be next triggers for markets to take direction forward.
Q. Is there a view on abrupt exits by auditors? How should investors trade in such stocks?
A. Reputed auditors resigning just days before announced result dates have raised questions about the transparency and reliability of the books of accounts and management integrity. Investors should stay away from companies which have corporate governance issues.
Q. With crude settling at around $75 levels, what is the level you foresee it trading for the rest of the year? How much of a risk can be anticipated from crude?
A. It is very difficult to predict future crude prices, high prices will hit profit margins and create resistance in bottom line growth. Companies which are able to command higher pricing power or pass on the costs – will have an advantage over others.
Q. Are there any top 5 or 10 stocks that you are betting on from a short-, mid- and long-term perspective?
From medium term perspective, I like Cadila Healthcare and Persistent Systems, and from long-term perspective, I like Jubilant Life Sciences, Deepak Nitrite, Aditya Birla Fashion and Retail.
Cadila Healthcare | Rating: Buy | Target: Rs 489
The company expects 40-50 launches annually and is focusing on vaccines and biologics – which could be future growth drivers. It has strong ANDA pipeline in the US, with 144 filings awaiting approval of which 60+ are Para IV.
The company will launch high-margin key products such as gAsacol HD and gToprol in FY19. The firm has recently announced it is considering fund raising proposals of up to Rs 10,000 crore via QIP and up to Rs 5,000 crore via FCCBs. We expect 11% and 17% CAGRs over FY18-20 in revenue and earnings respectively, our target price is based on 21x FY20e EPS.
Persistent Systems | Rating: Buy | Target: Rs 960
Over the last two years, the company’s focus has been on digital, which has helped it build capabilities in key technology areas as it transforms to software-driven businesses.
With its cash balance now, of $175 million, it will be seeking more acquisitions to expand its geographical reach, mainly in non-US markets, and is not keen on acquiring legacy businesses.
Levers to improve margins expansion
1) Better business mix,
2) Incremental IP revenue.
3) Greater utilization ratio
4) Pricing (up 4.5% y/y onsite, 2.5% offshore in Q4)
5) Currency (up 2.5% in Q1 FY19 so far)
We value Persistent at 18x FY20EPS, leading to a `960 target.
Jubilant Life Sciences | Rating: Buy | Target: Rs 1,040
JLS has crafted a niche wherein it has built its presence in segments like nuclear medicine (radiopharma), contract manufacturing of sterile injectables and allergy immunotherapy - which have high entry barriers on account of manufacturing complexity.
Also being backward integrated for most solid dosage filings in the US, the same is sustainable and attractive too.
JLS has planned to invest about Rs 550 crore in capital expenditure in FY19. In addition, JLS plan to invest Rs 300 crore in R&D during the year, including Rs 150 crore in Product Development expenditure.
We maintain a buy on the stock, with a target of Rs 1,040, based on 11.7x FY20e EPS.
Aditya Birla Fashion and Retail | Rating: Buy | Target: Rs 186
We expect a revival in Madura Lifestyle. We believe the strong brand image, established distribution network and expanding reach would lead to ~8% revenue growth and ~14% EBITDA growth over FY18-20. A 120bp margin expansion in Madura is expected over FY18-20.
Pantaloons is on a growth trajectory: Vigorous store expansion and better same sales growth would drive growth for Pantaloons.
Management initiatives such as reducing store size and ramping up franchised stores resulted in a turnaround as the division reported an operating profit in FY18. We expect this improved profitability to continue. We estimate it to report a ~170bp margin expansion to 7.7% by FY20.
We have a buy coverage of Aditya Birla Fashion and Retail with a target price of 186 at an EV/EBITDA of 17x FY20e.
Deepak Nitrite | Rating: Buy | Target: Rs 346
The company’s new greenfield expansion plan at Dahej, Gujarat for manufacturing phenol (2,00,000 ton/year) and acetone (1,20,000 ton/year) should provide a significant increase in its top line and profitability.
The project is now well into its pre-commissioning activity and the company has set up a marketing team for customer outreach of the new products.
We reiterate our coverage on Deepak Nitrite Limited with a BUY rating and a target price of Rs 346 per share.Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.