Price growth in Nifty will mostly come through earnings growth while valuation multiple will see continued contraction, said Vineeta Sharma of Narnolia Financial Advisors
Narnolia Financial Advisors
During samvat 2074, financial markets in India went through major changes in terms of valuations, liquidity and sentiment. Due to the tightening cycle in the US, markets in India witnessed record selling by foreign investors both in debt and equity market. Also, commodities have seen rebounded with crude trading above $70/bbl from $50 a year ago. These moves have resulted in rupee falling from levels of 65 per dollar to 73 per dollar.
Nifty that was trading at 22.2 times forward earnings is now trading at 20 times. More importantly, mid and small-cap indices that were trading at historic high valuations have seen significant correction over last one year.
Going forward, we believe Indian economy has undergone tremendous structural change with reforms like GST and IBC. Also, we are on the cusp of earnings revival for Indian corporate. Profit of listed Indian companies as a percentage of GDP is at lows.
We have seen close to 20 percent sales growth, particularly for large-cap space, but due to NPA provisioning and lately due to margin contraction, the sales growth is not getting reflected in terms of EPS growth. Over the last 5 years, Nifty EPS growth had been at 5 percent CAGR but price moved at 11 percent CAGR due to the valuation multiple expansions.
Going forward, we believe price growth in Nifty will mostly come through earnings growth while valuation multiple will see continued contraction. Our Nifty target for Samvat 2075 is 11,800 valuing it at 19 times FY20 EPS of Rs 621.
Here are 4 stock picks that could return 17-33% over one year:
Federal Bank | CMP: Rs 82.5 | Target: Rs 110 | Upside: 33%
Federal Bank has up fronted its loan book growth by an average of 26 percent in the last 2 years. Refraining itself from lending riskier large corporate loans in last few years, management is focused on better rated corporate, retail and SME portfolio.
A better rated corporate advances form 71 percent to the total corporate advances. Higher stressed loans have declined to 2 percent level from 3.4 percent in FY16.
SBI Life Insurance | CMP: Rs 563 | Target: Rs 700 | Upside: 24%
SBI Life is well placed to capitalise on India's low insurance penetration. It has strong distribution network with 1,13,045 agency network and support from around 22,000 branches of SBI.
VNB Growth and VNB margin have been improving on the back of change in its business composition in favour of protection business.
L&T | CMP: Rs 1,358 | Target: Rs 1,600 | Upside: 18%
Larsen and Toubro plans to double its revenue to Rs 2,00,000 crore by FY21 and improve margin to 11.6 percent along with reduction in working capital to 18 percent by FY21.
The company also plans to divest the non-core businesses and concentrate on improving the return ratios going forward.
Bajaj Auto | CMP: Rs 2,657 | Target: Rs 3,120 | Upside: 17%
Bajaj Auto is the largest premium segment motorcycle manufacturer in India. About 65 percent of the company’s product portfolio commands above 20 percent margin.
Going forward, we expect volumes to be driven by management's robust promotional activities, continued aggressive pricing strategy in entry and premium segment motorcycles.
Disclaimer: The author is a Head of Research at Narnolia Financial Advisors. 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.Analyst Disclosure: The stocks recommended are based on our analysis which is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. Analyst (s) does/do not have any personal holding in the stocks discussed above but may have been recommended to clients in the past.