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Last Updated : Dec 04, 2018 05:18 PM IST | Source: Moneycontrol.com

RBI policy, results of state polls to decide market trend; these 2 stocks could outperform

Investors can start looking for good companies that have a sustainable business model with good ethical management and a clear-cut strategy for the future, and are available at a cheap valuation

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Akash Jain

Ajcon Global

November was the best month for the domestic market over the last 4 months as foreign buying increased amid a strengthening of the rupee, and crude oil prices fell from their recent highs. The Sensex rose 5.1 percent during the month, marking its steepest monthly gain since July.

Overseas investors net bought $720 million worth of Indian stocks till November 28, after three months of net selling, according to data compiled by Bloomberg.

Domestic stocks and the rupee were already surging after a sharp decline in global crude oil prices. Brent crude prices have come off by over 30 percent in the past two months, helping India save billions of dollars in oil bills.

India's gross domestic product (GDP) grew 7.1 percent in July-September, down from 8.2 percent in the previous quarter as high fuel prices, a sliding rupee and relatively weaker rural demand seem to have applied the brakes on the economy.

Going ahead, we believe the RBI's policy meeting, the OPEC meeting, and the outcome (both exit polls and actual results) of assembly elections in five states will determine the market trend. Political stability or instability could well impact markets in more than one way.

Investors can start looking for good companies that have a sustainable business model with good ethical management and a clear-cut strategy for the future, and are available at a cheap valuation. Importers should be cautious as the rupee may not sustain at these lower levels.

Here are 2 stocks that could outperform the broader market in the medium term:

Automotive Axles

We are very bullish on this company owing to its strong promoter group and goodwill it enjoys in the auto ancillary space. The company would be a major beneficiary from the revival of commercial vehicles market.

A series of reforms, including demonetisation, implementation of Bharat Stage-IV (BS-IV) emission norms, implementation of the GST, and enforcement of overloading norms, have resulted in significant volatility in the purchase considerations of fleet operators, influencing the demand for commercial vehicles (CVs).

Nevertheless, in FY 2017-18, the domestic CV sales have grown by 20 percent in volume terms over FY 2016-17. Medium and heavy commercial vehicles (M&HCV) trucks and light commercial vehicles (LCV) trucks grew by 19.4 percent and 28 percent, respectively, in unit terms in the same period.

The company has all the ingredients to ride on the upturn of CV cycle. FY18 was a strong operational year for Automotive Axles.

The company’s constant focus on new product development, forward integration with the customers, adherence to stringent quality standards including Builtin Quality (BIQ), improved input-output mix and strict adherence and continuous focus to meet the customers’ delivery performance were the key drivers for its continuous growth.

The company enjoys strong cash conversion cycle of 50 days which has improved from 100 days in FY14. The return ratios of the company are also quite upbeat with ROE and ROCE of 19.5 percent and 31 percent respectively with minuscule debt in the books.

At CMP of Rs 1,374, the stock is valued at a P/E of 19x on trailing twelve months EPS. We recommend a buy with a target price of Rs  1,786 (19x on estimated FY20 EPS of Rs. 94) implying an upside of 30 percent.

State Bank of India

We believe the bank is well on track to return to its past glories. In Q2FY19, the bank returned to profit at PAT level. Strategy on controlling credit cost and focus on credit quality has enabled bank to deliver profits despite mark to market provision of Rs 1,749 crore.

The bank enjoyed decent domestic credit growth of 11.11 percent in Q2FY19 across retail and high rated corporate. The bank is expected to leverage credit growth momentum; CD ratio stood at 66 percent in Q2FY19.

NPA ratios have improved aided by lower slippages and higher recoveries while PCR is progressively higher.

SBI has put up for sale three of its non-performing loan accounts to recover dues of Rs 2,110.71 crore.

We like the bank as the slippages have come down for SBI and the resolution of NCLT cases is well on track. We expect good writebacks in the coming years although there may be higher provisioning in H2FY19. Our conviction on this PSU bank stems from the positive management commentary in its analyst meet.

To unlock value from its subsidiaries, SBI General Insurance and SBI Funds and Cards management are expected to be listed next year. We believe that the bank has accounted for its NPAs and stressed assets and the worst case scenario is now behind us. Prospects of recovery are likely to increase and we expect good write-backs as well.

The present NBFC funds crisis led by IL&FS fiasco has also opened a window of opportunity for SBI to pump atleast Rs 50,000 crore in the NBFC market at attractive interest rates.

At current market price of Rs 285, the bank trades at P/BV of 1.16x (H1FY 18 Book Value stands at Rs. 244 ) and at adjusted Book Value (after deducting Net NPAs), the stock trades at P/BV of 2.06x. We do not have immediate target in mind but expect handsome returns in the medium term.

Disclaimer: 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. The stocks discussed and opinions expressed in this article may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of the reader. The reader should independently evaluate the investment risks and consult their respective personal financial advisor. I do not have any personal holding in the stocks discussed above but may have been recommended to our clients in the past.

Disclaimer: The author is Vice President - Equity Research at Ajcon Global. The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
First Published on Dec 4, 2018 12:36 pm
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