Corporate banks, insurance, healthcare services, oil and gas, construction, engineering and logistics are among the key overweight sectors.
Investors are in a fix. Indian markets are around 9 percent from record highs and investors don’t know where to invest.
High-frequency macro data points to a slowdown and to add to the problem, foreign investors have been pulling away from markets.
Experts say the Nifty is expected to remain in a range but broader markets could see a boost.
The underperformance of midcaps compared to the Nifty does provide some respite in the stock selection, but largecaps still remain a preferred play.
The escalation in China-US trade tensions will likely hurt sentiment along with domestic and global economic growth.
“We mapped the quarterly revenue growth of Top 200 companies, sector-wise since Sep’15. Sectors that have shown a serious slowdown in the last two quarters (as compared the average growth seen in FY17-19) are: automobiles, auto Ancillaries, metals, hotels, FMCG, capital goods, and media,” Kotak Securities said in a report.
“Sectors that have maintained or sustained growth of more than 10% in the last two quarters are: power, healthcare, retail, paints, consumer discretionary, pharma (both generics & MNCs), information technology and banks.”
Key overweight sectors include corporate banks, insurance, healthcare services, oil and gas, construction, engineering and logistics. On the other hand, key underweight sectors: automobiles, auto ancillaries, metals, FMCG, consumer durables and building materials.
We have collated a list of top 10 high conviction bets from brokerages for September with an investment horizon of more than 12 months:
Brokerage Firm: Kotak Securities
Century Plyboards is a leading player in the plywood and laminate segment. To cater to varied customer preferences, the company has widened its product portfolio with multiple products at various price points.
Century Ply has expanded its laminate capacity and entered into MDF and particle board. It has guided for 7- 8 percent full-year volume growth in the plywood segment in FY20. The management expects 15-20 percent revenue growth in other businesses in FY20.
At the standalone level, EBITDA margin was unchanged at 16.1% but, the margin saw a significant improvement as compared with the last three quarters. We value the stock at a PE of 18x on FY21E EPS.
ICICI Bank reported a solid quarter with NII growth of 27 percent YoY led by 15 percent YoY loan growth and 40% YoY decline in provisions. NPL ratios are declining without any large resolutions, while slippages are now within normalised levels.
1QFY20 saw a decline in slippages by 60 bps QoQ to 1.9 percent (down 130 bps YoY). This is one of the lowest levels of slippages in the last three years, with slippages now closer to normalised levels for the bank.
The brokerage firm expects the net NPL ratio to reduce to ~1 percent by FY20 and slippages to decline to 1.5 percent in FY20-21E. It forecast ~13 percent CAGR in CASA over FY19-22E and stable CASA ratio of ~46 percent by FY22E.
The margins stood at a multi-year high in the June quarter but volumes hit a demand slowdown. The company reported revenues of Rs 6,900 crore. Volumes declined by 6 percent YoY in an industry-wide phenomenon due to elections, liquidity tightness and sharp price hikes.
Positive demand in the south was more than offset by a weak west for Orient. Product mix has kept shifting towards OPC due to higher sales to projects and non-trade segment.
With no growth capex, net debt would reduce to Rs 10.7 bn (-15% YoY) and net debt/EBITDA would reduce to 2.2X in FY20E from 4X in FY19.
The brokerage firm increases EPS by 5-1 percent in FY20- 21E and fair value to Rs 112 (from Rs 106) at 6X EV/EBITDA FY21E.
PLNG has set up India's first LNG receiving and regasification terminal at Dahej and another at Kochi. It is promoted by GAIL (India) Limited, Oil & Natural Gas Corporation Limited, Indian Oil Corporation Limited and Bharat Petroleum Corporation Limited. They hold 12.5 percent stake each.
The brokerage firm reduced its EPS estimates to Rs. 16.8 (-5%) in FY20 and Rs. 19 (-4%) in FY21 updating our model for (1) non-cash adjustments pertaining to the accounting of operating lease under Ind-AS 116, (2) details in FY19 AR and (3) other minor changes.
PNC Infratech Ltd (PNC) is in the business of construction and infrastructure development, with expertise in highways, bridges, flyovers, airport runways, development of industrial areas, etc
PNC has maintained guidance of over 45-50 percent YoY growth in FY20E, with EBITDA margins of 13.5-14 percent based on strong order book and execution timeline.
The EPC business (adjusted for Rs. 41 per-share value of BOT) is available at a PE of 11.3x and 7.9x based on FY20E and FY21E EPS of Rs. 12.2 and Rs. 17.5 per share, respectively.
VEDL had said it would unwind the structured investment of US$560 million in Volcan, the parent, ahead of the expiry in FY21E.
Volcan has announced it will call the bonds in return of the collateral and exit Anglo American. This reduces the risk of future inter-company investments by VEDL.
However, concerns over ~US$7bn debt at parent entity (Vedanta Resource, Volcan) remain, with high dependence on payouts by VEDL.
Brokerage Firm: Emkay Global
The US business is at an inflection point with quarterly run-rate expected to pick up to USD130-135mn/quarter from $100-105mn two-three quarters back. The US breakeven is at $115mn quarterly run-rate. Hence, incremental sales should flow to EBITDA.
FY20E EBITDA should benefit from: a) the US break-even, b) normalisation of capacity issues (a hit of Rs 1 billion in FY19) and c) better gross margins (FY19 saw a 150bps gross margin impact due to lower inventory realisations in tenders business).
The biggest concern is execution. With the US rebounding and robust growth in India, confidence should be back in the name.
The company is the biggest beneficiary of the global outsourcing story, given a strong IPR focus, healthy relationships with top-rung companies, proven execution, and a low-cost fungible manufacturing base.
The ongoing capex of Rs 17 billion is the highest ever in its history (~60% of its current gross block) and imparts strong growth visibility over the next three years. Historically, Divi’s is known to incur capex only when it has a strong order inflow visibility.
The stock trades at 23x FY21E EPS, which is at a discount to its five-year average multiple of ~24x.
The stock has corrected ~30 percent due to much lower-than-expected HVJ tariff hike, followed by unbundling-related news. Risk to reward ration is, however, favourable with current market price below bear-case valuation of Rs 132, which implies $55/bbl Brent.
Petchem can see improvement from better operations, LPG & LHC supported by cut in APM gas price in H2 and gas marketing outlook is steady looking at favourable Henry Hub vs. Brent prices. Transmission volumes should also grow.
The brokerage firm believes that hiving off and selling pipeline business would be a challeng, as besides usual legacy PSE issues, transmission is a strategic, high capex-low return business hence unattractive to private parties. A sale to CPSEs could be positive for minorities.
HCL Tech is likely going to lead Tier-1 techs in terms of organic revenue growth in FY20. See potential upsides to the company’s overall revenue growth outlook of 14-16% given easy arithmetic, driving to build in 17.2% yoy CC revenue growth for FY20E.
Large deal win momentum in recent quarters lends visibility to near-term growth prospects, notwithstanding the overall sector-wide macro concerns.
The valuations at ~13x FY21E EPS are at a discount to Tier-I peers on account of Street concerns around the company’s IP initiatives. The brokerage firm sees an improvement in the near-term revenue growth trajectory which is likely to negate Street concerns on this count.Disclaimer: 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.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.