SBI's economists say the surge in equity markets is not linked to economic recovery and maybe a sign of irrational exuberance.
The Indian equity benchmark Nifty closed above 10,550 on July 2 as the sentiment improved on hopes that a vaccine for the coronavirus was not too far.
In the global markets, Wall Street closed higher and the Nasdaq reached an all-time closing high on July 2, reported Reuters, as investors headed into long holiday weekend buoyed by a record surge in payrolls, an assurance that the US economic recovery was underway.
Major markets across the globe are rallying, supported by factors such as liquidity boost, hopes of a vaccine and optimism that with the reopening of economies things will begin to fall in place soon.
But it is not that simple.
SBI's economists, on June 29, said the surge in equity markets was not linked to economic recovery and maybe a sign of irrational exuberance.
They also warned that banks will start reporting higher non-performing assets (NPAs) after September, once the six-month moratorium on loan repayment ends.
While the recovery will happen, it will take longer as most macroeconomic indicators are flashing signs of acute stress barring the rural sector, which is the only ray of hope.
Despite the recent market rally, uncertainty prevails due to the coronavirus pandemic. As long as COVID-19 does not come under control, the cloud of uncertainty will continue to loom.
The market is witnessing huge divergence as the macroeconomic situation is completely different from the movement of indices.
While the economy is expected to gradually recover, the possibility of a sharp rally in the market looks feeble as the valuations have got stretched.
"Considering the potential threat to GDP growth, FY21 and FY22 earnings could be at big risk. Hence, valuations on FY22, which look optically lower today could gradually move higher in light of the potential risk to future earnings. The risk-reward ratio in largecaps has turned unfavourable. The Nifty50 is trading at 21 times on forward earnings, which seems to be on the very higher side," said Rusmik Oza, Executive Vice President and Head of Fundamental Research at Kotak Securities.
Market experts caution that investors should not get carried away and invest selectively only in companies that have high cash, robust books with minimal to zero debt, high return ratios, strong management and a smooth working capital cycle.
Experts suggest these 10 bluechip stocks for a one-year horizon. Take a look:
Analyst: Siddharth Sedani, Vice President, Equity Advisory, Anand Rathi Shares and Stock Brokers
UPL is one of the top five crop-protection product companies worldwide. It is expanding footprint in Africa, Russia and Eastern Europe.
UPL currently has 48 manufacturing facilities across the world and a presence in more than 130 countries.
In FY20, Latin America constituted 38 percent of the total revenue, followed by 16 percent in North America, 15 percent in Europe, 11 percent in India while the rest of the world accounted for 20 percent of the revenues.
All the regions witnessed double-digit revenue growth except Europe which de-grew as dry and hot weather conditions impacted crop yields.
The acquisition of Arysta for $4.2 billion increased leverage of UPL as the company funded the transaction through a combination of fresh equity and $3 Addressing debt concerns, UPL reduced net debt-to-EBITDA from 3.7 to 2.9 levels at end of FY20 billion debt.
For FY21, management sees continued growth in revenue and EBITDA and expects to reduce fixed costs. Also, the current environment remains challenging, however, the farm sector’s growth prospects look positive as governments around the world remain focused on food security with stable agricultural production.
"We believe UPL remains well-positioned for long term growth, given its strong market position, diverse product offering, expectations of reduced debt levels and decent revenue and cost synergies from Arysta acquisition," said the analyst.
Nestle is one of the leading players in the Indian FMCG space, with more than 100 years of presence, enjoying market leadership in about 85 percent of its product portfolio.
The company remains focused on continued innovation and expansion of product offerings, increasing its retail outlets from 4.4 million in 2018 to the range of 5.5-6million, accelerating penetration in small towns, tier 2 and 3 cities while further Expanding presence in the rural market.
Additionally, the company looks to seize opportunities in the out of home channels and ecommerce space.
In view of the COVID-19 outbreak, the management said that the company had resumed operations at all of its manufacturing locations and distribution centres and warehouses.
"We remain optimistic given the company’s diverse product mix, strong market position with solid processed foods industry," said the analyst.
With 34 manufacturing facilities spread over seven locations, Cipla has a complete range of therapeutic offerings--from simple anti-infectives to complex oncology products.
The facilities of the company have been approved by various agencies such as the USFDA. On the product filing front, Cipla has filed 259 ANDAs (abbreviated new drug application) with the USFDA cumulatively (FY20), with 175 of them already approved and 22 tentative approvals.
The company spends 7-8 percent of revenues on R&D. In the domestic market, Cipla remains among the top five players and is built on a network of nearly 7,500 medical representatives (MRs) covering a doctor base of nearly 5,00,000.
"We believe with healthy earnings growth and core ROCE expansion over FY20-22e, valuations are likely to witness re-rating," said the analyst.
In terms of market reach, HUL has almost 100 suppliers and associates, over 3,000 distributers and broad market penetration through more than 2.4 million stores.
The company has also started building future channels of modern trade like ecommerce.
Over the past several years HUL has exhibited a decent track record of revenue and margin growth.
"While current macroeconomic conditions are likely to keep demand subdued in the near term, we remain optimistic over the long term. We believe HUL is the largest FMCG company with one of the largest footprints in terms of products and distribution network, continued focus on strategy to target volume growth and decline in material and other costs should drive outperformance in both growth & profitability in medium to long term," said the analyst.
Analyst: Jyoti Roy, DVP Equity Strategist, Angel Broking
Bharti has posted strong ARPU growth in Q4FY20, driven by tariff hikes of nearly 35 percent in November 2019 by all telecom operators.
The company is expected to maintain a strong growth trajectory in FY21, driven by ARPU growth and market share gains.
Any further tariff hikes by telecom companies in FY21 could be a major positive for the stock given that tariffs are still very low.
ICICI Bank is better positioned to navigate the current crisis given its strong liability franchise with CASA ratio of 45 percent at the end of Q4FY20.
The strong provision coverage ratio of 76 percent along with low exposure to stressed corporate and SME segments provides comfort on the asset- quality front.
ICICI Bank is trading at a significant discount to historical average valuations which provides comfort.
The company has a strong order backlog of nearly Rs 3 lakh crore. The majority of the order book is from the Centre, state governments and PSUs, where the risk of cancellation is low.
"Order flows are expected to be muted over the next quarter, so we believe that it should pick up by the end of FY21," the analyst said.
The stock is also trading at a significant discount to historical average valuations and offers a favourable risk-reward from current levels.
RIL has built up a dominant presence in refining, petrochemicals, telecom and retail businesses.
Jio Platforms, which houses the telecom business, has attracted investments from marquee investors like Facebook, Silver Lake Partners, General Atlantic, KKR, Intel, etc of Rs 1.17 lakh crore.
Investments by such marquee names in Jio platforms have not only helped the company to become debt-free but also reaffirms confidence in the management’s ability to transform the company from a brick and mortar to a digital play.
Brokerage: Motilal Oswal Financial Services
HDFC is among the few companies that have delivered a steady performance in an otherwise a cyclical sector.
"In addition to its disciplined growth, we like its lean cost structure, competitive advantage on borrowings (leading to a lower-risk book), and the ability to resolve stressed corporate exposures," said the brokerage.
Given its strong asset quality and high capitalisation, net NPLs account for just 8 percent of core net-worth (excluding investments in subsidiaries).
Its subsidiaries have also outperformed peers in their respective segments.
"While the current stock price reflects the near-term issues impacting the economy, it undervalues the company’s long-term potential. As stability returns gradually with the staggered unlocking of the economy, we expect HDFC to re-rate faster than peers with comfortable liquidity and capital situation," Motilal said.
HDFC Bank has delivered strong growth despite economic activity being impacted due to the COVID-19 outbreak.
Moderation in retail credit due to consumption slowdown is being compensated well by the wholesale segment, which is driving overall loan growth.
On the asset quality front, slippages are likely to remain elevated due to the COVID-19 disruption, which could keep credit cost higher. However, higher provisioning buffers should limit the overall impact on earnings.
Furthermore, a strong liability franchise would support margins, while higher liquidity levels would enable the bank to ride the current crisis and gain a bigger market share.
"We estimate the loan book/PAT to grow at a CAGR of 16 percent/9 percent over FY20–22. The CEO’s succession though remains an important event in the near term," Motilal said.
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