September was really good, especially after weakness seen in previous three consecutive months amid growth slowdown, tepid earnings and asset quality concerns.
The Sensex and Nifty gained 4 percent each in September, thanks to government measures to revive economy, including 10 percent cut in corporate tax rate, against 6 percent and 7.5 percent correction respectively in previous three straight weeks.
After the way market reacted to corporate tax rate cut (around 3,000 points in just two days), a lot of experts immediately started feeling that the market could be at new highs by Diwali/October and can add around 15 percent in the next one year.
But, considering the current situation of market and economy, the record high in October could be possible only if September quarter earnings show some improved trend and RBI either changes its growth projections to upward or keep it steady with strong commentary, experts said, adding till then the market could remain rangebound despite recent fall due to PMC Bank fraud/rising asset quality concerns.
"10 percent cut in taxes implies an addition boof 8-10 percent in earnings of corporate. But indices continue to trade above 19 times, the scope of PE re-rating is limited and price gains need to come from earnings growth. Going forward, as global-domestic economic growth remains sluggish, a boost to net profits are the key to be kept an eye on," Vineeta Sharma, Head of Research - Narnolia Financial Advisors, told Moneycontrol.
She said in this context, forthcoming Q2 results season is highly important, particularly the management commentaries stating their take on-demand environment and their plans for the excess cash flows on account of lower tax. The market will wait for this clarity before making a decisive new-high, she added.
Romesh Tiwari, Head of Research - CapitalAim, also said, "To hit the record highs by Diwali we need to be certain that the revival in the real economy of India has started. I will wait for growth projections by RBI and other institution after the big booster tax cuts by the finance ministry. If the growth projection by RBI at the end of this week improves and RBI cut rates by at least 25 bps the Nifty can cross 12,000 by the end of October."
Experts are also hopeful for consumption revival in coming days especially due to festive season, but if that fails to revive then the record high could be unlikely in October.
"Full impact of the tax cut at the ground level is yet to be witnessed in the long run. A rally seen in September amid tax cuts would still be followed in the upcoming month pinning up on hopes of surging demands in the festive season. The surging demands amid the approaching festive season would be a factor in soaring the indices. It is expected that the demand environment would see an uptick in the consumption revival backed by lucrative deals to lure consumers," Gaurav Garg, Head of Research at CapitalVia Global Research Limited – Investment Advisor, said.
As far as broader markets are concerned, if the Nifty crosses 12,000 in coming days, the way for rally in midcaps and smallcaps would be cleared.
"Midcap and Smallcaps are looking attractive valuation wise but they are subject to the performance of the overall economy and the inflows in overall equity market. In case Nifty moves above 12,000, Midcap and smallcaps will start outperforming the largecap stocks in the next couple of quarter by a considerable margin," Romesh Tiwari said.
Vineeta Sharma also said it is a good time to start investing in mid and smallcap stocks as valuations of such stocks have already corrected. Now, we are in falling interest rate regime which in turn will benefit midcaps.
Hence, experts advised buying the following stocks for a portfolio and use add on dips strategy from henceforth as they feel a bull run has begun with the solid rally seen in second half of September.
Vineeta Sharma, Head of Research, Narnolia Financial Advisors
HDFC Bank | Target: Rs 1,500 | Return: 20 percent
HDFC Bank is the largest private bank in India with the assets base of Rs 12,65,200 crore as of June 30. The retail and wholesale lending constitute 54 percent and 46 percent of the total loan book of Rs 8,29,700 crore respectively. The bank's distribution network was at 5,130 banking outlets. The liquidity pressure under NBFCs provides an opportunity to gain market share for retail assets in the near to mid term. The return on equity is likely to improve by more than 60 bps and the return on assets by 7 bps to 17.2 percent and 1.9 percent respectively in FY21 driven by income CAGR of 22 percent over the next two years.
United Spirits | Target: Rs 730 | 13 percent
Lower penetration and expected increases in the affluent segment in total demographics will lead to higher growth in premium& prestige segment. Premiumisation is happening and there are lots of scopes to cover up realization differential vis a vis global on the back of product mix change. USL dominates the liquor market in India with a 38 percent market share.
Can Fin Homes | Target Rs 480 | 22 percent
Despite liquidity pressure in HFCs, CANFIN is expected to report a good set of numbers. AUM is expected to grow by 18 percent YoY in Q2FY20 driven by growth in the individual loan portfolio and better growth in non-Karnataka portfolio, the management expects Karnataka book to do well in the remaining quarter with RERA and GST stabilization and growth will pick up.
The management expects the loan growth to be Rs 23,000 crore in FY20. There are 3.95 crore new houses to be developed under the scheme of Housing for All by 2022. Canfinhome has focus on Affordable Housing Loans and Non-Housing loans. Assets quality is expected to remain stable as Can Fin Homes has very low exposure to high risk segment.
Avenue Supermarts (D-Mart) | Target: Rs 2,100 | 11 percent
The proportion of the organized retail sector is 5 percent in India versus 35 percent in Brazil and 85 percent in USA. D-Mart is best-managed in terms of operations, as well as financials. It has the best sourcing of materials and the least prices to consumers. The inventory days is of mere three days. We value D-Mart at 4 x FY21e EV/sales to arrive at a price of Rs 2,100 with the buy recommendation.
Gaurav Garg, Head of Research, CapitalVia Global Research Limited – Investment Advisor
ITC | Target: Rs 310 | Return: 21 percent
Fast-moving consumer goods (FMCG) major ITC would be a major beneficiary of tax cut, since their rates were 30-35 percent, which is much higher than the current rate of 25 percent. The reduction in taxes would help in raising investment. We recommend buy ITC LTD, with a target price of Rs 310.
Britannia Industries | Target: Rs 3,350 | Return: 15 percent
The consumer companies is to plough more savings with the government’s biggest tax cuts. These savings could be mobilized into building new factories and in expansion of its operating assets. Lowering tax outflow would lead to increase in cash flow. We recommend buy for Britannia Industries with a target price of Rs 3,350.
Dabur India | Target: Rs 520 | 18 percent
The consumer goods firm, with the reducing corporate taxes would help in reviving demand. Furthermore, the company is focusing more on implementing the winning strategies. The company has various plans to deepen its direct reach in rural markets. Which would aid growth in volume. We recommend buy Dabur India, with a target price of Rs 520.
VIP Industries | Target: 540 | 20 percent
The company witnessed increasing volume in the previous quarters. With the lowering tax cuts, the demand would surge backed by lowering prices. We recommend buy VIP Industries, with a target price of Rs 540.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.