Kshitij Anand
The year 2018 was one when long-term investors got plenty of opportunities to buy their choice of stocks on declines. But 2019 will be very different as headwinds faced in some sectors have now become tailwinds.
Investors should now tilt their strategy to capitalise on the sectors that are likely to benefit the most in 2019. The action will be largely stock-specific this year with focus on private as well as public sector banks, consumption theme, autos, capital goods as well as export-oriented sectors such as IT and pharma.
Earnings will be a big talking point in 2019 because India Inc. failed to deliver last year. Currently, Nifty 50 is trading at 14.5 percent premium to its 10-year average price to equity (P/E) ratio after earnings downgrade from 20 percent to 14 percent in FY19, said a report.
Irrespective of a global or political setup on the domestic front, long-term investors should focus on companies with earnings visibility, and a high margin of safety with high corporate governance standards. Investors should use dips to buy into stocks of such companies on declines.
“The major event risk for Indian markets is on account of elections. Unlike in 2014, the political outcome appears unclear. If the elections lead to a formation of a stable, business-friendly government, Nifty may end the year 2019 at 14,000,” Vivek Ranjan Misra, Head of Fundamental Research at Karvy Stock Broking told Moneycontrol.
“Given this, we favour cyclical sectors, we prefer Banks, Capital Goods. Also, growth should boost Consumption Discretionary and Autos. State-owned banks could be a dark horse in 2019, on account of a peak in NPL cycle, recovery of NPL’s via IBC and low valuations. A broad-based economic recovery will be supportive,” he said.
Misra further added that in the coming quarters, large-caps are likely to do better. Mid and small-caps are likely to underperform until their valuations become attractive. “We believe that after mid-2019, with decent time correction, conditions may be favourable for mid and small caps to perform well,” he added.
In the year 2018, the Indian market was among the better performers with a 3 percent return in rupee terms and about negative 6 percent return in USD terms.
After a flat 2018, most experts feel that 2019 should give double-digit returns although the events which are lined up for the year could throw in surprise which investors might not be prepared for.
Well, volatility is good for investing as it provides multiple entry points to investors. But, stock selection will be something which will drive the bottom line for your portfolio.
“We have consistently focused on coming out with stock ideas regularly after undertaking a deep-dive analysis into business fundamentals, earnings outlook coupled with a margin of safety on valuations and corporate governance standards,” Centrum Broking said in a note.
“We believe that inherent high volatility in the markets keeps making risk-reward highly (and many times irrationally) favourable for some high-quality businesses that we have been tracking closely for long,” it added.
Keeping this market inefficiency in mind, we have collated top ten high-conviction ideas from different experts to highlight such favourable mispricing opportunities for our investors. These stocks could give 15-100 percent return with a holding period of about a year:
Brokerage Firm: Centrum Broking
Bajaj Auto: Buy| LTP: Rs 2,657| Target: 3,075| Upside 15%
We like Bajaj Auto as it is one of the leading 2-wheeler and -Wheeler players and the largest exporter of both 2-Ws and 3-Ws from India. On the export front, the company has a market share of over 40 percent in South Asia and the Middle East and 25 percent in Latin America.
In 21 countries, which contribute 85 percent of its export sales, Bajaj is among the top two players. In the era of premiumisation, a strong product portfolio entailing iconic brands like Pulsar, Avenger, and KTM augurs wells for the company.
Considering some pains (high cost of ownership, CV and tractor cycles may peak, BSVI implementation etc.) in the domestic auto market, Bajaj Auto is safely placed with 40 percent sales exposure to export markets.
State Bank of India: Buy| LTP: Rs 295| Target: Rs 350| Upside 18%
State Bank of India is best placed to capitalise on the growth opportunity following a) improved credit environment, b) favorable bond yield movement and c) recovery from NPA accounts.
Loan growth has been on the rise (Q2’19 domestic loans grew 11.1%) and we see traction therein to continue. The reduced slippages, loan growth acceleration, and a stable interest cost have seen margins inch higher.
We see net interest margins (NIMs) inching towards 2.7 percent by end-FY20E (vs. 2.5% for FY18). Slippages have been on a decline; trends are set to remain encouraging in H2’19 as well.
While we see credit cost remain high, the softening in G-sec yield (down ~55-60bps since Sept’18) will see investment provisions reverse and in turn lower the overall provisioning charge. We also see SBI report strong trading gains in Q3’19. Valuations continue to remain attractive.
Brokerage Firm: Karvy Stock Broking
HCL Technologies: Buy| LTP: Rs 939| Target: Rs 1,167| Upside 24%
Karvy Stock Broking remains positive on the stock given its relative underperformance, upside risks to core organic growth and its potential to increase Mode 2 and Mode 3 revenues. It reiterates our buy on HCLT and values it on a consensus FY20E PE of 14.5x with a target price of Rs. 1167.
Karvy believes regaining organic growth momentum and scaling up of products and platforms business are key catalysts for rerating of the earnings and subsequently the stock.
The ongoing large deal momentum and maturing of IBM’s IP partnerships are giving visibility for the same. In the coming year, the brokerage firm expects HCLT’s stock price to be re-rated given the rerating of earnings.
Hindustan Unilever: Buy| LTP: Rs 1784| Target: Rs 2,138| Upside 20%
HUL’s acquisition of GSK Consumer garners a valuation of the entity at Rs. 317 Bn. HUL implies a leadership in the domestic HFD (Health Food Drinks) business along with soaps and detergent category
Karvy believes that the HFD portfolio growth will accelerate, given its strong direct distribution and portfolio innovation. In addition, significant cost savings are expected in FY21E, after all, synergies from the deal factor in.
To consider all benefits of the acquisition, we have assigned HUL a P/E of 54x to arrive at a target of Rs. 2138.
ICICI Bank: Buy| LTP: Rs 367| Target: Rs 440| Upside 20%
The performance continues to underlie the traction in recovery and stability in the core operating metrics. The headline asset quality ratios GNPA/NNPA/Coverage improved to 8.54%/3.65%/59.5% vs 8.81%/4.19%/54.8% in Q2FY19.
The retail slippages were at Rs. 8 bn vs ~Rs. 11 bn in Q2FY19, which continue to inspire confidence. Karvy Stock Broking maintains a buy recommendation on the stock with target price at Rs. 440 valuing subsidiaries at Rs. 101 per share and core banking book at 2.3x FY20E P/B.
Larsen & Toubro: Buy| LTP: Rs 1383| Target: Rs 1,700| Upside 23%
L&T’s diversified exposure to various sectors/geographies coupled with its excellent execution capabilities across sectors and its balance sheet strength compared to other peers in the sector has resulted in strong order book build up.
The consensus values the company at 23.5x for a target price of Rs. 1700, representing an upside potential of 18%. Delay in capex cycle recovery & order execution may pose threat to the call.
ONGC: Buy| LTP: Rs 147 | Target: Rs 210| Upside 42%
Oil and Natural Gas Corporation in FY18 recorded standalone revenue of Rs. 850041 Mn, up 9 percent over FY17 on the back of impressive production and sales performances
Synergies in ONGC’s upstream and downstream business with the acquisitions of HPCL and MRPL will prove to be valued unlocking and ensure not only retention of margin but also enhancement of the same for the company. Consensus valuation for the company is PE 8.2x of FY20E EPS for the target price of Rs. 210.
Tata Motors: Buy| LTP: Rs 175| Target: Rs 259 | Upside 48%
Despite the near-term pressure on margins due to a slowdown in luxury car demand, we think that the management’s focus on improving core profitability will help recover from the stress.
After the recent correction in the stock, the brokerage firm thinks that Tata Motors is available at a cheap valuation. Karvy expects a steady recovery in the JLR business and thinks that cost reduction measures being taken will work in favour of the company.
Tata Motors is valued on a SOTP basis based on consensus estimates for a target price of Rs. 259. However, uncertainties in the JLR business continue to be the downside risk to our call.
UPL: Buy| LTP: Rs 762| Target: Rs 1,004| Upside 31%
Growth in India and LATAM jointly contribute to ~66% of total sales. Products like Sweep Power, Avancer Glow and Delma received encouraging response from the farmers in India Business, despite erratic business.
Strong backward integration, consolidation in the agrochemical space with a boost to geographical/ segment/ product mix would give strong traction to the business and aid profitability.
Factoring in strong backward integration, consolidation in the agrochemical space with a boost to geographical/ segment/ product mix and strong traction in LATAM business, the stock is a buy.
Yes Bank: Buy| LTP: Rs 186| Target: Rs 410| Upside 120%
The bank’s Q2FY19 performance disappointed on asset quality notwithstanding the healthy business momentum. The slippages were much higher than anticipated nevertheless the miss was led by concentrated exposure and the bank continues to see a good possibility of recovery.
Karvy rate a “buy” on the stock with a target price of Rs. 410 valuing the stock at 2.67x FY20E P/B. The brokerage house believes that uncertainties about its top management and asset-quality issues will remain a cloud on the stock price in the near term.
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