Prabhudas Lilladher's top picks report
The free float EPS for NIFTY companies in FY15 is revised downwards to Rs432.6 while the FY16 and FY17 remained more or less unchanged at 512.5 and 610.7 respectively, representing a YoY growth of 6.7%, 18.5% and 19.2% respectively. The major growth in earnings is expected from BFSI at 14.9% in FY15, 21.9% in FY16 and 21.2% in FY17, IT at 15.5%, 13.6% and 12.5% FMCG at 12.8%, 17.6% and 16.6% and Automobiles at 19.3%, 22.3% and 19.2%.
NIFTY at 8,757 is trading at 20.2x FY15E, 17.1x FY16E and at 14.3x FY17E estimated free-float earnings. The last ten-year average for NIFTY’s one-year forward PE is at 15.3x, implying the NIFTY at 17.8x (EPS for year-ending March 2016is Rs512.5) is trading at a premium to its last 10-years average of one-year forward multiple.
The chart on Page 20 indicates MSCI India’s premium to MSCI Asia (excluding Japan) over the last ten years. The average of the last 10-year’s premium was at 26% and the current premium is at 38%. With the better earnings growth among the peers, India still continues to be one of the favoured destination for the FIIs reflected in the increased premium.
With the governments focus on adhering to fiscal discipline, our channel checks indicate that the government spending in 4QFY15 is lower than the expectations. This could lead to disappointment in terms of earnings across the sectors and we expect the recovery to get postponed to 2QFY16 as the government expenditure resumes in 1QFY16 and the effect of it getting reflected in the economy from 2QFY16 onwards. The corporate confidence levels continue to remain high, while the confidence level has not materialized into big ticket investments, our channel checks also indicate that the initial thrust is more on the completion of un finished projects which have been stuck half way. Post the reduction in repo rates by 25bps, the 10 year GSecs too is trading at 7.74%. India continues to remain in a sweet spot with a potential of higher economic growth while most of the economies in the world are struggling to fight its economic woes. Consequently we expect India to attract higher FIIs interest keeping the valuation metrics on elevated levels.
The recent Rabi harvest output has not been encouraging with lower yields, lower production as well as lower than normal increases in MSP. We expect this to have a pressure on the disposable income in the rural areas. Given this, we continue to recommend overweight position in the Financial Services, M&HCVs in the Automobiles, overweight in Infrastructure and IT while remaining Neutral in Capital Goods and Healthcare while remaining underweight in FMCG.
Keeping in mind the possibility of superior economic growth among peers, benefits from benign crude oil prices and the resultant interest from the FIIs, we are revising our Nifty trading range for the market to 8200-9300 levels for the next three months while maintaining the 12 month target of 10,000. While the impact of domestic factors seem to be behind us, the global issues though continue to overshadow the domestic optimism.
Top Picks
Large CapTata Consultancy Services, HDFC Bank, Infosys, State Bank of India, ICICI Bank, Larsen & Toubro, Maruti Suzuki, Ultratech Cement, Bank of Baroda, Aurobindo Pharma
Mid-CapCummins India, Ashok Leyland, Federal Bank, MindTree, Hexaware Technologies, JK Lakshmi Cement, KPIT Technologies, Ashoka Buildcon
(All prices as on March 09, 2015)
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