Indian market is on a dream run as benchmark indices have already rallied over 26 percent so far in the year 2017. Although the rise of equity as an asset class is something which the whole world has witnessed.
It has been a year where the S&P BSE Sensex hit Mount 33K while the Nifty50 rose above 10,000 but there is more to come, suggest experts. The rally which started in December 2016 is unlikely to lose steam anytime soon. The index made a fresh record high of 33,733.71 on Sensex last week while Nifty rose to a record high of 10,461.
One of the major factors contributing to the rise in Indian markets is strong rally seen in global markets and pro-growth reforms initiated by the Modi-government in the past 12 months.
Initiation of reforms supported a rise in small and midcap stocks, some of which are already trading above historical averages. Analysts advise investors to stay with quality names which have a strong product line and can deliver growth in the next 2-3 years.
“Main indexes are already up by 27 percent on YTD basis, while midcaps and smallcap indexes are 40 percent and 50 percent up, respectively. After the disruptive developments like demonetisation and GST which had interrupted the positive trend of the market, is recovering now led by a reversal in earnings growth and positive global cues,” Vinod Nair, Head Of Research at Geojit Financial Services told Moneycontrol.
“Currently, we do not see any signs to disrupt the trend of the domestic market rather than the high valuation of the global financial market. Our view is to stick with high-quality stocks and sectors within the mid-caps as they are likely to continue its outperformance in the long-term,” he said.
Domestic money has been one of the driving factors in driving rally in the small and midcap space but analysts’ are of the view that the risk to midcaps is a change in the global liquidity, which will impact the overall performance of the broad market risking mid-caps to underperform.
We have collated a list of top ten stocks across analysts from different brokerage firms which investors can look at for a holding period of more than 12 months:
Analyst: Vinod Nair, Head of Research at Geojit Financial Services
Mammoth order book of Rs75,000cr (12x FY17 sales) provides strong visibility for next 5yrs. NBCC is at the sweet spot with an inflow guidance of Rs25,000cr for FY18E, limited competition, and expertise in executing large projects.
Execution from large redevelopment is likely to improve from H2FY18E which will add impetus for re-rating. With pick up in execution, we factored earnings to grow at 42 percent CAGR over FY17-19E supported by 60bps improvement in EBITDA margin.
Considering the asset-light PMC segment, less leveraged balance sheet and robust opportunities in the pipeline, NBCC will command premium valuation in the construction space.
Bharat Electronics Ltd (BEL) has 37 percent market share in defence electronics and its core capabilities are in radar & weapons systems, defence communication & electronic warfare.
BEL has limited competition, due to its niche capabilities and strong technological tie-ups, strategic nature of projects, capital-intensive nature & high gestation periods act as strong barriers to competition.
Going forward, BEL will emerge as a key beneficiary from on-going defense modernization programmes & GoI focus on indigenisation. The current order backlog of Rs41,052cr is 5x FY17 sales, which has significantly improved the earnings outlook.
AARTI Industries Ltd (ARTO) is a global leader in Benzene based derivative products. Has a diversified product portfolio with end users in pharma, agrochemicals, specialty polymers, paints & pigments.
Exceptional performance over FY11-FY17, Revenue and PAT grew by14 percent & 25 percent CAGR, respectively. Focus on high margin products and cost reduction through forward and backward integration led to expansion in EBITDA margins to 20.7 percent from 13.6 percent during FY11- FY17.
During last 2-3yrs, ARTO is aggressively building CAPEX in various product categories with a focus on global markets.
Currently, global chemical companies are de-risking the supply chain for their raw material by diversifying from China to India, which will benefit domestic companies like ARTO.
Global Brokerage Firms
Deutsche Bank maintains a buy rating on HUL despite outperformance of the stock with respect to benchmark index so far in the year 2017.
It is not easy to be unhappy when your top Staples pick reports a 20 percent EBITDA growth (better than expected) and the outlook for price growth is improving.
However, the 4 percent volume growth is worrisome as it indicates an underlying deceleration in consumption. While the (perennial) hope of a rural consumption recovery exists for CY2018, at 45X FY19E P/E, the margin of safety is low.
The key takeaway from the conference call was “modest improvement in margins defined as a minimum of c80 bps expansion” (our interpretation). The brokerage firm maintains a Buy despite CYTD2017 stock returns of 54 percent (Sensex +24 percent).
Deutsche Bank maintains a buy rating on Yes Bank even though the private sector lender reported a significant divergence on its asset quality Rs64bn, (~5 percent of FY17 loans).
Even though repayments or upgrades are high at Rs47bn, divergences are still discomforting. Yet, historical evidence of actual losses is low, probably due to bilateral dealings and better collaterals.
For FY15/FY16, it had a divergence of 3 percent/3.2 percent of loans, but actual NPLs were only 15-20 percent and credit costs were contained at 50-60 percent (due to better recoveries); management guides for similar trends in FY17.
The global investment bank raised their slippage and credit cost estimates (from 75 bps to 90 bps for FY18/19). The earnings impact is limited to 3-4 percent, as core business trends are stronger than estimated.
Deutsche Bank recently upgraded Bharat Forge on the basis of an improving revenue growth trajectory. This was premised on the combination of strong data points and customer commentary, which pointed towards a sustained recovery in its end-markets.
The flow of data and commentary since then has continued to be upbeat and strengthens our positive view on the stock. We highlight below the specific trends that we follow to form our view on the stock.
The information has been collated from industry data points and management commentary, as well as research published by our global colleagues.
Mahindra & Mahindra Financial Services
The asset quality is stabilising and MMFS a good rural play. The global investment bank expects ROEs to recover to 16 percent by FY20F from 6-11 percent in the past two years, as the rural credit cycle normalizes and growth of (loans) picks up to a 17 percent CAGR over FY17-20F, compared to 11 percent over FY14-17.
The global investment bank increased its target price to Rs475 per share, implying 2.4x Sep-19 book.
Nomura maintains a buy rating on Emami post Q2 results. Emami’s 2QFY18 results were in line with our expectations on all counts. The growth trajectory has recovered significantly and the outlook remains more positive.
Further, the company has started the process of sales force automation and is working on reducing its dependence on the wholesale trade channel, which should yield positive results in the medium term.
After a long gap, the company has reinstated its focus on innovation, which the global investment bank saw as a positive. Nomura continues to like the long-term story, believe the risk-reward is inexpensive and maintain a Buy rating.
Nomura now builds in a revenue growth of 10.3 percent and a modest 10bps y-y margin contraction in FY18F.
Macquarie maintains an outperform rating on Maruti Suzuki post Q2 results and raised its target price to Rs10,000 from Rs8250 earlier.
Maruti is the best play on the Indian auto growth. The global investment bank expects Maruti to grow ahead of the industry given new model launches and extensive dealership network.
It expects the net profit for Maruti Suzuki to grow at a compound annual growth rate of 17 percent over March 2020.
Macquarie maintains a buy rating on Mahindra CIE (MACA). The company reported better-than-expected results for 3QCY17 with consolidated EBITDA growing 55 percent on a YoY basis (3 percent ahead of our expectations).
The key drivers of strong profit growth in 3QCY17 were i) the consolidation of Bill Forge business, ii) growth in automobile and tractor production in India, iii) new customer orders in India and Europe and iv) margin improvement on the back of increased cost efficiencies.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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