Experts feel that economic activity is likely to remain muted and investors will be better off with companies that are likely to benefit the most from the corporate tax cut.
In the last one month, many global rating agencies and investment banks have slashed India’s growth forecast, a reflection of their concerns over a slowing economy.
The International Monetary Fund (IMF) and the World Bank have trimmed India’s gross domestic product (GDP) growth prospects by 0.9 percent and 1.5 percent, respectively.
India's growth is projected to fall to 6 percent, the World Bank said on October 13. The bank, in its latest edition of the South Asia Economic Focus, said the country was expected to gradually recover to 6.9 percent in 2021 and 7.2 percent in 2022.
The IMF slashed its forecast to 6.1 percent from its July projection of 7 percent, amid concerns over weak demand. It also lowered India's FY21 GDP growth forecast by 20 bps to 7.2 percent.
Experts say when bad news about the domestic economy starts coming from institutes such as the IMF and the World Bank, it suggests that the worst may be over.
“When the IMF and World Bank beat the drums of a slowdown of any economy, (it) means that the phase is already over and better times are ahead. Recently, IMF as well as World Bank trimmed India’s GDP growth prospects by a whopping 0.9 percent and 1.5 percent, respectively which, when historically seen, acts as a good indicator to identify bottoms,” Jimeet Modi, Founder & CEO, SAMCO Securities & StockNote, told Moneycontrol.
“Considering a holistic perspective of corporate tax cuts, recapitalisation of PSU Banks, FPIs paring their short positions, continued domestic inflows – all point to one thing that may be the worst is behind us,” he said.
That said, experts feel that economic activity is likely to remain muted and investors will be better off with companies that are likely to benefit the most from the corporate tax cut.
“Investors need to focus on sectors that are likely to do well and within those companies that were paying full corporate tax. This combination could lead to very healthy earnings growth in FY20,” Rusmik Oza, Head of Fundamental Research, Kotak Securities, told Moneycontrol.
The second step would be to match these sectors with their historic valuation range and check if there were gaps and which companies were reasonably valued, he said.
“Few sectors that are bucking the slowdown and reporting healthy topline growth are insurance, private sector banks, power, healthcare, paints, consumer discretionary, plastics, larger NBFCs, and retail. Among these sectors, we like large banks, large NBFCs, power ancillaries, life insurance and select consumer names,” Oza said.
We have collated a list of 10 stocks that are safe and could beat economic downturn:
Analyst: Rusmik Oza, Head of Fundamental Research, Kotak Securities
Earnings growth in FY20 could be better than anticipated due to a reduction in the corporate tax rate. The stock is trading at 17x Fw PE, which is at the lower end of its 10-year average valuation band.
We haven’t heard any major negative on cigarette tax in the last few GST council meetings. Few of the non-cigarette businesses are growing well. Our revised price target works to Rs 320.
Adjusted earnings growth could be muted in FY20 due to higher provisioning on the builder finance book and impairment on Deferred Tax Asset. However, the company would generate healthy cash flows from stake sale in Gruh Finance.
On a standalone basis, the stock is trading at 3.7x forward price/book value, which is almost close to its lower end of the last 10-year valuation band.
The last 10 years' average forward price/book value on a standalone basis works to 4.8x. Our one-year price target stands at Rs 2,375.
Order inflows beyond water and hydrocarbons are healthy in FY20. The downward trend seen in the commodity prices is likely to cushion margins, especially for steel the prices of which peaked a year ago.
We expect FY21 revenue growth to be far higher than FY20E. Based on SOTP basis, we have a one-year price target of Rs 1,650 on the stock.
We expect Q2FY20 net sales and Adjusted PAT to go up by 10.8 percent and 17.2 percent on a YoY basis. We expect earnings growth to be 20 percent CAGR for the next two years.
After corporate tax rate changes, we have upgraded our price target to Rs 369. The stock is trading at just 8.5x on Fw PE basis for RoE profile of around 23percent. We have valued the stock at 12x on a forward PE basis.
Unlike other home textile exporters, the company’s owned and licensed brands contribute 75-80 percent of its revenue.
HSL has undergone a massive capex programme in the last two-three years, hence going forward we can expect deleveraging to be the management focus. We expect high single-digit growth of around 9 percent per annum in revenue in the next two years based on volume growth in bed-linen business and contribution from terry towel capacity.
The stock is trading at historic low valuations of 6.6x on Fw PE basis. Post corporate tax rate, we have revised the one-year price target to Rs 212.
Analyst: Pankaj Bobade, Head of Fundamental Research, Axis Securities
India has a very thin penetration of consumer durables such as air conditioners (ACs), which has become more of a necessity than a luxury now. We like Amber Enterprises which is a leading ancillary to branded AC manufacturers with a market share of almost 50 percent in the outsourcing industry and supplying to eight out of 10 top branded players.
Recently, Amber acquired Sidwal Technologies, which provides HVAC solutions to mobile units, including bus, trains, metros, and defence installations like tanks. The acquisition is in line with the company’s strategy of growing through the inorganic route to achieve profitable growth along with diversifying and de-risking its revenue streams.
Sidwal is a strategic fit in Amber’s portfolio. Sidwal has a leadership position in the railways (50 percent share) and the metro. It is a supplier of choice for defence, where it has 80percent share. It also works well because of high entry barriers and long approval cycles, and diversification into Mobile Transportation Air Conditioning, HVAC etc, which are the core business differentiators for Amber.
With a high level of backward integration, strategically located plants in proximity to customers and the ability to provide a bouquet of solutions, Amber is well placed to capture the growth in the highly underpenetrated AC segment.
Dixon Technologies, a leading manufacturer of products for consumer durables in India, has around 9 percent-plus share in Electronic Manufacturing Services (EMS) providing cost-efficient, end to end solutions to MNCs and domestic original equipment manufacturers (OEMs).
Dixon’s products include (i) consumer electronics-- LED TVs, (ii) home appliances-- washing machines, (iii) lighting products-- LED bulbs (iv) mobile phones and (v) CCTV & DVR. OEMs prefer EMS and original design manufacturers (ODMs) players who provide cost-effective solutions and value-added products that help them focus on differentiation via new product innovation, brand building, marketing and distribution.
ODM solutions fetch higher margins as compared to EMS business. With a leading presence in ODM, Dixon is well equipped to capitalise on rising OEMs’ demand for ODM solutions.
Indian Consumer Electronics and Appliances market is expected to grow at a faster pace of around 19 percent CAGR between FY19-21E as compared to global consumer electronic appliances market growth at 8 percent CAGR in the same period. High growth in consumer electronics and increasing EMS present a huge opportunity for players like Dixon.
Analyst: Mustafa Nadeem, CEO, Epic Research
Despite slowdown and a deterioration in its volume growth as compared to the previous quarters, the company has managed to post a net profit jump of 21 percent while revenue rose to Rs 9,708 cr.
There is consistency in numbers, which reflects that the overall growth trajectory is likely to sustain in the coming quarters. There is an improvement in EBITDA, while operating margin remained solid with improvement of 200 bps.
There may be concerns about rural growth but we believe with recent rate cuts and sliced corporate tax, the stock continues to be one of the best picks from consumer staples.
Tata Global has been on a growth trajectory with strong volume growth and that has resulted in 10.6 percent improved consolidated net profit, while the total income jumped 5 percent to Rs 1,927.66 cr. Some of its joint ventures are producing double-digit growth that presents a robust outlook for FY20.
UPL is one of the largest players in total crop production and chemical markets. We believe UPL is a long-term play with its unique and vast business market spreading from India, Europe to Northern America.
The recent takeover of Arysta Lifescience should further create synergy for the company making it a global leader in the agrochemical market.Disclaimer: The views and investment tips expressed by investment experts 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.