Market is in a splendid form. Will this party continue in 2020?

Siddhartha Khemka

The stock benchmark Nifty surpassed the 12,000 mark in November 2019 and continuously scaled new heights in December on the back of improved sentiment. What worked wonders was foreign investors’ buying streak --a seven-month high in November-- whose net inflows stood at more than Rs 95,000 crore till date.

Sentiment took a turn for the better, especially after the corporate tax rate cut announcement in September 2019.

We believe that the initiatives taken by the government and the Reserve Bank of India  (RBI) will take time to show results on the ground. However, long-term fundamentals of the Indian economy continue to remain strong with an expected gradual recovery in growth and a domestic consumption-driven economy.

While stock benchmark indices have been touching new highs, not many portfolios are making money. This peculiarity in the market has seen concentration on select stocks and a big divergence in performance within the Nifty and mid/small cap indices.

The market has clearly rewarded quality, growth and steady businesses irrespective of market capitalisation. A major theme for 2019 was corporate governance, and companies with a good, clean management were rewarded handsomely – a theme which may well continue in 2020 as well. With earnings growth set to improve, we expect more stocks to participate in this party and perform in 2020.

Outlook

After the recent rally, we believe that the Nifty at around 18x FY21E P/E captures the expected earnings recovery. The upside from current levels may be capped.

We expect participation in quality mid caps to increase, given their significant underperformance and discount to larger peers. The Nifty fetched returns of around 12 percent in 2019 and broke new ground despite the weak macros and slower earnings growth.

We expect the market momentum to continue in 2020 on the back of global economic revival, earnings growth, liquidity and any further announcements from the government to boost demand or consumption or both.

Going ahead, we also believe that large private banks, consumer, FMCG, core sectors like cement and capital goods would do well. We are positive on banks on expectations of asset quality normalisation over the next two years.

Further, with a revival in the economy, large private banks will be in a sweet spot to garner larger chunk of business and market share. Consumer companies will be the largest beneficiary of demand revival as and when it happens.

Both cement and capital goods sectors are trading at around 20x P/E, which is a discount to their 10-year average P/E as the capex cycle has yet not picked up. However, once the measures adopted by government start taking effect and capex cycle revives, these sectors will be big gainers. The insurance sector in India is in a sweet spot with strong structural potential as it is highly under penetrated.

Stock Picks for 2020

UltraTech (Target Price Rs 5,050)

UltraTech is the largest manufacturer of grey cement, ready mix concrete and white cement in India, with an installed capacity of 95 mt (million tonnes). The acquisition of Century’s cement asset and Binani increased its capacity to 109.4 mt, taking its pan-India market share to 24 percent.

Given limited capex needs, strong FCF (free cash flow) generation of over Rs 7,500 crore per annum (7 percent yield) from FY20 should drive deleveraging and stock price appreciation. North/Central India are structurally the preferred regional markets for us where UltraTech has the highest exposure. We forecast a CAGR (compound annual growth rate) of 26 percent/48 percent in EBITDA/EPS over FY19-21, driven by a 6 percent CAGR in volumes and better margins. We expect RoE (return on equity) to improve 550 bps (basis points) to 13.8 percent by FY21.

ICICI Bank (TP Rs 625)

ICICI Bank has increased its focus towards high-yielding retail loans like personal loans and credit cards. The retail business remains a key growth driver and constitutes ~61 percent of the total loan book.

ICICI appears firmly positioned to deliver healthy sustainable growth, supported by continued investments in technology and expansion in its digital offerings. It has one of the highest provisioning coverages in the banking sector. It remains one of our top ideas in the BFSI (Banking, financial services and insurance) space -- We estimate RoA (return on assets)/RoE to improve to 1.6 percent/15.7 percent in FY21. Our SOTP (sum of the parts)-based TP is Rs 625 (2.5x September 2021E ABV, Accredited in Business Valuation), primarily as we roll forward our valuations.

Titan (TP Rs 1,275)

Titan Industries is the market leader in watches and a pioneer in branded jewellery. The longer-term investment case remains promising as Titan is well-placed to grow its share in the largely unorganised jewellery market in India from the current level of ~8 percent. This makes it one of the most attractive candidates in terms of top line and earnings from a three-year perspective. With over 60 percent of the jewellery segment growth continuing to come from SSSG (same-store sales growth), operating margins are also likely to improve. This should help RoE improve from 25 percent in FY19 to 30 percent in FY21.

Siddhartha Khemka is Head – Retail Research at Motilal Oswal Financial Services. Views are personal.