After hitting a lifetime high of 11,171 in January, the Nifty corrected sharply to break the 10,000-mark in March. It followed it up with a gradual recovery along with rangebound trade. Trade war tensions between US and China, sharp rupee depreciation versus the dollar, steep increase in crude oil prices along with Karnataka election verdict caused selling pressure as well as volatility in the market.
Now the market has taken all these concerns in its strides and started inching towards that record high again on hopes of an earnings recovery and economic growth this fiscal. Stability in the dollar-rupee and crude oil prices aided the rally, though trade tensions took centre stage after the US threatened 10 percent tariffs on $200 billion of Chinese goods.
The Nifty is now trading at a 5-month high of around 11,000 levels and is 150-point away from its earlier record high. The market recovery has been backed by domestic inflows when foreign investors were sellers. The market is likely to continue its upward trajectory, though there could be some volatility due to global cues like trade tensions and any sharp spike in crude oil prices, experts said.
“We expect Indian markets to grind higher, though volatility will remain high. This may induce swings in either direction,” Karvy Stock Broking said in its recent note. It sees valuations at more reasonable levels now (compared to January) with Nifty trading at a 12-month forward price-to-earnings ratio of 18 times (Nifty’s average has been 16.2 times since 2005). “At current levels, valuations are not a constraint for the markets to move higher.”
Experts too see limited downside to the market now. For a correction to occur, the stated that oil prices have to stay above $80 a barrel and dollar has to increase sharply against the rupee.
But Pratik Gupta of Deutsche Bank India expects volatility to continue in the short term. “The market could fall 3-5 percent only if there is a sharp appreciation in the dollar-rupee and crude oil prices spike.”
However, he was quick to counter that this does not mean the upside is unlikely. “The Sensex and Nifty can end the current calendar year at 37,000 and 11,400, respectively, as the structural growth story is intact for the next 3-5 years with corporate earnings picking up.”
Karvy’s year-end target for the Sensex is 37,500, which is 6 percent higher than current levels. “We believe the Sensex will touch 40,500 by December 2020, an upside of 14 percent from the current levels.”
The research house suggests investors keep an eye on the dollar-rupee, global trade war, oil prices, ongoing resolution of bad loans in the banking sector and state elections in 4 states (Mizoram, Rajasthan, Chhattisgarh and Madhya Pradesh) in the run-up to the general elections to be held in May 2019.
Here is the list of 10 stocks from Karvy Stock Broking that can deliver 22-50 percent return in 1 year:
HCL Technologies: Buy | Target – Rs 1,176 | Return – 27 percent
The FY19 guidance of 5.25 percent organic growth was slightly below estimates and lower than industry average. This led to a sharp correction in the stock. HCLT’s underperformance relative to both broader markets and IT index is overdone. HCLT is likely to surprise positively on the growth front.
On a TTM basis, HCLT is currently trading at a PE of 14.8 and FY20E PE of 12.5. Currently, HCLT is trading at a discount of 46 percent to TCS’s PE vs historical average of 25 percent.
We remain constructive on the stock given industry leading growth rate and stable margins. We value HCLT at FY20 PE of 15.8 and reiterate Buy with a target of Rs 1176, an upside of 27 percent.
Sustained weakness in IMS and margin risk due to higher investments are key downside risks.
ICICI Bank: Buy | Target – Rs 405 | Return – 47 percent
Even though the slippages increased in Q4FY17, the material portion that includes adversely classified accounts including the guided stress list remained unchanged.
This is positive for the company as we expect the bank to be left with the adversely classified exposure of Rs 13,330 crore of which we assess Rs 10,000 crore to slip in FY19E.
Also, the RBI review report didn’t impact the asset quality negatively.
We estimate return on assets (RoAs) to improve to around 1.7 percent in FY20E from around 0.9 percent in FY18. We maintain a Buy on the stock with target price of Rs 405 valuing core banking operations at Rs 300, 1.9x FY19E P/B and subsidiaries at Rs 105 per share.
Key risk could be discovery of new NPAs that can further deteriorate bank’s financials, thus making recovery difficult.
Indiabulls Housing Finance: Buy | Target – Rs 1,519 | Return – 33 percent
The company fundamentals are on strong footing and as per consensus, the operating performance will be strong which derives a valuation of 3.4x price/book value for a target price of Rs 1,519 representing an upside potential of 33 percent.
Larsen & Toubro: Buy | Target – Rs 1,631 | Return – 28 percent
L&T’s exposure to various sectors/ geographies coupled with its excellent execution capabilities 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 24.0x for a target price of Rs 1,631, representing an upside potential of 28 percent. Delay in capex cycle recovery & order execution may pose threat to the call.
Oil & Gas Natural Gas Corporation: Buy | Target – Rs 192 | Return – 22 percent
Synergies in ONGC’s business and likely consolidation in downstream business with merger of HPCL and MRPL will ensure uptick in growth for the company.
We have valued the stock at PE 8x of FY20E EPS and have arrived at a target price of Rs 192 which gives potential upside of 22 percent. However, subsidy sharing will be detrimental to ONGC’s performance.
State Bank of India: Buy | Target – Rs 334 | Return – 29 percent
SBI with its focus on loan book growth, CASA share in deposits, sustained NIMs of 2.7 percent, reducing non-performing assets (NPAs) and fresh slippages augur well in the long term.
Merged SBI presents a case for a diversified balance sheet that mirrors the domestic economy available at bargain valuations from a long term investment perspective.
We value the stock at 1.2x FY20 BVPS with a Buy rating for a target price of Rs 334.
Tata Motors: Buy | Target – Rs 405 | Return – 50 percent
Around GBP 13.5 billion has been lined up for investments for the next three years on technology, new launches and capacity expansion which works out to be around GBP 4.5 billion per annum out of which around 78 percent is expected to be spent on technology and product development.
The technology involved is called Modular Longitudinal Architecture (MLA) which is compatible with Internal Combustion Engine (ICE), Battery Electric Vehicle (BEV) and Plug-in Hybrid Electric Vehicle (PHEV) making it a flexible design. This is expected to bring about some operational benefits and will be fully implemented by FY25E.
The Bloomberg consensus target price for Tata Motors is Rs 405 which is valued at P/E 8.9x for FY20E EPS based on future growth prospects. However, slowdown in the UK and European markets for JLR can be viewed as the possible downside risks to the call.
Titan Company: Buy | Target – Rs 1,058 | Return – 20 percent
Under jewellery segment, ‘Tanishq’ is the most successful and leading brand for the company in India. Now the company is planning to enter into international markets in jewellery segment by the end of FY19.
Titan, with its improving operational efficiencies and expansion strategies in retail network, is moving up the value chain and capturing more market share.
The stock is valued at 52.0x on Bloomberg consensus FY20E EPS with Buy rating to arrive at target price of Rs 1,058 with an upside of 20 percent.
However, government regulations on gold purchases, competition from regional jewellery players, gold price volatility, revival in consumer spending & competition from e-commerce players will be the key risks to the earning of the company.
UPL: Buy | Target – Rs 934 | Return – 51 percent
The favorable weather forecasts for key agricultural regions, constructive government policies, and possibility of price increase (given stock-to-use ratios of key grain commodities expected to fall in certain regions) should speak well.
Crop diversity and gaining traction in biological nutrition portfolio will further drive growth for UPL and help in mitigating risk. We recommend Buy for a target of Rs 934 valuing at 17.4x FY20E EPS representing an upside potential of 51 percent.
Yes Bank: Buy | Target – Rs 472 | Return – 39 percent
Volatility in asset quality is a cause of concern.
In the past five years, the bank has consistently delivered 1.5 percent+ return on assets and 18 percent+ return on equity. Liabilities have been managed well with CASA as well as retail deposits improving and its target of 40 percent by FY19 looks achievable.
It has ambitious target for NIM of 4 percent by FY20. Expansion of branches and employee addition will keep costs elevated.
Supported by strong earnings and the ability to raise capital at a good price, its book value accretion has been the strongest among peers with a five-year CAGR of +30 percent. We maintain a Buy on the stock with target price of Rs 472, an upside of 39 percent.
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