Nifty has taken two years to cross the 9000 level but this 360-degree recovery seems to riding on the hope of strong fundamentals going ahead. Major decisions including GST rollout and demonetisation taken by the Central government since it came in power in 2014 are likely to take centre-stage in the investment discourse on India over the next 2-3 years. But earnings will be a significant driver for further upside in markets, finds a Motilal Oswal report.
“Demonetisation and progress on GST have been the two most significant macro developments. Together, these two reforms have the potential to alter the investment landscape for several sectors. The obvious consequence of these two reforms is a greater formalisation of the economy and value migration from the unorganised to the organised segment,” it reasons.
After a sharp 15 percent rally in three months, the market seems to have largely shrugged the impact of demonetisation and valuations already have become stretched. This rally was largely backed by conducive macro factors – inflation under control, twin deficits within tolerance limits, government sticking to the fiscal consolidation path, and stable currency among others.
The brokerage house says valuations for the Nifty based on both one-year forward earnings and on trailing earnings are rich but at similar levels to March 2015.
Motilal Oswal says Goods & Services Tax (GST) is on track for implementation from July 1, 2017. The BJP’s strong showing in the recent UP elections (won 4/5th majority) should provide tailwinds for further reforms. The political calendar is light, as the next major assembly elections are due only in January 2018 (Gujarat). But earnings recovery is the only missing link, according to the research house.
It expects around 23 percent earnings growth in FY18 but delivery of the projected earnings growth is crucial for valuations to sustain and expand.
While FY18 would benefit from a low base in the second half of FY17 (demonetisation impact), there are two important near-term earnings headwinds to watch for – one is inflation in commodity prices, which could erode margins for B2C sectors like autos, consumer and cement, and second is the implementation of GST, which could impact earnings for a quarter or two (inventory adjustment in trade, initial implementation hurdles), the brokerage house says.
A Look Back at the Past
Over March 2015 – March 2017, institutional flows were dominated by DIIs. While inflows from DIIs were USD 15.9 billion, inflows from FIIs were relatively muted at USD billion. The shift in institutional flows in favour of DIIs are reflected in the sharper outperformance of midcaps and small caps. The Nifty CNX Midcap index has delivered 22 percent return over this timeframe, outperforming the Nifty by 21 percent. Also, over the last two years, the foreign ownership of Nifty stocks has reduced by 140bp whereas the ownership of DIIs and other domestic investors has increased by 190bp, the brokerage house says.
FIIs have increased their stake by 550-1,050bp in Eicher Motors, Adani Ports and BPCL, but have reduced their stake in Grasim, ICICI Bank and Ambuja Cement. DIIs have increased their holdings by 600-800bp in Kotak Mahindra Bank, Sun Pharma, ICICI Bank and Cipla, but have reduced their holdings by 200-500bp in BPCL, Maruti and Eicher Motors.
Following are top investment ideas from Motilal Oswal:
Indian Oil Corporation
PSU oil retailer IOC shot up 117 percent in two years period and nearly 14 percent in 2017 amid lower crude oil prices and deregulation of petrol & diesel prices.
Bakery products manufacturer showed consistent performance in its earnings. During March 2015 to September 2016, its profit grew by 212 percent on half yearly basis.
Motilal Oswal in its report dated March 7 said Britannia’s FY16 annual report highlighted a healthy operating performance, with revenue growing 10 percent YoY to Rs 8,680 crore and EBITDA margin expanding 310bp YoY to 14.1 percent led by benign commodity prices and premiumisation. Operating cash flow increased to Rs 960 crore (FY15: Rs 580 crore), supported by Rs 150 crore reduction (FY15: Rs 160 crore increase) in bank deposits; adjusted for this, operating cash flow was Rs 820 crore (FY15: Rs 740 crore).
The stock gained 57 percent in last two years and 17 percent in 2017.
Aluminium major Hindalco Industries climbed 25 percent in two years and nearly 24 percent in 2017, backed by rally in commodity prices and hopes of revival in earnings.
Cigarette-hotel-to-FMCG major ITC saw a rally of more than 17 percent in current calendar year after lower-than-expected excise duty hike on cigarettes and improvement in earnings. Analysts expect no change in total tax incidence on tobacco post GST implementation.
Incorporated in 1975, JK Cement, the second largest white cement manufacturer, gained nearly 25 percent in 2017 on hopes of revival in infrastructure sector.
The brokerage house in its report dated March 27, said company’s FY16 annual report highlighted an improvement in the operating performance, with consolidated EBITDA rising 21 percent to Rs 550 crore (FY15: Rs 450 crore) due to stabilisation at UAE operations and cost-control measures. However, consolidated PAT declined 57 percent, with the margin contracting to a five-year low of 1.6 percent due to higher finance and depreciation charges.
In its report dated March 24, Motilal Oswal said it believes the company’s increasing presence in a market dominated by tier-II players would improve the business dynamics in the region. With the completion of Jaiprakash Associates’ acquisition by UltraTech in Q1FY18, the brokerage house expects the company to ramp up the utilisation of these assets to 60 percent over the next 6-9 months. The stock gained 23 percent in FY17.
After meeting the management of Colgate, the brokerage house enthused about its longer-term business prospects, said the company has weathered the storm from herbal players like Patanjali, with minimal damage to its market share in the last three quarters. It believes the sharp dip towards the end of FY16 was only a small blip in what has been a longer-term uptrend in market share.
Given its rural dominance, Colgate is a great play on rural recovery, it feels. It said valuations are lower than the average 3-year and 5-year multiples.
Colgate has best-of-breed return on equity, strong earnings growth prospects, and best-in-class dividend yield, which is likely to rise rapidly now that a major part of the capex is over, said the brokerage house while maintaining buy on the stock in its recent research report (March 20).
The stock gained more than 9 percent in 2017.
The country’s largest telecom operator stock price rallied 13 percent in 2017 but fell nearly 2 percent in two years due to pricing competition.
State Bank of India
The stock fell 2 percent in two years but gained 15 percent on hopes of early resolution to non-performing assets and ahead of merger of associate banks with itself.
Larsen & Toubro
After meeting with management, Motilal Oswal, on March 6, said company’s base orders in infrastructure (which includes water, T&D and transport infrastructure) would drive order inflow in Q4FY17 and domestic execution pick-up is likely in FY18.
It further said the company is exposed to several levers across its business/geographical segments. It has emerged as the engineering & construction partner of choice in India, which provides it with a robust platform to capitalise on the next leg of investment cycle. It maintained a buy call with an SOTP-based price target of Rs 1,660.
The stock gained 15 percent in FY17 on hopes of revival in earnings in FY18 after sluggish growth.
The stock fell 0.5 percent in current calendar year (2017) and lost 17 percent in two years because of subdued earnings performance of Jaguar Land Rover. However, analysts still confident of revival in earnings performance due to likely new launches from JLR going ahead.
The brokerage house in its report dated February 3, said Tata Motors was one of its top picks in auto space, with a target price of Rs 775 after company’s new strategy for the passenger vehicle business and sub-brand/vertical TAMO.
“We see these initiatives as step in right direction and infuse more energy in TTMT’s PV business by giving autonomy and ring-fencing TAMO vertical to focus on innovation. This could long way in transforming PV business through agility, adaptability and making business leaner and meaner,” it said.
Country’s largest private sector lender stock price lost 19 percent in two years but gained 10 percent on likely strong earnings in FY18 post NPA concerns.
In its report dated March 10, Motilal Oswal said after visiting Angul steel plant, company appeared to be on track to more than double its steel capacity at Angul to 5 million tonnes (from current around 2 million tonnes) in two years by adding capacity through a more efficient hot metal production route (currently DRI).
With this, steel sales volumes will increase from around 3.3 million tonnes in FY17 to 5.8 million tonnes by FY19, implying a CAGR of 31 percent, the brokerage house said. It expects consolidated EBITDA CAGR FY17-19 of 32 percent to Rs 7,800 crore. Although adjusted PAT would remain negative due to bloated depreciation on massive asset revaluation, there will be a sharp turnaround in cash profits, it says while retaining buy call on the stock.
The stock price shot up 71 percent in current calendar year (2017) on rally in commodity prices and production capacity expansion.
Maharashtra-based RBL Bank (erstwhile Ratnakar Bank) share price surged 45 percent on strong financials and fundamentals. Asset quality also improved in October-December quarter. The bank raised Rs 1,100 crore through its IPO in August 2016.
Crompton Greaves Consumer Electrical
Home appliances and LED bulbs maker was demerged from Crompton Greaves and later on acquired by private equity firms Temasek & Advent International in 2016. The stock gained 42 percent in 2017.
Posted by Sunil Shankar Matkar