The Indian stock market is currently in a consolidation phase after hitting record highs on the Sensex. Some correction was seen after Moody’s India outlook downgrade, but buying at lower levels on the hopes of recovery provided support.
The 12 percent rally since September 20 after the corporate tax rate cut was largely broadbased as nearly 70 percent on the Nifty50 stocks rallied 6-38 percent. The broader market also followed suit, with the BSE Midcap index adding over 11 percent in the same period.
As a result, many of these aforementioned stocks are now trading at premium valuations.
Hence, experts expect some correction in the near to short-term, adding that sharp correction is unlikely unless global headwinds spoil the party. They further added that the long-term perspective of the market still remains positive.
They advice taking a stock-specific approach based on parameters such as corporate governance, earnings growth, less/no debt, sectoral growth etc.
“The past few months’ flow data has been positive for markets. DII and FII buying at various bottoms have arrested the downfall and we see buying interest from various market participants. However, we remain confident that there will not a sharp correction unless there are shocks emerging from external events on the geopolitical front or some surprises on the financial deficits,” Vijay Kuppa, Co-Founder, Orowealth told Moneycontrol.
“We are definitely trading at a record high from the index point of view, however, the polarization in the market over the last 5 years has meant that majority of the stocks are still trading at multi-year lows,” said Santosh Kumar Singh, Head of Research, MOAMC.
We have collated a list of 10 stocks where brokerages initiated coverage in November with a buy call and expect a return of 15-33 percent in the next one year:
Affle India: Buy | Target: Rs 1,900 | Return: 28 percent
We initiate with a Buy on Affle, a leading digital AdTech player in India. We think the underlying macros are attractive in Affle’s key markets (India & SEA), where a large internet user base, rising smartphone sales, improving data connectivity and young demographics augur well for the shift to digital. Digital ad spends are expected to grow faster at 32 percent and 18 percent CAGR in India and SEA versus 15 percent globally over FY18-21E.
Despite this, penetration is expected to remain low at 25-30 percent by FY20/21E versus 54 percent globally, thereby offering a long runway for growth. Further, as advertisers shift to direct sourcing, ad tech vendors could retain a higher share of digital ad spends, implying faster growth for ad tech vendors.
ICICI Prudential Life: Buy | Target: Rs 700 | Return: 33.5 percent
ICICI Prudential Life is the third-largest Indian private life insurer with an APE market share of 17.7 percent (FY19). Given the distribution strength, derived primarily from bancassurance (around 56 percent of total annual business) and augmented by a fairly large agency force, we see a clear runway to market share gain, especially if capital market sentiments remain supportive. VNB margin of 21 percent in H1FY20 has improved 1,160bps in the past three years on account of operational improvements (persistency) as well as product mix shift in favour of pure protection.
We expect APE to post 10 percent CAGR over FY19-22E and 390bps improvement in margin over the same period. Our 12 months’ target multiple of 3.6x FY21E P/EV yields target price of Rs 700. The key risk is persistency drop due to multi-year capital market apathy.
SBI Life Insurance: Buy | Target: Rs 1,220 | Return: 26 percent
SBI Life Insurance is the largest private life insurer in India with an individual APE market share of 22.3 percent (FY19). It is the lowest cost player on an overall basis and well-poised to notch up market share gains by straddling the entire gamut of products fully backed by the deep nation-wide distribution of its parent, banking behemoth SBI. We estimate SBI Life to clock APE CAGR of 16 percent over FY19–22 and maintain ROEV of 18 percent via average annual expansion of 50bps in new business margin.
We initiate with buy and 12 months’ target price of Rs 1,220, at 4x FY21E P/EV (expounded in sector note). Key risks: operational challenges such as managing activations across the massive branch network and management continuity given its PSU parentage.
Brokerage: Karvy Stock Broking
Shriram Transport Finance Company: Buy | Target: Rs 1,332 | Return: 19 percent
Going ahead, we expect STFC’s AUM to grow at a CAGR of 12 percent during FY20-22E aided by moderate volume in FY20 on account of pre-buying ahead of BSVI implementation, structural growth in economy and improvement in rural income leading to boost in rural consumption. On account of substantial increase in credit cost due to transition from 180 dpd to 90 dpd PAT growth was muted in recent years.
However, post transition to 90dpd there is stability observed in credit cost and going forward growth in AUM and interest income will translate to PAT growth. PAT for FY19-22E is expected to be 15.3 percent CAGR owing to a) Moderation in provisioning amount, b) Reduction in corporate tax rate from 34 percent to 25.2 percent. At CMP, the stock is attractively priced trading at 1.2x FY21E BV.
We initiate coverage on STFC with buy recommendation and a target price of Rs 1,332 per share.
Brokerage: SBICAP Research
Balkrishna Industries: Buy | Target: Rs 1,050 | Return: 27 percent
Balkrishna Industries’ strong franchise in a highly specialised & large OHT segment with around 5 percent global market share has delivered robust cash flows, return ratios and strong balance sheet across cycles.
Despite near-term uncertainties, commentary from global majors such as Caterpillar indicates we might be in the early stages of a multi-year recovery in industrial cycle.
With solid competitive positioning, multiple strategic initiatives currently underway and sufficient capacity (around 60 percent utilization), Balkrishna Industries is well-positioned in an up-cycle, translating into strong free cash flow and return ratio potential. We initiate with buy and with a target of Rs 1,050.
Brokerage: Centrum Broking
Reliance Nippon Life Asset Management: Buy | Target: Rs 421 | Return: 30 percent
We initiate with buy rating on Reliance Nippon Life Asset Management (RNAM), the fifth largest AMC in India. It is focused on building granular retail AUM via presence in B30 cities (beyond top 30 cities), through a large distribution network of independent financial advisers (IFAs).
Nippon Life Insurance of Japan recently completed acquisition of the previous promoter’s (Reliance Capital) stake. In our opinion, the Nippon Life brand is likely to aid RNAM in getting better flows from domestic corporates and the offshore segment going forward.
We value RNAM at 40.8 FY21E P/E resulting in a target price of Rs 421. Risks for the company include reduction in financial savings rate, potential negative news on the brands, and underperformance of schemes.
Brokerage: Axis Securities
Karnataka Bank: Buy | Target: Rs 100 | Return: 30 percent
With a significant portion of its corporate-book stress already recognised, we expect asset quality to stabilise and the bank’s focus to shift toward normalising profitability. Operating profit growth is likely to be aided by improved NII with NIM bottoming out and focus on the retail segment. Margin commentary, fee income outlook and operating expenses control was positive during the quarter.
We have tweaked loan growth estimates downwards over FY19-FY21E. The stock is quoting at attractive valuations of around 0.4x FY21E ABV and we retain buy on Karnataka Bank with target price of Rs 100.
Granules India: Buy | Target: Rs 144 | Return: 19 percent
Granules India has done well with 15 percent CAGR in revenue and an EPS growth of 20 percent over FY15-19. In last three-four years, GRAN has heavily invested in new capacities and enhance capabilities in finished dosage for long term growth. We think the current P/E of 8.2x FY21E EPS is at a discount to its intrinsic value, considering strong revenue growth coupled with improving profitability, we believe this valuation gap to narrow down.
With a focus on deleveraging balance sheet, divestments in joint venture and improving return ratios, we expect stock to trade in its 3-years average one year forward multiple of around 13-14x. We assume earnings CAGR of around 24 percent over FY19-21E, resulting EPS of Rs12.9/14.4 for FY20/21E respectively.
Brokerage: Anand Rathi
ICICI Bank: Buy | Target: Rs 569 | Return: 15 percent
The management has given a guidance to achieve a consolidated return on equity (RoE) target of 15 percent by June’20. Considering the strong brand franchise, improving asset quality trends and strategy focus, the bank is well poised to deliver consistently with improving return ratios.
We expect company to grow its standalone NII at a CAGR of 17 percent over the next two financial years. Healthy advances growth & cross sell opportunities in the existing high-quality deposit franchise will help in delivering strong NII going forward.
On profitability front, we expect company to report standalone PAT CAGR of 111 percent over the next two financial years. Lower credit cost along with healthy advances & NII growth will help in delivering strong profitability going forward.
We believe ICICI Bank is favourably positioned to deliver superior profitability and return ratios. We initiate our coverage on ICICI Bank with a buy rating and target price of Rs 569 per share.
Brokerage: Arihant Capital Markets
Bharat Electronics: Buy | Target: Rs 134 | Return: 23 percent
Bharat Electronics (BEL) has shown steady performance above the years with near-monopoly status in the Indian defence space. We like BEL due to its robust order book giving nearly 5 years of revenue visibility, which will help BEL to clock 12.8 percent revenue CAGR over FY19-21E. Also with easing concerns on margin due to new pricing policy, we expect BEL to maintain a stable margin of 19-20 percent over FY19-21E.
With India’s ever-increasing budget allocation in defence, BEL will continue to enjoy its near monopoly status and will be able to maintain its steady growth rate. We initiate coverage on BEL with a buy rating and a target price of Rs 134 per share.
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