Cautious on broader markets in 2018, Q3 earnings could definitely look better; 5 best picks to keep on radar

The valuation picture looks little stretched by all means. Is it fair to call this market a ‘buy on dips'

The Nifty is currently trading at TTM P/E & P/B multiple of 26.8 & 3.54 respectively. The average TTM P/E & P/B multiple of Nifty since January 2000 is 19.1 & 3.6, respectively. The markets have risen in the past few months on the back of strong liquidity and expectations of earnings recovery in second half of FY18.

We are cautious on the broader markets since there are various risks related to USD depreciation, crude run up, higher inflation expectations, firming up of bond yields and relatively high TTM valuations. However, we have a bottom up approach in stock selection and any correction in these stocks because of dampening in general markets shall remain a “buy on dip”.

We believe earnings in second half of FY18 and first half of FY19, Budget in 2018, RBI Bi-monthly Policy review, Build up to general elections in 2019, US FED announcements, US tax rate cuts & further developments here are key things to watch out for.

In our view, earnings should be robust due to lower base of demonetisation and GST. However the Budget could be more populist since it would be targeting FY19 elections. The RBI policy might remain circumspect given our commodity dependence and the high chances of crude rise.

Fed hike/s would lead to lower liquidity in the EMs while tax cuts would lead to a widening of fiscal deficit and lead to USD depreciation. All these events will certainly have mixed impact on Indian equities and the broader indices would be volatile at best.

2017 has been a great year for Indian equities as the market grew by around 25 percent. Do you see same kind of rally in 2018 also and what is your Nifty target for December 2018?

We do not have targets for NIFTY. As highlighted above, the market would be more volatile and under pressure in CY18 compared to CY17.

The domestic liquidity supported markets in the year 2017. Will that liquidity support continue in 2018 as well or do you see some tapering of flows?

Flows will naturally taper from earlier levels due to factors discussed above.

After Gujarat elections there are as many as 8 state assembly elections lined up before general elections in the year 2019. Do you see a change in tactics of the Modi government or a policy shift in policy framework – from reformist to populist? What are you key expectations from the last full-fledged Budget, especially after Gujarat elections results?

Lower-than-expected seats in Gujarat elections have made the BJP led government cautious. The government has also ushered a major reform in the form of GST and too much reformist action might be negative for FY19 re-election prospects. Given this background, we expect a populist Budget this year.

Everyone is saying corporate earnings were far better-than-expected in September quarter. Do you see December quarter earnings laying foundation stone of earnings recovery?

Q3FY18 would definitely seem better due to a lower base in the previous year. We do expect this and subsequent quarters to lead the next phase of rally in the stock markets.

As we move to 2018, what are your 5 best picks for 2018?

Ashoka Buildcon

We expect higher contribution of roads and financial closure of HAM projects to lead to a better margin profile and working capital improvements ahead. We expect a re-rating of the stock led by (a) execution ramp-ups, (b) more EPC/hybrid annuity project wins and (c) declining interest rates.

Cadila Healthcare

The company has more than 150 pending approvals with USFDA & has been consistently receiving approvals (over 40 approvals in FY17). Strong US growth combined with accelerating growth in domestic market will help Cadila’s earnings to grow at 30 percent between FY17-20.

We also expect Cadila to get higher valuation as compared to peers owing to no overhang of regulatory issues and robust pipeline.

Pokarna

Company is amongst the few listed granite companies in India with fully integrated operations from captive quarries to own marketing. In Quartz, there is huge opportunity to capitalise in USA market. Tie up with IKEA is expected further boost sales.

Power Mech Projects

Robust order book is likely to drive execution visibility in FY18/19. Sluggishness in the domestic ETC market is likely to be offset by higher share of O&M, AMC and international market.

Granules India

We expect multi-year traction in the business, where immediate triggers would be utilisation of the newly built capacities, new ANDA launches from Hyderabad facility & improvement in Omnichem JV realization.

Medium to longer term would be driven by complex generics from the US facility, traction in the Private label OTC sales & introduction of Oncology portfolio.

MORE WILL UPDATE SOON!!