The escalating load of NPAs, bond yields and decline in credit growth rate are major issues faced by state run banks.
Crude is currently trading at a four-year price high of above USD 71 a barrel, which may trigger a rise in inflation. But given the election period, oil marketing companies (OMCs) may have to absorb the hike in cost, impacting their profitability.
March CPI inflation has eased to 4.28 percent from 4.4 percent in February due to reduction in food prices. However, any further rise in oil prices and monsoon outlook will adversely impact its trajectory.
The recent spike in crude oil prices is largely due to a sudden spurt in West Asian geopolitical tensions. A spike in oil prices above current levels can attract higher US supplies (shale oil). Considering this, oil prices are likely to be in the USD 60-70 a barrel range in the medium-term.
Average monthly inflows in mutual funds was Rs 20,000 crore till February. This has reduced to Rs 11,000 crore in March due to negative equity returns since February in global and domestic markets.
Additionally, introduction of long-term capital gains (LTCG) from April, led to marginal redemption in the last two months of FY18. There is a possibility that this reduction in inflows can be sustained in the medium-term due to higher volatility in the global and domestic markets.
The trend is likely to be positive as financialisation of assets will be key to household holding in India for a long time.
The pharma sector could emerge as a dark horse in FY19. The sector has been facing adverse conditions in both the domestic and global markets since 2016. All major Indian pharma giants were impacted due to stricter norms of the US Food and Drugs Association (USFDA) leading to subdued earnings and underperformance by the sector.
During the last couple of months, we have slowly shifted our view on the pharma sector from neutral to constructive. Their valuations are so attractive that it is impossible to avoid such businesses for the long-term as these are likely to stabilise over the next one to two years. It is especially true for companies which have shown positive regulatory approvals from the USFDA.
Avenue Supermarts (D’Mart):
D’Mart has a strong track record of high growth and profitability. Revenue/PAT has grown at 37/51 percent in the past five years. EBITDA margin is higher among peers due to better asset turnover and lean cost structure. The recent strategy revamp to include leased stores along with owned ones will accelerate its pace of growth. We expect high growth to continue aided by store additions, change in strategy, e-commerce, debt reduction and tailwinds from the Goods & Services Tax (GST). As a result, we expect the high premium to be maintained in the medium-term.
Bharat Electronics (BEL):
At present, BEL’s valuation looks attractive post the recent 20% correction in the last two months due to lower-than-expected allocation to defence from the Union Budget and stake dilution by the government. However, we continue to maintain our positive view on the stock given the strong order backlog of Rs 40,000 crore (5x FY17 sales) which provides a strong earnings outlook. Further, BEL has limited competition due to its niche capabilities, strong technological tie-ups, strategic nature of projects, capital-intensive nature and high gestation period. Going forward, BEL will emerge as a key beneficiary from the on-going defence modernisation programmes and the government’s focus on indigenisation.
Natco Pharma:
Natco Pharma is a vertically integrated pharmaceutical company with a presence across multiple speciality therapeutic segments. Focus on R&D and complex molecules will drive growth and stability in the business. The company is strategically placed in terms of backward integration for critical active pharmaceutical ingredients (APIs), which equips it to enjoy corresponding gains in terms of cost, quality, and logistics. EBITDA margin is expected to remain stable at 40% over FY18-20e, led by new launches in the US and India and improvement in operational efficiencies.
Tata Consultancy Services (TCS):
We remain positive that TCS will deliver better earnings growth under its new leadership. Despite external headwinds, revenue from its digital business stood at 22.1 percent in Q4 FY18, a growth of 40 percent YoY. The management is confident that one-third revenue will accrue from the new digital business by FY20. We are factoring in 7 percent revenue CAGR over FY17-20e given the strong deal pipeline in the non-BFSI sector, coupled with traction in the digital business and recovery in the retail vertical. At present, TCS is trading at a valuation of 19x FY20 P/E, which is acceptable considering its three-year historical average.
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