Wednesday, 20 June 2018

Morgan Stanley sees Sensex at 44,000 by June 2019 in a bull case, focuses on these 20 stocks

In a bear case scenario, Morgan Stanley sees a 20 percent probability of the Sensex heading lower to 26,500 levels.

Global investment bank Morgan Stanley has a June 2019 Sensex target of 36,000 under its base case scenario. This means the index would trade below its historical average at just under 16 times one-year forward price-to-earnings. It said factors like improving growth, reasonable largecap valuations and low beta are up against an election year, rising oil prices and higher yields.
In a bull case scenario, it sees a 30 percent probability of the Sensex rallying towards 44,000. “Better-than-expected outcomes, most notably on the policy and global front will result in such an upmove. The market starts believing in a strong election result and earnings growth accelerates to 29 percent and 26 percent in FY19 and FY20, respectively.”
In a bear case scenario, it sees a 20 percent probability of the index heading lower to 26,500 levels “if global conditions deteriorate and the market starts pricing in a poor election outcome and Sensex earnings grow at 21 percent and 22 percent in FY19 and FY20, respectively.”
The global investment bank prefers largecaps over midcaps. The brokerage is positive on banks (private corporate and retail), discretionary consumption, industrials, and domestic materials, while avoiding healthcare, staples, utilities, global materials and energy.
India's low beta and its implications
The global investment bank said in its India Equity Strategy note that India is a likely outperformer even as absolute returns are capped by a tepid global equity market outlook. “The market is now recognising India macro's growing stability compared to emerging markets as is evidenced by the 37 percent fall since December 2014 in the country's beta to a 13-year low. The implications include case for a positive surprise in equity returns for India (as expectations are now low going by the beta level), with likely outperformance for India versus EM in a low return world.”

In addition, India's relative falling short rates, rising relative growth rates and a dip in positioning by foreign portfolio investors to 2011 levels add to the outperformance case, Morgan Stanley added.
Valuations
Morgan Stanley does not feel the Sensex or Nifty are pricing in a multi-year growth cycle, implying meaningful upside potential to stocks over the next three to five years. “For long-term investors, valuations are still in the comfort zone. Relative valuations are attractive and around average, but midcap valuations are still looking stretched despite the recent drawdown,” it stated.
Stocks in focus list:
  
MORE WILL UPDATE SOON!!


Portfolio picks: These 5 stocks can be multibaggers in the next 2-3 years

His favoured picks in the IT space are Tata Consultancy Services, Infosys and Hexaware Technologies.

  


If the monsoon remains normal as predicted by the India Meteorological Department, we will see a dovish stance from the Monetary Policy Committee accompanied by a 25 bps rate hike later in the year.
He is bullish on the IT and pharmaceutical space. His favoured picks in the IT space are Tata Consultancy Services, Infosys and Hexaware Technologies. From the pharma space, he advises long term investors to stagger buying in stocks like Cipla, Natco Pharma and Caplin Point.
We expect the market to remain rangebound with a positive bias, given we don’t see any major global fallout due to escalating trade tensions between the US and China. Despite relentless selling by foreign institutional investors (FIIs), markets are well supported by domestic inflows. We believe the tug of war between FIIs and domestic institutional investors (DIIs) will keep broader indices in a range with high short term volatility due to headwinds like rising crude oil prices, political uncertainty, reversal in the rate cycle and looming trade war between the US and China.
Unlike 2017, 2018 is a year where we are getting closer to an election cycle. Elections bring uncertainty: a factor which makes markets jittery and volatile. We are going to have a balancing year between opportunities like robust corporate earnings, strong rural consumption and bountiful monsoons along with challenges like rising crude prices, burgeoning current and fiscal account deficit and political uncertainty. The above factors will keep markets largely rangebound with sharp interim volatility.
We certainly expect one more rate hike in the latter half of the year given the surge in oil prices due to fresh sanctions on Iran.
If the monsoon spell remains normal as predicted by the India Meteorological Department, we will see a dovish stance from the Monetary Policy Committee accompanied by a 25 bps rate hike later in the year.
The recent directive is hawkish. Any further rise in US bond yields will lead to weaker emerging market currencies and outflow of funds from both debt and equity markets as returns will be depressed for foreign investors. India will not remain an exception.
However, inflows from domestic institutions remained robust. If we have a normal monsoon as predicted by IMD, we may see downward pressure on inflation in the second half of the year, which in turn will cool off rising bond yields at home.
In nutshell, if the FOMC increases rates gradually, it may not be a huge disruption for emerging markets including India.
We expect our domestic currency to remain relatively stronger than other emerging markets currencies, around 68/$ levels, due to comparatively better macros like strong domestic inflows and a hopes of a normal monsoon.
At present, rising crude oil prices is the biggest risk to our economy as it can potentially hurt our fiscal math leading to further weakening of the rupee. But recent developments like talks of hiking production at Friday’s OPEC meet has triggered a sharp fall in WTI crude oil prices from $72.5 a barrel to almost $65 a barrel.
A fall in crude oil prices will ease concerns about India’s swelling current and fiscal deficit and take pressure off from a weakening rupee.
 The outcome of the recently concluded elections in Gujarat, Karnataka and few key Lok Sabha by-polls has given fresh impetus to opposition parties who prepare to come together to fight the 2019 general elections, which can potentially change the caste and religious arithmetic against the NDA.
We believe the popularity of Prime Minister Narendra Modi is unmatched till date and his personal charisma will help NDA steer clear through any alliance strategy by opposition parties.
The market is also discounting the same. But there may be a possibility that its number of seats may reduce from last time and NDA may have to take support of other like-minded parties.
 Despite the steep fall from recent peaks, valuations of midcap and smallcap stocks are not attractive enough. A lot of corporate governance issues with mid-sized companies have surfaced in recent times in relation to the pre-termination of contracts by auditors.
Earlier, we expected margin expansion, but now see the same remaining under pressure due to high base and rising raw material prices, which will ultimately impact earnings.
The risk-reward ratio for small and midcaps seems unfavourable. However, there will be exceptional cases. Small companies with healthier balance sheets and strong execution record can emerge winners in medium to long term.
The Q4 FY18 earnings season has been relatively positive. Almost 50-60 percent of top 100 companies have reported in line or better-than-expected numbers. For the June quarter, we expect the positive momentum to continue mainly in metals, private banking, IT and selective mid and small sized companies. We haven’t revised our FY19 earnings estimates yet and will rather wait for June quarter earnings and management guidance to take any call.
 The Indian IT sector has undergone a massive structural change. Going by earnings of the last two quarters, it is quite evident that Indian IT companies are successfully weathering the H-IB visa issue by re-inventing their business model by shifting towards onshore, leaving behind the old offshore legacy model.
IT is a space where there are no balance sheet issues and last quarter’s numbers indicate early signs of an improving trend in client spending, particularly in some key pockets like banking, financial service and insurance (BFSI). Moreover, investors are raising their bets on the sector, amid weakening of the rupee-dollar and market volatility.
Though valuations are on the higher side now, the short term prognosis for the global economy is positive. The US economy is doing well, which usually translate into greater IT spending even though it may not be visible now. Our favoured picks in the IT space are Tata Consultancy Services, Infosys and Hexaware Technologies.
The ongoing pain in the pharma space due to customer consolidation and pricing pressure in the US may start gradually easing out in the second half of FY19 due to low base early signs that the US business getting stabilising.
We expect growth in the US to revive in the later part of this year with fresh approvals and product launches. Lately, we have seen a lot of resolutions from the US Food & Drug Administration, but in no way can we conclude that the USFDA is going easy on Indian pharma companies. Recently, whatever relaxation companies are seeing from the USFDA will actually take time to translate into positive financials. Long term investors can stagger buying in stocks like Cipla, Natco Pharma and Caplin Point.
Jamna Auto (CMP - Rs 90)
The stock is trading at 28.5 times its trailing earnings (down from almost 35 times few weeks back). The company maintains its industry leading return on equity of 30 percent and modest debt/EBITDA of 0.3 times. Strong Q4 numbers; safe play to ride the revival in the commercial vehicle sales cycle, with facilities located in close proximity to the plants of original equipment manufacturers; and benefits from lower logistic costs makes it difficult for new entrants to garner market share from OEMs.
JSW Steel (CMP Rs 326)
The stock is trading at 12.5 times its trailing earnings (down from 15-16 times a few months back) with robust RoE of 22 percent. The management expects steel demand to grow at 7-7.5 percent in FY19. We expect margins to improve in FY19, if steel prices remain rangebound. We maintain our accumulate rating with a target price of Rs 435 per share (discounting the stock to trade at 15 times FY19e earnings of Rs 29 per share).
Ashok Leyland (CMP Rs 136)
The stock is trading at 25.8 times its trailing earnings (down from 33-34 times a few months back) with a robust RoE of 22 percent. Uptick in economic growth and pick up in infrastructure activity is seen. Stricter enforcement of overloading norms is a positive development but competitive pressure is likely to remain high. We maintain our accumulate rating with a price target of Rs 183 per share (discounting the stock to trade at 24 times its FY19e earnings of Rs 7.64 per share)
NOCIL (CMP Rs  172)
The company is the largest rubber chemicals manufacturer in India and one of the few players in this business to offer a wide range of rubber chemicals to meet its customer needs. Tightening environment norms by the Chinese government has increased compliance cost and led to closure of unorganised/small players in China, which helped Indian players like NOCIL improve its competitive positioning. NOCIL has a healthy balance sheet with a debt-to-equity ratio of around 0.20 times. It is trading around 16 times its trailing earnings. Our target price on the stock is Rs 240 per share.
Insecticides India (CMP Rs -725)The stock is trading at a trailing P/E 17.8 times. Earnings of the next two quarters will play a major catalyst as: 1. A normal monsoon has been predicted by IMD till June 18; and 2. Minimum support price at 1.5 times cost of production will encourage farmers to strive for higher agricultural output.
MORE WILL UPDATE SOON!!

Stay cautious on short build-up by FIIs; 3 stocks that may return up to 13%

If the Nifty falls below the 10,680 mark, it could correct to 10,500 levels on the back of further selling.

  

A sharp sell-off was seen in the Nifty due to liquidation of long positions as traders turned cautious amid US-China trade tensions.
The recent market data has turned slightly negative and is indicating probability of further profit booking. Call writers are active in 10,700, 10,800 and 10,900 strikes, which indicate limited upside.
The continuous build-up of shorts by foreign institutional investors (FIIs) indicates cautiousness. The levels of 10,700-10,680 will remain crucial this week as indicated by option open interest concentration.
If the Nifty falls below the 10,680 mark, it could correct to 10,500 levels on the back of further selling. On a bounce, the index will face strong resistance around 10,800-10,850 levels.
If we look at the option open interest concentration, 10,700 put strike still holds the highest OI with more than 52 lakh shares, followed by 10,600 strikes with nearly 46 lakh shares.
On the call option side, the maximum OI is seen at 11,000 strikes, followed by 10,800 strikes with nearly 54 lakh and 45 lakh shares, respectively.
Here is a list of top 3 stocks that could return 11-13% percent in the short term:
Torrent Pharmaceuticals: Buy| Target: Rs 1,670| Stop loss: Rs 1,360| Return 13%
On daily charts, the stock had been consolidating in a broader range of Rs 1,230-1,430 since the beginning of the year which has led to a formation of an inverted head and shoulder pattern.
This week a fresh breakout was witnessed above the neckline of the pattern formation after prolonged consolidation which indicates more upside in prices moving forward. Traders can accumulate the stock in a range of Rs 1,470-1,490 for the target of Rs 1,670 and a stop loss below Rs 1,360.
Bata India: Buy| Target: Rs 900| Stop loss: Rs 760| Return 11%
After three months of prolonged consolidation, the stock witnessed a fresh breakout above the key resistance level of Rs 825 along with hefty volumes.
Additionally, the stock has also given a breakout above the neckline of the inverted head and shoulder pattern visible on the weekly charts.
The follow-up buying after the breakout can be seen in the stock as secondary indicators like the RSI and stochastic are also supporting the up move. Traders can accumulate the stock in a range of Rs 810-825 for the upside target of Rs 900 and a stop loss below Rs 760.
Natco Pharma Limited: Buy| Target: Rs 955| Stop loss: Rs 780| Return 13%
The stock has given a fresh breakdown below Rs 900 levels and its 200-days exponential moving average in the early 2018 and tested Rs 700 levels in the short span.
The price has been consolidating since then as the stock is fluctuating in the range of Rs 700-830. Last week, we have observed a V-shape recovery in prices from the lower band along with higher volumes which suggest for lower levels buying in the stock.
Now, a breakout above the resistance level of Rs 845 can further trigger follow-up buying in the stock to once again reclaim above 200-days EMA. Traders can buy the stock above Rs 845 levels for the upside target of Rs 955 levels and a stop loss below Rs 780.
MORE WILL UPDATE SOON!!