PSU banks look attractive after recent developments

All eyes would be on last budget of the current government to be presented before the general elections.

 

We expect volatility to remain in the market and street participants would now track global cues and Q3 earnings season. We believe Q2 earnings season has been mixed bag but Q3 can be much better. The monthly sales numbers of auto companies have been subdued in December 2018.

All eyes would be also on the last budget of the current government to be presented before the general elections. We do expect volatility as the central government may resort to populist measures to gain back popularity amongst the rural community especially farmers, after its loss in key states like Madhya Pradesh, Rajasthan and Chattisgarh.

The strategy at present should be to invest in a phased manner in companies which are not connected to any political party, have a robust business model, strong earnings and cash flow visibility, low debt and backed by quality management especially on the corporate governance front.

Considering the above factors, investors can have a stock specific approach in midcaps and smallcaps as there are many companies which are trading at a discount of 50-70 percent to their peak price in early 2018. We believe the falling crude oil prices will benefit paint companies. On the other hand, there would be significant inventory losses for OMCs.

Last week, Finance Minister Arun Jaitley said on Thursday that creditors are expected to get Rs 70,000 crore as some of the big cases, including Bhushan Power & Steel and Essar Steel, are likely to be resolved in this financial year.

They have already recovered Rs 80,000 crore from 66 cases resolved by the National Company Law Tribunal (NCLT). According to FM, increase in conversion of NPAs (non-performing asset) into standard accounts and decline in new accounts falling in the NPA category show a definite improvement in the lending and borrowing behaviour. All these factors would augur well for PSU banks which are trading at depressed valuations.

For short-term investors, the strategy can be to sell on rise and buy on declines up to the general elections. On a safer side, we would suggest long-term investors to have a look at pharma MNCs, consumption stocks, auto stocks, PSU banks – trading at depressed valuations (looking better after the cleanup of NPA mess, progress made under the NPA resolution framework under IBC, faster resolutions under NCLT and proposed recapitalisation), IT sector and private insurance companies at the current moment.

Stock Ideas

3M India | CMP: Rs 20,357 | | Target: Rs 24,800 | Upside: 22 percent

We like 3M India due to its unique and sound business model. The company’s products touch life of citizens on a daily basis in some way or the other with products in different segments like abrasives, automotive, casting and splinting, dental, filtration, food service and hospitality, hand hygiene, marine maintenance and repair, medical device and optical components, orthodontic, painting equipment & supplies, patient monitoring, safety products, securement and immobilization-dressing securement, skin and wound care, sterilization monitoring, surgical solutions, tapes and adhesives, vascular access and wire and cables.

With renewed rigour around priority market segments such as automotive, infrastructure, energy and retail, the company is well aligned to address customers’ challenges with its strong expertise in science and innovation.

There is no similar and comparable company in India with its unique products. As the country prepares for the 2019 general election, there are expectations of more focus on execution and increased expenditure on infrastructure by the government. All this augur well for the company’s business segments that are focused on domestic growth in the future.

The company enjoys a strong balance sheet with virtually zero debt company. The significant correction in the stock price gives investors an opportunity to take a pie of this great company who had missed the bus earlier.

In the recent turmoil, the stock has corrected from levels of Rs 26,662. At difficult times like now, it is better to accumulate companies of such kind which can give you multibagger returns over the horizon of 5-10 years. In the near term, we expect an upside of 22 percent.

Eicher Motors | CMP: Rs 20,103 | Target: Rs 25,129 | Upside: 25 percent | Horizon: 9-12 months

The company's motorcycle division (flagship brand – Royal Enfiled) reported subdued monthly sales numbers in December 2018 which resulted in steep correction of the stock price in the previous week.

Royal Enfield aims to lead and grow the mid-weight (250-750cc) motorcycle segment globally, and Interceptor 650 and Continental GT 650 will help the company accomplish this. The company’s strategy of new exclusive stores format introduced in India and international market is also auguring well.

Volvo Trucks is the market leader in the premium truck segment. VE Commercial Vehicles Ltd, a Volvo Group and Eicher Motors joint venture, reported 2.4 percent increase in sales for December 2018 to 6,236 units.

We believe this company is available at cheap valuation only at distressed times. One may argue that Royal Enfield market share might be impacted owing to competitors introducing new range of bikes to compete with Royal Enfield.

We believe, the company will be able to manage competition in a good manner owing to its strong technical capabilities and high brand recall among customers. Brand loyalty for Royal Enfield is huge.

Regarding the LMD and HD vehicle production, we expect the company to increase the same to an average of about 300 vehicles a day in next three months of this financial year as against about 260 vehicles a day, till December 2018.

We advise investors to stick with a quality company like Eicher Motors during difficult times as history has proved that great companies always bounceback when bull run starts.

MORE WILL UPDATE SOON!!