2019 to be a good year for mid-smallcaps; 15 picks by that could return 5-93%

Indian equity benchmarks outperformed global markets in 2018. In fact, Brazil (up 15 percent) and India (3 percent on Nifty) were only gainers during the year.

Favourable macros (sharp fall in crude oil prices), easing US-China trade tensions, liquidity support to NBFCs after credit crisis and rate cut hope helped the market end the year on a positive note, but gains were capped by global growth concerns.

The performance of broader market was quite bad in the year gone by as BSE Midcap and Smallcap indices lost 13 percent and 24 percent, respectively.

But 2019 is going to be good for the overall market, experts said, adding the first half could be volatile due to general elections but second half is expected to be good and the focus would be on earnings, macros and global factors.

Sharp decline in crude prices, appreciation in INR versus USD and fall in Bond yields augurs well for the market, however uncertainty regarding elections in 2019 might keep markets volatile.

Mid and smallcap earnings were hurt more due to crude currency and interest cost increase. Therefore, reversals in the same should lead to better earnings revival in small and midcaps, hence, we believe that 2019 will be a good year for small & midcaps.

Amara Raja Batteries

We expect healthy volume growth across segment for Amara Raja. Due to the correction in the lead prices we expect the benefits to come through in the second half of FY19. Company has also announced the capex of Rs 540 crore for adoption of advanced stamped grid technology in automotive batteries. Also the company is in the process of increasing its 4W battery capacity to 12.5mn units.

AIA Engineering

Due to large order received in FY18, company is well placed to deliver 18 percent volume growth in FY19E. EBITDA per tonne will improve by 8 percent YoY due to decline in chrome prices, in fact there is possibility of beat to our estimates due to INR depreciation.

Apollo Tyres

Apollo is well placed to benefit from strong growth in TBR (truck and bus radial) market in India as it commands pricing premium in TBR market vs other domestic players. Hungary will start showing profit gradually in FY19 and will report strong profitability in FY19.

Aurobindo Pharma

Bag-line issues should get resolved by Q3. Ensuing quarters to remain strong given limited competition in Valsartan price hikes. Acquisition of Sandoz's derma biz to start contributing from year-1 of consolidation itself. Integration can take our estimates higher by 20 percent (annualised).

Avanti Feeds

CY18 turned out to be a very difficult year for aquaculture sector mainly due to 1) Sharp fall in the international shrimp prices, which in turn led to 25-30 percent drop in farmgate prices. 2) Key raw materials for shrimp feed i.e. Soymeal and fishmeal firmed up by 15-20 percent in CY18 which led to margin pressure for the feed companies. Though Shrimp culture in India declined by 25-30 percent in Q2FY19, but Avanti Feeds was still able to improve its feed market share to around 45 percent from 43 percent at FY18-end highlighting the strength of their business model.

As RM prices (Soymeal and Fishmeal) have stabilised now and international shrimp prices have started inching up on demand revival in USA, company would be able to improve its operating margins going ahead. After a sluggish FY19, we expect FY20 revenues/PAT to grow by around 26 /42 percent YoY.

Coal India

Demand momentum to remain strong driven by power, other sectors. Over the last few months, Coal benefitted from lower stock of pit-head coal at power plants. Many non-power sector companies which got linkages in auctions were not getting promised supplies as sales were diverted to fulfill power sector needs; however, now they should drive volume growth as extra demand from power sector eases a bit.

Fuel supply agreement (FSA) realisations see healthy growth on price hike; e-auction realisations move sharply higher: FSA realisations increased 9 percent YoY due to benefits of the Jan’18 price hike.

Gujarat Ambuja Export

GAEL, one of the leading agro-processing companies in India, with its new plant will become the largest maize processor of country (around 21 percent market share by capacity). We expect GAEL to capture incremental demand of starch and its derivatives, higher value added derivatives shall support margins going forward & also expect utilization levels of oil extraction business to improve hereon. Overall we estimate 17 /23 /20 percent revenue/EBITDA/PAT CAGR over FY17-20E.

KEI Industries

GOI's focus on developing world class infrastructure has increased significantly. With initiatives like 'DDUGJY', 'IPDS, 'UDAY', 'Make In India' and 'Housing for All' is likely to spur strong demand for wires & cables.Strong order book with excellent execution capabilities will act a key driver for EPC business.

KPIT Technologies

KPIT has approved a composite scheme for (1) amalgamation of Birlasoft with KPIT, and (2) demerger of engineering business into KPIT Engineering Limited (KEL). KPIT-Birlasoft will focus on IT services business while KEL’s shares will be separately listed and shareholders would receive one share of KEL for every one held in the merged entity. Overall the deal creates value unlocking for existing shareholders with an option to own IT services and ER&D businesses. We believe, KPIT presents an attractive opportunity to ride the Automotive ER&D story in India.

Lumax Industries

We expect Lumax EPS to grow at 30 percent CAGR over FY18-21E driven by shift towards LED from halogen lamps in automotive lighting. Company is gaining share in HMCL models as later's main supplier has not coped up with technological changes in lighting and is in financial trouble as well. With 68 percent of sales from 4Ws and 28 percent from 2Ws, company has fairly diversified portfolio.

Mayur Uniquoters

Prices of major raw materials for Mayur Uniquoters — PVC resin, plasticiser and yarn — had risen by around 15 percent in first half of FY19 due to an increase in crude prices and INR depreciation. Now with decline in crude oil prices, raw material prices have also started moderating sequentially (but still up 10-15 percent YoY) which in turn would aid gross margins going ahead in Q4.

Company has also taken a 4% price hike effective from Oct'18. Also, export volumes should exhibit a healthy growth in second half of FY19 after a decline in first half FY19 as de-stocking exercise at USA subsidiary is over.

SP Apparels

FY19 will see strong growth in garments revenues with demand from existing customers orders normalizing and new customers giving incremental orders. Garment margins will be aided by rising utilization levels and favourable currency. Retail revenues will continue its revenue growth trajectory on continuous stores additions and rise in same-store-sales growth of existing stores. Retail margins which turned positive in FY18 will further increase on strong sales growth. SPUK will see robust growth on a low base.

Teamlease Services

TeamLease is a structural and scale play on the formal employment growth in India with market leader positioning (around 6 percent market share) in a fragmented and unorganised market, coupled with asset-light and collect & pay model.

FY19 could be constructive driven by healthy pipeline and improving conversion. Pipeline build-up is being driven by vendor consolidation in few large accounts, while on-boarding of associates for a BFSI customer could help 4QFY18.

Whirlpool

Whirlpool continues to deliver strong performance on the back of continued market share gains in WM and refrigerator categories mainly at the expense of Videocon. Extreme focus on distribution network along with new product launches to plug-in the portfolio gaps are likely to act as key volume drivers for Whirlpool.

Stable margins in-light of increase in crude oil prices, rise in raw material costs and weakening of INR against USD by taking timely price hikes and cost saving initiatives. With INR/USD currently at around Rs 70 levels, we expect Whirlpool to improve profitability albeit with a lag towards Q4FY19 and Q1FY20 on the back of recent price hikes, fall in prices of crude oil & key raw materials.

Yes Bank

While bond yields have spiked up of late, we believe the spike in bond yields for financial entities will normalise in a month or two given that RBI has been proactive in managing liquidity. Also incremental lending rates have started trending up and pressure on NIMs would moderate in second half of FY19. Divergence from FY18 asset quality review and selection of new MD&CEO remains a key monitorable.

While the overhang event of key person risk has played out, we believe that at around 1.5x FY19E ABV, Yes bank offers a good upside potential from current levels.

MORE WILL UPDATE SOON!!

Market Outlook

Equity benchmarks continue to trade with high volatility and closed the week lower by more than 1% on back of weak global cues as concern over global growth lead to decline in global equities. Broader markets also witnessed profit booking after recent outperformance as the Nifty Midcap and Nifty small cap indices to close lower by 1% and 0.6% respectively. The S&P BSE Sensex closed at 35695, down by 381 points or 1% while the NSE Nifty closed at 10727, down by 133 points or 1% for the week. Among the Nifty Constituents, Asian Paints, Sun Pharma, Infratel and Bharti Airtel were the top gainers. Whereas Bajaj Finance, HCL Technology, Hindustan Unilever, L&T, ONGC, Reliance, Tech Mahindra, Ultratech Cement, Metals and Auto stocks were major draggers on the index. The weekly price action resulted in a bear candle with a long lower shadow signaling continuation of the consolidation and buying demand at lower levels. The index has been maintaining the rhythm of not correcting for more than 61.8% retracement of the last up move and time wise not correcting for more than three sessions, since October low 10005. In the current scenario, the Nifty on Friday’s session rebounded after 61.8% retracement of the last up move (10534-10923) along with two consecutive sessions of decline. So we expect the Nifty to maintain the same rhythm as in the current scenario and witnessed a pullback in the coming week. Nifty in the last three weeks has been consolidating with positive bias in the broad range of 10500-11000, lack of faster retracement in either direction makes us believe that going ahead the Nifty would continue with its current consolidation in the broader range of 11000-10500 with a positive bias amid stock specific action as we are entering the Q3FY19 result season. The broader trend in the index remains firmly bullish as index is seen forming higher bottom at the 61.8% retracement of the previous up move since October 2018 low (10005). We believe any intermediate breather towards 10550-10500 should be used as incremental buying opportunity for up move towards 11000 levels in the coming weeks being the upper band of the last three weeks’ consolidation and high of December 2018 placed at 10985. Going ahead, we believe the Nifty has strong support near the key value area of 10535-10480 region. Thus, sustenance above 10535 (on a closing basis) would aid the Nifty to form a higher base, as it is confluence of:   upward sloping trend line drawn adjoining subsequent lows of October and December of 10005 and 10334, respectively, is placed around 10530 last week's low is placed at 10535 despite multiple attempts, the Nifty has managed to end above 10480 since November 2018 amid elevated volatility The broader market consisting of Nifty midcap and small cap extended its breather after the recent outperformance We believe the corrective decline is a sign of healthy consolidation that offers a fresh entry opportunity. The improving price structure of the Nifty midcap and small cap makes us believe the broader markets would form a higher base that would augur well for next leg of up move. Results during the coming week: TCS, Infosys, Indusind Bank, Tata Elxsi, Bandhan Bank.

Important data releases in next week:

US: FOMC Meeting Minutes, Core CPI (MoM) (Dec), ISM Non-Manufacturing PMI (Dec) EU: Unemployment Rate (Nov), ECB Meeting Minutes UK: GDP (MoM) (Nov), Manufacturing Production (MoM) (Nov) Japan: Nikkei Japan PMI Services (Dec) India: Industrial Production YoY (Nov)

Previous Week Highlights

Growth for Eight core industries in November 2018 came in at 3.5%, lower than 6.9% YoY growth in November 2017. The slower growth was largely on account of a higher base decline in output of crude oil and fertiliser by -3.5% and -8.1%, respectively. The RBI has allowed a onetime restructuring of MSME loans in default as on January 1, 2019 with overall exposure per borrower not exceeding 25 crore. Banks/NBFCs will have to provide 5% additionally on the restructured loans while the restructuring has to be done by March 2020. According to media reports the central government is to announce direct benefit transfer scheme for farmers, where farmers will receive  4,000 per acre per season plus interest free crop loan up to 1 lakh per farmer. The scheme is estimated to cost the government ~230,000 crore on annual basis. The government is working on a 18,000 crore subsidy scheme to revive gas-based power plants under which it proposes to offer imported gas at subsidized rates to stranded and underutilized projects. The government is looking at subsidizing electricity tariffs by around 1.75 per unit to make it affordable at about  4.50 per unit. At present, all the nearly 25,000 MW of operational gas-based capacity is stressed because of fuel supply constraints. Brent Crude prices closed higher at about US$ 57.11/barrel as compared to previous week’s close of US$ 53.48/barrel. Gold prices ended higher at $ 1293/ounce as compared to last week's closing price of $ 1281/ounce. Bond yields also ended higher at 7.45% as against last week's closing of 7.39%. MORE WILL UPDATE SOON!!

Derivatives Strategy

Market Strategy

Nifty has key support placed at 10600 which is in proximity of highest Put base of 10500. The volatility has not seen any major jump due to writing seen in these Put strikes. We believe the consolidation to prevail above these levels. The Call OI base at 11000 has become highest and broader consolidation is expected to pan out with midcap and small caps to remain in focus. In the last couple of sessions, heavy writing was seen at near the money strikes of 10800 and 10900 for January series. Hence move above 10850 levels is crucial for fresh uptrend. The premiums in Nifty futures have remained quite high at 50-55 points. Historically it is seen Nifty enters into consolidation at such high premiums. If the global risk-off abates, the markets may eventually start moving higher. On Z-score reading of long Nifty & short S&P pair, the current score is above 3. This kind of outperformance trend by the Nifty has not been seen in over a decade. This suggests that if the US and global risk sentiments fail to recover, the Nifty could also give up its resilience trend.

Index Outlook

Bank Nifty : The volatility remained extremely high in the first week of the new year as the Bank Nifty saw sharp whipsaw on both the sides. However, it concluded the week on an optimistic note mainly triggered by fresh buying in few private bank leaders. The IV’s moved near 17% which is providing more head-room for OTM option writing. Open interest in Bank Nifty at the inception of the series was one of the lowest since August 2014. As the week progressed fresh OI additions of 24% was seen supported by positive Delta. However, premiums continued to remain high for Bank Nifty future which is indicating towards possible consolidation in coming weeks. Call OI blocks is seen in 300 Call strike of SBI. Same activity was also seen in few private banks which is likely to keep the index move in check. OI concentration remains high in 27500 strike Call and once the index manages to close above this levels, short covering trend can be seen. However, weekly low near 26900 is likely to be the strong support area.

Derivatives strategies

Weekly future recommendation:

Sell Hindustan Unilever (HINLEV) January future in range of 1785-1790. Target: 1705 Stop Loss: 1840

Adverse global news flows has pushed a bout of profit taking in Nifty as well, with the Index falling to its key support of 10600. While there is continued support from banking and financial space, there is fatigue seen in the FMCG space. Sectoral leader, Hindustan Unilever, is also struggling to move past 1840 levels. The current OI in the stock of 10.4 million shares has making of higher leverage (as the current OI is one of the highest in trailing 1-yr). As a large part of these positions were created above 1780 levels, decline in the stock is likely to trigger leverage based closure, pushing the stock lower. MORE WILL UPDATE SOON!!

The Five Lessons of 2018

Markets closed out 2018 in a burst of volatility, capping a year of several yo-yos. Equity and debt markets had a tumultuous 2018, which served to drive home certain basics. Here they are.

 

1. Midcaps and smallcaps are risky

2018 showcased a fact that had been brushed under the carpet for years – that midcap and smallcaps are risky and are not meant for those who cannot handle steep falls. The year reinforced the norm that when markets are in a correction mode smaller stocks tend fall more than their larger counterparts.

In the 2014-2017 period, midcap and smallcap stocks seemed infallible. Consider 2016 – markets across the globe corrected from the second half of 2015. Within the first two months of 2016, the Nifty Midcap 100 lost 15% and the Nifty Smallcap 100 dropped 24%. Midcap and smallcap funds lost 17% on an average. But while sharp, the fall was short-lived. March to October 2016 saw the two indices gain 35% and 44% respectively. Funds in this space rose 35% on an average. This behaviour repeated in 2017. The real pain of a correction was not felt.

But in 2018, the midcap and smallcap segment fell and stayed down. January was the peak and the two representative indices corrected steadily right through the year. There was no bounce back, even as the Nifty 50 and Sensex alternately rallied and corrected throughout 2018. The Nifty Midcap 100 is down 18% from its January peak while the Nifty Smallcap 100 lost 33%. On a weekly rolling basis, both indices have clocked more weekly losses than they have weekly gains in 2018. This has not been the case in the 2013-2017 period. The fall saw the high 2017 returns completely wiped out.

                               

But here’s the good news: while midcap and smallcap funds fell, most have managed better than the indices. On an average, midcap and smallcap funds lost about 3 and 10 percentage points less than the benchmark in 2018. Funds such as Franklin India Prima, Invesco India Midcap, HDFC Midcap Opportunities, Axis Midcap, HDFC Smallcap, Reliance Smallcap, and Franklin India Smaller Companies all showed good ability to limit downsides in the correction.

2. Equity is not for the short term

Volatility made a comeback in 2018; deviation in 1-month rolling returns of the Nifty 50 this year are over 1.5 times more than in 2017. Measured by this metric, volatility in 2018 was higher than years such as 2014 and 2016 as well. The Nifty 50 and the Sensex were strong in January, corrected for the next two months, rose until September, crashed spectacularly over the next two months and were volatile for the rest of the year.

Equity market behaviour was also unpredictable. A recent example is the market reaction to the December resignation of the RBI governor, which coincided with shock state election results. Markets spent one day correcting and bounced back almost immediately, contrary to all expectations. Similarly, factors such as oil prices and the rupee fluctuated right through the year, influencing equity markets in their wake. Finally, global markets were also unpredictable and volatile.

Volatility apart, 2018 showed that short-term is not good for equity especially after a year like 2017. Of the BSE 500 index, 75% of the stocks have ended the year on a loss. Equity funds faltered in 2018 in consequence across all categories. A 1-year or even a 2-year period is not enough for equity investing. Investors who got into the market in 2017 would have seen their gains reversed by the end of 2018. Getting into short-term predictions on where markets will be headed, whether markets are at a low or a high, whether this is a good time to invest or not, would all have been an exercise in futility.

Keeping a 5-year and above horizon for equity is always preferable, and tagging important near-term goals to equity is a strict no.

3. Hybrid aggressive funds are not infallible

Not just pure equity – 2018 reminded markets that hybrid aggressive funds can also fall. These funds are still equity oriented and a steep market wide correction will pull down returns in the short term. Remember that these funds do move across market capitalisations on the equity side and a midcap fall would hurt returns even as these funds shifted to the largecap segment.

While the debt component provides a balance, it would not have been enough to compensate entirely for an equity fall. Funds also tend towards longer-term accrual on their debt side and yield fluctuations hurt too. Therefore, while hybrid aggressive funds are far less volatile than equity and contain downsides much better, they are still liable to fall in a 1-year period if there is a sustained equity market correction. These funds require a 3-year holding period to deliver.

                                   

Those depending on regular dividends from these funds would also have learnt a lesson in 2018. In correcting markets, surpluses are hard to come by. Funds may have also been using the dips to accumulate stocks at cheaper prices. Some funds which were paying monthly dividends skipped a couple of months. Other funds may have kept up their quarterly/monthly dividend payments, but the amount was much reduced.

Should markets continue to correct, dividends could further be affected. Therefore, depending on equity-oriented funds for regular cashflows would not be wise.

4. Higher debt returns don’t come without risk

In other words, do not chase higher debt fund returns without understanding the risk. The failure of an institution such as IL&FS and a credit downgrade from the top rating to default in a matter of days is a one-off event. Downgrades do not always result in default. What the episode did show is the effect of credit risk and rating downgrades on debt fund returns. A drop in a paper’s credit rating results in a revaluation of the market value of the paper, consequently influencing fund returns.

Two, it shows that higher portfolio yields and returns can come about only in the face of higher risk. Where fund yields or fund returns seem higher than peers or the average, this is usually because some level of credit risk has been taken in the portfolio. For example, consider Indiabulls Short Term, which has among the best 1-year returns of 7.4% and a November portfolio yield of 11.7%. About 56% of its November portfolio is in papers rated below AA+, which defines higher credit risk. In contrast, Kotak Short Term Bond, whose 1-year returns are 6.3% and YTM is at 8.7% holds no paper below AA+. Therefore, while one fund may look like it is lagging on returns, it could be because it is less risky. This holds for hybrid conservative funds too.

Three, it spotlighted concentration risks in debt funds. Adverse rating actions have a bigger impact on concentrated portfolios than more diffused ones. Invesco India Credit Risk, for example, suffered a good deal more from the IL&FS fallout than a fund like Aditya Birla Sun Life Credit Risk fund. The Invesco fund had a much higher exposure to the IL&FS group papers than the ABSL fund, and therefore saw a steeper NAV fall post the downgrades. The 1-day fall in NAV after the first downgrade was 0.03% for the ABSL fund and 0.39% for the Invesco fund. NAV drops after the second downgrade were similarly much higher.

A larger fund size also helps, especially in the liquid and ultra short duration categories. A pull out by institutional investors can leave the fund vulnerable while additionally making it harder to meet redemption requirements.

Therefore, where there is no ability to see a drop no matter what the holding period, it is always best to stick to funds that do not take risks.

5. Debt can be volatile too

Debt funds follow either an accrual strategy or combine it with a duration strategy (like dynamic bond funds) when the interest rate cycle throws up opportunities. However, 2018 (in conjunction with 2017) showed that the interest rate cycle can get unpredictable and yield movements can be volatile.

Going into 2018, markets had been building in rate hikes. The Reserve Bank followed through with two hikes. Gilt yields were falling, dropping to 7.12% by around April. Then crude oil prices spiralled, rate hikes in the US continued, the rupee depreciated, and inflation remained. Gilt yields were rising. Then there was a liquidity crunch in the wake of IL&FS. Gilt yields hit the 8% mark and moved lower later on. The end of 2018 was a reversal of the start, with rate cut expectations now being built in with inflation staying low. The graph below shows the movement of the Nifty 10-year Gilt index over 2018, which is influenced by gilt yield changes.

Volatility in debt cannot be ruled out. Betting on rate cycle directions and a duration strategy can backfire. Sticking to an accrual strategy is a better option, especially for the risk averse.

What should you do?

The lessons are not new. 2018 just reinforced them. The steps you need to take are not new, either:

1. Stick to an asset-allocated and category-allocated strategy. This will ensure that you are in line with the level of risk you can and you need to take, based on your goals. It will also ensure that you haven’t gone overboard on some funds – like midcaps, for example.
2. Maintain a long-term view when it comes to equity. Each year, markets find different reasons to move. There will always be bad news and good news. Over time, though, short-term moves get ironed out. Keep return expectations realistic. A 12% CAGR over a 20-year period in equity is the same as buying a piece of land for Rs 20 lakh and selling it for Rs 2 crore.
3. Stick to your SIPs. Don’t lose faith. SIPs cannot give you high returns if the market corrects. What SIPs do is to ensure you are not influenced by short-term movements and invest across market cycles. This will allow you to catch market downs as well as ups and keeps your savings on track.
4. Don’t be afraid of debt funds. credit events like the ones in 2018 are extremely unlikely to repeat. Debt funds always hold the potential to beat FDs and are more tax-efficient. Be aware of the risks in the fund you hold, and stick to the safer options. If you cannot handle volatility of long-term debt funds, stay with short-term high-quality accrual funds.
5. Keep a mix of funds in your portfolio. Not just in terms of different asset classes or categories, but in fund strategies too. This will ensure that if one strategy takes time to deliver, another will prop up returns in the meantime.

It is rare that equity and debt markets both do poorly at the same time. 2018 was a good year to bring markets back to earth and help understand the risks in investing. So, don’t get discouraged by the 2018 market and think long term. Cut out the noise and stay invested!

MORE WILL UPDATE SOON!!

20 Nifty stocks fell 15-60% in 2018; Should you invest in beaten-down names?

Beaten-down stocks make for an interesting investment case, but the challenge is to figure out whether the underperformance is temporary or structural in nature.

Investors are always on a lookout for stocks that could give quick returns and are also available at fair valuations. The year 2018 was not a good one in that sense - while returns from benchmark indices were merely in single digits, many quality stocks corrected in double digits.

Nifty50 recorded gains of little over 3 percent in 2018, while nearly 60 percent of the index components gave negative returns.

So, are all the stocks that have seen a double-digit cut in 2018 attractively valued? Well, that might not be the case always, suggest experts. It does make a good investment case, especially if they are Nifty50 companies, but investors should also study the reason why the stocks fell in the first place, they say.

Beaten-down stocks make for an interesting investment case, but the challenge is to figure out whether the underperformance is temporary or structural in nature. Heavily beaten-down stocks have major structural challenges like Tata Motors which is seeing a major global slowdown.

However, if the challenges are internal and the management has the capability and ability to resolve the issues then the stock will make for an investment case. Sun Pharma is one such case and it presents with a good investment case.

Kulkarni further added that in 2019 some beaten-down stocks like Yes Bank and Sun Pharma could perform well if they are able to resolve the internal issues, but if the challenges are structural in nature like in case of Tata Motors and Tata Steel then the time is not ripe for these stocks.

Out of Nifty 50 stocks, 20 counters fell 20-60 percent in 2018, which includes Tata Motors, Yes Bank, Bharti Airtel, HPCL, Vedanta, and BPCL.

The S&P BSE Largecap index recorded gains of over 1 percent as compared to small & midcap indices which fell by 13 percent and 23 percent, respectively, in 2018.

The first rule of investing is to look at the earnings growth of the company. The divergence between good quality growth-orient companies and value stocks is still very high. Most experts advise investors to stay with quality names or largecaps as volatility could rise ahead of general elections.

Largecaps might not give multibagger returns, but they play a crucial part in protecting your capital in case momentum starts heading south.

We expect volatility to be high in the first half of CY19. Hence, it will be ideal to stay invested only in good names where one is confident of any earnings improvement or business cycle changing in FY20 (at least till election results come through).

We would not suggest an across-the-board investment in beaten-down stocks. We would recommend investing in only a few names like Tata Motors, oil & gas companies, and select names like Eicher Motors where valuations have become reasonable.

Oza further added that one should avoid getting into beaten-down companies which have issues beyond fundamentals, like corporate governance or bleak sector outlook. Post-election results, if we see either a BJP/Congress-led coalition government then one can get into select beaten-down largecaps.

MORE WILL UPDATE SOON!!

Bank of Baroda-Dena, Vijaya Bank merger: Brokerages say time to ‘buy’

The swap ratio appears fair in respect to Dena Bank owing to the multiple challenges faced by the bank, and most experts feel that Vijaya Bank shareholders have nothing to gain from this merger.

  

Most global as well as domestic brokerage firms such as Nomura, Motilal Oswal as well as Kotak Institutional Equities maintain their buy or add rating on Bank of Baroda after the share swap ratios were announced for a merger with Dena and Vijaya Bank.

Shareholders of Dena Bank will receive 110 equity shares of BoB for every 1,000 shares they hold. Vijaya Bank shareholders will get 402 equity shares of BoB for every 1,000 shares they hold. The swap ratio clearly seems to be in favor of BoB shareholders, suggest experts.

The next big questions is – should one buy Bank of Baroda now? Well, analysts at top brokerage firms maintain their positive stance on the stocks after the swap ratio announcement.

"BoB’s board has decided on the merger ratio for the amalgamation of Dena Bank and Vijaya Bank, implying a 6-27 percent discount to the current prices of Dena/Vijaya Bank and 18-43 percent lower than BOB’s Sep-18 valuation. We believe this is fair for BOB’s shareholders given BOB’s superior franchise and NPA coverage position.

The merger will be ~4% book-accretive (increase the book value) to BOB and ~4% earnings-dilutive. BOB trades at 0.65x Sep-20F book on an adjusted basis, which we believe is undemanding, hence maintain our Buy rating. We prefer corporate banks of the India financials, with Axis/ICICI, but remain positive on SBI/BOB.

The swap ratio appears fair in respect to Dena Bank owing to the multiple challenges faced by the bank, and most experts feel that Vijaya Bank shareholders have nothing to gain from this merger.

But, for Bank of Baroda, the merger will lead to the creation of the third largest lender in India, with an advances and deposits market share of 6.9 percent and 7.4 percent, respectively.

The retail book of the merged entity will increase to 20 percent of total loans (16% for BoB standalone) due to a higher retail book of Vijaya Bank. The combined entity will have a CASA mix of 33.6 percent, with a Credit-deposit ratio of 70.7 percent (71.4% for BOB standalone). Post-merger, the number of PSBs will reduce to 19 from 21 now, said a report.

While the process of merging multiple entities will present its own set of challenges in the near term, BOB stands to benefit over the long term, in our view.

We will look to revise our estimates on attaining more clarity on the growth and earnings trajectory. We maintain our Buy rating with an unchanged target price of INR140 (1x Sep-20E ABV).

Kotak Institutional Equities in a note said that the focus now shifts to actual integration from financials. It maintains an ‘ADD’ rating with fair value unchanged at Rs 130 for Bank of Baroda.

The challenges of integration of IT systems, employee satisfaction, branch rationalization, client experiences at the time of merger are issues that are hard to model.

Even though most brokerage firms see the merger as a positive step for Bank of Baroda, two global brokerage firms namely -- Morgan Stanley and JPMorgan maintain their Underweight or Neutral rating on the stock.

Morgan Stanley maintained its underweight rating on Bank of Baroda with a target price of Rs 95. The global investment bank expects 30 percent dilution for BoB and trailing BVPS accretion or book value of equity per share of around 15 percent. It expects BoB to see material moderation in credit costs.

JPMorgan maintained its Neutral rating on Bank of Baroda with a target price of Rs 100. The global investment bank is of the view that the merger swap ratio alleviates pricing concerns.

Merger synergies will take a long time to play out, and it is of the view that the next round of PSB mergers is likely to follow only post-elections.

MORE WILL UPDATE SOON!!