The BSE Sensex has lost 1,475.16 points to 26,032.38 from 27,507.54 on January 1 to August 25.
With key benchmark indices falling over 5 per cent so far this year, rupee becoming weak, commodity prices dropping, investors are having jitters about the domestic equity markets. The domestic markets like their global counterparts fell sharply this calendar year amid weak Chinese manufacturing data and a surprise devaluation of its currency.
The BSE Sensex lost 1,475.16 points to 26,032.38 on August 25 from 27,507.54 on January 1. During the period, metal and realty stocks declined the most.
In the sectoral indices on the Bombay Stock Exchange, the BSE Metal index tumbled the most — 34.25 per cent at 7,146.03, it was followed by the BSE Realty index (down 20.60 per cent at 1236.88) and the BSE Power index (down 13.94 per cent at 1799.80) on a year to date basis. On the other hand, BSE Healthcare index and BSE Consumer Durables index gained 18.53 per cent and 9.88 per cent at 17,392.76 and 10,652.17, respectively.
After the correction, valuations have moderated but still looking above average. On August 25, price-to-earnings ratio of the BSE Sensex was at 20.88 against five year average of 18.67.
ICICI Securities in a research report said, “The recent sell-off in the equity market has created opportunities for investors. We recommend investing into quality large cap and midcap names that have reasonable growth visibility coupled with strong balance sheets. At present, the global markets are volatile. Therefore, we advise investors to buy in a staggered manner.”
According to Bank of America Merrill Lynch, based on current earnings forecasts, the BSE Sensex is now trading at 15.3x 12-month estimated forward earnings, which is largely in-line with historical average of 14.5x. However, adjusting for earnings downgrades to consensus Sensex EPS estimates, index is trading at ~16.1x 12-month estimated forward earnings which is still around 12 per cent premium to long term averages.
Brokerage houses recommend five stocks that investors can rely upon in these uncertain times:
1) Reliance Industries (RIL)
Recommended by: IndiaNivesh Securities
Target Price: Rs 1,300
Current Market Price (as on August 25): Rs 852.90
Why Buy: RIL had reported strong Q1 FY16 (consolidated) numbers on the back of strong margin from refining and petrochem business. Gross revenue margin (GRM) for the quarter stood at $10.4 per barrel vs. $10.1 per barrel bbl in Q4 FY15 and $8.7 per barrel in Q1 FY15. GRM was boosted by strong gasoline cracks, low energy cost and favorable crude differential. Despite strong Q1 FY16 numbers, the share price of the company corrected over 25 per cent in the past one month due to strong sell off in global equity.
The brokerage house believes recent margin uptick in refining business and rupee deprecation will help to support refining EBIT margin of RIL going forward. Further Petcoke Gasification project is under rapid execution and this $4 billion project is expected to provide competitive energy costs (aid in replacing LNG) for its integrated refining complex improving its return on capital and reducing volatility in earnings.
2) Maruti Suzuki India
Recommended By: ICICI Securities
Current Market Price: Rs 4199.45
Why Buy: Maruti Suzuki India (MSIL) is the market leader with around 47 per cent share in the Indian passenger vehicle industry. A recovery in the overall economy would have a multiplier effect on the passenger vehicle segment, which would benefit MSIL. It has vast distribution network of over 1,200 dealership and around 3,000 workshops across India. In the next five years, ICICI Securities expects penetration levels to increase from levels of around 15 cars per 1000 and march towards peer penetration levels (China: around 60/1000, Brazil: nearly 200/1000). New launches, higher contribution from the premium segment, reduction in discount levels and localisation efforts and JPY depreciation is likely to aid margins for MSIL. ICICI Securities continues to remain bullish on longer-term growth prospects of the car segment, especially MSIL and expect volume to grow around 13 per cent CAGR over FY15-17, outpacing the industry.
3) Cadila Healthcare
Recommended By: KR Choksey Shares & Securities
Target Price: Rs 2,105
Current Market Price: Rs 1,825.95
Why Buy: The brokerage house believes growth will be normalised for Cadila Healthcare in FY16. The company has launched biosimilar of AbbVie’s Humira in India under the brand name Exemptia at 1/5th of innovator’s price and targeting sales of around Rs 100-150 crore in next 3-5 yrs which will be the positive trigger for growth in domestic business. Its domestic formulation segment to show 15 per cent CAGR (compounded annual growth rate) over FY15-17E. Its key segments like GI, Gynaec, respiratory, women healthcare and Derma continues to do well while it needs to focus on CVS and CNS segments. Vaccines and biologics will be the future growth drivers. Company has around 10 Vaccines under development and plans to launch in India during the year. US business posted strong growth of 56.3 per cent in FY15 respectively due to traction in Authorised generic (AG) products and market share expansion on hydroxychloroquine in the US market. Management has guided for 20 approvals in FY16. IndiaNivesh Securities expects revenue CAGR of 28 per cent in US business over FY15-17E.
4) Infosys
Recommended By: ICICI Securities
Current Market Price: Rs 1,086.50
Why Buy: Infosys expects to achieve revenue of $20 billion by FY20. This includes $1.5 billion contribution from acquisition and 10 per cent or $2 billion from new technologies such as design thinking, artificial intelligence and platform based offerings. This translates to 13.6 per cent CAGR for existing business (FY15-20E). Employee productivity improvement could be driven by initiatives like new technology and automation in commoditised business. Infosys raised its FY16E dollar revenue growth guidance even as it maintained its 10-12 per cent constant currency growth guidance led by healthy deal wins, improved win rates, better execution and top accounts mining. ICICI Securities estimates Infosys will report revenue and PAT CAGR of 13 per cent and 10 per cent, respectively, over FY15-17E (with average 25.3 per cent EBIT margins in FY16- 17E. Recovery to industry average growth and margins could lead to re-rating. Rupee depreciation could aid profitablility in FY16E.
5) Bajaj Auto
Recommended By: KR Choksey Shares & Securities
Target Price: Rs 2,727
Current Market Price: Rs 2,204.65
Why Buy: Bajaj Auto increased its overall share in the domestic market by 300 basis points to 18 per cent in Q1FY16 from 15 per cent in Q4FY15. The company’s strategy is to reassert its dominance in the “Sports” and “Super Sports” segment and to further expand its share in the M1 segment. The company is also focused on improving its market share by launching new products in the coming quarters. Favorable response for the new products will drive further gains for the company. The brokerage house expects 15 per cent CAGR in export numbers in the next 3-4 years. The company is expected to strengthen its performance in the existing export markets. Rupee depreciation would also give its products a competitive edge over others in the export markets. The company’s focus to expand its market share in domestic and export markets and its commitment in containing operating costs will aid further profitability.
Current Market price as on Tuesday, August 25, 2015.
Disclaimer: The stocks listed in this article are recommended by the brokerage houses.
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