As Indian equities scaled one peak after another in Samvat 2077, market veterans have turned cautious ahead of the new Hindu year.
The Nifty 50 and Sensex have rallied more than 41% from last Diwali. That was mainly driven by easy liquidity, speedier Covid-19 vaccinations, and corporate earnings.
Analysts BloombergQuint’s Niraj Shah spoke with said while there’s value to be found in the market, investors need to choose stocks carefully to generate healthy returns.
Mayuresh Joshi, Dipan Mehta and Sudip Bandyopadhyay suggest their stock picks for Samvat 2078.
Mayuresh Joshi, head of equity research (India), William O’Neil & Co.
The markets will find it difficult to replicate the outperformance witnessed in the last 12 months. “We will have normalised growth, looking at macro conditions globally as well. That should be the base case scenario for investors.”
India is well placed on the macro front, with government policies in support of industry growth, he said. “Therefore, the earnings trajectory should hold out for selective segments.”
Joshi’s top pick is JK Tyre & Industries Ltd.
“The worst period in auto sales is largely behind us now and all ancillaries will smoothen out in the next quarter or two.” The markets also start factoring such things four to six quarters beforehand and so the next fiscal should be better.
He also bet on Orient Electric Ltd., citing a pick-up in discretionary spending in urban and semi-urban areas after the lockdowns eased. Premium fans, among other Orient consumer goods, are where the company’s “next leg of growth” is, specifically in semi-urban areas.
While a third Covid-19 wave or the inability to pass on rising input costs are risks, the chances of them playing out are very faint.
One Serious Correction
Dipan Mehta, founder-director, Elixir Capital
The markets will see at least one serious correction in the next 12 months. “Seeing the rally and the froth, I’d factor in a 15% correction in the next six to 12 months, and at that time, being in defensives would certainly help.”
While one might miss out on the fun in mid-cap stocks, it’s a much safer strategy. “The risk-return profile is not in favour of many of the counters which have given multi-bagger returns in the last 18-24 months.”
“We should start the next year on a cautious note and watch out for events which may be negative, as the law of averages will catch up with us.”
Mehta’s first pick is HDFC Bank Ltd. The stock has been an exceptional wealth creator and the private sector lender has handled industry crises over the years in a “legendary manner”. It should be in one’s core holding.
His next bet is Larsen & Toubro Ltd.
India’s largest engineering and construction company, like HDFC Bank, has been a multi-year underperformer despite having an edge over peers. “There are certain projects like the Mumbai Coastal Road project that only L&T can do.”
The company’s capital management is “exceptional” as it has been monetising all its investments. “The return on capital expenditure could move up in the next two-three years and when return ratios go up, price-to-earnings ratio has space to go up.”
Careful Stock Selection
Sudip Bandyopadhyay, group chairman, Inditrade JRG
Matching last Samvat’s 40% returns is difficult. “But 20% seems doable, provided one selects stocks carefully. There are several factors around the corner — tapering, geopolitical tensions — that could derail markets and lead to massive correction.”
Bandyopadhyay’s first pick was NTPC Ltd. “We haven’t realised the importance of power in everything we do. We treat it like a commodity which is abundantly available, but we have seen what happened in China [power outage].”
Second, he picked Surya Roshni Ltd. “[Besides lighting] It is also focused on galvanised iron pipes and API pipes, in which margins are fantastic.” Demand from the real estate sector, too, will benefit.
Bandyopadhyay’s “safe bet”, however, is logistics provider Gateway Distriparks Ltd.