Top picks in a bull market

Experts tell Ujjval Jauhari that investors need to be careful in picking stocks given high valuations and with markets possibly ignoring potential risks.

Illustration: Uttam Ghosh/Rediff.com.

The scaling of a new high by a broader index, such as the Nifty 50 (the S&P BSE Sensex is not far from its all-time high) is a reflection of the elevated investor sentiment and confidence of the Street.

While some market experts say the rally in the stock markets is liquidity-driven, others believe it is already factoring in strong earnings growth, moving forward.

Many also believe that the markets are being complacent in assuming possible risks.

Against this backdrop, stock-picking has become even more important.

Research houses are already cautioning investors about the need to be selective in picking stocks.

Macquarie's approach, for instance, is entirely bottom-up based, either on the maintaining of trend growth or on significant earnings upgrades over consensus. Thus, the move to an overweight stance on information technology (IT) with HCL Technologies as their top pick.

Also, private banks, infrastructure, materials and autos are areas they are overweight on, while pharma, telecom, non-banking financial companies and public sector banks are the underweight sectors.

Among specific stocks, Hindustan Unilever (HUL), L&T, Eicher Motors and HDFC Bank feature among their top five large-cap picks along with HCL Tech.

There is little secret about HDFC Bank. The bank continues compounding shareholder returns driven by a best-in-class returns profile, superb liability franchise, industry-leading growth and pristine asset quality, says Macquarie.

Among other banks, Motilal Oswal Securities (MOSL) is positive on ICICI Bank as the brokerage believes a visible improvement in asset quality with consistent decline in total net stressed loans should widen the gap between core pre-provision operating profit and credit costs.

Banks are proxies to economic growth and should emerge as early beneficiaries, but given the bad loan issues facing the sector, experts are cautious and very selective.

Among other banks, Sanjeev Zarbade at Kotak Securities prefers South Indian Bank (SIB).

It is the second cheapest bank among old private sector banks (OPSB) in terms of price-to-adjusted book value. With a market cap to business (at four per cent), SIB is the cheapest along with Karnataka Bank.

SIB is highly attractive when compared to much smaller banks in the OPSB segment (40 per cent cheaper than Dhanlaxmi Bank and Lakshmi Vilas Bank in terms of price to adjusted book value), says the brokerage.

The auto segment is also seen gaining from rising demand, low interest rates and a revival in rural income levels besides the issue of remaining Pay Commission incentives.

In this space, Macquarie prefers Eicher Motors as its growth trajectory is expected to continue with increased capacity additions.

MOSL and Kotak Securities prefer Tata Motors. MOSL estimates recovery in Jaguar Land Rover's (JLR's) margins over FY17-19, driven by improving hedge rate and operating leverage.

The consumer vehicles (CV) business, though, faces uncertain times in FY18, feels Kotak Securities.

Nevertheless, both brokerages are positive on Tata Motors' personal vehicles business. MOSL expects 74 per cent compounded annual growth (CAGR) in the company's consolidated earnings per share (EPS) over FY17-19.

Apollo Tyres is also among the top picks of some brokerages.

Reliance Securities expects Apollo to witness a decent scalability in business with the expected pick-up in demand, with the company investing more in diversified and rapid growth areas.

Apollo's revenue and earnings, according to them, are to witness a 19 per cent and 13 per cent CAGR, respectively, through FY17-19.

The FMCG space, too, will also benefit from higher consumption. While Macquarie prefers HUL in the large-cap space, Emami remains the choice of MOSL.

Macquarie sees significant margin expansion for HUL and no market-share loss on account of major launches in the Naturals space to drive earnings growth.

MOSL says, despite near-term challenges due to disruption following the GST (goods and services tax) implementation, they believe Emami remains a credible long-term play with healthy growth led by rural recovery, ability to turn around acquisitions, best-of-breed R&D spend and efforts towards improving direct distribution reach.

Among metals, MOSL prefers Hindalco, given its robust and de-risked business.

Novelis and its copper segment operate on the conversion model, with LME prices being a pass-through.

Aluminium smelting is a high-margin business and prices are supported by supply discipline in China. With improving free cash flows and deleveraging, they re-iterate buy with a target price of Rs 310.

Energy stocks are also among the top picks even as they have rallied in the recent past. In the oil and gas space, Petronet LNG and GAIL are top preferences.

MOSL expects Petronet LNG to benefit from structurally low LNG prices and firm utilisation contracts at its terminals. For GAIL, robust volume-led earnings growth in the medium term and inexpensive valuation are key positives.

A focus on housing and infra would lead to strong gains for Kajaria Ceramics and Somany Ceramics.

For Kajaria, the market leader in tiles, strong brand, implementation of GST and strong new product funnel would be the key growth drivers, says Reliance Securities.

Somany should also deliver superior performance on the back of improved product mix, asset-light business model and traction in sanitary ware and bath fittings.

Among others, the top picks for Pankaj Karde, head-institutional sales & sales trading, Systematix Shares, include Asahi Songwong Colors Ltd, Control Print, V2 Retail, Ashok Leyland, Karur Vysya Bank (KVB).

KVB is also a pick of HDFC securities.

Anita Gandhi, whole-time director at Arihant Capital Markets said her preferences include M&M, DCB Bank, Tata Global Beverages, Bharat Electronics and L&T Finance Holdings.