Motilal Oswal suggests buying these stocks ahead of June quarter results
In an interaction with Business Today, Sneha Poddar, AVP, Research, Broking & Distribution, Motilal Oswal Financial Services, says 80 per cent allocation towards equity remains structurally positive
- Jul 12, 2023,
- Updated Jul 13, 2023 12:48 PM IST
Benchmark equity indices BSE Sensex and NSE Nifty are hovering at record-high levels. A couple of factors including foreign institutional investor interest, positive global cues and a pause in interest rates by the Reserve Bank of India (RBI) supported sentiment. The market now awaits the June quarter (Q1) results, IT majors Tata Consultancy Services and HCL Technologies are slated to announce their results on July 12. What to expect from June quarter earnings season? Or which stocks will deliver solid returns going ahead? In an interaction with Business Today, Sneha Poddar, AVP, Research, Broking & Distribution, Motilal Oswal Financial Services, shared her views on the stock markets. Edited excerpts:
BT: Nifty scaled its all-time high of 19,523.60 this month. Do you think market participants have missed the rally?
SP: After a volatile first three months of CY23, the domestic market recovered from its March lows on the back of improving global macros, interest rates nearing their peak, containment of banking crises in the US and Europe, healthy earnings performance by India Inc and strengthening FII inflows. Market participation which had reduced in the March quarter, has recovered since then as reflected in monthly average cash volume data, which has been increasing since April. Even NSE active clients improved marginally in May after a decline for 10 consecutive months. FIIs data also has been very strong over the last two months. Thus, market participants seem to have not missed the rally.
BT: In which pockets do you think investors can book profit right now?
SP: Investors can book profit in those pockets where the price run-up has been very fast and the valuations have turned expensive. Even there we would suggest partial profit booking if the earnings growth remains robust as the overall structure of the market remains positive given various fundamentally positive factors. Growth is the most important deciding factor and thus one should review his portfolio based on it. In Q1FY24, we are expecting cement and metal companies to report an earnings decline, thus one can look at profit booking in those counters selectively.
BT: What do you expect from the Q1 result season? Which sectors will surprise markets and why?
SP: We expect sales and Ebitda of Nifty companies to rise 4 per cent and 17 per cent YoY, respectively. Earnings of Nifty50 companies may grow 25 per cent YoY in 1QFY24. OMC’s profitability is likely to surprise the market as it is anticipated to surge to Rs 40,500 crore in 1QFY24 from a loss of Rs 18500 crore in Q1FY23 owing to strong marketing margins. Excluding OMCs, Nifty’s earnings should rise 11 per cent YoY for the quarter. Overall earnings growth is likely to be driven once again by domestic cyclicals such as BFSI and auto, which are expected to post 47 per cent and 11x YoY jump while consumer and IT are likely to report a healthy 19 per cent and 16 per cent YoY growth, respectively. Metals and cement are anticipated to drag the aggregates with a 53 per cent and 17 per cent YoY decline in earnings, respectively. Excluding global commodities (i.e. Metals and O&G), the Nifty should post 40 per cent YoY earnings growth, respectively, in 1QFY24. The EBITDA margin for Nifty companies, excluding OMC and financials, are likely to expand 110 basis points YoY to 20.8 per cent during the quarter, led by a sharp drop in commodity costs.
BT: How do you see market valuations after the recent run-up?
SP: Nifty is trading at a 12-month forward P/E of 19.2x, at a 5 per cent discount to its long-period average (LPA). Notably, Nifty EPS grew around 19 per cent during FY20-23 to Rs 806 as against market returns of around 14 per cent (over Jan’20-Jun’23). Thus, valuations are far more reasonable today than the in October 2021 peak. That being said, relative valuations are still at a premium – MSCI India is trading at a premium of 100 per cent to MSCI EM vs. LPA of 70 per cent. The premium, while elevated, can sustain given India’s healthy macro-micro combination and better earnings visibility.
BT: What would be the right asset allocation strategy for now?
SP: We believe one can have an 80 per cent allocation towards equity as the overall long-term view remains structurally positive. 10 per cent exposure can be towards gold or silver while the balance 10 per cent can be towards FD/ debt instruments. In the case of equity, we rely on the sector winners with growth visibility for stock selection. After a period of lull in CY21/CY22, growth as a theme has made a strong comeback while value is relatively on the back burner. As interest rates stabilise/peak globally as well as in India, we expect growth to remain the most important driver of relative alpha creation! We believe that in every recovery cycle, valuations always look expensive because while the direction of recovery is self-evident, the quantum of recovery can surprise. Thus, as rates peak and the narrative of a CY24 rate cut gains momentum, we expect the growth theme to dominate value. We remain overweight on financials, consumption and automobiles. We are underweight on metals, energy and utilities and neutral on healthcare and telecom.
BT: How do you see Reliance Industries and TCS going ahead?
SP: Reliance Industries may start performing as it unlocks value through Jio Financial Services which owns a 6.1 per cent stake in Reliance. The stake is valued at Rs 1.1 lakh crore which represents a substantial portion (around 90 per cent) of JFS’s net worth. The demerger has got NCLT approval and the record date too has been fixed for July 20. Listing could happen within the next 2-3 months and could lead to value-unlocking potential for RIL as it is not yet included in the latter’s SOTP valuation.
TCS on the other hand, may continue to consolidate in the near term as considering the macro headwinds, the management has cited near-term uncertainties, though the medium-term outlook remains healthy. It anticipates the possibility of moderate full-year revenue growth in FY24 if similar instances of delayed decision-making and cash conservation from clients reoccur.
BT: Can you recommend five stocks for a 12-24 month timeframe?
SP: Since we are overweight on financials, consumption and auto, our top picks reflect this.
ICICI Bank: ICICI Bank is well positioned to deliver steady earnings, supported by pristine asset quality and strong momentum in business growth. The stable mix of a high-yielding portfolio (retail/business banking) and a low-cost liability franchise is driving steady NII growth, resulting in margin expansion to 4.9 per cent.
M&M: The stock has seen a substantial re-rating in FY23, driven by a strong performance in the SUV segment, market share gain in tractors and a new launch pipeline in EVs. The outlook for tractors remains stable given the expectation of normal monsoon this year. We expect the auto business to be the key growth driver for the next couple of years on the back of a strong order backlog in the SUV segment led by new launches.
Titan: Earnings growth visibility remains strong for Titan. It has compounded earnings by around 20 per cent for an elongated period. It has ample growth opportunities, given its sub-10 per cent market share in jewellery and the ongoing challenges faced by its unorganised and organised peers.
ITC: ITC’s earnings outlook is better compared to other large-cap staples players in FY24 and FY25. The cigarette business continues to deliver volume growth and market share gains in the absence of competition from illicit trade. The FMCG - Others segment has also delivered strong growth across markets and product lines, and as input prices decline, we anticipate an expansion in margins too. Further value unlocking can happen through the demerger of other verticals a part cigarette.
Cholamandalam Investment and Finance Company: It benefits from a well-diversified loan book, with newer business lines shaping up well. It has more levers than its peers to deliver a healthier RoA/RoE.
BT: What is your view on mid- and small-caps following their recent outperformance?
SP: As the peak of the rate-hike cycle appears behind, mid-and small-caps are back in favour. RBI has already taken a pause while US Fed took an intermittent pause. After one or two more rate hikes, even US Fed is expected to pause and thus 6-8 months down the line, we can expect central banks to adopt rate cut. This would be more beneficial for mid and small caps which bear the maximum brunt of high-interest rates. Thus, mid and small-cap companies are likely to continue with their momentum.
Also read: Hot stocks on July 12, 2023: Adani Enterprises, Delta Corp, Suzlon Energy, Wipro and more
Also read: RIL, ICICI Bank among shares that MFs bought in June; Tata Motors stock on sell radar
Benchmark equity indices BSE Sensex and NSE Nifty are hovering at record-high levels. A couple of factors including foreign institutional investor interest, positive global cues and a pause in interest rates by the Reserve Bank of India (RBI) supported sentiment. The market now awaits the June quarter (Q1) results, IT majors Tata Consultancy Services and HCL Technologies are slated to announce their results on July 12. What to expect from June quarter earnings season? Or which stocks will deliver solid returns going ahead? In an interaction with Business Today, Sneha Poddar, AVP, Research, Broking & Distribution, Motilal Oswal Financial Services, shared her views on the stock markets. Edited excerpts:
BT: Nifty scaled its all-time high of 19,523.60 this month. Do you think market participants have missed the rally?
SP: After a volatile first three months of CY23, the domestic market recovered from its March lows on the back of improving global macros, interest rates nearing their peak, containment of banking crises in the US and Europe, healthy earnings performance by India Inc and strengthening FII inflows. Market participation which had reduced in the March quarter, has recovered since then as reflected in monthly average cash volume data, which has been increasing since April. Even NSE active clients improved marginally in May after a decline for 10 consecutive months. FIIs data also has been very strong over the last two months. Thus, market participants seem to have not missed the rally.
BT: In which pockets do you think investors can book profit right now?
SP: Investors can book profit in those pockets where the price run-up has been very fast and the valuations have turned expensive. Even there we would suggest partial profit booking if the earnings growth remains robust as the overall structure of the market remains positive given various fundamentally positive factors. Growth is the most important deciding factor and thus one should review his portfolio based on it. In Q1FY24, we are expecting cement and metal companies to report an earnings decline, thus one can look at profit booking in those counters selectively.
BT: What do you expect from the Q1 result season? Which sectors will surprise markets and why?
SP: We expect sales and Ebitda of Nifty companies to rise 4 per cent and 17 per cent YoY, respectively. Earnings of Nifty50 companies may grow 25 per cent YoY in 1QFY24. OMC’s profitability is likely to surprise the market as it is anticipated to surge to Rs 40,500 crore in 1QFY24 from a loss of Rs 18500 crore in Q1FY23 owing to strong marketing margins. Excluding OMCs, Nifty’s earnings should rise 11 per cent YoY for the quarter. Overall earnings growth is likely to be driven once again by domestic cyclicals such as BFSI and auto, which are expected to post 47 per cent and 11x YoY jump while consumer and IT are likely to report a healthy 19 per cent and 16 per cent YoY growth, respectively. Metals and cement are anticipated to drag the aggregates with a 53 per cent and 17 per cent YoY decline in earnings, respectively. Excluding global commodities (i.e. Metals and O&G), the Nifty should post 40 per cent YoY earnings growth, respectively, in 1QFY24. The EBITDA margin for Nifty companies, excluding OMC and financials, are likely to expand 110 basis points YoY to 20.8 per cent during the quarter, led by a sharp drop in commodity costs.
BT: How do you see market valuations after the recent run-up?
SP: Nifty is trading at a 12-month forward P/E of 19.2x, at a 5 per cent discount to its long-period average (LPA). Notably, Nifty EPS grew around 19 per cent during FY20-23 to Rs 806 as against market returns of around 14 per cent (over Jan’20-Jun’23). Thus, valuations are far more reasonable today than the in October 2021 peak. That being said, relative valuations are still at a premium – MSCI India is trading at a premium of 100 per cent to MSCI EM vs. LPA of 70 per cent. The premium, while elevated, can sustain given India’s healthy macro-micro combination and better earnings visibility.
BT: What would be the right asset allocation strategy for now?
SP: We believe one can have an 80 per cent allocation towards equity as the overall long-term view remains structurally positive. 10 per cent exposure can be towards gold or silver while the balance 10 per cent can be towards FD/ debt instruments. In the case of equity, we rely on the sector winners with growth visibility for stock selection. After a period of lull in CY21/CY22, growth as a theme has made a strong comeback while value is relatively on the back burner. As interest rates stabilise/peak globally as well as in India, we expect growth to remain the most important driver of relative alpha creation! We believe that in every recovery cycle, valuations always look expensive because while the direction of recovery is self-evident, the quantum of recovery can surprise. Thus, as rates peak and the narrative of a CY24 rate cut gains momentum, we expect the growth theme to dominate value. We remain overweight on financials, consumption and automobiles. We are underweight on metals, energy and utilities and neutral on healthcare and telecom.
BT: How do you see Reliance Industries and TCS going ahead?
SP: Reliance Industries may start performing as it unlocks value through Jio Financial Services which owns a 6.1 per cent stake in Reliance. The stake is valued at Rs 1.1 lakh crore which represents a substantial portion (around 90 per cent) of JFS’s net worth. The demerger has got NCLT approval and the record date too has been fixed for July 20. Listing could happen within the next 2-3 months and could lead to value-unlocking potential for RIL as it is not yet included in the latter’s SOTP valuation.
TCS on the other hand, may continue to consolidate in the near term as considering the macro headwinds, the management has cited near-term uncertainties, though the medium-term outlook remains healthy. It anticipates the possibility of moderate full-year revenue growth in FY24 if similar instances of delayed decision-making and cash conservation from clients reoccur.
BT: Can you recommend five stocks for a 12-24 month timeframe?
SP: Since we are overweight on financials, consumption and auto, our top picks reflect this.
ICICI Bank: ICICI Bank is well positioned to deliver steady earnings, supported by pristine asset quality and strong momentum in business growth. The stable mix of a high-yielding portfolio (retail/business banking) and a low-cost liability franchise is driving steady NII growth, resulting in margin expansion to 4.9 per cent.
M&M: The stock has seen a substantial re-rating in FY23, driven by a strong performance in the SUV segment, market share gain in tractors and a new launch pipeline in EVs. The outlook for tractors remains stable given the expectation of normal monsoon this year. We expect the auto business to be the key growth driver for the next couple of years on the back of a strong order backlog in the SUV segment led by new launches.
Titan: Earnings growth visibility remains strong for Titan. It has compounded earnings by around 20 per cent for an elongated period. It has ample growth opportunities, given its sub-10 per cent market share in jewellery and the ongoing challenges faced by its unorganised and organised peers.
ITC: ITC’s earnings outlook is better compared to other large-cap staples players in FY24 and FY25. The cigarette business continues to deliver volume growth and market share gains in the absence of competition from illicit trade. The FMCG - Others segment has also delivered strong growth across markets and product lines, and as input prices decline, we anticipate an expansion in margins too. Further value unlocking can happen through the demerger of other verticals a part cigarette.
Cholamandalam Investment and Finance Company: It benefits from a well-diversified loan book, with newer business lines shaping up well. It has more levers than its peers to deliver a healthier RoA/RoE.
BT: What is your view on mid- and small-caps following their recent outperformance?
SP: As the peak of the rate-hike cycle appears behind, mid-and small-caps are back in favour. RBI has already taken a pause while US Fed took an intermittent pause. After one or two more rate hikes, even US Fed is expected to pause and thus 6-8 months down the line, we can expect central banks to adopt rate cut. This would be more beneficial for mid and small caps which bear the maximum brunt of high-interest rates. Thus, mid and small-cap companies are likely to continue with their momentum.
Also read: Hot stocks on July 12, 2023: Adani Enterprises, Delta Corp, Suzlon Energy, Wipro and more
Also read: RIL, ICICI Bank among shares that MFs bought in June; Tata Motors stock on sell radar