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Market tanks 2% but offers array of opportunities; top stock picks for 2016

Analysts believe first half of 2016 may mirror bearish trend of 2015, but benchmark indices may begin to log gains in the second half of 2016.

Aprajita Sharma January 5, 2016 | Updated 10:23 IST
Market tanks 2% but offers array of opportunities; top stock picks for 2016
"Midcap indices are likely to outperform the broad indices in the first half as substantial pick up in the earning for the large cap stocks are likely to be delayed," said expert. Photo: Reuters

Even as nothing concrete has changed on the ground, investors and fund managers across the world are ritualistically re-writing market strategies for 2016 with a fresh vigour. The domestic benchmark indices bid adieu to year 2015 posting losses for the first time in four years.

Yet, the analyst community remains upbeat on domestic equities. Analysts believe first half of 2016 may mirror bearish trend of 2015, but benchmark indices may begin to log gains in the second half of 2016.

Brokerage firm Anand Rathi Financial Services said that the consensus estimate for earnings per share (EPS) outlook of Sensex for 2016 has fallen around 16 per cent to Rs 1,640 from Rs 1,950 in 2015, but the brokerage believes things to start looking up again towards the mid-2016, for a two-three-year long bull run.

"The momentum for estimate revision for further downgrades remains high, thus indicating the cuts to continue in first half of 2016. But, in our opinion, this should bottom out in mid-2016 and would get poised for looking up towards the end of 2016. Markets are smarter than the analysts and hence we should expect equity markets to start looking up again towards the mid-2016 for a 2-3 year bull run," said Amit Rathi, Managing Director of Anand Rathi Financial Services.

G Chokkalingam, Founder & Managing Director, Equinomics Research & Advisory is also positive on the equities. He believes the headline indices are likely to give around 20 per cent return in 2016. Chokkalingam believes though believes midcap indices to outdo largecap indices in the first half of 2016.

"Midcap indices are likely to outperform the broad indices in the first half as substantial pick up in the earning for the large cap stocks are likely to be delayed. Only in the second half, the industrial economy and hence, the overall economy is expected to grow substantially. Hence, large companies would take another 1 or 2 quarters to improve their earnings as the impact of global deflationary pressures are likely to continue for another 6 months," said Chokkalingam.

Here is a list of stocks recommended by top three brokerages that can yield you healthy returns going ahead:

Ambit Capital

1) Bank of Baroda (Target price: Rs 190)

Ambit Capital noted the asset quality of Bank of Baroda bank has deteriorated in the last year, but credible appointments of a MD & CEO and a Chairman from the private sector, in September 2015, have raised expectationsa of structural reforms.  

The brokerage maintained 'buy' on the stock and said the scrip is their preferred pick among PSU stocks. Ambit Capital expects 19.49 per cent upside on the stock in 12 months against Friday's closing figure.

2) Trent (Target price: Rs 2,010)

Trent is India's largest women's wear and fast fashion company built around an own brand portfolio and a fast fashion brand under its JV with Inditex.

The brokerage believes the current valuations of the company (18x FY17E EV/EBITDA) do not reflect the high EBITDA growth from structural changes in Westside, the turnaround of Trent Hypermarket (THL) and the sustainability of the Zara JV.

"After investing time to get the model right, Trent will step up store expansion, leading to operating leverage (EBITDA CAGR of 78 per cent over FY15-FY17E)," said Ambit Capital.

The brokerage expects an upside of 32 per cent on the stock with a target price of Rs 2,010.

3) Sadbhav Engineering (Target price: Rs 375)

Sadbhav Engineering's strong EPC execution (19%/17% revenue/EBITDA CAGR over FY10-FY15) and a healthy standalone balance sheet (0.7x D/E) set it apart from its struggling overleveraged peers. Its asset holding subsidiary (SIPL), owns the fourth largest BOT (build-operate-transfer) portfolio in India, which is entirely funded. SIPL will not only benefit from falling interest rates but also from rising trade traffic.

Ambit Capital sees an upside of 8 per cent on the stock with a target of Rs 375 against Friday's closing figure.

4) Ashoka Buildcon (Target Price: Rs 225)

The brokerage believes Ashoka Buildcon's strong balance sheet, lifecycle road development experience and financial discipline positions it as the best road developer in India.

"Improving road order inflows should address investor concerns regarding Ashoka's tepid EPC revenue growth. Moreover, mining resumption in eastern India will drive non-linear traffic growth on its BOT asset portfolio, which in turn would narrow the valuation discount with Sadbhav," said the brokerage.

Ambit Capital expects an upside of 13 per cent with a target price of Rs 225 against Friday's closing figure.

Edelweiss Securities

1) Dalmia Bharat

Dalmia Bharat is India's 3rd largest cement group, with a capacity of 24 MT spread across South, East and North East regions. The company is expected to witness substantial boost in profitability with the incremental clinker capacity addition in the North East.

"North East remains one of the most underpenetrated regions in terms of cement demand, with per capita consumption at 142 kgs vs all India average of 210 kgs," said the brokerage.

Change in investment plans, inability to pass on increase in cost and changes in macro environment are some of the risks that loom over the company.

2) Jamna Auto Industries

Jamna Auto Industries (JAI) is a market leader in the CV suspension leaf spring segment (90% of sales), including products like the conventional leaf spring and parabolic leaf spring.

JAI is expected to be a significant beneficiary of the CV cycle recovery in India.

"Post a 2-year downturn, the MHCV industry in India is registering a recovery. JAI is the largest player in the domestic leaf spring industry with 64 per cent market share whilst several other small companies contribute to the remaining 36 per cent share," said the broking firm.

Risks: 1) End-segment concentration risk, 2) Steel price pass-through may affect revenue growth

3) Natco Pharma

Natco Pharma is focused on R&D play in Oncology, CNS and other niche therapies. It has track record of winning complex patent challenges (Nexavar (CL)/ Copaxone/Sovaldi/Tamiflu) and it also de-risks itself from litigation expenses. The company also accounts for 30 per cent market share in Indian generic Oncology market.

"Current opportunity of $15 billion of the drugs known filed ANDA's in the US Market will benefit the profitability of the company, but currency risk must be taken into account," the brokerage cautioned.

4) Siyaram Silk Mills

Siyaram Silk Mills (Siyaram) is an integrated textile manufacturer with a domestic focus which has strategically transformed itself from a textile manufacturer to a major garmenting and brand house.

"The stock trades at very attractive valuations of 9x FY16E and 8x FY17E EPS of Rs 105 and Rs 121, respectively - much cheaper than its peers," said Edelweiss.

Risks: 1) Fluctuation in raw material prices, 2) competition from the unorganized sector, 3) semi-urban slowdown and limited Pricing Flexibility

5) United Spirits

USL has achieved unparalleled dominance in the IMFL industry, holding 40 per cent market share in terms of volume with 19millionaire brands and has presence across all five segments, viz. whisky, rum, gin, brandy and vodka and has also entered the fast growing wine segment.

"The company will benefit as it will become the sole and exclusive manufacturer and distributor of Diageo's brands in India resulting in USL products being available across the price range, right from low to premium, providing it a wider reach to divergent consumers. We expect USL's market share in premium IMFL to jump from 36 per cent currently to 40 per cent on back of tie-up with Diageo," said the brokerage.

AnandRathi Institutional Research

We believe that 2016 belongs to infrastructure investments by government especially in the roads and power transmission segment. Hence we advise building up portfolios with road asset owners (Ashoka Buildcon), EPC companies focused on road projects (KNR Construction), and transmission asset owners as well transmission EPC companies (KEC International).

Alternative energy investments is driving growth for a number of capital goods companies, hence look out for good companies which manufactures components or provides services to this segment (Sanghvi Movers).

Infrastructure investments will bode well for Cement companies (Heidelberg Cement) as well as they have been having a subdued demand from housing sector till now.

One must balance these high beta sector with low beta sectors like consumer (Bajaj Corp), pharmaceuticals (Suven Pharma) and technology (Persisent Systems).

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