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2020 : The haze may lift
At the cusp of 2020, Indian stock markets look more polarised than its fractious politics! It seems that incremental inflows are mostly chasing less than a dozen stocks. The reasons for this ‘passive flight to safety’ are not difficult to identify. Macro growth has slipped, alarmingly some say, and is not just on a cyclical downtick. High frequency data and core indicators are mostly struggling. Policy reform has been directionally encouraging (GST, RERA, IBC, tax cuts, the push for formalisation and financialisation) but messy and inadequate. Government’s efforts to spur capex are sputtering. Modi 2.0 looks like a tougher grind than Modi 1.0, say the detractors.
So why should the haze lift? An under-estimated factor is the slowly healing global economy, post some concrete steps by the two largest economies in the world (US and China) to end their looming trade stalemate. Government policy action, as we well know from history, has been boldest when it is cornered. Our intuition is that the upcoming budget may well see the government springing a surprise on its naysayers.
Our top picks for 2020 are hardly different from the compilation we made a few months ago at the turn of the Samvat and derive from underlying quality and a measure of sanity in valuations.
* FINANCIALS: The healing cycle is set to play out further at stressed lenders, despite a slowing economy. Our picks here include the rapidly healing Axis Bank and SBI. We also like steady compounders such as Cholamandalam Inv & Finance and CUB. In the non-lending pack, SBI Life is set for sustainable growth. ICICI Lombard is a great business, but looks overpriced in view of the de-tariffing risk in TP.
* CONSUMER cos are sitting on very high valuations, even as sentiment (as seen in volume growth) has struggled considerably of late. New age businesses like QSR face long growth runways and (justifiably) command high valuations. Durables/appliances players with niche strengths are similar. The category expansion play at Britannia is not fully priced in, even after the run up over the last few years. Dabur’s focus and rising distribution penetration drive our optimism, while Jubilant’s multi-year growth story is yet to play out. Among retailers, we see structural risks playing out for the stratospherically valued D-Mart while V-Mart offers an interesting growth proposition, driven by strategic focus on value retailing.
* TECHNOLOGY cos, with all their enticing talent, FCFs and payout yields, are going for under 15x FY22E EPS (top 5 avg). Value is emerging at Infosys. Staffing leader Teamlease is relatively affordable now, while the growth/valuation bargains at L&T Tech and Sonata seem sensible at CMP.
* CEMENT may not enjoy the twin benefits of higher pricing and softer coal prices for another year. Our preferred stocks here include market leader Ultratech and the fast growing and (now) reasonably profitable JK Cement.
* AUTOMOBILES are battling a severe cyclical downturn and face longer term challenges, as the threat of EVs looms large. Sales vols are down 19/38/14% for PVs/MHCVs/2Ws in 1HFY20. Here, we like Bajaj Auto’s global sales footprint, while Concor can capture freight from truckers in the congested Delhi-Mumbai route as the Dedicated Freight Corridor takes off.
* OIL cos will find it a hard ask to recover from a value destructive regulatory environment. The unfettered-by-regulation city gas distributors thus make sense. Gujarat Gas will (as its product mix tilts towards CNG) tread the path of Indraprastha Gas. Meanwhile, the exceptionally talented and prudent Alkyl Amines is our speciality chemicals pick.
* INDUSTRIALS never really recovered from the slowdown in corporate capex after the fairy-tale pre-GFC years. Barring L&T, infra stocks have gone through a ride to heaven and back. KNR Constructions is the other consistent performer in this space.
* PHARMA may well emerge in 2020, from its multi-year slump. But we are betting here on the more domestic-focussed Alkem and torrent, that also have interesting USs pipeline and look set to improve capital efficiency and cash flows in the foreseeable future.
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HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475
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