Samvat 2076 – Muhurat for Quality Small and Mid-Caps
The ongoing festive season has brought some cheers, as the demand scenario in the country seems to be improving, while the structural reforms initiated by the government will have a marked long-term impact. Our last year picks were backed by strong earnings visibility as we expected the market to remain range-bound, while we preferred large-cap stocks compared to mid-cap ones. However, we find the scenario has changed significantly over the last one-year, as the stocks have corrected quite significantly, while major reforms have been initiated by the government. Apart from the major cut in corporate tax, major cut in personal income tax rate is also on the cards over the next twelve months, which is likely to provide a big boost to the demand scenario. Good monsoons during the year will also help a good Rabi crop, which will help the rural economy and keep inflation under the RBI’s comfort level.
The interest rate scenario continues to remain benign providing a big boost to the interest rate sensitive sectors. Thus, we find the current market is very well set up to focus on mid-cap, smallcap and interest sensitive large-cap stocks, which could see a significant improvement in earnings and a non-linear jump in demand scenario in the forthcoming quarters. While we believe there are strong re-rating prospects in the small-cap and mid-cap stocks, we believe that there can be no compromise on quality and corporate governance standards.
We present our Samvat 2076 picks based on the following parameters
* High quality mid-cap and small-cap stocks.
* Stocks with solid re-rating potential with steady improvement in demand scenario.
* Private banks with visibility of market share gains
Our Top Picks
This Diwali season we essentially prefer small-cap and mid-cap stocks, as they have the maximum potential for re-rating and deliver solid returns over the next one year. We also present 5 large-cap companies, which fit into the theme well. Our large-cap picks have a higher allocation towards banking sector, as we believe they are well-placed to cash in the current liquidity challenges and gain pricing power to their advantage, going forward. The large banks with solid retail franchise will be the biggest beneficiaries. In small-cap and mid-cap space, we choose stocks based on bottom-up approach with strong earnings visibility, as they have higher potential for re-rating.
Large Cap Ideas
* HDFC bank: Consistently gaining market share and well-capitalised to deliver even amid tough environment. Target price Rs1,430.
* ICICI Bank: Growth prospects improving and gaining market share. Relatively cheap private bank with solid retail franchise. Target Price Rs500.
* HCL Tech: Undervalued for the improving growth prospects. One of the cheapest large-cap IT companies. Target Price Rs1,200.
* UltraTech: Realisations continue to hold strong. Earnings visibility better than most sectors. Target Price Rs5,000.
* Marico Industries: To overcome the near-term headwinds and deliver on growth front with strong brands portfolio. Target Price Rs463.
Our Mid-cap Picks
Amongst mid-cap stocks, we like the following ideas which offer reasonable valuations and strong earnings visibility over the next one year. f Sonata Software: A vertical and platform-focused IT firm with Microsoft partnership fulcrum. Target Price Rs395.
* Crompton Greaves Consumer: Robust product portfolio, established brand equity with wide distribution network. Target Price Rs297.
* Aarti Industries: Long-term multi-year deals to provide strong earnings visibility. Target Price Rs929.
* Ashok Leyland: Strong M&HCV industry rebound in FY22 on the back of new investment cycle and pent up demand to upscale earnings and valuation multiple. Target Price Rs111.
* V Mart: Pioneered the concept of ‘Organized Value Retail’ providing value fashion in Tier II/III/ IV towns of India. Target Price Rs2,516.
* Gujarat Gas: Volume growth will kick in as it invests in CNG & PNG distribution in existing geographical areas and new areas. Target Price Rs214
* Coromandel International: Improved outlook; remains best bet in fertilisers space. Target Price Rs500.
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