The outcome of general elections in May is seen as the biggest local event that will set a direction for markets. Until then, equity gauges are expected to react to progress on global developments such as Brexit and US-China trade talks.
Foreign portfolio investors have pumped in a net of $767.77 million into Indian equities so far in February.
In a key economic development, India’s merchandise trade deficit widened to $14.73 billion in January after hitting a 10-month low of $13.08 billion in December, data released by Commerce Ministry showed. The deficit was $15.67 billion in January 2018. Merchandise exports grew 3.74 percent on year to $26.36 billion, mainly due to growth in textiles, drugs and pharmaceuticals as well as organic and inorganic chemicals.
The Reserve Bank of India has warned Yes Bank of regulatory action for making public its report on divergence in violation of the confidentiality clause, the private sector lender said on February 15. The private sector lender in a press release earlier this week had said the RBI did not find any divergence in the asset classification and provisioning done by the lender during 2017-18.
In a regulatory filing on February 15, Yes Bank said it has received a letter from the RBI that noted that the Risk Assessment Report (RAR) was marked ‘confidential’ and it was expected that no part of the report be divulged except for the information in the form and manner of disclosure prescribed by regulations.
“Therefore, the press release breaches confidentiality and violates regulatory guidelines. Moreover, NIL divergence is not an achievement to be published and is only compliance with the extant Income Recognition and Asset Classification norms,” the RBI said in its letter. This may adversely impact the stock price in the coming week.
Globally, all eyes would be on ongoing tussle between the US and China. The recent slowdown in China’s economic growth is also a cause of concern for global investors. Growing confidence that the United States and China will resolve their ongoing trade dispute will help boost global investor sentiments. Those talks will restart next week in Washington, with both sides saying this week’s negotiations in Beijing showed progress. Clarity on Brexit would also act as a key trigger for investor interest.
Investors have turned cautious ahead of the forthcoming general election. Investors sentiments were dampened by the steep decline in shares of certain large-cap and mid-cap companies amidst mixed earnings performance in Q3FY19. All the sectoral indices lost value over the last seven sessions.
The equity markets have turned very volatile and even massive companies are not spared. The recent volatility in stock prices of Tata Motors, Dr Reddy’s, Sun Pharma, Yes Bank, Vedanta, Essel group companies, Anil Ambani group companies is a matter of concern as retail investors are getting trapped with every newsflow.
As a result, we advise investors to be cautious on the newsflow in markets, do proper analysis and neither rush to take fresh positions or square off the existing positions or holdings on disturbing newsflows unless getting a proper clarity of a particular event or on company’s performance.
We believe domestic bourses would remain volatile till general election results are out. There would be temporary headwinds for investors but on the long term, we believe the Indian equity markets are in a structural bull run as the benefits of implementation of GST, Insolvency and Bankruptcy code, digitisation, thrust on Make in India and improving relations with key foreign countries would augur well for the economy.
The strategy at present should be to invest in a phased manner only in companies that are not connected to any political party, have a robust business model, strong earnings and cashflow visibility, low debt and backed by quality management especially on the corporate governance front.
Considering the above factors, investors can have a stock specific approach in mid-cap and small-cap space as there are many companies that are trading at a discount of 50-70 percent to their peak price in early 2018.
On a safer side, we would suggest investors look at consumption stocks, top quality pharma companies, NBFCs having strong parentage, auto and auto ancillary stocks, gas companies, PSU banks (looking better after the cleanup of NPA mess, progress made under IBC), IT sector and private insurance companies at the current moment.
Here are the top stock trading ideas that can give good returns:
Indraprastha Gas: CMP: Rs 282| Target: Rs 350| Upside: 24 percent
We like Indraprastha Gas as it is a structurally strong story on CNG distribution. Initiative to substitute crude oil with natural gas to reduce India’s import bill also has the potential to give a boost for extensive gas usage.
In this backdrop, we are of the view that the anticipated increase in gas demand would come mainly from the retail segment or from the city gas distribution sector.
The company boasts of strong consistent financial performance in the last few quarters and even Q3FY19 result displayed strength with volume growth of 12.2 percent and realisation growth of 13.6 percent.
The management expects to win around 3-4 geographical areas (GA) in the latest city gas distribution (CGD) bidding round where the company has bid for 15 GA. Owing to the expectation of wionning 3-4 GA, the company envisages a capex of around Rs 3,000-5,000 crore, which is expected to be funded through internal accruals.
The management remains positive of achieving double-digit volume growth even in upcoming quarters. The Company’s expansion in Gurugram, Meerut, Muzaffarnagar and Shamli is expected to drive volume growth. Expansion in Rewari and Karnal are expected to drive incremental industrial volumes.
There are temporary headwinds like margin pressure owing to increase in operating costs and margins to OMCs. In an interview, ES Ranganathan, Managing Director, said IGL always maintained double-digit growth and this year also the company may record 11 percent.
Although the stock has rallied, we still find value in the company as it is a structurally strong company operating in a sunrise sector with impeccable execution record with zero debt. At CMP of Rs 282 (Face value: Rs. 2), the stock trades at a P/E of 29x on FY18 EPS of Rs 9.58. 9MFY19 EPS stood at Rs 8.02.
We recommend a buy with a target price of Rs 350 (25x on FY20 estimated EPS of Rs 14) implying an upside of 24 percent for investors with a horizon of 12 months.
GAIL India: CMP: Rs 317| Target: Rs 390| Upside: 23 percent
The company is creating value across the entire gas value chain—natural gas (around 11,000 km of pipeline network, and expanding to 15,000 km), liquid hydrocarbons (seven gas processing units producing LPG, propane, pentane, naptha etc.), LPG transport capacity of 3.8 MMTPA (2,038 km), petrochemicals (domestic market share of around 20 percent), exploration and production (participation in 15 blocks with presence in Myanmar and the US), city gas distribution (serving over 1.4 million vehicles and 1.4 million households through subsidiary and joint ventures).
GAIL has signed multiple long-term LNG supply contracts, supplies from which have commenced from 2018 up to 2020. The company has signed around 30 Master Sales Purchase Agreements with all reputed LNG suppliers including BG, Shell, Total, etc. under which it has been importing LNG cargoes from time to time. In addition, GAIL is importing LNG under term deals signed from time to time with various suppliers.
The company witnessed decent Q3FY19 result due to higher revenue from its natural gas marketing and liquefied petroleum gas business. In Q3FY19, the company witnessed 33 percent yoy PAT growth to Rs 1,681 crores. On a nine-month basis, GAIL’s PAT is Rs 4,903 crore, signifying an increase of 36 percent against the corresponding period of FY18.
The company management said GAIL is expected to achieve capex outlay of around Rs 7,000 crore during 2018-19, which is more than 70 percent increase from last year.
At CMP of Rs 317, the stock trades at a P/E of 16x on FY18 EPS of Rs 20.48. We recommend a buy with a target price of Rs 420 (15x at estimated FY20 EPS of Rs 28) for investors with a horizon of 9-12 months.
Oil and Natural Gas Corporation: CMP: Rs 135| Target: Rs 162| Upside: 20 percent
The company’s Q3FY19 results were above our expectations. Gross Revenue was up 20.4 percent QoQ to Rs. 27,694 crore.
Net profit witnessed a growth of 64.8 percent QoQ to Rs 8,263 crore. The company’s written-off cost for exploratory witnessed a rise of 79 percent YoY and 120 percent sequentially to Rs 2,388.42 crore during the quarter.
The company got $66.38 for every barrel of crude oil it sold in the quarter, 13.6 percent higher than $58.42 per barrel realisation a year ago. Gas prices were 163 percent higher at $3.36 per million British thermal unit.
ONGC said crude oil production dropped 4.8 percent to 6.03 million tonne but gas output rose 6.6 percent to 6.7 billion cubic metre. During the first nine months of this fiscal, oil production dipped 4.7 percent to 18.33 million tonne and gas output was up 4 percent at 19.25 billion cubic metres.
In terms of exploratory performance, two new basins, i.e., Vindhyan and West Bengal have been upgraded to Category II during the current financial year. The appraisal plans are drawn to further upgrade them as producing basins. ONGC has notified a total of 11 discoveries so far in FY’19 (4 discoveries after November 3, 2018).
At CMP of Rs 135, the stock trades at a P/E of 9x at FY18 EPS of Rs 15.54 and at a P/E of 6x at annualized 9MFY19 EPS of Rs 23.56. We recommend a buy with a target price of Rs 162 (6x at estimated FY20 EPS of Rs 26).
The author is Vice President, Equity Research at Ajcon Global Services.
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