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Angel Broking Diwali Top Picks (Diwali Muharat)
Angel picks 12 stocks for you. See links below
- Axis Bank
- Banco Products
- Bank of India
- Crompton Greaves
- Goodyear India
- ICICI Bank
- India Cements
- Infosys
- Jagran Prakashan
- Mangalam Cement
- Punjab National Bank
- Siyaram Silk Mills
Earnings growth to drive market forward
Markets have witnessed a strong rally in the last eight months, which has so far been
aided by the deeply beaten down valuations. Going ahead, we believe that acceleration
in earnings growth will drive the markets forward. We expect the performance of
various domestic cyclical sectors to continue improving going forward on the back of
the improving economy and policy environment. In our view, top-line and earnings
are at subdued levels across most cyclical sectors and are likely to show material
improvement going forward, which is not yet fully reflected in consensus. Further, we
expect earnings growth to be better than sales growth in the coming years on the
back of improvement in operating margins, capacity utilisation and financial leverage
(which would reflect in lower depreciation and interest costs).
Lower inflation and interest rates to catalyze investment cycle
The government and the Reserve Bank of India (RBI) have been continuously making
efforts to bring down inflation, which is now beginning to yield results. Lower crude
oil prices and stable currency have aided in easing of inflationary pressures. Going
forward, we expect inflation to continue trending lower as RBI's tight policy as well as
the government's decision of measured 4-5% hike in minimum support prices as opposed
to average hikes of 10-12% in last few years, would aid in lowering food and overall
inflation. As inflation reaches RBI's comfort levels of 6%, we expect rising financial savings
and declining interest rates, which would also act as a catalyst for the investment cycle.
Earnings growth to outpace sales growth
There is increasing credibility that the better inflation and policy environment are
likely to push up GDP growth and consequently corporate sales growth. Further, we
expect earnings growth to be better than sales growth in the coming financial years.
The better demand environment and resulting improved pricing power, coupled with
lower cost inflation are likely to help companies in reviving their operating margins
back to previous levels. Moreover, under-utilized capacities set-up prior to the downturn,
capex on stuck or delayed projects due to policy logjam as well as stretching working
capital requirements had burdened P&Ls in the form of higher depreciation and
interest costs (as per data across 1,883 listed companies, excluding BFSI, IT, Pharma
& FMCG). Hence additional topline growth in the next few years will not require
commensurate interest & depreciation costs. Moreover, higher cash-flows, easier access
to fresh equity capital and lower interest rates are likely to further aid in lower interest
costs as a percentage of sales. All these factors are in our view expected to cumulatively
contribute towards higher growth in earnings.
Outlook and Valuation
We are positive on a range of domestic cyclical stocks and quality mid-caps where
there is still upside left in terms of value and where earnings outlook remains strong.
Amongst sectors we like, banking is one of the preferred sectors as plays on the
overall economic revival story. We like both private and PSU banks - private banks in
anticipation of continued structural market share gains and PSU banks as beneficiaries
of improving asset quality and lower interest rates. We also like stocks in the tyres and
auto ancillary space owing to recovery in auto sales volumes and improving margins.
We are positive on cement stocks, on similar expectations of economic revival and
more specifically, pick-up in infrastructure and construction activity due to the
government's focus. We particularly like smaller regional cement players as their
valuations still look compelling.
LINK
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