14 October 2014

Angel Broking Diwali Top Picks (Diwali Muharat LINKs)

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Angel Broking Diwali Top Picks (Diwali Muharat)

Angel picks 12 stocks for you. See links below

  1. Axis Bank
  2. Banco Products
  3. Bank of India
  4. Crompton Greaves 
  5. Goodyear India 
  6. ICICI Bank
  7. India Cements 
  8. Infosys 
  9. Jagran Prakashan
  10. Mangalam Cement
  11. Punjab National Bank 
  12. 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.


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