12 top picks you may invest in for this Diwali
Angel Broking is 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 banking is one of the preferred sectors as plays on the overall economic revival story, says the report.
Angel Broking's market strategy report
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. Top picks
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