Top 10 largecap picks for 2015 by Karvy
Stellar Performance of Indian Equities
Indian equities had outperformed major global indices, barring China during CY2014, mainly driven by MODIfied political and investment scenario. Among the domestic factors, Lok Sabha elections 2014, in which BJP under the leadership of Mr Modi had got the decisive mandate removing the political uncertainty and brought hopes for good governance. Sharp drop in crude oil prices and stronger rupee had improved fiscal health and led to a turnaround in Indian macros. Globally, steady recovery in the US economy had led to the US Fed ended the QE and readying for increase in interest rates, confirming the healthy recovery in the worlds’ largest economy.
Our Wealth Maximizer 2014 performed well with Nine out of ten stocks exceeding the targets. We retain six out of the ten stocks and replaced four stocks due to expected under-performance in the next few quarters.
Outlook for 2015
Economic growth to reach 6.5%-7.0% during 2015 driven by good governance under the leadership of Mr. Modi: During the year 2015, Indian economic growth could be driven by reform momentum. The government has taken the initiatives to introduce GST, land acquisition amendments, insurance sector reforms and coal blocks auction bills. Under the ‘Make in India’ campaign, Govt is opening opportunities for domestic manufacturing in Defence, Electronics Hardware & Medical equipment from the 25 sectors identified to be given priority. The ordinance route chosen by the government for three out of the above four bills indicates the urgency in reviving the economic growth.
Interest rate cuts to help in credit growth: Expectations over RBI cutting the interest rates by over 50 basis points were reflected in 10Year G-Sec yields. The reduction in interest rates coupled with the improving business climate could trigger a pick-up in credit cycle.
Subdued inflation amid softening commodity prices: Crude oil prices after falling nearly 40% in 2014, are expected to remain soft in 2015 due to supply glut and lack of consensus among OPEC countries to cut the production. Expectations over lower consumption from China, European Union and lower import demand from the US could keep the global crude oil price under check.
Up-cycle in interest rates in the US reflects confidence about the sustainability of growth: US Fed is expected to increase the interest rates by up to 75 bps during 2015, for the first time after 2006, amid expectations over strong recovery in GDP growth to around 3%. The sharp increase could result in outflow of capital from emerging markets to the US. However, rising interest rates reaffirm the health of the US economic recovery.
Improved macros could bring stability in Indian currency markets: Amid expectations over lower fiscal deficit of 4% and current account deficit of 2%, on the back of lower import bills for crude oil and gold, INR is expected to display relative strength during 2015.
Sustainability of earnings growth: Corporate earnings in India are expected to grow over 15%-18% during 2015, which is likely to be revised further based on improvement on execution at ground level, softening commodity prices and sustainability of the global growth momentum.
Large equity issuance through disinvestment: Large equity issuances either to comply with SEBI guidelines on minimum public holding or new issuances like RINL could help the Government in meeting the disinvestment target as well as keep the IPO market buoyant.
Money flows into Indian equities to remain robust during 2015: Indian equities continue to be the 2nd best performing asset in the world equity markets, as well as the best performing asset class in India. Indian equities are expected to attract FII inflows in 2015, that were around Rs 97,600 cr in 2014. Amid political/economic stability, direct participation of retail investors has increased, while retail participation through mutual funds has also risen as indicated by the increase in individual folios by 8.4 lakh during Apr-Nov 2014, reflecting confidence among the retail investors on Indian equities.
Our take on the market
We expect Sensex to trade in the band of 27720 – 35640. There could be short-term volatility as markets have priced in growth post the elections and multiples are at the middle of the trading band. The Sensex consensus EPS for FY15E is Rs.1635 and for FY16E is Rs.1980, implying a P/E band of 14 – 18x for FY16EPS. Sensex currently trades at 14x FY16E EPS. We remain overweight on Automobiles, BFSI, Cement, Consumer Goods, Infrastructure, Metals, Software and Pharma.
Earnings upgrades and in a more conducive environment for the businesses, corporate earnings are expected to grow over 18% in the next one year
On ground execution of the capex cycle to pick up
Stable currency and improved government finances along with a decline in inflation likely to present the case for lower interest rates
Growing income levels and better job prospects trigger for higher domestic consumption
Overall, the scenario is conducive for cyclicals, manufacturing and export oriented sectors. With the expected growth in corporate earnings, continued inflow of funds from FII’s and renewed interest from the domestic investors, we expect equities to outperform other asset classes in the next one year and recommend to stay invested in equities.
Wealth Maximizer 2015: Our top ten Largecap picks in the Wealth Maximizer (for a time frame of 9-12 months) are Asian Paints , Divis Lab , HDFC Bank , ITC , JSW Steel , L&T , Reliance Industries , Tata Motors , TCS and Ultratech Cement .
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