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The Midcap index may have corrected a little over 2 per cent compared to over 3 per cent fall in the BSE Sensex so far in the year 2015, but investors will be better off shopping in large cap stocks for their portfolio, says a panel of experts at the ET Roundtable.
The S&P BSE Small cap index has plunged over 5 per cent so far in the year.
The correction since late April has made many stocks (both large & midcap) attractive, but the risk-reward equation is much more favourable in largecap stocks, as against small or midcap stocks. Small caps and midcaps continue to be expensive but they may not be in the bubble zone yet, they say.
In the calendar 2014, the S&P BSE Midcap index had rallied over 50 per cent compared to about 30 per cent rise seen in the S&P BSE Sensex. But similar outperformance cannot be expected going forward, as most of it was a hope-based rally which pushed stocks higher, say experts.
"It was illogical to expect year-on-year returns of more than 50% on midcaps and more than 20-25% on large caps. There has to be a reset that you cannot get 25-50% returns per year, and whenever that reset happens, it's interpreted as gloom; there is no logic to it," says S Naren CIO, ICICI Prudential AMC at ET Roundtable.
"There may be opportunities in the small and midcap space if you are a good stock picker. But, when you look at overvalued stocks, they are far more in the small and midcap space than in the large-cap space," explained Naren.
The S&P BSE Small cap index has plunged over 5 per cent so far in the year.
The correction since late April has made many stocks (both large & midcap) attractive, but the risk-reward equation is much more favourable in largecap stocks, as against small or midcap stocks. Small caps and midcaps continue to be expensive but they may not be in the bubble zone yet, they say.
In the calendar 2014, the S&P BSE Midcap index had rallied over 50 per cent compared to about 30 per cent rise seen in the S&P BSE Sensex. But similar outperformance cannot be expected going forward, as most of it was a hope-based rally which pushed stocks higher, say experts.
"It was illogical to expect year-on-year returns of more than 50% on midcaps and more than 20-25% on large caps. There has to be a reset that you cannot get 25-50% returns per year, and whenever that reset happens, it's interpreted as gloom; there is no logic to it," says S Naren CIO, ICICI Prudential AMC at ET Roundtable.
"There may be opportunities in the small and midcap space if you are a good stock picker. But, when you look at overvalued stocks, they are far more in the small and midcap space than in the large-cap space," explained Naren.
Because of the huge differential return in small and midcap vis-a-vis large caps, a lot of funds have had to move to small and midcaps, though they essentially have a large-cap benchmark. So, when midcaps fall, they will have to go back to large caps, added Naren.
Most experts denied that mid or small cap stocks are moving towards bubble formation. For a bubble, we need to see huge buying happening, explain experts. Some of stocks have to trade at 50 or 60 PE.
But the large-cap quality names have corrected beautifully in the last six months. In comparison, some of the midcaps are at extremely high valuations at even 40 or 50 PE.
"Midcaps do not look to be in a bubble. In a bubble, we see a large amount of supply and frenzied buying. However, we are not yet seeing that. In a bubble, you see the valuation level clearly at the top," says Nilesh Shah, MD and CEO, Kotak AMC.
"My guess is that when large and midcaps start trading at the same valuation and when we say that earnings recovery will happen and it will be a little back-ended, then it is better to stay in the safety of large caps. Obviously, there are a few interesting midcaps that will continue to do well," he said.
However, Shankar Sharma, Chief Global Trading Strategist, First Global, is of the view that this is a start of a bull-market for the midcaps and small caps but a beginning of a bear market for the large caps.
"I mean, we have to wake up and smell the coffee. The fact of the matter is large caps are fully priced and there is scope for them to be downgraded in terms of earnings and business. I don't think this is the case for midcaps," he adds.
We have collated a list of ten promising stocks from different brokerage firms for a period of 6-12 months:
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Brokerage Name: Prabhudas Lilladher Ltd
Tata Consultancy Services: Target price set at Rs 2,980
TCS derives $125m (over 55% YoY) revenue from Digital. Management expects momentum to stay strong in Digital driven by BFS and Retail vertical. TCS has launched an AI-based IT and business automation platform. It will yield productivity gain through automation and self-learning for IT, IMS and BPM.
Management reiterated their view on healthy overall demand environment with positive bias for IT budget for their clients along with healthy deal pipeline.
The brokerage firm sees continued moderation in Street's revenue expectation putting pressure in the near term. They expect TCS to grow in line with NASSCOM's guidance. "We Retain our 'BUY' rating with TP of Rs 2,980."
HDFC Bank Ltd: Target price set at Rs 1,200
In Q4FY15, HDFC Bank delivered 21 per cent YoY growth in core revenues, led by strong growth in NII and fee income. NII growth was led by healthy loan growth and better retail mix (healthy growth in all retail segments).
The brokerage firm believes that branch expansion has been done in high retail deposit concentrated centres which will improve retail mix and keep CASA stable. They are also very pleased with HDFC Bank's asset quality and expect credit cost to remain under control for FY16 as well, while cushion of floating provisions of Rs 15.6 bn provides them a big comfort.
They maintain a BUY rating with a PT of Rs 1,200 at 3.7x Mar-17 ABV.
State Bank of India: Target price set at Rs 350
SBI continued to report declining trend in slippages for the third quarter in a row, which is a big positive. However, higher restructuring and bad loan sale to ARC diluted the performance. Bank management predicted early signs of revival in project lending, while push into retail will be the focused area in FY16.
The brokerage firm retains a BUY rating with a target price of Rs 350, which corresponds to 1.8x Mar-17 ABV. They estimate SBI's RoA to improve gradually over the next two years as net NPLs have declined to more manageable level of 2.1% (from peak of 3.24% in Q3FY14), while prospects of further write-down on SR portfolio remains low, given hefty haircuts already taken.
ICICI Bank Ltd: Target price set at Rs 390
ICICI Bank is well-capitalised with Tier-I ratio of 12.8% and given low-rate of capital burn, management suggested that it won't need to raise capital for the next three years. The brokerage firm believes that improving asset quality trends along with robust subsidiary performance will enable ICICI Bank to gradually re-rate from the current levels. They maintain a 'BUY' with a target price of Rs 390.
Management cited that the outstanding restructured portfolio is highly granular and will, thus, prevent any repeat of lumpy slippage, while the fresh NPL formation is showing an improving trend.
Maruti Suzuki India Ltd (MSIL): Target price set at Rs 4,300
With fundamental drivers expected to fall in place over the next 6-18 months, demand for PVs would remain healthy. As the market leader, Maruti Suzuki would be a key beneficiary. The brokerage firm expects market share gains to continue in the passenger cars space for MSIL with operating leverage benefits too kicking in.
A highly favourable exchange rate, better operating leverage, and steps to control costs would help improve margins ~160bps over FY15-17e. Controlled lowering of discounts and higher sales promotion expenses would also help.
They value MSIL at 20x FY17E EPS to arrive at a target price of Rs 4,300/share. Their earnings CAGR over FY14-17e is around 32.3%.
L&T Ltd: Target price set at Rs 2,025
L&T has guided for a 15% sales growth, 15% order inflow growth and 100-bps improvement in margin (ex services). L&T expects to get 75% of inflow for domestic market and largely dominated by infrastructure (roads, Power, Metros, DFC etc).
They believe the revenue growth could be back-ended as large order flow will start contributing meaningfully from H2FY16. In FY15, L&T generated free cash of Rs 3 bn and Rs 6 bn in standalone and consolidated entity, respectively (after 3 years of negative FCF).
L&T continues to be the best play in the Indian infrastructure space, given its strong business model, diverse skill sets, strong execution capabilities and relatively healthy/large balance sheet. Maintain 'BUY'.
UltraTech Cement Ltd: Target price set at Rs 3,400
UltraTech cement (UTCEM) ranks way ahead of its peers, ACC and ACEM, across all fronts on the back of highly efficient operations and strong management quality, backed by aggressive capacity addition.
The cement major has outperformed its peers on majority of parameters, including capacity expansion, shift to pet coke, timely M&A, balanced mix between non-trade and trade sales, timely project execution, high market share, etc.
The brokerage firm expects the company to consistently outperform the sector on growth as well as quality of earnings, led by timely addition and highly efficient operations.
Current valuations at EV/EBITDA of 11.6x FY17 may sound expensive but strong volume growth and expansion in EBITDA/t from seven years low of Rs850 in FY15 to Rs1150/t in FY17 would drive the expansion in stock's valuation to the peak cycle average of 14x one year forward earnings.
Brokerage Name: IndiaNivesh
Aurobindo Pharma Ltd: Target price set at Rs 1,600
The brokerage remains positive on the stock. It sees an implied potential upside of nearly 20 per cent from current levels. The brokerage believes that ARBP is in a sweet position to maintain a sustained increase in sales as well as profitability over the next 2-3 years.
"ARBP has cumulative filing of 376 ANDAs at the end of Q4FY15; the cumulative ANDAs pending for approval stands at 183, which has good mix of complex molecules which would enable not only enhanced sales growth but also improve profitability for sustained period. The faster turnaround of acquired Actavis operation in Europe would also help in further improvement in overall margins of the company, the brokerage said in a research note.
Reliance Industries Ltd: Target price set at Rs 1,111
Singapore GRMs, which fell to USD 4.8/bbl levels during Q2FY15, have recovered in the past few months, boosted by gasoline (US refinery strikes) and naphtha cracks. In Q4FY15, RIL's GRM stood at USD 10.1/bbl (v/s USD 9.3/bbl in Q4FY14 and USD 7.3/bbl in Q3FY15. We believe the recent margin uptick and rupee deprecation will help refining EBIT margin of RIL going forward.
Analyst: Sudip Bandyopadhyay, President, Destimoney Securities Pvt Ltd
Coal India Ltd:
We like Coal India and, in fact, this is one of the large cap stocks that we are recommending to BUY at this stage. It is a very attractive price. Lots of things are going in favour of Coal India. We all know that it is one of the cheapest coal producers in the world and there is enough and more reason to buy Coal India.
We also believe that a lot of policy uncertainty which was around the coal production is getting resolved. That is getting behind us. So, if you have some one year plus time horizon, definitely it is worth buying at current levels.
(Views and recommendations expressed in this section are the analysts' own and do not represent those of EconomicTimes.com. Please consult your financial advisor before taking any position in the stocks mentioned.)
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