Ambit Capital, which was bearish on domestic stock markets, has raised its Sensex target from 22,000 to 29,500 for the current fiscal year ending in March 2017. Ambit’s new target implies a 10 per cent upside in Sensex from current 27,000.
Ambit cited the “firefighting done by the Reserve Bank and the Banks Board Bureau” for the change in its views.
“We take cognizance of the recent efforts of the RBI and the Bank Boards Bureau (to resolve the asset quality and liquidity issues facing the banking sector) by revising our base case scenario Sensex earnings multiple to 19 times (which is also the 10-year P/E average),” said Ambit Capital.
The brokerage, however, reiterated that there is “no” economic recovery underway in India.
It said three substitution effects are being mistaken as “green shoots” in the economy: 1) commercial vehicle demand substituting for falling railway freight demand; 2) consumer durables demand substituting for real estate and jewelry demand; and 3) private banks and NBFC lending substituting for public sector banks’ lack of lending.
“The slow pace of the adjustment also points to protracted economic recovery process that is more likely to fire in FY18 rather than in FY17,” Ambit said.
It further said that global risks – Chinese economy slowdown, the Fed’s monetary policy tightening and deflationary scenarios in the European Union and Japan – can on weigh on the rally in domestic equities that has resulted in 18 per cent rise in Sensex from February 2016 lows.
“Both these scenarios – a sharp Yuan devaluation and the ineffectiveness of the European and Japanese banks in handling deflationary risks – represent a significant risk to the Sensex,” the brokerage noted.
Ambit’s Stock Recommendations:
1) ITC: Buy with a target of Rs 415. Following an increase in cigarette volumes in March quarter, expect 2-3 per cent year-on-year volume growth in FY17.
2) HUL: Buy with a target of Rs 960. The rollout of subsidies on Direct Benefit Transfer platform from FY17 will result in higher disposable income for target households.
3) Tata Motors: Buy with a target of Rs 480. Jaguar Land Rover volumes have recovered in recent months on the back of strong response to new launches such as Discovery Sport and volumes stabilising in China.
4) Marico: Buy with a target of Rs 287. It has maintained leadership in its core categories.
5) Berger Paints: Buy with a target of Rs 324. Promoters have shown staunch focus on (1) the paints industry, (2) controlled capital allocation, and (3) a hands-off approach that gives professionals complete control of ground-level execution.
6) Page Industries: Buy with a target of Rs 14,787: New entrants offering either international brand recall, or affordable price, struggle to break Jockey’s customer loyalty built on a combination of quality, affordability and brand.
7) Cholamandalam Finance: Buy with a target of Rs 905. It enjoys strong mid-term catalysts of declining cost of funds, improving operating leverage and pickup in light commercial vehicles sales to deliver growth.
8) TVS Motor Company: Buy with a target price of Rs 340. It is best placed to ride the increasing shift toward scooters and premium models in two wheelers.
9) City Union Bank: Buy with a target of Rs 120. The bank has very little exposure to corporate loans on the assets side and almost no reliance on wholesale funding on the liabilities side.
10) Mahindra CIE Automotive: Buy with a target of Rs 240. Strong track record of profitability and turning around flailing businesses through intense cost focus, decentralisation and process improvement has increased chances of a turnaround in Mahindra Forgings Europe.
11) Finolex Cables: Buy with a target price of Rs 400: Strong growth in North India led by brownfield expansion at Roorkee, huge potential to sweat the brand, rising ad spend, and dealer addition (tripled in the past 6 years).
