Domestic plays to ride global uncertainties

The Indian stock market has seen sharp swings in both directions in the past two years. From a level of 22,200 in early May 2014, just before the Narendra Modi government was voted to power, the S&P BSE Sensex surged 35 per cent and made an intra-day peak of 30,024 on March 4, 2015. The Sensex fell to 22,500 on February 29 this year, only to rise 20 per cent to 27,167 currently. But, at these levels, with earnings yet to show clear signs of recovery and valuations above the market's long-term average, the risks for investors are elevated.

After the run-up from their end-February lows, the Sensex is now trading at a price-to-earnings multiple of 21 times reported earnings. Notably, the BSE MidCap and BSE SmallCap indices are trading at premium valuations - trailing price-to-earnings multiple of 25.3 times and 42.7 times, respectively - which make it increasingly necessary for investors to be cautious.

Higher global uncertainties such as decelerating growth in China or the UK's exit from the European Union have only increased the vulnerability of emerging markets, including India. There are worries that Indian companies having exposure to international economies may be adversely impacted. The fact that the recent rally has been fuelled by hopes of continuing easy liquidity conditions globally itself suggest the markets could correct on a whiff of disappointment. (Click here for table and charts)

India's macro indicators are far better compared to what they were two years earlier and are also better than many comparable global peers. However, given the challenges, experts advise that investors focus on domestic themes with reasonable growth visibility, even if valuations are a bit demanding. While smaller companies are not ruled out, those with attributes like business leadership in the areas they operate in, strong fundamentals and high growth visibility will provide a cushion if the markets trend lower.

Says U R Bhat, director, Dalton Capital Advisors, "One should look at companies that dominate domestic markets, basically consumer-facing companies with reasonably good fundamentals and low debt." However, these companies trade at rich valuations. Bhat adds, "They have generated reasonably good returns for investors despite being expensive."

Most of the 10 companies mentioned below enjoy leadership in their businesses, have a good track record and are expected to post double-digit earnings growth in FY17. The only exception from an earnings perspective is Bharat Petroleum, where analysts' estimates vary sharply, as has been the case in the past due to the different assumptions they work with. But, most analysts agree that as the market turns confident of the ongoing fuel-pricing reforms, oil marketing companies could see better earnings and possible re-rating of valuations. Stocks like Exide could see more gains if the company is able to monetise its life insurance business, while companies such as InterGlobe Aviation (operator of IndiGo Airlines) and UltraTech Cement could benefit from higher operating leverage. UltraTech will also benefit from the ongoing consolidation in the cement industry. Similarly, PVR, Exide and Britannia also stand to gain, albeit from the next financial year, if GST (Goods and Services Tax) is implemented.

Vishal Chhabria, Ram Prasad Sahu, Sheetal Agarwal, Ujjval Jauhari and Hamsini Karthik