From HCL Technologies to UltraTech Cement, here're 10 stock picks for 2020

Even as the Sensex and Nifty have gained about 12 per cent each over the past year, the rally has largely been led by large-caps. Mid- and small-caps have barely retained their year-ago values. In fact, the BSE SmallCap index has shed about 7 per cent over the year.
 
The economic slowdown and uncertain environment have led investors to put their faith in quality and size. Brokerages such as Credit Suisse believe that at least for the first half of CY2020, the market’s narrow performance will continue. For a broad-based rally, more policy action is necessary, say analysts. Morgan Stanley's bullish view, for example, is based on corporation tax rate cuts boosting the investment cycle, accelerated government capex, and an uptick in exports. Most analysts believe the recovery will be gradual, picking up pace only in the second half of CY20.
 
In addition to a low base, other growth triggers are normal monsoons and the full impact of interest rate transmission. With investment and consumption expected to pick up, most research houses believe that domestic recovery plays such as financials will be the key beneficiaries. In addition to financials, we have highlighted stocks across sectors with high return potential and ones that are considered relatively safer. Moreover, these stocks have been recommended by at least two brokerages, with upside of 10 per cent or more.

Larsen & Toubro

• With 16 per cent market share, the company has maintained its leadership position in infrastructure space
• A surge in new orders has helped the engineering major’s order book cross the Rs 3 trillion-mark in September 2019
• Given the strong deal pipeline in the second half, L&T should beat its order inflow growth guidance of 10-12 per cent for FY20
• Over the medium term, the company will be a key beneficiary of government’s investments in roads, railways, port, airport and urban infrastructure
• The company’s return ratios are expected to improve as it moves away from non-core and low-margin businesses

 

Bharti Airtel

• Tariff hikes, uptrading, and higher consumption of data to drive average revenue per user
• Government measures to alleviate distress in the sector should help Airtel as well
• Plan to raise capital and improving cash flows to offset the pay-out on account of aggregate gross revenue in the worst case scenario
• Given the network and offerings, it is best placed to benefit from consolidation
• Diversified geographic presence and non-telecom offerings to contribute meaningfully over the long term

HCL Technologies

• Focus on new age technologies such as internet of things, big data and block chain to drive future growth
• Client mining, collaboration with partners and cost management through automation to maximise current growth opportunities while aiding margins
• Balance between inorganic and organic growth and focus on maximizing revenue from acquisitions
• Deal wins, strong order book and contribution from the software segment (includes the acquired IBM products business) are key triggers

Ultratech Cement

• UltraTech is the leader with close to 23 per cent market share and pan-India presence
• Expectations of a pick-up in government spending on infrastructure and low-cost housing in 2020 to aid overall cement demand and higher clinker capacity utilisation in most of regions would improve the overall realisation
• Likely strong free cash-flow amid limited capex requirement would help UltraTech’s return ratios
• The recently acquired cement capacities of Century are expected to turn around helping UltraTech’s overall earnings over the next two years
• Risk-reward looks favourable after the recent stock correction

Power Grid Corp

• Power Grid is aggressively going for tariff-based competitive bidding projects to beat the slowdown in capital expenditure (capex), and replenish the order book and ongoing projects
• The company is monetising its assets, which will help unlock value and provide capital for new projects
• Government’s plan to increase renewable energy capacity, from around 130 gigawatts currently to 450 gigawatts by 2030, is positive as it would entail a transmission capex of Rs 5.5 trillion
• Power Grid’s stock currently trades at inexpensive price to earnings valuations on a one-year forward basis
• Apart from growth prospects, a dividend yield of 4.4 per cent also gives comfort

State Bank of India
 

• Vast branch network is an edge over peers in terms of business opportunity
• Recent completion of Essar Steel resolution among other bad loan accounts to lead to provisioning write backs and boost earnings
• Though the impact of last year’s bad loan divergence needs to be seen, strong provision coverage ratio of 63 per cent as of Sept’19 provides comfort
• Sturdy performance of key subsidiaries, which SBI plans to monetise, will create further value for shareholders
• Currently, the stock is trading at an attractive 1.2 times FY21 estimated book value compared to 2-3 times in case of some large private banks

 

Chola Invest & Fin.

• A diversified non-banking financier with focus on relatively safe and steadily growing vehicle finance and home equity segments
• Good liquidity access, parent support (Murugappa group) and conservative credit practices augur well amidst sectoral challenges
• Digitisation focus, introduction of new tools like Gaadi Bazaar (online market for used vehicles) to support its vehicle finance business
• Supportive balance sheet with large chunk of fixed interest rate assets and major share of floating liabilities indicate strong margin accretion
• Bad loans ratio down from 3.6 per cent in June’18 to 3.2 per cent in Sept’19

Dabur India

• Expectations of improvement in rural sentiment are positive as 45 per cent of revenues accrue from the rural areas
• Aggressive promotional activities and trade offers would help push volumes during the current weak demand situation
• Strategy of enhancing rural reach (51,000 villages as of September) is helping Dabur to drive its rural business ahead of urban unlike other major peers
• Focus on innovation and premiumisation, mainly for natural products segment, should improve margins
• The 13 per cent upside potential is best among FMCG majors

AXIS BANK

• A large network of branches, including ATMs, has helped the bank to build a strong retail franchise, which should improve further with use of technology
• Long-term focus on loans giving higher return on risk-weighted assets and cost efficiency to improve profitability
• Pool of BB & below or lower-rated loans has declined to 1.1 per cent of total assets as of September 2019 compared to 7.3 per cent as of June 2016
• Improved outlook on asset quality to boost return ratios with likely decline in bad loan provisioning
• Capital adequacy ratio of 18.5 per cent and provision coverage ratio of 79 per cent as on September 2019 also look good

 

Hindustan Unilever

• Largest fast moving consumer goods (FMCG) player with multiple product segments and merger of GlaxoSmithKline Consumer to strengthen its product base
• Strong brand equity would help reap the benefits of premiumisation trend observed in the current challenging situation
• Progress in faster adaptability to market requirements and efficient execution of natural products portfolio; plans to focus on technology to boost earnings growth are positive
• Expectations of a revival in rural economy should support the overall earnings given that 40 per cent of HUL’s revenue comes from rural areas
• In the September quarter, the company's sales growth remained stable, rising 5 per cent sequentially, despite sluggish demand

Current price is as on December 31, 2019; Target price and upside are for next 12 months; price-to-earnings (P/E) and price-to-book value (P/BV)  ratios based on trailing-12 months ended September 2019 financials; NII is net interest income; EPS is earnings per share; Source: brokerages including Axis Securities, ICICI Securities, KIM ENG Securities, Motilal Oswal Financial Services and Credit Suisse

Data compiled by BS Research Bureau