Many large-caps ripe for picking

Recent correction in stock prices and cooling of their valuations make some of these more attractive

 

The S&P BSE Sensex gaining by 560 points was some needed relief to investors but with the washout since January, experts say we need many more of Monday’s rally to bring back faith in equities. The benchmark Sensex on the BSE continues to remain in the red, down nearly 14 per cent year-to-date.

The question is what an investor should do in these markets. While mid-cap stocks appear a good opportunity, their valuations have not cooled as much, despite the correction in stock prices. On the other hand, experts suggest many large-cap stocks once again appear a good investment opportunity, given the sharp Sensex declines in recent weeks and reasonable valuations.

Ajay Bodke of Prabhudas Lilladher explains that as large-cap stocks have withstood ups and downs of the economic cycle, these would be preferred when interest from large foreign institutional investors (FIIs) return in equities. “Mega- and large-caps would be sought after, as these companies are operationally well-diversified,” he adds.

Agreeing, Deven Chokskey of KR Choksey Investment Managers says the recent correction is a good buying opportunity for some large-cap stocks.  

A study of 89 of these scrips (market capitalisation of Rs 10,000 crore and more) from the BSE 100 pack suggests Adani Port, State Bank of India (SBI), Glenmark Pharma, Aurobindo Pharma, Tata Motors, Maruti Suzuki and LIC Housing Finance seem attractive bets. These have fallen by 15-30 per cent since January. The valuations have also significantly reduced from their peaks in September 2015 and, barring stocks such as Glenmark Pharma, Aurobindo Pharma and Maruti Suzuki (as they continue to be among the preferred defensives, despite relatively higher valuations; it is also typical of pharmaceutical companies to command higher valuations), the rest trade at a reasonable discount to the Sensex (valued at 17.4 times the 12-months trailing price to earnings ratio).

With much of the bad loan provisioning being accounted for in the December quarter, stocks such as SBI and Bank of Baroda (BoB) again feature on the list of preferred large-caps. "With NPAs (non-performing assets) likely having peaked and valuations having come off from highs, SBI and BoB look attractive at these levels”, says Dipen Shah of Kotak Securities. Shah prefers Tata Motors for the positive traction seen in Jaguar Land Rover, and prefers Maruti Suzuki as its stock is expected to benefit from higher consumption.

Likewise, in the case of Glenmark Pharma and Aurobindo Pharma, Bodke feels it will not take much for sentiment to swing and a rush to hold these. Experts estimate these stocks could see about 15 per cent earnings growth in FY17.

There's a word of caution, too. U R Bhat of Dalton Capital warns that if there is more trouble from Europe or China, one can expect further correction in large-cap stocks. “Allocate 25-30 per cent of equity to large-cap stocks and wait for further development (in global markets) to accumulate these,” he suggests.

Clearly, the message is to buy select large-cap stocks, where valuations are reasonable and earnings growth visibility is good enough. And, buy in small lots by making use of stock corrections.