Nifty is seen to touch 20,936; which stocks to buy and sell?

In their October 2022 report, analysts Amnish Aggarwal and Anushka Chhajed at Prabhudas Lilladher said, “Indian markets are currently having a roller coaster ride as global headwinds continue to drag strong domestic fundamentals. Rising GAS prices and disruption in global supply chains following Russia Ukraine war are driving inflation to a 15-20 year high in most developed markets. Consequently, hawkish stance by FED and other central banks is likely to push interest even higher in the coming quarters. Shortage of GAS and rising interest rates are likely to impact demand with rising fears of a recession in US and Europe.”

This week, on Friday, Nifty 50 closed at 17,314.65 down by 17.15 points or 0.1%. However, overall in the week, the benchmark has risen by more than 3%.

Although there has been a meaningful correction in commodity prices of Crude, Metals, Palmoil and various Agri commodities, Prabhudas Lilladher analysts do not rule out intermittent spurts in coming months.

“We expect global macro-economic situation to remain volatile in coming 3-6 months unless there is an end to Russia Ukraine war,” the analysts note added.

In terms of monetary policy, RBI has been hiking the repo rate for the fourth consecutive month by cumulatively 190 basis points. Currently, the policy repo rate is at 5.9%. The rate hike is in line with US rates. However, the gap between 10-year T Bills in India and US has dropped to a 13-year low.

The brokerage’s analysts note said, “We believe slowing global growth and volatility can result in further downward pressure on INR in coming months. Domestic demand remains firm in discretionary segments although rural demand has not shown any appreciable reversal in trend so far. Although RBI expects inflation to soften in another couple of quarters (currently ruling above upper limit), we are cautious on the same given global headwinds and liquidity pressures.”

Festive season to set a path for robust growth in the second half of the current fiscal.

“Our channel checks suggest strong pend-up demand in first normal festival season after 2 years. we believe strong festival season will set the stage for strong growth in 2H,” the note added.

As per the note, the analysts continue to believe that structurally story led by 1) IT services with strong global demand 2) expected gains from China+1 supply chain realignment in Pharma, Chemicals, Textiles, etc. 3) rising visibility of CAPEX across  ublic Infra (Rs1400 billion), PSU’s, PLI (Rs220 billion), Defense, Digitisation and Data Centres.”

Thereby, Prabhudas’ note said, “We expect current state of volatility to be temporary and recommend accumulating fundamentally strong stocks for medium to long term gains.”

Setting a base target of 20,936 for Nifty 50, the analysts note said, “We estimate NIFTY EPS at 855.2 and 963.4 and introduce FY25 EPS at 1069.2. This shows a growth of 12.1/12.7/11.0% for FY23/24/25. Our estimates are 3.5% and 5.6% and 8.3% lower than consensus EPS estimates. NIFTY is currently trading at 19x one year forward PE which is a 7.8% discount to a 10-year average of 20.5.”

Hence, in their base target, the analysts note said, “we value NIFTY at last 10-year average PE of 20.5x on Sept24 EPS of Rs1016, and arrive at Sept 23 NIFTY target of 20936 (20057 earlier).”

Noteworthily, the Nifty 50 also has the potential to reach the 22,918 mark. The stock brokerage has raised its target in the bull case, adding, “we value Nifty at 10% premium to 10-year average PE (21.5x) and assign a target of 22918. (22063 earlier).”

But in the bear case, Prabhudas Lilladher has valued Nifty 50 at a 20% discount to the 10-year average and arrived at a target of 15800 (16046 earlier).

Where to invest on stock market?

Banking stocks:

Prabhudas Lilladher analysts are overweight on banking stocks. The note said, “We remain overweight on Banks by 220bps (310bps earlier) on multi higher credit growth and expected increase in NIM in rising interest rate scenario. We retain overweight on all the front-line banks like HDFC, ICICI, Kotak, SBI, and Axis Bank. We slightly tinker with our weights in KMB and SBI by 50bps and 20bps.”

HFC/NBFC:

The stock brokerage is underweight in this basket.

The note added, “We remain underweight on NBFC. We reduce weight on HDFC by 70bps but increase weightage on BAF by 20bps. However, we believe that BAF has the risk of P/BV de-rating if it is asked to get converted into a bank at certain stage.”

Healthcare:

An overweight trajectory has been set over this sector. In the report, the analysts said, “We retain overweight on Healthcare and increase weightage on Cipla by 20bps on improved growth prospects in US inhalers, Revlimid linked upside. We remain structurally positive on leading Hospital chains, given rising insurance incidence and health awareness.”

IT services:

Giving an overweight outlook on the segment, the note said, “we retain overweight (260bps) on IT even as we cut weights by 100bps. We believe that order books remain healthy and there is no dent to long-term growth story in ERP, Data Analytics, Digital, Artificial intelligence, supply chain, etc. We believe near term margin pressures are transitory and don’t expect any meaningful impact on growth trajectory of Indian IT majors due to expected recession/slowdown in USA.”

Automobiles:

The analysts have retained 220 bps overweight on automobiles as they expect the current cyclic recovery to last for the next 2-3 years.

“We believe positives like easing out of semiconductor issue, softening commodity prices, and strong pent-up demand are positives. Revival in entry-level segments can further push

growth rates. However, we believe that players with higher exposure to US and Europe might underperform in the near term,” the note added.

Consumer:

The analysts are underweight here by 300 bps as the recent run up has discounted the expected benefits from commodity price

a correction has been priced in even as volume growth remains tepid in staples.

Analysts note said, “Discretionary segments are doing better given strong pent-up demand in QSR, Apparel, Travel, etc. We continue to prefer consumer discretionary stocks over staples over the next 2-3 period.”

Capital Goods:

They have increased overweight on this sector to 360 bps and expect the industry to report strong growth over the next 3-5 years.

In addition to front-line stocks, the note said, “we expect meaningful gain in consumable stocks in this universe. We retain L&T, Siemens, and ABB in our model portfolio.”

Oil and Gas:

Prabhudas analysts have maintained underweight on oil and gas and further retained allocation on Reliance only in this universe.

Telecom:

The stock brokerage included Bharti Airtel in its model portfolio being a structural play on rising data usage in Ecom, Infotainment, etc and expects sustained growth in coming years.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.