SBI to ITC: Sectors and stocks brokerages are bullish on for 2020

The year 2019 saw benchmark indices scale fresh lifetime highs amid volatility. Trade war concerns, tax proposals for India Inc and foreign portfolio investors (FPIs), the overall slowdown in the economy, rate cuts by the Reserve Bank of India were some of the key factors that guided markets through 2019.

Till December 23, the Sensex had gained 13.3 per cent for the calendar year while the Nifty50 was up 12.3 per cent. However, the broader market continued to bleed and the S&P BSE Mid-cap index corrected by 3.91 per cent. The S&P BSE Small-Cap index fared worse and slipped 9.3 per cent for the year.

Going ahead, analysts say the market will be driven by macro-economic tailwinds. Receding global trade war fears, continuity of enabling government policies, benefits of low-tax structures for corporates, good monsoon, low-interest rate regime, the low base of CY19 will turn sentiment around, leading to higher consumption. Improving economic outlook along with favourable policies should see FPIs returning.

Here are the sectors and stocks leading brokerages across the country are bullish on for 2020

JM Financial

The brokerage house sees risks to earnings in consumer discretionary (rural demand, economic recovery, fuel prices), metals (further the decline in steel prices, the slowdown in demand) and financials (increase in slippages and provisioning), but remains bullish on the pharmaceutical sector. Alembic, Torrent, Cipla, Natco and Sanofi are the top buys.

Angel Broking

The brokerage expects retail-focused private sector banks to do well along with a few large corporate-focused banks which have turned-around in FY20. Additionally, it sees, both, consumer discretionary and staples coming back after a lackluster FY20. It expects the auto sector, including auto ancillary segment, to do well in 2020. Besides, given the ongoing shift of production from China to India, they expect the specialty chemical sector to continue to do well, which could further be accelerated given the corporation tax rate cut.

Motilal Oswal Financial Services

Banking (ICICI Bank, Axis Bank, State Bank of India); fast-moving consumer goods (Hindustan Unilever and Colgate Palmolive); Cement and Capital goods (Larsen & Toubro, ABB, Siemens, Ultratech and JK Cement); Insurance (HDFC Life and ICICI Prudential Life) and hospitality (Indian Hotels) are their preferred sectors for 2020.

HDFC Securities

The brokerage expects cyclical stocks to get back in favour in 2020 as hopes of the economy bottoming out gather pace. Metals, Auto, Realty, Oil & Gas, BFSI could all do well. Sectors that had performed well over 2018 and 2019 could take a breather. Within these, the leaders (whether brand or scale) could be the ones to watch out for. However, for over-leveraged companies, the ride could be bumpy.

Geojit Financial Services

Their analysts remain bullish on metals, energy, capital goods and industrials’ sectors. Among individual stocks, HDFC Bank, SBI Life Insurance, Aarti Industries are some of the counters they are bullish on.

Anand Rathi Shares and Stock Brokers

Analysts at the brokerage are bullish on select counters in fast moving consumer goods (HUL, ITC), infra sector (road/highway developers), pharma firms (focused on Indian market), and auto sector.

IndiaNIVESH Securities

ITC Limited | CMP: Rs 242 | TGT: Rs 310

Valuation has become attractive, after the recent price correction of around 21 per cent from peak levels. Usually, the stock trades at a PER of 27.63x (TTM basis) which is now at around 21x (TTM), a discount of around 24 per cent from the mean. ITC’s other business divisions, such as FMCG, hotels and paper, are showing good traction aided by benign inflation. Going forward, better monsoons and expectations of a good Rabi crop will aid revenue growth.

Hindalco | CMP: Rs 208 | TGT: Rs 250

Accommodative monetary policies across the globe will pay-off in 2020, and global growth will not only show resilience but can surprise on the upside. Improvement in blended realisation and operating leverage playing out is expected in H2FY20. Positive macro-economic developments like receding of the trade tariff war between US and China will give much needed impetus.

DR. REDDY’S LABS | CMP: Rs 2,823 | TGT: Rs 3,370

There is a renewed focus on the domestic business, which is evident from the 5 percentage point growth (from 12 per cent in FY15 to 17 per cent in FY19) seen in the business as per cent of sales. The company expects an increase in new launches (approximately 30–40 per year) and volume growth with in-line pricing growth. Significant top-line growth with a stable sales force could drive consolidated EBITDA margin expansion of ~80–100bps. We expect EBITDA CAGR of 17% and RoCE to double to 16% by FY22E (FY18: 8%).

ESCORTS | CMP: Rs 617.50 | TGT: Rs 810

The company stands on strong financials as the Balance Sheet is almost net-debt free, has healthy return ratios and operating margins, and ROE in excess of 15 per cent.

From ACC to L&T Finance, mid-cap shares may be in line for a comeback

Smaller companies have earned another look after suffering through some two years of underperformance relative to their larger peers.

The divergence between the two groups is “significant” compared with longer-term historical correlations, according to Citigroup. The MSCI India Mid-Cap Index has lost 17 per cent in the past two years, while the benchmark S&P BSE Sensex has gained more than 20 per cent.

“With better risk-reward post underperformance, we would selectively look to add mid-caps,” Citi analyst Surendra Goyal wrote in a note this week.

“Valuation discount of mid caps versus large caps is close to 10-year highs, highlighting the improved risk-reward and low expectations. In two years, mid-cap sentiment seems to have gone from extreme optimism to huge pessimism.”

Companies across India — big and small — are grappling with a slowing economy amid waning consumption. Prime Minister Narendra Modi has announced a series of reforms to arrest the slide and attract investment, including an overhaul of controversial labour laws, aggressive cuts to corporate taxes, relaxation of foreign investor rules and the biggest privatisation drive in more than a decade.

India’s economy is forecast to slow further to 6 per cent growth this year, following a deceleration in 2018, according to economists surveyed by Bloomberg.

“One of the reasons to buy mid and small caps is the high return potential” if investors can pick a winner, Goyal said. Of course, this is easier said than done. The analyst notes that only 2 per cent of small caps have become large caps over the past 10 years, while 20 per cent either have ceased to exist or are no longer listed.

The odds are a bit better for mid caps, with 15 per cent able to elevate to large-cap territory, but on the other hand almost two-thirds were downgraded to small caps. Top mid-cap picks from Citi include cement maker ACC, biotech Biocon and L&T Finance Holdings.