Bluechips to ride

Updated: Sep 1 2014, 07:35am hrs
We continue to believe that the long-term upward trajectory for Indian equities is intact. A consolidation around 8,000 levels on the Nifty is the general expectation, given 11% run up since the election outcome and valuations (P/E) touching 15x FY16 earnings but our research team sees significant upside not just in select mid-caps but also a number of large caps.

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We have identified 12 blue chips which are extremely attractive even at current levels of the market. Each of these 12 large-caps can potentially deliver 35-45% returns over a period of two years.

Indian equities are significantly better placed than most emerging markets today. Indias equity market capitalisation is higher than the likes of Mexico, Brazil, Russia and South Africa with a wide range of large-sized companies across industries to keep FIIs excited. A slowing China only adds to Indias relative attractiveness.

Little wonder that equities have already seen net FII inflows of $13 bn in 2014 and tipped to touch $20 bn by end of this year. Already rates have softened due to the liquidity in the system, even as RBI maintains status quo on Repo. Notwithstanding below par monsoons, both WPI and CPI are showing signs of moderation. We have achieved significant control over fiscal and current account deficits and these twin deficits are unlikely to impact the market in the foreseeable future.

The Q1FY15 earnings season didnt fail to impress with double digit growth in turnover and profits, reaffirming a recovery in corporate earnings. A sharp 150bps expansion in Ebidta (earnings before interest, taxes, depreciation and amortisation) margins was the big surprise. If this pace of margin expansion continues in rest of the year, margins would return to long-term average from two-decade lows in FY15 itself. Margin expansion coupled with moderation in interest expense growth has resulted in an improvement in financial health of companies.

The government action so far, hasnt let down the market either. While a long- term road map is awaited, measures taken to clear stalled projects, continued diesel deregulation, focus on inflation control, opening up of FDI in insurance and defence, support extended to Aadhaar and railway passenger fare hikes are encouraging moves. The budget also attempted to correct expenditure with a focus on investment related spending from consumption related focus in the past few years. Expected supply side reforms will result in a gradual recovery in economic growth. The IIP data has improved in last three months and will aid GDP growth recovery.

Mid-cap ideas in our previous strategy piece have delivered 14% return so far (assuming equal investment in all stocks). Its time to add large -ap weight to portfolios. Having these large companies in your portfolio will make its risk profile more palatable without diluting the return potential materially. These 12 recommendations manifest our sectoral preference for domestic cyclicals (Financials, Auto, Infra, etc) and a more cherry picking approach within other sectors. The selected stocks are in sync with our time-tested theme of backing companies with strong managements, advantageous competitive position, high earnings growth visibility, better corporate governance and relatively attractive valuation.