Diwali is around the corner. Are you one of those investors keen on playing the Muhurat trading session? If so, you might be wondering which stocks to pick this year.

Doing a quick assessment of how the market has moved since Diwali last year, we note that the Sensex is up 16 per cent while the Nifty is up 18 per cent.

But the gain in stock prices has been accompanied by almost stagnant earnings growth, making valuations pricey. The Nifty and the Sensex are currently trading at trailing price earning multiple of 23.5, which is far above the five-year average multiple of 19 times.

Of greater concern is the steep valuation in the mid-cap segment, with the BSE Midcap index currently trading at 45 times. Mid-cap stocks ought to trade at 15 to 20 per cent discount to large-cap indices due to lower liquidity and higher risk. But with the mid-cap index trading at nearly 95 per cent premium, the risk is far higher in this segment.

With the slowdown caused by demonetisation and GST likely to affect earnings in the coming quarters, and given the fact that FPIs have currently turned net sellers, the downward risk appears enhanced at this point.

But if you are still game for Muhurat trading, for the sake of tradition, here are some evergreen hits with bright, long-term prospects that we have picked for you.

Reliance Industries Deep coffers to disrupt and dominate industries, diversified presence, massive scale of operations, solid financial position, robust profit growth, aggressive expansion plans — all these make behemoth Reliance Industries a good stock to put some money on, this Diwali, from a long-term perspective.

The stock, after being somnolent the past few years, made a roaring comeback early this year — gaining close to 70 per cent since February — and salvaged the company’s reputation as one that rewards shareholders.

The immediate trigger for the rally was revenue visibility in the telecom business (RJio), in which billions continue to be poured in. What also helped was a solid show by the core refining and petrochemicals businesses that have seen mega investments over the past few years.

The retail business also delivered strongly. The oil and gas exploration business remains a weak spot with declining output and low prices, but this no longer really impacts the company’s fortunes.

RIL’s profit (before exceptional items) rose by about 19 per cent y-o-y in 2016-17 and 13 per cent in the half year ended September 2017. The company should continue doing well. Capital expenditure in the refining and petrochemicals segments are almost done for now, and the company should continue reaping benefits. In the telecom space, after the brutal competition it has unleashed, RJio will likely be among the few players standing. While break-even for RJio seems a few years away, it has the potential to become a money spinner. The retail business should continue growing fast.

A recent 1:1 bonus issue also perked up sentiment in the stock. The RIL stock now trades at about 16 times its trailing 12-month earnings, costlier compared with the average 11 times or so it quoted at in the past few years. But the stock has likely been re-rated and current valuations should sustain, if not improve.

HDFC Bank HDFC Bank, the largest private bank, has been able to hold its earnings over the past two to three years, despite the challenges plaguing the sector. The bank has been the blue-eyed stock of investors, given the visibility and predictability in earnings, low delinquencies, superior margins, and strong capitalisation.

Gaining over 2 percentage point market share in overall bank lending over the past two years, the bank appears well placed to ride the next wave of recovery. Its loan book has been growing steadily by 20-25 per cent (year-on-year) on an average over the last seven-eight quarters, way above the 4-5 per cent levels at the system level.

Besides retail loans, the growth has also been led by corporate loans, as a large portion of the bank’s lending has always been for working capital financing, insulating it from the weak investment activity.

At the current price, the stock trades at about 4.3 times its one-year forward book value. This is higher than its five-year average of 3.4 times, but only marginally up from its peak levels of four times.

Given that the bank’s earnings are likely to grow by 20-22 per cent over the next two years, the stock remains a good bet for the long haul. Also, when the economy revives, HDFC Bank will be in a better position than other leading banks to leverage the opportunity.

Titan Titan Company, which owns Tanishq, India’s leading jewellery brand, is a good long-term investment if you are looking for a bet on India’s insatiable appetite for gold. The company drives about 15 per cent of revenue from watches and eyewear.

The stock trades at 53 times its expected earnings for 2017-18. Though the valuation is a little expensive, the solid growth outlook for the company over the next three years justifies it.

Titan’s growing market share in jewellery, aided by targeted marketing of wedding collections, attractive exchange schemes, penetration into new markets and stepping into e-commerce with the acquisition of CaratLane, an online jewellery brand, should buttress growth and help it achieve higher than industry growth.

While the last three years were difficult for the industry and its players with changing regulations, the next three years look promising. GST is a big positive for organised players in the jewellery business, including Titan. The company recorded a 50 per cent growth in sales on Akshaya Tritiya this year (in the June 2017 quarter) over last year.

Diwali sales may also be good, given that the government has removed the gems and jewellery industry from the provisions of the Prevention of Money Laundering Act; customers purchasing jewellery over ₹50,000 will no longer be asked to provide Aadhaar or PAN card.

Hero MotoCorp Strong rural demand from good monsoons, the Seventh Pay Commission payouts and lower borrowing costs will aid Hero MotoCorp, the market leader in entry-level (75-110 cc) bikes.

Even as executive/premium bikes have been getting more popular with customers, Hero’s market share in entry bikes in the last five years has moved up steadily from 66 per cent to 75 per cent currently. Strong brands such as Dawn, Deluxe, Splendor and Passion and its wide footprint in the more price-sensitive rural markets have helped the company do well.

Hero is also strengthening its presence in the fast growing scooter and higher segment bikes. Three new scooters are expected to be launched over this fiscal and next. While the refreshed Achiever, a bike in the 150cc segment, was launched last year, a new 200cc bike is on the cards too.

Broader market volatility has seen the stock correct over 10 per cent from its one-year high of ₹4,200, touched in end-August 2017. This provides a good entry point for investors currently. Valuations are also reasonable at 22 times trailing 12-month earnings.

Larsen & Toubro Investors with a long-term investment horizon should look at investing in the stock of engineering and construction giant Larsen & Toubro. At the current market price, it is quoting at a trailing 12-month price-to-earnings ratio of 25 times as against its three-year average of 29.

The stock is the best play on the infrastructure story in India, which is getting a significant push from the Central government in the last two years. For 2017-18, the Centre allocated about ₹4,00,000 crore towards infrastructure, especially transport infrastructure of roads, railways, waterways and civil aviation. About 75 per cent of the company’s order book is from the infrastructure sector.

Moreover, the company has excellent revenue visibility with its large order book of ₹2,62,900 crore being 2.4 times its annual sales of FY17. The company hopes to bag some of the big-ticket urban infrastructure and defence projects that are expected over the next one to two years; four landing platform docks for the Indian Navy, Mumbai Bandra-Versova sea link, Mumbai Trans harbour, Mumbai-Nagpur Expressway and Mumbai coastal road project.

Sun Pharma The stock of the country’s leading pharma player Sun Pharma has been down in the dumps for over a year now. While concerns around regulatory action, particularly by the US Food and Drug Administration (FDA) and competition in the key US market, have been responsible for the depressed stock performance over the past year (28 per cent decline), we believe that the long-term drivers are intact.

The company’s specialty business with three novel products — of which its dry eye drug Seciera (through acquisition of Ocular Technologies) is ready to hit the market and the others, psoriasis drug Tildra (in-licensed from Merck) and anti-cancer drug Odomzo (acquired from Novartis) are in advanced trials — will likely be a big revenue and profit driver. Also, regulatory clearance of its plant at Halol, where remediation has been completed and inspection is awaited, could be a big positive for the company, when it happens.

Mutual funds for this muhurat...

DHURAIVEL GUNASEKARAN

Are you chary of the overheated stock market? Given that the market has delivered exceptional performance in the last three or five years and stock valuations are ruling at high levels, your anxiety is not unfounded. But avoiding equities altogether may not be such a good idea. For wealth creation over the long run, some exposure to equities is essential, to generate inflation-beating returns.

But if you are a newbie or lack the time and understanding to track the stock actively, investing through the mutual fund route is a tax-efficient way to add kicker to your overall portfolio returns. If you are an investor with a reasonable appetite for risk and have long-term financial goals such as children education, marriage, retirement, etc, you can consider investing in equity-oriented mutual funds.

Given the current volatility in the market and the fact that small and mid-cap funds have had an exceptional period of outperformance over the last three years, go for equity large-cap and balanced (equity-oriented) funds at this juncture. These funds tend to contain the losses well in market downturns and make the best of market rallies.

Invest through the Systematic Investment Plan (SIP) route. This inculcates discipline in investing and helps tide over market volatility by averaging the cost of purchase over the long run.

Large-cap funds Equity large-cap funds invest mainly in blue chip stocks, with large market capitalisation. These companies are well-established players within their sectors, having a sound business model and a consistent track record of performance. Large-cap funds deliver steady returns with relatively lower risk during market corrections compared to mid- and small-cap funds. However, they tend to underperform mid- and small-cap funds during market rallies.

Picks: Aditya Birla SL Frontline Equity Fund, ICICI Pru Top 100 Fund and Franklin India Prima Plus fund.

Aditya Birla SL Frontline Equity Fund, a consistent outperformer since its launch, has allocated around 85 per cent in large-cap stocks while exposing around 5 per cent in mid-caps to spice up returns. Its performance during market rallies has been commendable.

ICICI Pru Top 100 Fund has allocated around 85 per cent of its in large-cap stocks and around 8-9 per cent in mid-cap stocks. The fund has proved its mettle especially during volatile market conditions.

While Franklin India Prima Plus has allocated relatively higher proportion (more than 10 per cent of its assets) in mid and small-cap stocks than peers, the fund has managed to contain losses well during market downturns.

Hybrid/Balanced - Equity-oriented funds Hybrid – Equity-oriented mutual funds allocate more than 65 per cent in equities and the rest in debt instruments. The debt portion performs the task of capping the downside while the equity portion generates inflation-beating returns. Over the long run, the hybrid equity-oriented funds have managed to deliver notable returns. Many schemes from the category have posted returns similar to that of the large-cap diversified equity funds. Given the more than 65 per cent allocation to equity, these funds enjoy the same tax treatment as equity funds. While dividends declared by these funds are exempt from tax, there is no capital gains tax on units sold after one year.

Picks: HDFC Balanced Fund, ICICI Pru Balanced Advantage Fund and Tata Balanced Fund.

HDFC Balanced has maintained a well-balanced portfolio comprising equity and debt with a mix of 69:31 respectively (on an average over the last three years). On the equity side, the fund bets on consumption and investment themes.

Allocation to mid- and small-cap stocks has been relatively higher (around 13 per cent). The fixed income portfolio is actively managed with duration calls.

ICICI Pru Balanced Advantage Fund invests in a judicious mix of equity (46 per cent as per the latest portfolio), derivatives (19 per cent) and debt (33 per cent). The dynamic asset allocation strategy has helped the fund outperform during market downturns and underperform during market rallies, thus delivering lower volatility in returns over periods.

Tata Balanced Fund’s portfolio is a mix of equity and debt in the ratio of 73:27 over the last three years. On the equity side, the fund favours a growth-oriented strategy. On the fixed income portfolio, the fund has been aggressively managing its duration calls.

-

Related Topics
comment COMMENT NOW