Market to see stability in Nov, time to accumulate quality stocks like HDFC Bank

The 10-Year bond yields have also softened from the high’s of ~8.20% few months ago to 7.75% giving some relief to the banking/NBFC sector

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Fall in crude prices by more than 20% has been a huge relief to the Indian equity markets. This will help the market stabalise and address a lot of macro-economic concerns directly and indirectly — like inflation, interest rates and  current account deficit, among others.

The retail inflation data has been encouraging at 3.31% which is way lower than the RBI’s medium-term target. This will give RBI room to hold interest rates.

The 10-Year bond yields have also softened from the high’s of about 8.20% few months ago to 7.75% giving some relief to the banking/NBFC sector.

We expect the Indian equity markets to stabilise in November till the state election results are out in early December.

Investors can accumulate quality stocks like –

HDFC Bank | Rating: Buy | Target: Rs 2,420

HDFC Bank reported steady Q2FY19 operational performance. NIM expanded ~10 bps QoQ and was flat YoY at 4.3%. Core fee income growth at 26% YoY continued to remain strong deriving strength from retail fees including cards, third-party insurance, other retail and cash management.

Bank has continued to gain market share in key businesses led by digital sourcing and deeper penetration improving product delivery and cost control which has led the bank to reach historic low C/I of 39.9% in Q2FY19.

HDFC Bank has raised Rs240bn of fresh equity in H1FY19, which will support its loan growth in the coming years.

Further, we expect HDFC Bank to be a major gainer of the current crisis in the NBFC space as it has best-in-class liability franchises along with superior customer outreach across business segments.

Asian Paints | Rating: Buy | Target: Rs 1,471

The company has to its credit a leadership position in its market, proven track record of adapting to changes in market conditions, a professional management, history of innovative strategies in marketing, efficient manufacturing and logistics in place and prudent financial management.

In its latest financial results, APNT has reported a growth of 8.8% in revenues at ₹46,391 million in Q2-FY19 as against ₹42,652 million in Q2-FY18.

In terms of growth, we continue to expect Indian paints industry to grow at around 8%-12% in next few years and demand factors remain strong in terms of growth.

Aarti Industries | Rating: Buy | Target: Rs 1,600

One of the global leaders in benzene-based chemistry through its process chemistry and scale-up engineering competencies, Aarti Industries’ revenue and profit are expected to grow at 20% and 22% CAGRs over FY18-21, driven by scale-ups in its specialty chemical and pharmaceutical businesses and the new toluene capacity.

For Q2 FY19, Aarti’s revenue shot up 46.4% y/y to Rs. 1290 Cr, chiefly due to strong volume growth and the increasing share of high-value products.

The specialty chemicals, pharmaceuticals and home- and personal-care divisions brought respectively 80.0%, 14.8% and 5.2% to revenue. The good performance and higher capacity utilisation boosted the EBIDTA margin 58bps y/y to 18.6%. Thus, due to the good operational performance, PAT swelled 56.6% y/y to Rs. 120 Cr.

Its capex of ~Rs. 1700 Cr in the next three years, strong operating performance of all divisions, focus on R&D and strong relationships with clients would shift growth to a higher trajectory in future.

We maintain our Buy rating, with a target price of `1,600 a share. At this price, the stock is valued at a PE of 31x FY19e and 21x FY21e.

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