Motilal Oswal sees crude near $80/bbl in FY19, lists top 5 buys which can offer up to 40% return

The ongoing tension between US and Russia over Syria has led to oil prices spiking up. Yogesh Mehta, Vice President- Equity Advisory, Motilal Oswal, sees crude prices inching close to $80 a barrel in FY19.

Edited experts from an interview to Moneycontrol's Sunil Shankar Matkar

Q: After a sharp rally from 2018 lows, the market has mostly traded sideways. Is it awaiting cues from the ongoing earnings season before taking a position?

A: The market is awaiting triggers from the ongoing earnings season and the monsoon.

Q: Do you expect the Nifty to end FY19 at 12,000 levels. If yes, what could be the drivers and if not, what will be the constraints?

A: A number of state elections are lined up till January next year. The monsoon will also play a key role. It is difficult to project Nifty levels as the earnings season has just begun. If there is a revival in corporate earnings, then we may head to all-time highs.

Q: Crude prices have hit a four-year high of $73 a barrel. Do you expect it to continue upward and breach $80 a barrel in FY19?

A: Oil prices have spiked on ongoing tension between the US and Russia over Syria. With demand rising, prices are most likely to inch to $80 a barrel in FY19. The current spike in oil price has already been factored in by the market.

Q: Will higher crude oil prices become the biggest economic risk and stall the market's northward journey? How much of an impact will it have on the earnings of oil marketing companies and other related sectors?

A: Higher crude oil prices can pose a risk to the Indian economy. However, any subsidy sharing by oil marketing companies can impact their earnings to extent of 25-35 percent. No other sector will face an adverse impact.

Q: With three state elections lined up in 2018 and general elections next year, will political risks supersede all other factors for the market?

A: Not really, but any negative outcome in the 2018 state elections could impact market sentiment and may displace all other factors.

Q: Mutual funds flows slowed drastically in March. Do you expect the slowdown to continue or could there be a revival? 

A: Mutual fund flows are dependent on market sentiment. Hence, any factor weighing on market sentiment will affect flows. SIP based inflows crossed Rs 7,100 crore in March and the same is only going to continue.

Q: Bond yields have been volatile, moving in a band of 7-7.5 percent? What is your outlook on yields?

A: We do not foresee any alteration in policy rates. Hence, bond yields will remain in a 7-7.5 percent range.

Q: The recent bond rally drove NBFCs higher and there are also expectations of an earnings revival in the sector? What is your view on the NBFC space?

A: NBFCs are in a sweet spot due to lower bond yields. We expect an earning revival with a favourable demand outlook.

Q: Banking has been in focus due to asset quality concerns. Do you think it is the right time to buy state run banks and will the NPA problem abate in FY19?

A: Public sector banks are struggling with NPAs, even though the Reserve Bank is monitoring developments and working them. It is difficult for these banks to get rid of this problem at least in the near term.

Q: Are the pharma and IT sectors out of the woods? What is your view on Infosys post earnings?

A: Pharma is almost on the verge of emerging from the woods on the US Food and Drug Administration import ban issue. Lupin and Sun Pharma are having their key plants inspected. Almost all companies are growing at 17-18 percent.

The IT sector will see 6-10 percent revenue growth in FY19.

Infosys Q4 FY18 earnings was in-line with our expectation. The company is utilising cash for buying back its shares this fiscal. The management’s lower EBIT margin guidance of 22 percent is conservative. Pricing pressures seeming to be tailing off. Share of higher margin Digital is also inching up. At the current market price, Infosys is trading at 16x FY19e P/E and hence is a conservative Buy.

Q: What are your five best picks for FY19?

IndusInd Bank: Buy | Target: Rs 2,250

It's key focus is to scale up its retail operations, led by a higher share of non-vehicle retail loans by FY20. The bank is targeting 25-30 percent loan growth, led by continued branch expansion and strong customer acquisition. A merger with Bharat Financial Inclusion will strengthen the bank's liability profile and further boost return ratios.

Maruti Suzuki: Buy | Target: Rs 10,685

We remain positive on Maruti Suzuki, considering: a) Multi-year favourable product lifecycle; b) Improvement in product mix (increasing share of premium products) aiding realisations and consequently margins; c) Reducing yen exposure; d) Lower capex intensity; e) Improvement in free cash flow conversion; and f) High FCF generation and sharp improvement in return on invested capital.

Jindal Steel & Power: Buy | Target: Rs 361

Looking at the progress at Angul and Raigarh, volume estimates of 1.2MT for Q4FY18 and 5.8MT for FY19 appear comfortable. Steel production is at an inflection and expected to grow at 29 percent CAGR to 6.4MT over FY18-20. Strong long product prices in India, operating leverage and timely volume growth augur well for earnings. Nearly 25 percent of raw material cost is insulated from input price risk due to captive iron ore mines and coal linkage.

Shriram Transport Finance: Buy | Target: Rs 1,925

Over the past five-to-six years, Shriram Transport Finance's PAT has been in the Rs 1,200-1,300 crore range. Growth slowed and there were concerns on margins due to migration towards newer vehicle financing. Growth in the past 6-8 quarters (barring the quarters around demonetisation) has been good.

The impact of non-performing loan migration on yields as well as credit costs will end soon and FY19 will be a year of normalised return ratios. The company is investing for growth by expanding its branch network aggressively. We expect return on equity to improve to over 18 percent from FY19 onwards which would be at the higher end compared to its NBFC peers.

Britannia: Buy | Target - Rs 6,180It has delivered consistent healthy performance. Rapidly expanding distribution, continuing investment in R&D and significant expansion of its own manufacturing indicate the immense confidence that management has on growth prospects. The opportunity beyond biscuits is also substantially high. Continuing premiumisation, significant incremental cost savings, lined up new product launches in FY19 and favourable commodity cost outlook mean that 15 percent EBITDA margins are achievable.