Reliance Securities bets on these 6 quality names for the long term

Against the anticipation of healthy earnings recovery in Q4 FY18, corporate earnings continued to remain depressed as Nifty companies (barring public sector banks and high corporate exposure private banks) registered an annual growth of 12 percent.

Similarly, BSE 500 (barring banks) registered a growth of 7 percent during the quarter gone by as against expectation of over 15 percent growth. Having seen dismal earnings environment for the last four years (single-digit growth), strong earnings improvement was important for the market to sustain premium valuations.

The management commentary and underlying volume growth in most of industries has been impressive, indicating earnings growth going forward.

While sectors like agrochemical, chemicals, hotels and metals have reported healthy improvement in earnings. The same banks with high corporate exposure, cement, capital goods, automobile and pharma remained dismal.

Though volumes from cement, automobile and FMCG have witnessed decent recovery, cost pressures led by higher input and fuel prices took a toll on earnings. As the transitory impact of Goods & Service Tax implementation and demonetisation seem to be behind us, volume growth is likely to remain healthy for most industries, which is to be supported by increased government spending in the backdrop of general election in 2019.

India has been witnessing a contraction in the ratio of corporate earnings to GDP (gross domestic product) for the last 8-9 years as excess supply and demand setback took a toll on earnings. India’s corporate earnings to GDP ratio currently hovers in the range of 3-4 percent as against 7 percent during FY09-10.

Hence, considering the likely pick up in rural consumption, higher utilisation and recent reforms, we are hopeful that corporate earnings will witness double-digit growth in coming quarters.

In the backdrop of higher fuel prices, interest rates and weakening rupee-dollar, the market may trade in a range and is unlikely to witness strong appreciation in the next 6-8 months.

Our advice to investors is to invest in quality stocks, which are less vulnerable to macro concerns and have healthy cash flow visibility. We believe HDFC Bank, Kotak Mahindra Bank, Maruti, UltraTech Cement, Britannia and Titan appears to be decent bets at this point of time.