Kotak Securities suggests these large-cap stocks; do you own any?

Benchmark equity indices BSE Sensex and NSE Nifty are set to deliver a double-digit return in the financial year 2022 despite lingering concerns over geopolitical tensions, rising inflation, elevated crude oil prices, monetary tightening by central banks and supply-side issues.

Going ahead, analysts believe that returns will depend upon the earnings potential of corporates. The BSE Sensex gained nearly 16 per cent, or 7,853 points, to 57,362 on March 25, 2022 against 49,509 on March 31 last year. Likewise, the 50-share index NSE Nifty added nearly 17 per cent, or 2,462 points to 17,153.

In an interaction with Business Today, Sumit Pokharna, VP fundamental research, Kotak Securities said, “Stock market is a slave of earnings. If companies display strong revenue growth then it is quite likely that Nifty will give a decent return in FY23.”

The market watcher thinks that consumption stocks may see earnings downgrade due to higher-than-assumed crude prices. “Global commodities and IT services can offset minor earnings downgrades in India’s consumption stocks. We expect 18 per cent earnings growth in FY2023 and 12 per cent earnings growth in FY2024,” he added.

While sharing his top picks from the large-cap space, Pokharna said they are bullish on players like Reliance Industries (RIL) as most of the business segments are doing good. “We are also positive on BPCL because of the recent price hikes and it is also a potential divestment candidate. Infosys is our next top pick as it is the best bet to play India’s IT growth story with strong revenue visibility,” he said.

On the sectoral front, he added that they find reasonable reward/risk balance in sectors such as banks and diversified financials, capital goods, real estate and specialty chemicals.

In the next financial year, there are expectations that the Indian equity market will closely watch how fast the de-escalation of geo-political tensions happens coupled with the US Fed action.

The Federal Reserve began its rate hike cycle by raising the Federal Funds rate by 25 basis points to 0.25-0.5 per cent amid a strong economy, decadal-high inflation, and a tight labour market. The Fed chairman has also stated that they expect to begin reducing the size of the Fed’s balance sheet “at a coming meeting”.

The BoE raised its key policy rate by 0.25 per cent for the third consecutive time, taking the policy rate to 0.75 per cent. The move comes at a time of better-than-expected growth despite the Omicron variant, historically high inflation levels, and a tight labour market. However, BoJ maintained the status quo on rates and the stimulus program citing uncertainties arising from the Russia-Ukraine war.

“Aggressive rate hikes by global central banks will result in higher cost of capital which will impact global equity market returns. However, this will also offer an opportunity to add quality stocks at a reasonable valuation,” Pokharna said, adding strong earnings momentum and continued retail participation in the markets should keep the breadth of the market healthy.

“The earnings outlook for the sectors like information technology, banking and commodities have improved. Further to elaborate, US Accenture’s results point to continued buoyancy in the IT space. Second, commodities are benefitting from the Russia-Ukraine situation. Third, the banking outlook is strong with lower provisioning and higher profit after tax growth. Notably, global commodities and IT services can offset minor earnings downgrades in India’s consumption stocks,” he added.