InCred Equities upgraded its rating on the pharmaceutical sector to 'Overweight'. It likes Cipla, Ipca Laboratories and Alkem Laboratories. With the delays in the RBI rate cuts and high expectations built around the recovery in earnings growth, InCred Equities said it is a bit cautious. With a strong political mandate for the Bharatiya Janata Party or BJP in assembly polls in Maharashtra, the second-largest state in political terms, the domestic brokerage expects the government’s capex plans to be revived soon. A sharp correction from its peak in mid-September has eased Nifty valuations, even as recent earnings cuts remain a cause of concern.
In its bull case, InCred Equities sees Nifty at 28,575. Its base case suggests a Nifty target of 25,977 while its bearish case target at 23,379 hints at a possible call ahead for Nifty.
"While the forward P/E eased to below the 10-year mean level, we expect the correction phase to persist for a few more months, as the weak macroeconomic situation fails to impress on the EPS momentum front. We cut our Nifty-50 blended index target by 3 per cent to 25,327. We upgrade our rating on the pharmaceutical sector to Overweight by upgrading Cipla, Ipca Laboratories and Alkem Laboratories," InCred said.
High-conviction stock ideas
InCred Equities' high conviction ideas include Bajaj Finance Ltd, Bharat Forge Ltd, HDFC Bank Ltd, Lupin, Tata Steel Ltd, Hero MotoCorp, Cipla and State Bank of India. Others included Tata Consultancy Services (TCS), InterGlobe Aviation, Maruti Suzuki India, Cyient DLM, Petronet LNG and SBI Card, among others. It sees up to 94 per cent potential upsides on its high-conviction stock counters.
Q2 upgrades & downgrades
"The 2QFY25 Nifty-50 EPS posted an 8 per cent rise YoY, but was flat QoQ, as a limited number of stocks beat consensus estimates during the quarter. The slowdown in sales growth and a higher other income trend continues. High single-digit Ebitda growth was seen in telecom, financials, IT and FMCG sectors. In the last two months of the results season, Nifty Bloomberg consensus EPS witnessed a 3-4 per cent cut for FY25F-26F while the reduction in Nifty-200 was limited to 2 per cent. Major downgrades are in commodity, FMCG and capital goods sectors while upgrades are restricted to utilities and pharmaceutical sectors," InCred Equities.
Capex spend, economy
The broking firm said the domestic economic activity picked up momentum around the festival weeks at the end of October and early November, as seen from indicators like automobile retail sales and online sales GMV (gross merchandise value) scaling a new peak during the festivals. But the RBI’s tight monetary policy and prudential policies against unsecured credit will weigh on the short-term trend. Hence, indicators like electricity consumption, Index of Industrial Production or IIP, Purchasing Managers’ Index or PMI and loan growth show that India is witnessing a cyclical slowdown, with urban markets slowing down and the recovery in rural markets being gradual.
It noted that the government needs to spend Rs 1.2 lakh crore to meet its FY25 budgeted target. Given the previous trends, spending over Rs 1 lakh per month is an aggressive goal, it said.
"In November 2024 so far, the rupee has weakened significantly against the dollar. A robust dollar and continued foreign portfolio investor (FPI) outflows together led to the depreciation of the rupee. FPIs continued their selling spree in November, which contributed to the depreciation of the rupee. Between 1-15 Nov 2024, FPI outflows amounted to $3.2 billion. This comes over the significant outflow of $11.4 billion in the previous month. Along with the relentless depreciation of the rupee in Nov 2024, its volatility also spiked," InCred Equities said.
Largecaps over mid, smallcap stocks
"We continue to shift our portfolio towards large- caps with the addition of Cipla and Pidilite Industries to the list. We have introduced short-term pair trade ideas within sectors so as to make the best out of the sideways market movement. The significant ones are Pidilite Industries vs. Asian Paints, GAIL vs. Indraprastha Gas or IGL, Bajaj Finance vs. Cholamandalam Finance and ABSL AMC vs. HDFC AMC," it said.