Bank of America Merrill Lynch hosted an investor conference recently and the undertone suggested that a re-rating in markets is a thing of the past and that returns would mirror earnings growth going ahead. There could be disappointment on both the gross domestic product and earnings front, the investment bank said.
Given the choppy conditions, the following stocks are the global investment bank's top picks:
1) Maruti: Increased diesel capacity and new launches should drive growth though sales may see some downgrades. Currency will help strong margins.
2) Tata Motors: JLR's launch pipeline and a ramp-up on track will drive growth though the domestic commercial vehicle business could see downgrades.
3) ICICI Bank: Asset quality is still strong and margins are likely to stay in the range of 3.0-3.1 per cent supported by a change in mix towards domestic loans.
4) Lupin: The generic launch run-rate is expected to improve on approvals of niche products with limited competition/Para IV (20+ launches expected annually).
5) DLF: Operational cash flow will be positive in FY14.
Bank of America Merrill Lynch's top mid-cap picks: Havells, Motherson, Yes Bank, Glenmark.
However, the bank has reiterated that the following risks pose considerable threat to the investment climate:
1. Consumption demand: Overall, consumption demand is still holding up, but some cracks are showing with
(a) lower hiring targets across a range of sectors, including software;
(b) smaller hikes in compensation; and
(c) higher inflation.
The rural market is slowing versus last year.
2. Investment demand: Most companies are not looking to start any significant capex. This was reflected in a common theme of weakness across companies in sectors like commercial vehicles and infrastructure (Tata Motors, L&T) to the lack of new project approvals by lenders.
3. Earnings: Earnings for FY14 will be downgraded to around 10-12 per cent growth (versus the current bottom-up growth of 17 per cent). Overall, companies seem to indicate that margins may hold as input costs are easing, but sales growth will be weak.
Software, pharma and private banks come across as the most positive sectors, given the macroeconomic backdrop, according to Bank of America Merrill Lynch.
Disclaimer: Investors are advised to make their own assessment before acting on the information.
(Sourced from a Bank of America Merrill Lynch report 'Recovery Signs Are Still Missing')