Which stocks should you buy now for solid returns? Here’s what Gaurav Dua of Sharekhan has to say

The BSE Midcap and BSE Smallcap indices have shown remarkable growth, surpassing the BSE Sensex (which has risen by 3.41 per cent) by recording a rise of over 10 per cent so far this year. Will this strong performance in the broader market continue? Furthermore, which stocks are expected to deliver significant returns at this juncture? Gaurav Dua, SVP, Head of Capital Market Strategy at Sharekhan by BNP Paribas, shared his insights on the equity market in an interview with Business Today. Edited excerpts:

BT: What is your outlook for the broader market compared with the benchmark equity indices in the next 12-18 months?

GD: At the benchmark level, Nifty has gone through close to two years of time correction. Nifty has crossed the 18,500 level in August 2021 and is at a similar level now though the Nifty EPS has moved up from Rs 570-575 to Rs 825-830, resulting in substantial moderation in PE multiples. The correction in the broader market (mid-cap/small-cap) has been more severe and in line with past experience, which has created attractive investment opportunities for stock pickers. Over the next 12-18 months, we believe that there could be a 10-15 per cent upside in benchmark indices in line with growth in Nifty EPS over the period. On the other hand, the returns could be much better in broader markets. But one needs to be selective and focus on quality rather than chase momentum.

BT: Which sectors do you think will generate strong returns now?

GD: From investors’ point of view, India is on a multi-year upcycle and the portfolio needs to be designed to leverage on the huge opportunity over the next 3-5 years of an economic uptrend. Accordingly, we believe that banks and financials, engineering or capital goods, building materials and select consumer stocks could outperform and are likely to be less volatile as compared to global commodities (metal, energy) or export-oriented sectors like IT services.

BT: What factors have contributed to the BSE Realty index’s impressive 20 per cent growth in 2023? Additionally, what is your perspective on real estate stocks?

GD: We have seen the beginning of a new upcycle in the real estate sector. Normally, real estate has 5-7 years of upcycle followed by a downturn of 10-12 years. So the cycle could extend for the next 3-5 years from here. So, we are positive on the real estate sector and stocks. However, the real estate cycle can also be played through building material companies and mortgage finance companies

BT: What are your insights on the performance of other sectors that have been outperforming, such as capital goods, auto, and FMCG?

GD: Generally, engineering and capital goods outperform in an economic uptrend. Auto is a vast space with divergence in performance across OEMs and auto ancillaries. Thus, one needs to be selective. In the case of FMCG, the valuations are not cheap. However, the input cost pressure is easing out and some of the companies look attractive to us.

BT: Could you provide a few stock recommendations for a 12-24-month timeframe? What potential upside do you anticipate for these stocks?

GD: For investors with an investment horizon of at least 18-24 months, our preferred picks are Bharti Airtel, Larsen & Toubro (L&T), Mahindra & Mahindra (M&M), State Bank of India (SBI) and Titan in the large-cap space. On the other hand, we like APL Apollo, Gabriel India, Jupiter Wagon, Himatsinghka Siede and Mahindra CIE in the mid-cap and small-cap space.

We expect the large-cap basket to give 20-25 per cent returns while the mid-cap and small-cap basket of stocks are likely to deliver 40-50 per cent returns over the next 18-24 months.

BT: What are the reasons behind the poor performance of the oil and gas and power sectors in 2023? How do you see the movement of these sectors from here?

GD: Oil and gas has underperformed for many years now. The levy of windfall tax only added to uncertainty related to profit growth and cash flows which has been a drag on the sector. However, some of the stocks are available at steep discount to fair value and one can look at investing in OMCs given the benign outlook of crude oil prices in the backdrop of a slowdown in global economic growth in the next 6-12 months.

BT: In a scenario where markets are currently at record-high levels, how can an investor allocate Rs 10 lakh effectively?

GD: Direct equity or through mutual funds, it is always better to invest in a systematic and staggered manner for retail investors. It is not practically possible to time the markets and regular investment is an easy way to take advantage of volatility.

BT: How do you see the IT sector after around 1.5 years of underperformance? Do you see any buy-on-dip opportunity in the sector?

GD: Given the slowdown in the US, Europe and key markets for Indian IT services companies along changing technology landscape, the domestic IT companies are witnessing a slowdown in demand and there is a risk of further cuts in discretionary IT spending by large corporates in their target markets. Hence, Indian IT companies have seen a downgrade in earnings estimates and the premium valuation has normalised to long-term average valuation multiples in the past 12-15 months. However, the underperformance could continue in the near term due to global uncertainties and continued downgrade in consensus earnings estimates.