Be high on consumption, pharma, IT stocks: JM Financial

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The ongoing bull run on Dalal Street has put investors in a fix between making new bets at elevated levels and booking profits. At the same trailing PE (price to earnings) for Nifty has moderated to 26.5x from 29x month on month. “We continue to see Nifty PE settling lower at 24x. As Nifty 50 is already close to our scaled-down 12 months target of 16500, which assumes EPS growth at 18% for FY22-23E vs. consensus 32%; margin pressure emerging from 1QFY22 results corroborate our less optimistic expectations,” said Dhananjay Sinha, MD & Chief – Strategist, JM Financial Institutional Securities.

Current setup

The moderation in commodity prices amid a global slowdown, ebbing of post-Covid fiscal impulses in China and fiscal drag from the American Rescue Plan 2020 after Sep’21 is visible. Besides the rising probability of US Fed’s QE (quantitative easing) tapering the inverse correlation with commodity prices play is yet to materialise.

Crude oil prices have moderated a bit with Brent at US $71 per barrel and INR/USD is steady at 74.50. Coupled with Moderation of FII (foreign institutional investors) flow and Nifty trailing PE is at 26x vs. 29x M-o-M. Makes the current scenario akin to 2011-12, 2014-15, 2018-19 and to an extent 2007-08, Sinha added.

Mid & Small caps in bubble

JM Financial maintains a precautionary view on the small and mid cap indices, which have made new highs on relative valuation against NIFTY50. Small cap index reached 83% of NIFTY P/B, topping the peak of 82% in Jan’18. Comparatively, the mid cap index at 78% is lower than 88% in Jan’18.

According to the brokerage firm study of BSE 500 of select 195 stocks from key industries indicates that over the past year retail investors were lead buyers in 58 stocks and FII in 73 and 60% of these came from domestic funds. Domestic funds and promoters were lead buyers in 50 and 14 stocks, respectively. Further, FII were proportionate lead buyers across small (27 stocks), mid (22) and large cap (24) stocks. Retail were leads in 35 small cap stocks. Domestic funds were proportionate leads in small (21) and Mid Caps (19).

“Unlike the 2017 mid and small cap boom, the risk to liquidity tapering and valuation correction is higher this time due to higher component of discretionary retail money and even FIIs participating in mid and small caps. Considering the relative valuation and change in ownership across stocks we believe large caps can perform better going forward,” Sinha stated.

Portfolio stance

The brokerage house has reduced its overweight stance on autos primarily due to the softening in raw material costs and visibility on semi-conductor availability gets prolonged after 1QFY22 results.

While it has maintained overweight on IT as the Q1FY22 results exhibit a strong FY22 for IT stocks. It also increased overweight on FMCG (Britannia), Healthcare (added Torrent Pharma in place of Alembic) and Utilities.

On the other hand, it is underweight on commodities; strong quarterly performance has kept the sentiment strong, but mostly priced in. Risk-reward not favourable after the 12 month mega rally.

JM Financial maintains equal weight on Banking; strong USD, commodity price volatility and higher global sensitivity to impact valuations; and remained underweight on non banking finance companies.

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