Continue to focus on bottom-up approach, says B&K Securities; a look at its portfolio update

India has underperformed the emerging markets in the last quarter. In a recent report, brokerage house B&K Securities said, the key drivers of the market – both globally and locally – continue to remain uncertain, implying that the focus has to be on bottom-up stock picking.

The Indian indices are down around 1.5 percent in the last 1 month and 4 percent in 2023 YTD. With recent correction in the markets, valuations are now closer to the long-term average, the report stated.

Given the uncertainty and relative valuations, the brokerage has advised a 'Sector Neutral' strategy to investors. It has reduced its weight on IT from ‘overweight’ to ‘neutral’ based on the global BFSI (banks, financial services and insurance) uncertainty. It is also ‘neutral’ on communication services.

However, the brokerage pointed out that amid this volatility, cement sector seems to be standing out on the back of an improving outlook with robust demand and sharp correction in fuel prices. It has added Ramco Cements to its portfolio which already had UltraTech Cement.

Further, on a bottom-up basis, Bosch and Aarti Industries are two stocks which B&K believes are coming out of company-specific issues that they faced over the last few years. It has added them to its model portfolio.

The brokerage also pointed out that its ‘equal-weighted’ portfolio stocks underperformed the BSE200 by 90 bps. Only, 45 percent of stocks in the portfolio outperformed the benchmark in the last one month.

Balrampur Chini Mills (10.8 percent), Trent (7.6 percent), and Varun Beverages (6.6 percent) were the top three performers. Whereas M&M (-8.7 percent), Ratnamani Metals Tubes (-9.4 percent) and Coforge (-11.3 percent) were the worst three, it noted.

The brokerage has included Bharti Airtel, Bosch, Ramco Cements, and Aarti Industries in its model portfolio in April whereas excluded TCS, Maruti, Gujarat Fluorochemicals, and RHI Magnesita.

It also highlighted that on average “our Top 10 Multicap picks have not done well last month but B&K's conviction remains high.”

Its top 10 picks include SBI, M&M, L&T, UltraTech, Bosch, Bharat Forge, Carborundum Universal, Ratnamani, Westlife, and Shoppers Stop.

Outlook

As per the brokerage, the corporate commentary suggests that the consumption slowdown seems to have spread to more sectors. Further, B2B (business-to-business) growth continues to be strong and construction activity has become more broad-based and upcoming elections should help boost public capex, it noted. Commodity price correction will also help earnings for commodity users in FY24, it added.

Meanwhile, monetary conditions are neutral with M3 growth a tad below average and inflation remains high, hence, the expectations of a US rate hike have tempered which should help Indian interest rate remain stable, it further predicted.

"We think that in India we are close to the terminal policy rate. Our own estimate is that 6.5 percent is probably the terminal rate. The decline in inflation, positive real rates (>1 percent), and a slowdown in the growth of the manufacturing sector make us believe that the terminal rate has been reached. But clearly, the fight against prices is not over and we feel that RBI is likely to keep repo unchanged for the full calendar year," it explained.

Also, the global risks have moved from the debate on inflation to one on financial sector stability and the extent of economic slowdown.

Commenting on flows, the brokerage pointed out that after months of Negative FPI flows, we saw a positive number in March. However, domestic sentiment seems to be waning, it cautioned, but added that global worries and high-interest rates should keep flows in check.

Given the flow situation, B&K believes that the market will remain close to the long-term average valuations. Based on the earnings yield framework on a 12 percent EPS growth for Nifty, which is a bit lower than the consensus growth, and a 10-year bond yield at 7.5 percent, the base case Nifty target for March 2024 is 18,750, it said.

In the short term, the brokerage expects the markets to be significantly away from the fair value. Any change in the geopolitical situation, monetary policy stance and growth estimates will influence the near-term moves, but in the long-term, the returns should marginally be lower than the earnings growth, it predicted.

However, given the current uncertainties and flow situation, it expects Nifty to tract close to long-term average valuations.