B&K recommends a sector-neutral strategy and lists top picks and portfolio changes for September

In a recent report, domestic brokerage firm B&K expressed a cautious yet optimistic outlook on the Indian market, highlighting several key factors shaping the current and future business landscape. The report noted that domestic demand has yet to pick up significantly across most categories, while exports remain a challenge for many sectors. Additionally, government spending has not gained momentum in a major way, leaving certain industries waiting for a boost.

Despite these hurdles, B&K pointed out that the monsoon season appears good and plentiful. While there is uncertainty regarding the Kharif season, depending on rainfall patterns over the next few weeks, the brokerage expects the Rabi season to perform well due to favourable reservoir levels. Most companies are anticipating that the September quarter will not show strong results. Still, they are more optimistic about the second half of the year, with better performance expected as the year progresses.

Fundamentals

The long-term story for India remains robust from a bottom-up perspective. B&K expects medium-term earnings growth to outpace nominal GDP growth, reflecting the strength of the underlying economy. The balance sheets of India Inc. have also shown further improvement, with absolute net debt levels continuing to decline. Interestingly, the balance sheets of smaller-cap companies have strengthened more than their larger peers, as they have utilized internal accruals and equity raises to fund capex and working capital needs. According to B&K, the net debt of smaller-cap companies has decreased by 11 per cent, even with the growth in fixed and net current assets.

Risk has also been reduced at the promoter level, as many promoters have taken advantage of high valuations to pare down their stakes. Meanwhile, banks' non-performing asset (NPA) levels are at a historic low, contributing to the financial stability of the sector.

Fund Flows and Valuations

On the investment side, domestic inflows remain strong, with systematic investment plan (SIP) contributions growing each month. Foreign portfolio investor (FPI) inflows, while not large, have remained positive, contributing to market buoyancy despite the introduction of capital gains tax and high valuations. B&K expects continued supply in the form of more initial public offerings (IPOs), qualified institutional placements (QIPs), and private equity (PE) exits, along with promoter sell-downs. These factors, combined with net inflows, are anticipated to drive market performance soon.

According to B&K, valuations remain rich on both an absolute and relative basis, capturing the near and medium-term outlook. Based on their Yield Gap model, B&K forecasts that the Nifty will provide a return lower than earnings growth over the next 12 months. With an expected 13 per cent earnings growth and a 6.7 per cent exit yield, the fair value of the Nifty in 12 months is projected to be 6.5 per cent higher than current levels.

Portfolio Strategy

Given these fair relative valuations, B&K recommends a sector-neutral portfolio strategy, as previously advised in their last update.

For stock selection, B&K favours bottom-up picks combined with a thematic approach. In their latest portfolio update, the brokerage introduced Arvind SmartSpaces and L.G. Balakrishnan & Bros as new additions, while Sandhar Technologies was removed.

B&K’s top multi-cap picks include NTPC, Samvardhana Motherson International, Cholamandalam Investment and Finance Company, Affle (India), Vinati Organics, Praj Industries, City Union Bank, Safari Industries (India), Usha Martin, NOCIL, and Arvind SmartSpaces. These selections reflect B&K’s continued focus on companies with strong fundamentals and potential for growth across various sectors.

In conclusion, B&K remains optimistic about India’s long-term growth prospects despite near-term challenges. The combination of improved corporate balance sheets, strong domestic inflows, and favorable macroeconomic conditions are expected to drive future earnings growth and market performance.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.