Samco baffled by post election rally; liked Jubilant Food, Metropolis, Mamaearth, Senco in mid/smallcap space

After an around 6 percent drop in the benchmarks on June 4, the Lok Sabha election results day, the Indian markets have recovered dramatically, rising over 4 percent for the month of June. However, domestic brokerage house SAMCO is baffled by the recent post-election rally.

Going ahead, the brokerage sees limited short-term upside for the Nifty due to high valuations and a lack of positive catalysts. Despite this, the pause is viewed as a temporary phase in a long-term bull market, with a low likelihood of a significant correction.

SAMCO maintains a positive outlook on the manufacturing and investment cycle, favoring the Durables (Auto) and Materials sectors. Interestingly, they also identify potential opportunities in the FMCG and Tech sectors based on relative valuations. For Industrials and Financials, they suggest a selective approach focusing on small and mid-cap stocks (SMIDs).

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The brokerage added Jubilant FoodWorks, Honasa Consumer (Mamaearth), Suprajit Engineering, and Metropolis Healthcare to its SMID picks and retained Senco Gold.

These selections are based on their strategic insights and analysis of market trends and valuations. The brokerage has filtered the stocks on growth-adjusted valuations, ROE trends, and cash-flow ratios. However, it has not considered the stock-price momentum in its filters.

Headline indices – Limited upside

The brokerage noted that the Nifty is trading at 20.1x one-year forward PER vs the 18.8x five-year average. This looks overcooked with the premia in the cheaper sectors like banking and industrials more at risk, oddly. SAMCO sees no positive triggers for the next 2-3 quarters, either from policy (a positive budget is now factored in) or from earnings revisions. It said that it will revisit its June 2025 Nifty target of 22,000 (at a PER of 19x, -1sd below LTA) after the mid-July Union Budget, which is the next big event.

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Macro trends intact

The brokerage further pointed out that the BJP’s dependence on coalition partners is unlikely to change the two broad pillars of the NDA’s macro policy – fiscal-monetary conservatism and a preference of capex in state spending.

Structural reform, especially in factor markets, will be challenging, as legislation will now require a consensus-building approach. Though the coalition government could bring more uncertainty in policymaking, SAMCO does not foresee any pivot towards large-scale welfare spending. The post Covid cycle of manufacturing over services and investment over consumption remains undisturbed.

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Mean reversion on sectors

SAMCO's counterintuitive calls are i) Overweight on staples, where it sees earnings acceleration and valuation accompanied by a possible turnaround in mass spending; ii) Underweight on Industrials, where valuations are stretched and earnings growth, though robust, is decelerating; and iii) Overweight on Technology, where valuations are near LTA even if the growth recovery is 2-3 quarters away.

As per the brokerage, the Staples sector is experiencing a broad-based improvement in earnings per share growth (EPSg) and return on equity (ROE). This positive trend could lead to a tactical rerating of the sector. The focus is on companies trading at the lower end of their long-term average (LTA) price-to-earnings ratios (PER), presenting attractive investment opportunities. It added that Hindustan Unilever (HUVR) and Dabur are currently trading at significant discounts to their 5-year average price-to-earnings ratios (PER). A positive catalyst, such as accelerating earnings growth or rising return on equity (ROE), could trigger an upward movement in their stock prices.

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SAMCO views the Industrial sector as attractive from a long-term perspective. However, they note that 40% of companies in this sector are trading at a valuation premium compared to historical levels, and earnings upgrades are stalling. Additionally, there's some deterioration in cash flow ratios, which is typical for manufacturing companies in a high growth phase but poses a temporary risk to valuations.

Given these factors, SAMCO is cautious in the short term, despite a compelling 2-3 year outlook. They believe that selective bottom-up opportunities in small and mid-cap (SMID) stocks will remain appealing.

Meanwhile, for the IT space, it noted that large-cap IT stocks are trading at 5-year average. There are no immediate catalysts, but a turnaround in demand could drive a rerating.

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The brokerage's other major calls are overweight on Durables (strong cycle and cash flows) and underweight on Financials (valuations out of sync with growth).

This is a stock-pickers vs top-down market, so there are a few exceptions: e.g. opportunities in select SMID Industrials, it added.

Apart from its SMID picks listed earlier, its model portfolio includes: Bharti Airtel, Tata Motors, TVS Motor, Hero Moto, Maruti Suzuki, Dabur India, HUL, Nestle, RIL, Shriram Finance, IndusInd Bank, Axis Bank, ICICI Prudential, Infosys, Wipro, TCS, Shree Cement, UltraTech Cement, and Interglobe Aviation.

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SMID Picks

Jubilant Foodworks: Jubilant FoodWorks (JUBI) is experiencing a growth reversal, and if these trends continue, its valuations should remain high. SAMCO appreciates JUBI's multi-country, multi-format food-tech positioning, which is bolstered by investments in back-end commissaries, store networks, and technology platforms. Although the current target price (TP) offers limited upside, the consolidation of DP Eurasia and sustained strong trends could lead to a re-rating for JUBI. Therefore, SAMCO recommends an "ADD" rating for JUBI. Over the medium term, margins should stay on the path to improvement, with investments in commissaries and a potential reduction in competitive intensity, it added.

Metropolis Healthcare: Leveraging its specialized offerings (71% of revenue) and strong brand loyalty among medical influencers (80 percent volume from acute patients), Metropolis has grown from a regional operator to the third-largest pan-India specialized diagnostics chain. Easing competition, a focus on improving B2C and wellness share, and premium brand positioning have boosted margins (400bps over FY24-26E) and resulted in a 37 percent PAT CAGR, said SAMCO.

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Suprajit Engineering: SEL's global business, comprising 47% of revenue, is stabilizing and improving, with growth resuming in Q4FY24 after two-quarters of decline and sequential margin expansion, noted the brokerage. The company is expected to outpace industry growth due to order wins, including through the China Plus One strategy, in cables, and beyond. Domestically, a recovery in the two-wheeler (2W) industry and growth in new product verticals like braking systems and sensors support a positive outlook. SEL's tech center drives new product development, diversifying its revenue base, it said. With reasonable valuations, SEL is projected to achieve 24%/51% revenue/EPS CAGR over FY24-26E.

Honasa: Honasa has strategically built a robust beauty and personal care portfolio covering 70% of the Rs1.5 trillion TAM through its 'House of Brands' strategy, ensuring relevance across diverse consumer segments. As it expands offline, robust revenue growth (21% CAGR FY24-27E) and margin-driven earnings enhancement are expected, supporting a strong returns profile (FY27E RoE 19%), stated SAMCO. It recommends BUY on Honasa Consumer with a June 2025 target price of ₹525/share, based on 6x EV/sales. Our valuation, 15% below the sector average, aligns with growth prospects (~21% revenue CAGR FY24-27E).

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Senco Gold: Senco's >20% earnings growth is driven by new stores and strong same-store sales (SSG) due to a shift to organized retail, premiumization, and higher gold prices. FY24 EPS growth was muted due to IPO dilution and margin normalization without diamond inventory gains, noted the brokerage. Senco has consistently delivered mid-teen topline growth and trades at 33x FY25E EPS, a 30% discount to Kalyan. With significant re-rating potential as it meets expectations, it recommends a BUY on Senco with a target price of Rs1,100/share.

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.