Motilal Oswal makes key changes to its model portfolio ahead of Q4 earnings; adds Chola Investments, Hindalco, JK Cement

With the onset of the March quarter (Q4FY24) earnings season, brokerage house Motilal Oswal (MOSL) predicts a 6 percent year-on-year (YoY) growth in Nifty earnings for the quarter. Excluding global commodities (i.e. Metals and Oil & Gas), Nifty would post a 9 percent YoY earnings growth for the quarter, it forecasted.

It expects sales and EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) for Nifty to improve 9 percent YoY each. Ex-OMC’s, EBITDA of Nifty is likely to grow 10 percent YoY though, it added.

As per the brokerage, overall earnings growth is likely to be driven once again by domestic cyclicals, such as BFSI (Banks, Financial Services and Insurance) and Auto.

Read here: Q4 Earnings Preview: These 5 companies are likely to post over 15% decline in net profit

"Overall earnings growth is anticipated to be driven, once again, by domestic cyclicals, such as Auto and BFSI, which are expected to post 20 percent and 15 percent YoY growth, respectively. Conversely, earnings growth is expected to be weighed down by global cyclicals, such as Oil & Gas and Metals, which are anticipated to decline 6 percent and 12 percent YoY, respectively," it forecasted.

MOSL believes that private banks and NBFC-lending would mainly lead BFSI’s earnings, with 14 percent and 23 percent YoY growth, respectively. However, it pointed out that earnings growth of private and PSU banks, at 14 percent and 12 percent, while healthy, is the lowest in 10 and 8 quarters, respectively.

Motilal Oswal (MOSL) maintains its forecast for the Nifty EPS at ₹980 for FY24, while it has revised its projection for FY25 by 1 percent to ₹1,132. The firm anticipates Nifty EPS growth rates of 21 percent for FY24 and 16 percent for FY25.

Read here: Q4 results preview: Top-line, profit of India Inc. may moderate, say experts

Ahead of the March quarter earnings, the brokerage house has also made some key changes to its portfolio. Let's take a look at those:

"Our Model portfolio remains aligned with key domestic cyclical themes amid a consistent backdrop of earnings growth. We remain overweight on Financials, Consumption, Industrials and Real Estate. Industrials, Consumer Discretionary, Real Estate, and PSU Banks are our key preferred investment themes. We have also made several additions from a bottom-up viewpoint across sectors," said the brokerage.

FINANCIALS: MOSL reiterated its 'overweight' stance on Financials and maintained a significant 'overweight' position on PSU banks. Valuations in the banking space are very reasonable after the recent underperformance, even as asset quality continues to remain healthy, it noted. It has kept stocks and weights broadly unchanged in both private and PSU banks. Meanwhile, in the NBFC- lending space, the brokerage has added Chola Investments. MOSL predicts that CIFC will sustain faster growth compared to its peers in the medium term, supported by a diverse product range and a steady enhancement in market share. With an impressive track record of achieving industry-leading loan growth (projected 23 percent AUM CAGR over FY24-FY26E), along with robust asset quality (expected credit cost of 1.2 percent over FY25-26) and a healthy RoE of 21-22 percent, CIFC is anticipated to maintain premium valuations relative to other NBFC peers.

Read here: Q4 results preview: 5 stocks are likely to post 45% rise in YoY net profit

CONSUMPTION: The brokerage remains ‘overweight’ on Consumption space as well with a significant bias towards discretionary consumption names. ITC is the only consumer staple stock it has held in its model portfolio. It has added Cello World to the portfolio.

"Cello, with a presence across diverse product categories, benefits from the growing total addressable market (TAM) in each category. The overall TAM of Cello is expected to record a 13 percent CAGR over FY23-27 (to ₹1,22,900 crore by FY27 from ₹74,300 crore in FY23). The company is anticipated to register a robust revenue/EBITDA/Adj. PAT CAGR of 18 percent/23 percent/25 percent over FY23-FY26," it explained. It also continues to maintain its allocations in Avenue Supermart, Indian Hotels, Zomato, Lemontree Hotels, and Metro Brands.

AUTOMOBILES: In this space, MOSL has replaced Hero MotoCorp with Samvardhana Motherson International (SAMIL).

"Given its well-diversified presence across components, geographies, and customers, SAMIL is emerging as the key beneficiary of the growing popularity of electric cars and the rising trend of premiumization across segments. This is evident in a solid ramp-up in its order book, where its booked business has scaled up to $77.3 billion. The stock trades at an attractive valuation relative to peers (at 17x FY26E EPS)," said the brokerage. 

Read here: Q4 Results Preview: Auto companies to post stronger earnings led by PV, 2W/3W

It has also reintroduced Craftsman Automation after the correction. Its track record of creating and gaining market leadership organically is uncommon in the auto component industry. This has enabled the company to deliver a good balance of strong growth and superior capital efficiency, noted MOSL. It estimates a CAGR of 25 percent/24 percent/30 percent in consolidated revenue/EBITDA/PAT over FY23-26.

METALS: While Coal India continues to remain MOSL's preferred idea, it has also added Hindalco to its model portfolio. Novelis has experienced a significant improvement in EBITDA/t over the last few quarters, which is expected to reach $600 by FY25-end (from $500 at present). The stock is currently trading at an EV/EBITDA of 5.5x on FY26E EBITDA, stated the brokerage.

CEMENT: In this space, the brokerage has added JK Cement, which has demonstrated superior execution capabilities, resulting in higher-than-industry volume growth. Its management has outlined expansion plans to reach over 30mtpa by FY26-27, and MOSL believes that JKCE has the potential to reach 50mtpa+ capacity in the long run. It has upgraded the FY25/FY26 EBITDA estimates for the cement stock by 5 percent/6 percent.

Read here: UltraTech to ACC: Should you Buy, Sell or Hold cement stocks ahead of Q4 results

Here is a complete list of MOSL's top large and mid-cap ideas for the upcoming earnings season:

Largecaps – ICICI Bank, SBI, L&T, TITAN, ITC, HCL Tech, Coal India, M&M, Zomato, and Hindalco.

Midcaps: Indian Hotels, Godrej Properties, Global Health, PNB Housing, Kirloskar Oil Engines, Cello World, Sobha, Lemon Tree Hotel, and JK Cement.

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.