With a 41 percent rally in both the benchmark and the broader markets since March 23 low, experts no longer feel that market valuations are cheap.
On July 6, the market ended on a more than four-month high don the back of three weeks of positive gain in Nifty. Positive news on the COVID-19 vaccine front and optimism over earnings and economic growth next year kept the party going for the bulls.
"The current actual fundamental data of economy & companies do not provide confidence to take a directional call on the market. Valuations have also reached near the last high due to low earnings base of FY21 & bounce of the market. Given both the outlook, today the stock market is moving with small positivity as per the push in liquidity, macro and micro news, hoping for a no virus issue in CY21," Vinod Nair, Head of Research at Geojit Financial Services.
Axis Securities also feels Nifty on FY20 earnings is trading at 23x. "The market has breached the mean valuations on the upside, we find the market not cheap even after considering the earnings are at the cyclical bottom."
Hence the brokerage feels stock picking and playing the right themes will be the key hereon. "While the broader economic challenges will continue to persist but value, quality mid and smallcap names will see increased allocation as they will see a consistent uptick in business in the forthcoming quarters. Pricing power will be a key factor in picking mid and smallcaps," the brokerage said.
Its long-term themes of uptick in Digital, Telecom, Rural, Supply chain shifts and Consumer staples remained intact but it also expects the positive impact of pent-up demand to help Automobile and Cement sectors in the near term. Hence it upgraded both the sectors to equalweight.
The brokerage feels markets eventually follow earnings trajectory. IT, Consumer and Telecom are likely to post better earnings and demonstrate better earnings growth trajectory in the upcoming results, according to the brokerage.
Axis Securities added ITC and CCL products in its list of top picks as it sees value buying. It dropped Aarti Industries and Escorts from its list.
The brokerage has recommended the following 10 stocks:
ICICI Bank: Buy | Target: Rs 495 | Return: 37.1 percent
We expect higher provisioning over FY21/22 cushioned by stable NIM, low cost of funds and healthy capital adequacy. We believe valuations are undemanding for the stock given strong liability franchise and leveraging opportunities across group products. We remain positive on the stock and maintain buy with SOTP of Rs 495.
Manappuram Finance: Buy | Target: Rs 173 | Return: 7.3 percent
We expect moderate loan growth and higher provisioning over FY21/22E cushioned by improvement in cost ratios. Pressure on the non-gold portfolio is easing off as collections improve in rural areas. Gold lending will remain an attractive option for customers looking for credit as banks will be more risk-averse. We expect Manappuram to maintain ROAE of around 24 percent over FY21/FY22. We remain positive on the stock and revise our target price upwards to Rs 173.
Varun Beverages: Buy | Target: Rs 804 | Return: 15.2 percent
We expect Varun Beverages to register Revenues/Earnings CAGR of 10/28 percent respectively over CY19-21E. This growth will be driven by 1) consolidation in newly acquired territories, 2) distribution led market share gains, 3) cost efficiencies and 4) margin tailwinds.
Varun Beverages' EBITDA margin stood at 16.2 percent in Q1 CY20 and with benign raw material prices, it is likely to sustain in CY20. The stock trades at 10.5x EV/EBITDA on CY21E basis versus its 3-year mean of 14x EV/EBITDA.
CCL Products: Buy | Target: Rs 267 | Return: 11.3 percent
We expect CCL Products to post Revenue/EBITDA/PAT CAGR of 9/11/12 percent respectively over FY20-22E driven by product mix improvement and 3,500MT expansion at Vietnam plant. Our estimates are also supported by the company's guidance of Volume/EBITDA growth of 10-15 percent in FY21 along with sustaining its high margins, despite COVID-19 led challenges.
Minda Industries: Buy | Target: Rs 318 | Return: 11.3 percent
We expect annual revenue to grow at 14.5 percent CAGR over FY20E-22E. Expect EPS to grow robustly at 35 percent YoY and 32 percent YoY for FY21 and FY22. The company trades at 23.8x FY22E P/E multiples and will continue to command premium valuation due to an unmatched product offering among auto ancillaries and a long history of superior growth.
ITC: Buy | Target: Rs 230 | Return: 16.6 percent
Clearly, Q1FY21 performance will be severely impacted owing to COVID-19 led disruptions leading us to revise our estimates downwards for FY21/22. However, progressive normalisation of operations across segments, share gain possibilities in core cigarette business, quicker recovery in FMCG sales given increased in-home consumption and consumers’ preference towards trusted brands could support a quicker recovery in earnings.
Increase in dividend payout (81 percent in FY20 versus 56 percent in FY19) and can sustain going ahead in our view. At CMP stock trades at 15.5x FY22E EPS providing enough valuation comfort and high dividend yield +5 percent, with steady return ratios and likely market share gains in core cigarette business supported by inorganic acquisitions.
Mindtree: Buy | Target: Rs 1,088 | Return: 15.1 percent
The company's management is confident in gaining momentum and has worked efficiently with zero productivity loss. While traction is expected in Capital goods, Digital initiatives remained strong. Hi-Tech and automation is expected to gain pace post-COVID-19. However, we see some near-term challenge in terms of softness in revenue growth and pressure on Q1 operating margin.
We expect annual revenue to grow by 11 percent YoY and 11 percent YoY in FY21 and FY22, respectively. EPS is expected to grow at healthy 16 percent YoY and 15 percent YoY for FY21E and FY22E, respectively. We recommend buy and assign 21x P/E multiple to its FY22 earnings of Rs 50.6 which gives a target of Rs 1,088 per share.
Biocon: Buy | Target: Rs 474 | Return: 19.8 percent
We expect annual revenue to grow by 25 percent CAGR over FY20-22E, EBIDTA to expand by 35 percent CAGR and PAT by 47 percent CAGR over the same period. The EBIDTA margins are expected to expand from around 27 percent in FY20 to 29 percent by FY22 driven by increased contribution from high margin Biologics segment. Given the prospects of earnings growth over next couple of years, we value the company at 35x FY22 earnings to arrive at target of Rs 474.
Bharti Airtel: Buy | Target: Rs 650 | Return: 11.9 percent
Bharti Airtel is one of the largest telecom companies in the world with operations spanning 18 countries and a subscriber base of more than 420 million. It is the second-largest wireless telecom operator in terms of revenue after Reliance Jio. Bharti Airtel is a well-capitalised telecom operator with offerings across the telecom spectrum of enterprise and fixed-line broadband services.
Considering the industry structure further tariff hikes cannot be ruled out in the forthcoming quarters which will lead to consistent EBIDTA improvement.
We value the company based on SOTP valuation at Rs 650. The value could increase by a further Rs 40/share if Vodafone-Idea shuts down.
HCL Technologies: Buy | Target: Rs 653 | Return: 12.8 percent
HCL Technologies is a next-generation global technology company that helps enterprises reimagine their businesses for the digital age. Its products, services and engineering are built on strong innovation making it a more sustainable business model even in uncertainties.
We believe HCLT has a resilient business structure from a long term perspective. We recommend buy and assign 13x P/E multiple to its FY22E earnings of Rs 50.3, which gives a target of Rs 653 per share.
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