The market had a strong run for the second consecutive month in November, with the benchmark indices rising more than 11 percent and carrying the uptrend, so far, into December as well.
The Sensex surpassed the 45,000-mark and the Nifty50 hit a record high of 13,250 on December 4, backed by consistent foreign liquidity, rising hopes of the economy turning positive in the second half of FY21 likely earnings growth, falling COVID-19 infections and more coronavirus vaccine candidates showing promise.
The benchmark indices have rallied 72 percent from March 23's closing low. There have been shifts in the drivers of this rally. IT and pharma stocks were leaders till August, then after the September correction, banking and financials, infrastructure and metals have assumed the led roll.
"Rally was seen across the financial services sector including the PSU banks, which have lagged significantly. As our allocation in the BFSI space has increased significantly, we will continue to maintain our allocation in the sector even after the solid rally," said Axis Securities that raised its earnings estimates after a strong beat in the September quarter.
In Nifty50, 34 companies beat earnings expectations in Q2 by a reasonable margin. While a significant portion of the beat has been on account of better margins attributable to cost management but recovery of revenues has also been better than expected.
With the significant beat as a backdrop, "we have raised earnings estimates for FY21 and FY22 by 6 percent and 8 percent and introduced FY23 earnings. We arrive at December 2021 target by valuing the Nifty at 20x FY23E earnings of 730 translating to target of 14,600", said the brokerage.
The Nifty financial services index registered a 23 percent gain. The NSE private bank and the PSU bank indices were up by 24 percent each in November.
"The key reason for the rally is that the market now believes that the orientation of the sector has changed from capital-protection to growth, while the challenges of NPA may not be as severe as they were believed to be at the beginning of Q2FY21. The management commentary across the board was largely upbeat," Axis Securities said.
The broader markets also joined the party in November, as the Nifty midcap index surged 15.5 percent and smallcap index up 13 percent, taking gains from March lows to 83 percent and 98 percent, respectively, outperforming the Nifty.
The majority of experts say the rally is expected to continue in broader space, as both midcap and smallcap indices lag the record highs they touched in January 2018.
"Smallcaps and midcaps present with both better value and growth proposition over the medium term. We continue to remain bullish on the mid and small-cap theme and recommend more allocation in the space," Axis Securities said.
Foreign institutional investors (FIIs) have poured in Rs 1.74 lakh crore, so far, in the current financial year, partially due to recovery in the Indian economy with strong earnings and falling COVID cases as the US and several European countries are hit by a second wave.
Indian economy reported a contraction of 7.5 percent in the September quarter 2020, much better than 24 percent decline in the previous quarter. The Reserve Bank of India expects the economy to turn positive in the second half of FY21 with a 0.1 percent growth in Q3FY21 and 0.7 percent in Q4FY21.
"Economic indicators have improved with GDP for Q2FY21 was better than expectations. However, the impact of pent up demand has also started to recede and sustenance of demand across the sectors could pose challenges," Axis Securities said.
"While there are challenges, the opportunities in the market are also significant. There is still value in BFSI, IT, telecom, small and mid-cap stocks. Our top picks orientation will continue towards adding beta and market dips should be viewed as a buying opportunity," the brokerage added.
Axis has come out with a list of 15 stock picks which can return up to 46 percent by December 2021:
We maintain a positive view on ICICI Bank and believe that the bank offers the best risk-reward among bank coverage, given a healthy, sustainable earnings outlook. Asset quality is likely to strengthen following adequate provisioning and guidance of lower credit costs. A strong liability profile, better asset mix, and a healthy CAR could make ICICI well-positioned to come through this challenging period with a relatively lower degree of stress.
We believe that credit costs will remain high on asset quality concerns for the non-gold business. We expect cost optimisation to aid profitability. Balance-sheet liquidity remains comfortable with no funding challenges. While cautious on the non-gold business, we believe the gold business will support overall performance in uncertain macro conditions. We expect MGFL to maintain ROAE of around 24 percent over FY21/FY22.
While loan growth moderation is expected along-with slight asset quality deterioration on account of COVID-19, we expect the company to recover faster than its peers due to its loan mix and negligible developer exposure. Lower cost of funds should aid the company in maintaining NIMs, while the loan mix profile skewed towards the salaried segment will help in maintaining asset quality. We remain positive on the stock, given its loan book profile, stable liquidity position and robust CAR (25 percent).
Given strong underwriting standards, changing loan mix and a strong retail deposit franchise, we expect the valuation to improve. Federal Bank adopted a cautious approach in building the loan mix toward high-rated corporates and retail loans. The bank's liability franchise remains strong with CASA plus Retail TD of around 90 percent and one of the highest LCR among banks.
NOCIL
We note there has been a significant improvement in the overall business from H2FY21 (aided by unlock driven improving demand in replacement tyres and OEMs) with a sharp rebound in volumes to be reported in FY22 on the back of new capacity commercialisation, economic growth bouncing back to normalcy and a low base. Further, a positive outcome on ADD levy and a structural opportunity to play as a dependable non-Chinese player augurs well for NOCIL's long term prospects.
With business growth restoring, aided by unlock as witnessed in Q3CY20, we expect this momentum to continue. The trend of in-home consumption has seen an increase and is likely to continue as consumers get habituated to consuming soft drinks at home. Further, OOH also resuming normalcy, there could be growth seen here too. Rural regions are likely to grow ahead of urban counterparts on the back of a healthy outlook for the Rabi crop. Share gain opportunities from smaller players are expected to boost its market share, especially in acquired territories of South and West where the company will look to add dealers ahead of the season in CY21.
We believe CCLP is well placed to deliver steady earnings over the medium term given 1) expertise in customized blends and cost-efficient business model, 2) long-standing client relationships (around 50 percent revenue contribution from brand owners) 3) largest exporter of instant coffee in India 4) presence in Vietnam, the world’s largest Robusta growing country 5) capacity additions in value-added products (FDC & small packs) and 6) steadily improving branded retail business.
We expect Endurance Technologies to outperform the industry given its sticky relations with OEMs, broad product basket, market leadership with a market share of around 35 percent in suspensions, 25 percent in hydraulic-braking system, 20 percent in disc-braking system and 16 percent in transmission. New products along with tailwinds for 2-wheeler sector to support Endurance Technologies.
Being in an oligopoly market, SSWL commands leadership with the market share of around 55 percent in steel wheel rims and around 20 percent in alloy wheels. We expect SSWL to outperform the industry, given its sticky relations with OEMs across all the auto segment viz., 2/3W, PV, CV, and Tractors.
Minda Industries
We are bullish on MNDA's ability to comprehensively beat industry performance by 1) leveraging the broader vehicular trends of industry like EV, premiumisation and automation 2) strategic inorganic acquisition to enhance product offering and gain market share 3) maintaining balance sheet discipline and maintain optimal leverage, 4) investing In R&D to bring technological change and 5) tap on its deep-rooted relationship with OEMs to increase kit value.
Dr Reddy's Laboratories
DRRD has leveraged its 100 ANDAs portfolio and launched high-value products with limited competition in the last two years. Further, commentary from Top 6 generic pharma players in NAG reveals pricing stability in the generic pharma business. In the next two years, DRRD has a healthy pipeline to launch drugs like gRemodulin, gDexilant, gNuvaring, gCopaxone and gKuvan and potentially gVascepa that could be a gSuboxone kind opportunity. We expect revenue CAGR of 8.7 percent in constant currency for North America Generic business over FY20-FY23.
Driven by market share gains and new launches in these high-margin biosimilars, the biologics segment is expected to post robust revenue growth (approximately in mid-twenties) over the next two-three years. The management has set an ambitious target to cross $1 bn revenues for biologics over the next couple of years (from around $300 plus million in FY20). Biocon is targeting to have eight different biosimilars to be sold by FY22, thereby addressing a market size of $33 billion. The company is planning to deliver at least three additional molecules between FY23 and FY25.
We believe Tech Mahindra has a resilient business structure from a long- term perspective. We recommend "buy" and assign 16x P/E multiple to its FY23 earnings estimates of Rs 62.7, which gives a target of Rs 975 per share.
The ARPU improvement in Q2FY21 was a function of customers upgrading and better post-paid sales. However, considering the industry structure further tariff hikes cannot be ruled out in the forthcoming quarters, which will lead to consistent EBIDTA improvement. Bharti's management indicated that ARPU will reach Rs 200 over the medium-term but the timing of tariff hikes is difficult to calibrate. We maintain ARPU assumptions and forecast 13 percent and 17 percent CAGR for revenue and EBIDTA, respectively, over the period FY20-23.
We believe HCL has a resilient business structure from a long-term perspective. We recommend buy and assign 16.6x P/E multiple to its FY23 earnings estimates of Rs 58.8, which gives a target of Rs 975 per share.
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