The market has rallied 4 percent in November so far in anticipation of Democratic Party winning US election and hopes of further supportive measures from Federal Reserve. The benchmarks had hit their recent low on October 30.
Also the data points indicated that the economy has gradually been in a recovery mode given the rising demand in unlock phase. The nation went into a complete lockdown from late March to May end to avoid the spread of coronavirus.
Decent September quarter earnings also induced some optimism as brokerage houses upgraded earnings estimates for FY22. In addition to that, FII inflow continued to support the market.
"From extreme pessimism in March 2020, the current stock market recovery is indeed incredible, now inching closer to the previous life-time high. Notwithstanding the uncertainty on many economic fronts, we believe that the worst is over for the capital markets," Yes Securities said.
"The sharp recovery in the ongoing Q2 FY21 results is nothing short of impressive. Barring few stressed sectors like aviation and multiplexes, the scene is highly encouraging. While many businesses have grown on a year-on-year basis, many others are only 10-20 percent below pre-COVID levels," the brokerage added.
The broader markets also participated in the run with the Nifty Midcap index rising 60 percent and Smallcap above 73 percent since March low.
"The year 2020 is largely about survival, both health-wise and finance-wise. It is also an opportune time to tweak and tighten the portfolio for the next bull run. Vikram Samvat 2077 could well be akin to the year 2003, from a market standpoint," said the brokerage.
Hence, to make the portfolio future-ready, brokerages present 18 power-packed Diwali buys:
Brokerage: Yes Securities
KPR Mill is currently focusing more towards betterment of its portfolio mix - garmenting revenue's share has increased from 28 percent in FY17 to 42 percent in FY20 whereas Yarn and Fabric share has dipped from 57 percent in FY17 to 42 percent in FY20. We expect the mix to get better even further with incremental sales volume coming from 4.2 crore per annum garmenting unit in the medium term (capex: Rs 250 crore; announced recently). As the company further moves down the value chain from Yarn & Fabric to Garmenting and retail, we may see stock getting re-rated. Due to integrated nature of operations and better competitiveness (compared to its peers in the textile industry where profits are generated through cost and process control), the company has delivered return on equity (RoE) and return on capital employed (RoCE) of around 20 percent in FY20 with EBITDA margins of 20 percent.
Increasing share of gold loans and its rising profitability fortifies MGFL's already strong capital and funding/liquidity position. We estimate 10-12 percent consolidated AUM CAGR over FY20-22, which is satisfactory in current scenario and would be better than most other NBFCs. RoE delivery is likely to be sturdy at 24-25 percent in FY21/22 with improving capitalization levels (AUM growth substantially lower than RoE).
Redington's working capital days has reduced to just 17 days (in Q1FY21), largely due to aggressive collections (compared to Sales in COVID-19 period), efficient ordering management to keep inventory at minimum levels, and better supplier credit. Also, its ability to manage working capital very well has led to generation of positive free cash flow at a consolidated level of Rs 2,330 crore (in Q1FY21). Additionally, the company is net cash positive and its RoE is likely to remain at 20 percent+ going forward, At CMP, the stock is trading at an attractive valuation of 7.3x FY23E P/E.
Kansai Nerolac Paints
We are positive on Kansai largely backed by expected improvements in structural drivers such as shift towards organized sector, housing push in semi-urban and rural areas, shorter painting cycles, governments focus on increasing rural income and increased consumer awareness in rural areas. Lower raw material prices to aid in higher Gross Margins and most part of negative impact on account of lower absorption of fixed costs would be negated by higher GM's for remaining part of FY21. We expect ROE to move to reach 17 percent by FY23.
Mahindra & Mahindra
We are positive on M&M backed by its efficient operations gained via strong focus on cost optimization, value engineering, improved supply chain management, productivity improvements, and exploitation of synergies between various group businesses. Additionally, we expect improved financials with a) improved performance in core business with FES segment doing well and automotive segment being better placed (higher Auto sales come from rural areas and expects quicker recovery), b) better mix (higher share from FES), and c) exit from loss making subsidiaries. We recommend a buy with the target price of Rs 800.
Post the Rs 15,000 crore equity capital raise, the CET-1 ratio of the bank stands increased to around 15.6 percent. Augmented capital base positions ICICI Bank strongly for future growth. The core bank trades at 1.4x FY22E P/ABV; insurance and AMC subsidiaries will continue to accrete value (Rs 120 per share now).
TCIE is one of the better placed express player in the industry with a) its sturdy position in express industry, b) higher contribution from B2B clients, and c) focus on growing SME sector. Also, its return ratios remain best among the industry.
The core mortgage business of HDFC is available at an inexpensive valuation (at lower end of long-term historical band) of 1.7-1.8x current P/BV after adjusting for the substantial value of its holdings in group’s banking, insurance and asset management businesses. While COVID has accentuated both growth and asset quality challenges for the mortgage lender, we believe it would be a short-lived phase and a new business cycle could take shape from FY22 driven by major tailwinds of decade-low interest rates, upswing in economy and benign funding environment.
Radico has been consistently growing market share for the last six quarters, especially in North India. In the vodka market, its brand Magic Moments commands 62 percent share and the company hopes to repeat its success in whiskeys; the 8pm brand has crossed sales of 1 crore cases already.
It is well placed to grow revenues by 12-15 percent CAGR and margins in mid to high teens. It will be helped by volume growth in premium segment, high margin exports and price hikes by some states with supportive ENA prices.
Stock trades at 19x FY22 earnings and deserves a re-rating, backed by rising ROCE, strong cashflows and shortening working capital cycle. We envisage a higher dividend payout of 15-20 percent versus 10 percent currently and debt free status in two years' time.
Kotak Mahindra Bank
Post robust Q2 FY21 performance, we raised FY21/22 earnings and ABV estimates by 10-12 percent and 2.5-3 percent respectively on the back of material upgrade in PPOP expectations (higher NII and lower cost growth now) and significant reduction in credit cost assumption.
We estimate the standalone bank to deliver 20-22 percent earnings CAGR on a 6-7 percent loan CAGR over FY20-22 because of expansion in core PPOP margin. We see no deterioration in RoA for the current year despite higher provisions and expect profitability to improve to life-time high in FY22.
We are positive on CRISIL with a) its strong foothold in ratings industry, b) above average growth rate compared to GDP, c) presence into risk-free non lending business, d) high entry barriers, e) asset light business with debt free balance sheet, f) better pricing power compared to peers due to a stronger brand, and g) high profitability ratios (30 percent ROE - CY23). Also, despite disruptions in last 4 years such as demonetization, GST, NBFC crisis and global pandemic, the company has relatively performed well.
Going forward, we believe the company is best placed to gain in cyclical and structural uptick in domestic ratings segment (expects 25 percent+ CAGR PAT growth, seen in earlier cycle) when next round of economic expansion happens post COVID-19 aided by market share gains. Given such quality play, the stock trading is currently trading at an attractive valuation of 23x CY23E P/E.
Brokerage: IDBI Capital
APL Apollo Tubes
APL Apollo's management's has a strategy to strengthen balance sheet during the lockdown. We believe steel prices are unlikely fall meaningfully hereon which bodes well for APL's margins. We expect strong recovery in volumes and profitability from H2FY21. APL's stock is trading at an attractive valuation of 17x FY22E P/E given that we forecast its EPS to grow 50 percent in FY22.
US sales (43 percent of FY20 revenues) grew at around 12 percent CAGR in FY16-20 to Rs 2,000 crore on the back of consistent product launches including limited competition products. Despite being a late entrant, the company has done reasonably well with a product basket of 198 ANDA filings (67 pending final approval).
During Q2FY21 domestic revenue decreased 5.6 percent YoY (23 percent of revenue, down 10.5 percent QoQ) due to industry wide slowdown in Indian Pharma Market (IPM) in the months of April & May, though recovery was seen in the month of June.
We believe agrochemicals segment is least affected due to any natural calamity as food cultivation remains at the heart of any activity in the country. So impact of COVID-19 on Bayer crop would be negligible unlike other most of the companies which are struggling during the pandemic. Also, anti-China sentiments may drive shift of manufacturing hub from China to India, which would benefit the company in a longer run.
Bayer Crop's acquisition of Monsanto India resulted into a bigger entity in agro-chemical and seed. This will unlock the growth potential of Indian agriculture as a global producer and exporter of food, feed and fiber. Further, the merger has resulted in cost efficiencies and revenue synergies and would result in incremental earnings growth for Bayer Crop. The company enjoys a unique position in the domestic agrochemical space due to its ability to offer new innovative products.
With the reduction in competitive intensity and price hike, Bharti's domestic wireless ARPU increased to Rs 157 in Q1FY21 from Rs 129 in Q1FY20. This coupled with Bharti's cost management resulted in India EBITDA margin improving and Bharti expects ARPU to structurally improve from the current levels which augers well for its earnings growth.
The Supreme Court of India has granted the telcos 10 years for payment of AGR dues. The total AGR payment for Bharti is Rs 44,000 crore and it has already made payment of Rs 18,000 crore. We believe that Bharti is well placed to make the balance payment over the stipulated time period. The raising capital for Bharti has never been an issue.
The government has taken several initiatives to promote domestic manufacturing of ACs and its components such as Phased manufacturing programme, review of FTA’s and Quality Control Order for component imports. These schemes will help in reducing import dependence and promote indigenization through backward integration. JCH-IN stands to gain due to its focus on backward integrated manufacturing units, India specific R&D, technology and product development capabilities.
Initially, JCH-IN had a strong presence only in premium category. With the launch of new model ‘Kaze’ in split and window AC it entered mass premium segment to reach out to more customers. Additionally, it has added a lot of retail touch points in tier 2&3 cities. It has expanded its distribution reach to 10,000 retail touch points (up 150 percent in 5 years) across 1,350 cities.
Nestle will be least impacted by disruption from COVID-19 as 90 percent of its product portfolio falls under essential category. In packaged food category, industry tailwinds to be positive in Milk Products and Maggi segment (75 percent of Nestle's revenue). Nestle being category leader in 85 percent of its product portfolio, to continue gain market share driven by differentiated brand positioning and superior distribution network.
Nestle enjoys superior pricing power. Despite price hike of 4 percent in Milk Product and Nutrition segment, Nestle gained market share in its largest segment i.e. Infant Milk Formula.
The management has guided for Rs 2,600 crore capex (equivalent to total CAPEX done over last 8-9 years) over next 3-4 years to (i) develop new factory in Sanand, Gujarat and (ii) enhance existing capacities.
Currently 63 percent of revenue contribution is from PVC pipes segment. SIL boasts of over 8,000SKUs in pipes segment which is used in around 38 applications. The company is present across all pipes categories and has pan India reach with its extensive 3,300 distributors network. Over the years, the company has maintained its leadership position with around 10 percent revenue share in the domestic pipes market.
SIL plans to spend Rs 350 crore on capacity expansion, particularly on pipes segment to capture incremental growth. The management has guided that total capacity will increase to 700,000 TPA and new plants would be operational by FY22E end. We believe the company's strategy to increase sales by focusing on sales volume bodes well for long term shareholder value creation.Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.