The outbreak of Covid-19 created opportunities over the last year for retail investors to get into markets at discounted valuations. However, while 2021 promises to be good, it might not be as profitable or rewarding for investors as we are already trading at the higher end of the valuations.
Experts advise investors to remain stock or sector-specific over the next 12 months and use dips to get into preferred stocks that are sector leaders and promise growth. In the December quarter, a large number of companies have managed to beat expectations at revenue and earnings levels, which is a positive sign for bulls.
A combination of healthy capital expenditure, PLI schemes and privatisation/strategic divestment of PSUs could lead to strong economic growth in the future. Green shoots are already visible in terms of higher GST collections, GDP data for the December quarter, and auto sales numbers for February.
“The Indian economy may be on the verge of a multi‐year investment cycle similar to the 2003‐11 cycle (led by households and the private sector). Factors such as plentiful and cheap labour, recent labour reforms, low taxation rates for manufacturing and PLI schemes may kickstart the private sector investment cycle,” Kotak Securities said in a note.
“Since near-term valuations are still very much on the higher side it is not wise to expect healthy returns in less than one year. The market could see a consolidation phase in the next few months and eventually start rising as investors start discounting FY23E by the end of the calendar year,” it said.
Sectors to watch
The report added that a few sectors and pockets that can make money for investors — given their past underperformance and potential recovery — are banks, capital goods, construction, engineering, oil & gas, cement, real estate & metals.
Investors can have an accumulation strategy in economy-driven sectors on every decline, and look for stocks and sectors that are available on discount in the mid- and small-cap space compared to their peers in the large-cap space, say experts.
“Mid- and small-cap stocks in general, PSU & SME Banks, a few agri stocks, and select oil & gas stocks are trading at a significant discount to their large-cap peers, which needs attention,” George Heber Joseph, CEO & CIO, ITI Mutual Fund, told Moneycontrol.
“Cyclical stocks re-rating is what we are playing in our funds and the above segments of the market look interesting to bet from the perspective of the next 3-5 years as an economic recovery-led earnings growth impact and valuation re-rating are possible here,” he said.
Historically speaking, small caps and mid caps go through bouts of underperformance for 3-4 years and then a massive outperformance in the following years. Investors are turning towards broader market stocks on earnings visibility.
“Investors are turning towards broader markets due to improved earnings visibility and pockets of valuation gaps. Large caps, on the other hand, have rallied in full swing and the majority of them are currently trading at overbought levels,” Nirali Shah, Head of Equity Research, Samco Securities told Moneycontrol.
“Also, as the Indian economy continues to recover, earnings are expected to grow much faster in small- and mid-caps due to their higher operating leverage,” she added.
Moneycontrol has collated a list of ten stocks across sectors in which various brokerage firms have initiated coverage for the first time since February with a 12-month target:
Aditya Birla Fashion: Buy| Target: Rs 240
Axis Securities initiated coverage on Aditya Birla Fashion (ABFRL) in the first week of March with a buy recommendation and a target price of Rs 240.
ABFRL’s strong growth prospects, and well-accepted apparel brands (under Madura), and value range offerings in Pantaloons will aid in a faster recovery in the post-Covid environment.
Furthermore, expansion of Innerwear and Ethnicwear will support medium to long-term growth. Recent funding infusion through right issues and a strategic investment by Flipkart will lower debt levels and improve liquidity.
Astral Poly Technik: ADD| Target: Rs 2210
HDFC Securities institutional research initiated coverage in February on Astral Poly Technik Ltd (ASTRA) with an ADD rating and a target price of Rs 2,210.
"We like ASTRA for its leadership presence in the CPVC segment and continued traction in the adhesive business. Aided by strong demand outlook in both businesses and ASTRA's new product launches (tanks and valves in plastic pipes, newer chemistries in adhesives), distribution strengthening in adhesives, and focus on asset sweating, ASTRA's revenue/EBITDA/APAT should grow at robust 24/29/35% during FY20-23E (ahead of 24/27/24% CAGR during FY10-20)," said the note.
ASTRA’s superior capital allocation has resulted in strong revenue and earnings growth, as well as high return ratios.
Camlin Fine Sciences: Buy| Target: Rs 155
Axis Securities institutional research initiated coverage in February on Camlin Fine Sciences with a buy rating and a target price of Rs 155.
“We expect CFS to register Revenue/PAT CAGR of 20%/65% over FY20-23E driven by 1) Growth in the blends segment; 2) Increasing demand of vanillin worldwide; 3) Judicious expansion and focus on achieving a worldwide presence; 4) Strategic vertical integration; 5) Step up in innovation/new launches; 6) Healthy margin profile and 7) Improving balance sheet,” said the note.
The stock is trading at a fairly attractive valuation of 10x FY23E EPS and given a promising growth outlook from a medium- to long-term perspective, it offers excellent upside potential.
Axis Securities institutional research initiated coverage in February on ACC with a buy rating and a target price of Rs 2,100.
ACC is one of the oldest and the third-largest cement manufacturer in India, with a capacity of 34.4 million tonnes per annum (MnTPA) and commanding an estimated market share of 9 percent.
Over the years, it has achieved a widespread footprint across India and a strong market presence in key markets. Currently, the company is in the process of expanding its existing grinding capacity from 34.4 MnTPA to 39.2 MnTPA through greenfield and brownfield expansion in Central and East India.
Gland Pharma: Buy| Target Rs 2700
Motilal Oswal initiated coverage on Gland Pharma with a buy rating in February for a target price of Rs 2,700.
Gland Pharma (GLAND) is a comprehensively injectable-focused company, with a wide generics portfolio comprising of
a) own/contract development
b) technology transfer
c) an established manufacturing value chain across the range of delivery systems
d) extensive regulatory capabilities
GLAND is progressing well on building a complex product pipeline, backward integration, and gaining market share in commercialised limited-competition products.
Motilal Oswal expects a 25 percent earnings CAGR over FY20–23. The potential upside in earnings owing to inorganic opportunities funded through cash available on the balance sheet is not captured in our estimate.
Edelweiss Wealth Management Research initiated coverage on CEAT in February with a buy rating for a target price of Rs 2,050.
“We continue to maintain a bullish stance on the tyre industry and continue to like CEAT and maintain it as the best play within the sector. With investments done in both capacity and products in the last 2-3 years, we expect the company is well poised to grab market share,” said the note.
The note added that with volume recovering and new capacities coming on-line, Edelweiss expects a considerable improvement in financials.
KNR Construction BUY | Target: Rs 337 & PNC Infratech: BUY | Target: Rs 241
Emkay Global initiated coverage on KNR Construction & PNC Infratech with a buy rating in February for a target price of Rs 337 and Rs 241, respectively.
The government has come up with an ambitious plan of spending Rs 102 trillion to boost the infrastructure in the country over FY20-25, highlighted through the National Infrastructure Pipeline (NIP).
“We downgrade L&T to a Hold while initiating coverage on KNR Constructions and PNC Infratech with a Buy rating,” it said.
ICICI Securities initiated coverage on Computer Age Management Services in February with a buy rating and a target price of Rs 2,085.
Computer Age Management Services (CAMS) is the leading Mutual Fund Registrar and Transfer Agent (MF RTA) of India (69.2 percent market share as of January 2021). The company is a play on the growth story of the Indian MF industry (~90 percent of CAMS’ 9MFY21 revenues are based on a percentage fee of the AUM of client MFs).
Through strong, longstanding integration with client MFs and widespread distribution infrastructure/technological expertise, CAMS enjoys a strong business moat with healthy financials (5-year average RoE at 32 percent/5-year average dividend payout at 60 percent).
“The earnings growth may remain dependent on the AUM growth while monetisation of new initiatives could be constrained in the medium term,” the brokerage said.
Happiest Minds Technologies: Buy| Target: Rs 480
Nomura initiated coverage of Happiest Minds Technologies in February with a buy rating and a target price of Rs 480.
“We expect Happiest Minds Technologies to record USD revenues CAGR of ~25% over FY21-24F, but build in EPS CAGR lagging at ~17% on EBIT margins falling to 18% by FY24F (vs 22% in FY21F) and the full impact of tax rate starting in FY22F,” the report said.
“We expect Happiest Minds Technologies to trade at a premium as: 1) we think it will continue to grow at ~2x the pace of large-caps and ~1.5x of mid-caps, led by the presence in Digital, 2) we like the stickiness offered by PES and scalability offered by DBS/IMSS; and 3) we factor in its ability to sustain EBIT margins, similar to mid-caps
(despite being 1/10th their size),” it said.
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