Jyoti Roy
While the initial phase of the rally from the March lows was led by the Federal Reserve induced liquidity, the second phase from July was driven by improvement in the global economy. The Indian economy also continued to improve in August, which was reflected in the high-frequency data like auto sales and PMI numbers.
Auto companies reported another month of strong sequential growth, with Maruti Suzuki reporting a 17.1 percent YoY increase domestic sales in August as compared to a 1.1 percent growth in July while Hero Motocorp reported a 6.5 percent YoY growth in motorcycle sales. The manufacturing PMI for August also pointed to continued improvement as it went up to 52.0 from 46.0 in the previous month.
After Unlock 1.0 in June, there had been a significant improvement in economic activities from May till the third week of July. However, localised lockdowns saw growth taper off growth from the last week of July. Due to lockdowns in April and May, there is pent-up demand, which along with inventory buildup prior to the festival season and further opening up of the economy under Unlock 4.0, should lead to an improvement in economic activities.
We expect the rural, essential and digital theme to continue playing out over the next few quarters, given the revenue visibility and strong growth prospects.
We, therefore, continue to maintain our positive outlook on sectors like agrochemicals, IT, telecom, two-wheelers and tractors. However, we also expect the recovery theme to gather strength in the near future due to continued improvement in the economy. Within the recovery theme, we believe that sectors like low-ticket consumer durables, cement, hotels and multiplexes should do well.
Key risks that can derail the recovery rally are a surge in infections, a delay in vaccine production as compared to markets' expected timeline and a higher-than-expected drop in the growth after the festival season.
Here is the list of 10 stocks that can return up to 31 percent in the next one year:
Endurance Technologies: Buy | Target: Rs 1,316 | Return: 22 percent
Endurance Technologies is one of India’s leading automotive component manufacturers with operations in India and Europe. It mainly caters to two and three-wheeler original equipment manufacturers (OEMs) in India and supplies aluminum casting products to four-wheeler OEMs in Europe.
Post COVID-19, evolving consumer preference for lower-ticket priced means of private transport amid pressurised incomes and awareness around social-distancing are expected to act as tailwinds for domestic two-wheeler in India and four-wheeler across developed nations. We believe that Endurance Technologies will be one of the key beneficiaries of the pickup in demand in two-wheelers in India, given that it is a key supplier of components to two-wheeler companies in India.
Swaraj Engines: Buy | Target: Rs 1,892 | Return: 12.5 percent
Swaraj Engines is engaged in the business of manufacturing diesel engines and hi-tech engine components. Diesel Engines manufactured by the company are specifically designed for tractors, with the company being the key supplier of tractor engines to M&M, which reported a strong growth of 27 percent YoY in its tractor division in July 2020.
We expect strong demand for tractors due to robust rabi crop production, hike in MSP and a normal monsoon, which will be beneficial for Swaraj Engines. At current levels, Swaraj Engines is available at a significant discount to historical valuations.
Hawkins Cooker: Buy | Target: Rs 5,556 | Return: 13.4 percent
Hawkins Cookers Ltd (HCL) operates in two segments—pressure cookers and cookware. Over the last two years, the company has outperformed market leader TTK Prestige in sales growth around 13 percent versus around 4 percent in cookers and cookware segment.
Cooking gas (LPG) penetration has increased from 56 percent in FY2014 to 80 percent in FY2019, which would drive higher growth for cookers and cookware. We expect HCL to report healthy topline and bottomline growth on the back of government initiatives, new product launches, strong brand name and a wide distribution network.
Ideas For Profit | What makes Hawkins Cookers a differentiated rural consumer play
Reliance Industries: Buy | Target: Rs 2,366 | Return: 12.3 percent
RIL has built up a dominant presence in refining, petrochemicals, telecom and retail businesses. Jio Platforms, which houses its telecom business, has attracted investments from marquee investors like Facebook, Silver Lake Partners, General Atlantic, KKR, etc. of Rs 1.52 lakh crore.
Investments by such marquee names in Jio Platforms has not only helped the company to become debt-free but also reaffirmed our confidence in the management's ability to transform the company from a brick and mortar to a digital play. Potential listing of the digital and retail business over the next three-five years would also lead to significant value unlocking for shareholders in the long run.
Metropolis Healthcare: Buy | Target: Rs 2,156 | Return: 20.6 percent
The company has posted a better than expected set of numbers for Q1FY21 while management has guided for further improvement in business for Q2. While non-COVID revenues are back to above 80 percent of pre-COVID levels, revenues from coronavirus-related tests will more than make up for any shortfall in revenues during Q2.
With further opening up of the economy, we expect non-COVID revenues to reach pre-COVID level in Q3FY21. We are positive on the company given expected long-term growth rates of around 15 percent CAGR, stable margins profile and moderating competitive intensity due to consolidation in the industry.
Hero Motocorp: Buy | Target: Rs 3,422 | Return: 19.5 percent
Hero Moto Corp is India’s leading motorcycle manufacturer with a market share of 54 percent. In FY2020 the company kept its market share intact. Entry-level motorcycles in rural India are posting a faster rebound in sales post COVID-19, given good monsoon and shift from public transport to personal vehicles.
Hero Motocorp continued to out-perform in the two-wheeler space and reported a 6.5 percent YoY growth in motorcycle sales for August 2020, with sales volumes recovering to pre-COVID level. Hero Motocorp remains one of our top picks in the two-wheeler space on the back of strong demand from rural India and market share gains.
Persistent Systems: Buy | Target: Rs 1,276 | Return: 28.6 percent
Persistent Systems is one of the leading service providers to independent service vendors (ISV). The company has a very strong presence in hi-tech, manufacturing and life science segments, which were among the least impacted due to COVID-19.
The company posted a very strong set of numbers for Q1FY21, with a dollar revenue growth of 3.1 percent QoQ. The services business grew by 1.8 percent to $108.2 million. The company has also reported ab improvement in margins due to tight cost control.
Persistent won a large deal during the quarter that will ramp up over the next few quarters. We expect the company to post strong revenue and profit growth between FY20-FY22 given the negligible impact of Covid-19 on FY21 numbers, strong deal wins and a ramp-up of projects along with margin expansion.
Radico Khaitan: Buy | Target: Rs 514 | Return: 31.1 percent
Radico Khaitan Ltd (RKL) is a leading manufacturer of Indian-made foreign liquor (IMFL). It has a strong pan-India presence with growing sales in the premium brands like Magic Moments Vodka and 8PM Premium Black Whisky.
During FY2020, RKL has outperformed the IMFL industry by 12 percent growth and we expect the company to continue to outperform. Over the last five years, RKL has increased premium product volume mix (high margin business) from 24 percent to 29 percent and this trend is expected to continue.
The company has a healthy balance sheet along with free cash flow and higher profitability and is trading at a discount to peers and offers value at current levels.
JK Lakshmi Cement: Buy | Target: Rs 328 | Return: 28.4 percent
Promoted by the Singhania group, JK Lakshmi is a cement company with a capacity of 13.3 million tonne, predominantly based out north India, the most favored region for the industry given the better demand-supply dynamics.
The company also posted a good set of numbers for Q1FY21 due to favourable regional presence. Despite the sharp fall in volumes, cement companies were able to maintain their margins due to lower power and fuel costs, which is expected to continue due to continued low crude prices.
JK Lakshmi is our top pick in the midcap cement space given that it is trading at a significant discount compared to historical averages and peer group.
HCL Technologies: Buy | Target: Rs 793 | Return: 9.4 percent
HCL Technologies is among the top four IT services company based in India and provides a gamut of services like ADM, enterprise solutions, infrastructure management services, etc.
HCL Tech also posted better-than-expected numbers for Q1FY21 as revenues were in line with street estimates, though margins and profits came in above estimates due to cost control by the company.
Management commentary was also strong, saying that the deal pipeline had improved significantly since March led by cloud-related services. The management guidance of 1.5-2.5 percent QoQ growth in revenue in constant currency terms for the rest of the year also provides comfort.
At the current price, the stock is trading at a significant discount to the other largecap IT companies like Infosys and TCS and offers value at current levels given market leader status in Infrastructure management.
(The author is DVP-Equity Strategist at Angel Broking.)
Disclosure: Reliance Industries Ltd is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments Ltd which publishes Moneycontrol.
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