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Motilal Oswal Financial Services betting on these 10 stock for up to 33% return in FY22

ICICI Bank, Britannia Industries, BPCL, Sun Pharma and Mahindra and Mahindra are among the top picks for the next financial year by the Motilal Oswal Financial Services for double-digit returns.

March 27, 2021 / 09:08 AM IST
As we enter FY22, markets are consolidating after having a dream run and touching new highs in FY21. The rally in FY21 was on the back of abundant liquidity, positive developments on the vaccine front and signs of economic recovery. More importantly, improved corporate earnings boosted market sentiments. "We expect Nifty Earnings to grow at high single digit in FY21 while expecting a sharp rebound in FY22," said Motilal Oswal Financial Services. On the domestic side, economy has showed continued trend of revival over past few months. The momentum is expected to continue in FY22 with government’s focus on fiscal expansion and capex spending which is very important for the revival of the long-anticipated private investment cycle. However, rising Covid cases is a near term risk which if results in stricter lockdown once again could impact the economic growth. given the likelihood of some consolidation continuing in the near term, Motilal Oswal would suggest investors to accumulate good quality companies on any declines in the market. Market is witnessing rotation from high PE stocks to cyclical/value plays. This apart – the capex cycle is also expected to pick up in FY22. Thus from next 12 months perspective, apart from being positive on IT, BFSI, Healthcare, Telecom, Auto and Consumer, we also prefer some cyclicals within Metals, Cement, Oil & Gas and PSU space.
As we enter FY22, markets are consolidating after a dream run and touching new highs in FY21. The rally in FY21 was on the back of abundant liquidity, positive developments on the vaccine front and signs of economic recovery. More importantly, improved corporate earnings boosted sentiment. "We expect Nifty earnings to grow at a high single digit in FY21, while expecting a sharp rebound in FY22," said Motilal Oswal Financial Services. On the domestic side, the economy has continued to revive over the past few months. The momentum is expected to continue in FY22 with the government’s focus on fiscal expansion and capex spending, which is very important for the revival of the long-anticipated private investment cycle. However, rising COVID-19 is a near-term risk, which if results in stricter lockdown could impact the growth. Given the likelihood of some consolidation in the near term, Motilal Oswal suggests investors to accumulate good quality companies on any declines. The market is witnessing rotation from high PE stocks to cyclical/value plays. This apart, the capex cycle is also expected to pick up in FY22. Thus from the next 12 months' perspective, apart from being positive on IT, BFSI, healthcare, telecom, auto and consumer, we also prefer some cyclicals within metals, cement, oil & gas and PSU space. (Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.)
Source: Reuters
Mahindra and Mahindra | CMP: Rs 796 | Target Price Rs 1,015 | Upside: 27 percent | Mahindra and Mahindra is one of the best rural proxy plays with one of the highest exposures to the rural markets (around  65% of volumes). The company's core business is into three buckets—tractors, pickup UVs and passenger UVs. Tractors and pickup UVs are on a strong footing in terms of outlook. Furthermore, it has guided for an almost 90% reduction in international subsidiary losses in FY22E, driven by the completion of phase-1 of the capital allocation exercise. M&M has twin levers of core business recovery as well as benefits of tightening capital allocation for EPS growth and re-rating. Maintain Buy.
ICICI Bank | CMP: Rs 579 | Target Price Rs 700 | Upside: percent | Bank reported a strong 3QFY21, led by robust operating performance, while strong asset quality trends enabled decline in provisioning expenses. Loan growth is showing a strong revival in both Wholesale and Retail, with disbursement in many business segments surpassing pre-COVID levels. Asset quality remains under control. Provision coverage remains best in the industry and the bank holds additional unutilized COVID provisions of Rs 64.7 billion. Liability franchise continues to improve with cost of deposits declining to 4%, while the Balance Sheet remains fairly liquid and thus conducive for growth. We expect RoA/RoE to improve to 1.8%/15.2% for FY23E. Maintain Buy.
ICICI Bank | CMP: Rs 580 | Target Price Rs 700 | Upside: 21 percent | The bank reported a strong 3QFY21, led by robust operating performance, while strong asset quality trends enabled a decline in provisioning expenses. Loan growth is showing a strong revival in both wholesale and retail, with disbursement in many business segments surpassing pre-COVID levels. Asset quality remains under control. Provision coverage remains best in the industry and the bank holds additional unutilised COVID provisions of Rs 64.7 billion. Liability franchise continues to improve with the cost of deposits declining to 4%, while the balance sheet remains fairly liquid and thus conducive for growth. We expect RoA/RoE to improve to 1.8%/15.2% for FY23E. Maintain Buy.
SBI | CMP: Rs 372 | Target Price Rs 475 | Upside: percent | Among PSU banks, SBIN remains the best play on a gradual recovery in the Indian economy, with a healthy PCR of 75% (68% on a pro forma basis), Tier I capital of ~ 11.7%, a strong liability franchise, and improved core operating profitability. Bank reported robust operating performance in a challenging environment. Loan growth is showing healthy recovery in retail portfolio, with disbursements in many business segments surpassing pre-COVID levels. Deposit growth stood strong, while margin remains broadly stable. Asset quality outlook remains encouraging, with controlled slippages, low restructuring levels. The bank is well on track to keep credit cost under control, while recoveries from resolution of large accounts can further support earnings. We project RoA/RoE of 0.8%/14.5% by FY23E. Maintain Buy.
SBI | CMP: Rs 358 | Target Price Rs 475 | Upside: 33 percent | Among PSU banks, SBI remains the best play on a gradual recovery in the Indian economy, with a healthy PCR of 75% (68% on a pro forma basis), Tier I capital of  round 11.7%, a strong liability franchise, and improved core operating profitability. The bank reported robust operating performance in a challenging environment. Loan growth is showing healthy recovery in the retail portfolio, with disbursements in many business segments surpassing pre-COVID levels. Deposit growth stood strong, while margin remains broadly stable. Asset quality outlook remains encouraging, with controlled slippages, low restructuring levels. The bank is well on track to keep credit costs under control, while recoveries from the resolution of large accounts can further support earnings. We project RoA/RoE of 0.8%/14.5% by FY23E. Maintain Buy.
L&T | CMP: Rs 1,401 | Target Price Rs 1,625 | Upside: percent | L&T has rightly prioritized Balance Sheet strength over growth during the COVID-19 crisis. All-time high order book (3QFY21: +8%; FY21E: +16%), with OB-to-revenue ratio of 3.7x, provides strong revenue visibility. Order inflows remained robust with 76% YoY growth during 3QFY21, thanks to large orders like the High Speed Rail. We expect L&T to witness core E&C revenue/EBITDA/adjusted PAT CAGR of 16%/14%/17% over FY21-23E. The outlook looks quite encouraging, with likely FY21E exit at a record high order book, robust Balance Sheet, improving government financials, and impetus on Infrastructure development as a tool to lift long-term economic growth in India. Maintain Buy.
Larsen and Toubro | CMP: Rs 1,398 | Target Price Rs 1,625 | Upside: 16 percent | Larsen and Toubro has rightly prioritised balance Sheet strength over growth during the COVID-19 crisis. All-time high order book (3QFY21: +8%; FY21E: +16%), with OB-to-revenue ratio of 3.7x, provides strong revenue visibility. Order inflows remained robust with 76% YoY growth during 3QFY21, thanks to large orders like the high-speed rail. We expect L&T to witness core E&C revenue/EBITDA/adjusted PAT CAGR of 16%/14%/17% over FY21-23E. The outlook looks quite encouraging, with likely FY21E exit at a record high order book, robust balance sheet, improving government financials, and impetus to infrastructure development as a tool to lift long-term economic growth in India. Maintain Buy.
ACC | CMP: Rs 1,876 | Target Price Rs 2100 | Upside: percent | ACC is going ahead with its announced Central India expansion, with guided commissioning of Jun’22, which offers volume growth visibility beyond CY22. We expect costs to stay under control, supported by a master supply agreement with Ambuja as well as supply chain efficiencies. ACC trades at a 35–60% valuation discount to peers Shree, UltraTech, and Ramco. We believe such a large discount is excessive as: (a) ACC has arrested its market share losses since CY17, (b) cost is expected to stay under control, aided by savings in logistic costs, and (c) with planned expansions, the proportion of inefficient assets would decline, improving profitability. Maintain Buy.
ACC | CMP: Rs 1,861 | Target Price Rs 2100 | Upside: 13 percent | ACC is going ahead with its announced Central India expansion, with guided commissioning of June '22, which offers volume growth visibility beyond CY22. We expect costs to stay under control, supported by a master supply agreement with Ambuja as well as supply chain efficiencies. ACC trades at a 35–60% valuation discount to peers Shree, UltraTech, and Ramco. We believe such a large discount is excessive as: (a) ACC has arrested its market share losses since CY17, (b) cost is expected to stay under control, aided by savings in logistic costs, and (c) with planned expansions, the proportion of inefficient assets would decline, improving profitability. Maintain Buy.
Britannia Industries | CMP: Rs 3,568 | Target Price Rs 4,120 | Upside: percent | The management’s efforts in the last few years on a) expanding distribution, b) boosting R&D capabilities, c) successful implementation of its low unit packs strategy, d) consistent cost rationalization, e) investments in boosting overall and regional manufacturing capabilities and f) its new regional strategy is resulting in consistently widening moats over peers in Biscuits as well as in the broader Food category. Immense structural opportunity, remarkable track record, RoEs of over 40% superior to most consumer peers, and an attractive risk reward ratio on FY23E earnings, leads us to be positive on Britannia. Maintain Buy.
Britannia Industries | CMP: Rs 3,505 | Target Price Rs 4,120 | Upside: 17 percent | The management’s efforts in the last few years to a) expand distribution, b) boost R&D capabilities, c) successfully implement its low unit packs strategy, d) consistent cost rationalization, e) investment in boosting overall and regional manufacturing capabilities and f) its new regional strategy is resulting in consistently widening moats over peers in biscuits as well as in the broader food category. Immense structural opportunity, remarkable track record, RoEs of over 40 percent superior to most consumer peers, and an attractive risk-reward ratio on FY23E earnings, leads us to be positive on Britannia. Maintain Buy.
Sun Pharma | CMP: Rs 586 | Target Price Rs 740 | Upside: percent | Sun Pharma delivered higher-than-expected profitability on: a) better traction in Specialty portfolio/US Generics, and b) extended benefit of lower opex. The company filed 10 ANDAs and received 15 approvals in 9MFY21. Its ANDA pipeline remains robust, with 90 approvals pending. We believe company’s RoE is at a trough and would improve with 22% earnings CAGR, led by 9%/7%/10% sales CAGR in DF/US/RoW and 340bp margin expansion over FY20-23E. We are positive on Sun Pharma due to: a) continued benefit of lower opex in the Branded segment, b) further ramp-up in the Specialty portfolio, c) strong ANDA pipeline and d) market share gain in the US Generics segment. Maintain Buy.
Sun Pharma | CMP: Rs 586 | Target Price Rs 740 | Upside: 26 percent | Sun Pharma delivered higher-than-expected profitability on: a) better traction in specialty portfolio/US generics, and b) extended benefit of lower opex. The company filed 10 ANDAs and received 15 approvals in 9MFY21. Its ANDA pipeline remains robust, with 90 approvals pending. We believe the company’s RoE is at a trough and would improve with 22% earnings CAGR, led by 9%/7%/10% sales CAGR in DF/US/RoW and 340bp margin expansion over FY20-23E. We are positive on Sun Pharma due to: a) continued benefit of lower opex in the branded segment, b) further ramp-up in the specialty portfolio, c) strong ANDA pipeline and d) market share gain in the US Generics segment. Maintain Buy.
Infosys | CMP: Rs 1,374 | Target Price Rs 1600 | Upside: percent | Infosys should be a key beneficiary of a recovery in IT spends in FY22, given its capabilities around Cloud and Digital transformation. Leading operational performance in 9MFY21 and strong deal wins should translate into strong outperformance in EPS growth (v/s the sector). Company reported deal wins of USD 7.13 billion in Q3, the highest ever in its and the Indian IT industry’s history. Of these, 73% were net new deals. Going forward, growth should accrue from next generation services like Data, Cloud, and Security. The deal pipeline is also extremely robust. Maintain Buy.
Infosys | CMP: Rs 1,338 | Target Price Rs 1,600 | Upside: 19 percent | Infosys should be a key beneficiary of a recovery in IT spends in FY22, given its capabilities around cloud and digital transformation. Leading operational performance in 9MFY21 and strong deal wins should translate into strong outperformance in EPS growth (v/s the sector). The company reported deal wins of $ 7.13 billion in Q3, the highest ever in its and the Indian IT industry’s history. Of these, 73% were net new deals. Going forward, growth should accrue from next-generation services like data, cloud, and security. The deal pipeline is also extremely robust. Maintain Buy.
Representative image (Image: Reuters)
BPCL | CMP: RS 425 | Target Price Rs 520 | Upside: 22 percent | BPCL posted better-than-expected profitability driven by better than expected marketing margin. On privatisation, further advice from DIPAM is awaited. The company is ready with its preliminary assessment. Retail auto fuel prices in India are at a record high. Gross marketing margins are at Rs 3-4/liter v/s Rs 4.5-5/liter in 3QFY21. BPCL’s board has approved the divestment of its entire 61.65% stake in Numaligarh Refinery (NRL) for Rs 98.76 billion to a consortium of Oil India, Engineers India and the government of Assam (which has the first right of refusal). Oil India/ Government of Assam hold 26%/12.35% stake. Maintain Buy.
Tata Power | CMP: Rs 105 | Target Price Rs 123 | Upside: percent | The improvement in company's 3QFY21 earnings was led by interest cost reduction and profitability in its Odisha distribution business. Divestment-related measures and infusion of Rs 26 billion from the promoter has aided debt reduction. The EPC business is recovering and is expected to pick-up, led by the healthy order book at Tata Power Solar. Possible benefits from the merger of CGPL and Tata Power Solar with itself and favorable InvIT valuations provide scope for further upside. We maintain a buy on Tata Power taking into account: a) the recent takeover of Odisha DISCOMs, b) higher EPC profitability, c) benefits from the merger of CGPL and Tata Power Solar with itself, and d) higher valuations for the renewable business.
Tata Power | CMP: Rs 103 | Target Price Rs 123 | Upside: 19 percent | The improvement in the company's 3QFY21 earnings was led by interest cost reduction and profitability in its Odisha distribution business. Divestment-related measures and infusion of Rs 26 billion from the promoter have aided debt reduction. The EPC business is recovering and is expected to pick-up, led by the healthy order book at Tata Power Solar. Possible benefits from the merger of CGPL and Tata Power Solar and favourable InvIT valuations provide scope for further upside. We maintain a buy on Tata Power taking into account: a) the recent takeover of Odisha DISCOMs, b) higher EPC profitability, c) benefits from the merger of CGPL and Tata Power Solar with itself, and d) higher valuations for the renewable business.
Rakesh Patil
first published: Mar 27, 2021 09:08 am

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