Bharti Airtel, BoB, L&T to offer decent returns by Diwali 2022; key factors to drive stock markets

November 04, 2021 11:46 AM

Markets have rallied 50% since last Diwali and many stocks have zoomed to new all-time highs

stock markets, Nifty, nseThe macro numbers in India have started to show improvement and the international agencies have also lauded India’s resilience and prudence in these trying times. Image: Reuters

By Devarsh Vakil

Last year before Diwali, India was grappling with the aftermath of the first Covid-19 infections wave and there were considerable uncertainties on how the pandemic will impact India and globe. Stock markets had recovered from a steep Covid-19 induced fall and benchmark nifty was pushing near pre-Covid all-time highs levels of 12000 levels. Last year’s Diwali picks were issued in such an uncertain environment.

From those turbulent times to this Diwali, the pendulum has swung the other way. Markets have rallied 50% since last Diwali and many stocks have zoomed to new all-time highs. On a Diwali to Diwali basis, Diwali 2021 will register the highest percent returns since 2008-09 period.

This year, there is palpable excitement in the investor community. Most investors have earned superlative returns on their investments and are looking forward to deploy capital aggressively. We would like to temper their enthusiasm and make them aware of the risks. Many stocks are trading at exorbitant valuations and their current stock prices are factoring in superlative growth and many are at the risk of disappointing heightened earnings growth expectations.

The Indian economy is fine fettle and the pace of growth is strengthening. The government’s tax collections have overshot their own budget expectations and that leaves ample room for the government to pump prime the economy by spending on infrastructure. The government’s spending is likely to generate higher demand for various goods & services as well as direct & indirect employment.

The macro numbers in India have started to show improvement and the international agencies have also lauded India’s resilience and prudence in these trying times. As stock markets discount the future, these positives have been largely discounted in the current valuations. Our call on PSU stocks and Metals stocks made in the last Diwali note turned out to be right.

Shortlisting stocks at these levels is a tricky exercise. Most stocks are discounting a bright future over the next two years. Hence we have to shortlist stocks where we think the street is yet to give full value to the future potential. Sectorally, PSU still has steam left post-Air India decision and some progress on BPCL and SCI divestment. Banks (both PSU and private) could come back in the reckoning. Auto and Capital Goods can also do well after subdued performance over the past few quarters.

We have recommended 5 large caps and 8 midcap stocks as Diwali picks this year. Some of the well-known stocks are Bank of Baroda, Bharti Airtel and L&T. We recommend investors to accumulate these stocks gradually in next few weeks for handsome returns till next Diwali.

Bank of Baroda – Over the years, the Bank has been scaling up its market position to emerge as a major ‘Financial Conglomerate. Most of the concerns arising out of pending write-offs out of restructured/SMA accounts are already in the price.

Bharti Airtel – Over the last 18 months, in the Covid era, Telecom as a sector has undergone an accelerated digital explosion which has resulted in strong penetration of data even in rural and low income segments. Bharti Airtel has completed a Rs 21,000 crore (US$ 2.87bn) rights shares issue to existing shareholders. This will boost its balance sheet to invest in 5G technologies and expand its existing telecom network to compete in the market.

L&T- Larsen & Toubro Limited is a conglomerate with technology, engineering, construction, manufacturing and financial services businesses. An investment cycle is to start taking shape in India, after a long gap. We remain comfortable on L&T, given its (1) strong order book (Rs 3.2 lakh cr), (2) healthy balance sheet, and (3) robust services business.

(Devarsh Vakil, Deputy Head of Retail Research, HDFC Securities. Views expressed are the author’s own.)

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