In this Samvat, the narrative of the Indian markets is likely to remain robust with key growth levers already in place.
By Yesha Shah
Was it in anyone’s realm of imagination that Samvat 2077 could be the best performing year in over a decade? Last year pre-Diwali, while India was battling the shocks induced by the pandemic, uncertainties regarding the future continued to prevail. Even amid elevated skepticism, Samvat 2077 has been a remarkable year with the benchmark indices hitting milestone after milestone! Now as the pendulum has swung, we step into the New Year with markets being at record high valuations and an economy better equipped to withstand shocks.
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In this Samvat as well, the narrative of the Indian markets is likely to remain robust with key growth levers already in place. The successful privatization of Air India has improved conviction in the disinvestment plans. An accelerated capex cycle, up-cycle in the corporate earnings trajectory and needless to say the China+1 sourcing have been the silver lining of the pandemic and are expected to further augur well for the markets. Having said this, one should be mindful of some immediate chinks in Mr. Market’s armour being the earlier than expected monetary policy tightening, prolonged inflationary pressure.
Albeit these overhangs, we believe that Indian equities are likely to deliver superior returns and will continue to offer plentiful investment opportunities. However, as the markets digest their overstretched valuations, the expected returns for Samvat 2078 may not be as stellar as the year gone by. With the markets expected to temper down, money making will become difficult and the investors will need a sharper eye for stock picking to continue to earn superior returns.
Factoring in all this and with the emerging themes in mind, we present to you our Diwali Picks for Samvat 2078!
Dabur India Ltd
Dabur is the world’s largest Ayurvedic and natural healthcare company. In the last year, Dabur reported an impressive ~15% YoY growth in domestic FMCG sales. It has been a consistent compounder with improving operating margins from ~17% in FY15 to ~21% in FY21 and average 5 year ROE and ROCE of 30% plus. In the wake of the pandemic, the demand for Ayurvedic healthcare products witnessed a surge and Dabur, with its strong lineage, robust R&D capabilities and healthy financial metrics, is a clear beneficiary.
Asian Paints Ltd
Asian Paints, the largest paint company in India, has witnessed industry-beating growth over the last 3 years. Its strength is reflected in its remarkable resilience, with a 5 year sales CAGR of 9.4% even amidst pandemic related disruptions. While the gross margins of the company have taken a hit recently, the company remains confident to maintain its EBITDA margins in the 18-20% range. With the shift in the sector from unorganised to organised players expected to propel its growth, we remain positive on the paint-maker due to its strong portfolio mix coupled with robust distribution channel.
LIC Housing Finance Ltd
India’s second-largest pure play mortgage lender achieved its best-ever operational performance in FY2021 with strong customer retention and a lower cost of funds, despite COVID-related challenges. It also benefits from LIC’s strong brand equity and access to its agency network. The industry is in a sweet spot with historically low interest rates, attractive property prices, robust demand and improving collection efficiency. Considering these tailwinds, despite of strong competition, investors can reap decent returns from this HFC.
Rossari Biotech Ltd.
Rossari Biotech is one of the largest textile specialty chemical maker. With a portfolio of 3,500+ products, the company’s revenue stream is well-diversified. The company is expected to close FY22 with at least a 50% jump in both the topline and bottom-line. The 2 acquisitions announced are expected to extract synergies by catering to a wide customer-base, newer geographies and cross-selling opportunities. With an almost debt-free balance sheet, a healthy financial track record, the company’s growth outlook remains solid.
Computer Age Management Services (CAMS)
CAMS operates in a highly regulated Registrar and Transfer Agent (RTA) industry. It is a market leader with market share of ~70-72% of total Mutual Fund (MF) AUM in a duopoly RTA market. It has a strong and consistent financial track record of compounding sales and profit growth by 8% and 13% respectively and has stellar ROE & ROCE of more than 40% each. Additionally, India has one of the lowest MF penetrations globally with an AUM-GDP ratio of 12% vs world average of 65%, this itself offers long-term growth potential for the overall MF and RTA industry.
Instead of investing in single stocks, investors should invest in the portfolio as a whole as it includes a mix of large and quality mid cap stocks which have the ability to withstand volatility and deliver handsome returns over medium to long term. Markets won’t move up in a stretch and there may be some corrections and breathers in the next Samvat. Such instances should be used by investors to accumulate these quality names and be a beneficiary to the multiyear rally ahead of us!
Wishing you all a very happy and prosperous Diwali and happy investing!
(Yesha Shah is the Head of Equity Research at Samco Securities. Views expressed are the author’s own. Please consult your financial advisor before investing.)