Given the likelihood of high volatility continuing in the market for some time, investors would do well by accumulating good-quality companies on declines in the market.
While the long-term structure of the market continues to remain positive, it may face some hurdles in the near term due to concerns over the bond yields, commodity prices and risk of increase in inflation.
Equity markets posted strong gains in Feb 2021 driven by a pro-growth and capex-driven Budget, positive global cues, US stimulus and rebound in GDP data. There was some selling in the latter part of the month due to rising global bond yield, commodity prices (including crude) and rising coronavirus cases in India.
Overall, Nifty gained 6.6% MoM in Feb’21, crossing the 15k mark for the first time. The broader market continued to outperform with Nifty Midcap 100 / Smallcap 100 indices up 11.3% / 12.2%, respectively.
FII inflows were robust at Rs 21,960 crore (including primary market activity). DII net sold Rs 11,970 crore sharply down from Rs 37,300 crore in Dec’20 and Rs 48,340 crore in Nov’20.
The Indian economy came out of a technical recession in 3QFY21 with Real GDP growing 0.4% YoY, up sharply from -24.4% in Q1 and -7.3% in Q2. Festive season demand, coupled with the reopening of the economy, facilitated this recovery. Even the PMI Services data expanded for the fifth straight month while the manufacturing PMI data was stable. The GST collections too crossed the Rs 1 lakh crore mark for the fifth month in a row in February. However, global 10-year bond yields have risen sharply in Feb’21 on the back of rise in inflation expectations. Bond yields in India too are up around 33bps in the month of February. This has led to huge volatility in the market.
The government’s focus on fiscal expansion and capex spending augurs well for the revival of the long-anticipated private investment cycle. Nifty is witnessing rotation from high PE stocks to cyclical/value plays in Feb’21. Metals, Cement, Oil & Gas, PSUs outperformed Consumer, Private Financials in the Nifty. Metals may be best positioned for global reflationary rally and rise in bond yields. PSUs outperformed in month of Feb’21 and saw big gains post Union Budget announcement on privatization.
While the long-term structure of the market continues to remain positive, it may face some hurdles in the near term due to concerns over the bond yields, commodity prices and risk of increase in inflation. Even Nifty valuation at ~21x FY22 EPS is not inexpensive and demands consistent delivery of earnings. Rising bond yields may cap equity valuations as the RBI may have to do a fine balancing act to keep bond yields at lower levels while managing the government’s borrowing program. Thus, given the likelihood of high volatility continuing in the market for some time, investors would do well by accumulating good quality companies on declines in the market.
1. ICICI Bank, CMP-625 TP-700
ICICIBC 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 INR64.7b. 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.
2. Infosys, CMP-1346 TP-1600
INFO 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).
We upgrade our FY21E/FY22E/FY23E EPS estimate by 1%/3%/7% as we adjust our revenue and EBIT margin trajectory to incorporate a strong deal environment.
Based our revised estimates, the stock is currently trading at 21x FY23E EPS. Reiterate Buy.
3. ACC, CMP-1828 TP-2100
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.
4. L&T, CMP-1508 TP-1625
L&T’s consolidated adjusted. PAT grew 5% YoY to INR22.6b, 42% above our expectation. Order inflows remained robust with 76% YoY growth during 3QFY21, thanks to large orders like the High Speed Rail.
Strong order inflows make up for minor miss on core E&C performance. L&T has rightly prioritized Balance Sheet strength over growth during the current COVID-19 crisis.
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.
5. Tata Consumer Products, CMP-612 TP-680
TCP has two strong legs in the India business – Tata Tea and Tata Salt – by which it is targeting lower double-digit growth, driven by cross-selling between Tata Chemicals and TCP’s distribution channels and expansion into new geographies.
TCP is building its third leg – Tata Sampann, which should grow in high double digits and deals in Pulses and Spices.
6. SBI, CMP-388 TP-475
SBIN 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. SBIN has prudently improved PCR (~68% of pro forma coverage).
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.
7. Voltas, CMP-1041 TP-1125
Voltas’s 3QFY21 earnings were 31% better than our expectation, led by better than-expected execution in the EMP segment, strong volume growth in the UCP segment, with ongoing cost rationalization leading to higher margin.
It has retained its numero uno position in Inverter Air Conditioners/Room Air Conditioners (RAC) with a market share of 21.8%/26% in Dec’20. Valuations are expected to remain elevated going into the summer season, with high expectations as well as likely announcement of a detailed PLI scheme for the AC industry.
We increase our FY21E/FY22E/FY23E EPS estimate by 5%/11%/15% owing to the strong performance in 3QFY21.
8. IOC, CMP-101 TP-142
IOCL is likely to benefit from the petchem spread which is currently at multi-year highs.
Among the OMCs, we reiterate IOCL as our top pick, on the back of a diversified EBITDA mix (Marketing: 43%, Refining: 23%, others: 34% in FY19) – with the best free cash flow generation profile going forward.
Better marketing and petchem margins, along with lower refining opex resulted in a beat on EBITDA. Maintain BUY.
9. Sun Pharma, CMP-613 TP-740
SUN Pharma delivered higher-than-expected profitability on: a) better traction in Specialty portfolio/US Generics, and b) extended benefit of lower opex.
We raise our FY21E/FY22E/FY23E earnings estimate by 9%/7%/7%, factoring in: a) gains from marketing in the Specialty portfolio, b) market share gain/utilizing shortage opportunities in US Generics, and c) controlled operational cost due to uncertainties related to COVID-19.
We remain positive due to: a) superior execution in the Specialty portfolio, b) strong ANDA pipeline, and c) outperformance in the Branded Generics segment. Maintain Buy.
10. M&M, CMP-852 TP-1040
Mahindra & Mahindra’s 3QFY21 performance was driven by good performance in both the Tractors and Autos businesses.
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.
MM has twin levers of core business recovery as well as benefits of tightening capital allocation for EPS growth and re-rating.
We upgrade FY21/FY22E EPS by 14%/20% to reflect volume upgrade in Tractors & Autos, tighter cost control, lower depreciation, and higher other income. Maintain Buy.