Renewed investor interest is being witnessed in the equity market, which is evident from the performance of the Nifty and the Mid-Cap Indices since March lows (Nifty up 54% and Mid-Cap Indices up 59%). We have also seen higher retail activity on the exchanges (retail share in the cash segment is around – 65%).
Here’s a stock basket curated by the MOFSL Research Team to help retail investors participate in the market. The key aspects considered for creating this basket are:
1. Strong businesses with visibility of revenue for the next 12 to 24 months.
2. Relatively lower impact of post-Covid on consumer behaviour.
One can also consider building such basket through the SIP route.
1. Tata Consumer (Buy; TP-INR 558)
Tea prices currently stand at INR 234/kg, which is likely to stabilize around INR 170/kg – higher v/s pre-COVID prices. We expect margin expansion to moderate in the near term as high cost tea inventory, which is procured by the company, will be sold in the quarters to come. However, this should aid in driving value growth for the company over longer term. Currently, TCP has two strong legs in the India business – Tata Tea and Tata Salt – wherein TCP is targeting lower double-digit growth, driven by cross-selling between Tata Chemicals and TCP’s distribution channels and also expansion into new geographies. TCP is building its third leg, which should grow in high double-digits – Tata Sampann – dealing in pulses and spices. Thus, growth is expected by grabbing market share from unorganized players with increasing distribution reach. Apart from the above, TCP has launched nutrimixes (Chilla), poha and chutney in the ready-to-cook space, which should aid growth. Over FY20-22E, sales/EBITDA/ PAT are expected at CAGR of 11%/23%/25%.
2. Hindustan Unilever (Buy; TP-INR 2620)
HUVR’s best-of-breed analytics, execution ability and cost-saving plans are key factors driving the pace of earnings growth. Gain in market share (90% of the portfolio) has increased penetration in 70% of the portfolio compared to pre-COVID levels. We remain positive on HUVR from a medium-term perspective encouraged by: (a) robust earnings growth potential beyond the near term owing to its portfolio and execution strengths, and (b) significant synergies in FY22E as a result of GSKCH. These factors suggest premium multiples are likely to sustain. Outlook for the company is gradually improving. The discretionary part of its portfolio (15% of sales) is seeing gradual recovery. In a period of relative normalcy, we believe that HUVR is likely to post superior earnings growth.
3. Hero Motocorp (Buy; TP-INR3,900)
HMCL is in a sweet spot as strong rural-led recovery plays to its strength in the Economy–Executive category in the Motorcycles segment. With an apt product portfolio for the rural market, the highest brand recall, and a strong distribution network, it is best placed to benefit from low penetration and ongoing momentum in the rural economy. HMCL’s competitive positioning has improved in both the 100cc and 125cc categories post BS6. This would enable further recovery in market share in FY21 – signs of recovery are visible YTD. HMCL has just 5% market share in other segments such as Scooters, Premium Motorcycles and Exports, which contribute over 55% to the 2W industry. Learning from its lack of success, it has course-corrected in each of these segments and is returning with renewed strategy. If HMCL turns second-time lucky in either of these segments, it could potentially add another volume driver, in turn supporting the core portfolio. We believe HMCL has multiple re-rating triggers including: 1) the return of volume growth, 2) a possible foothold in Premium Motorcycles, Scooters, and/or Exports, and 3) a speculated GST cut. Unlike the last 5 years, we expect EPS to grow at a 12% CAGR over FY20–23E.
4. ICICI Bank (Buy; TP-INR475)
ICICIBC has the highest PCR of 78.5% among in the banking sector and carries an additional INR 82.8b in COVID provisions. Thus, ICICIBC is well-cushioned with higher provisions on the balance sheet v/s higher delinquencies in these uncertain times. ICICIBC has also been following rigorous underwriting in growing unsecured loans (~9.3% of total loans). The retail loan mix has increased to 64%. This, along with a) one of the strongest deposit franchises among the private banks, b) CASA of 42.5%, and c) lowest funding costs should enable it to underwrite profitable business without undue risk. The recent capital raise has further strengthened its balance sheet and ability to absorb losses. Thus, we estimate RoA/RoE of 1.3%/~12% for FY22. Adjusted for subsidiaries, the standalone bank trades at 1.2x FY22E ABV.
5. Cholamandalam Investment & Finance (Buy; TP-INR300)
Two aspects of CIFC’s Vehicle Finance business stand out v/s most peers: (i) it is well-diversified across product segments and (ii) there is no state-level concentration – the largest state accounts for only 11% of the total portfolio. Recovery in auto demand in 1QFY21 is not only encouraging but also meaningfully ahead of our expectations. In our view, products linked to farm income, such as tractors, are likely to fare better given the strong monsoons and healthy rabi crop harvest. In other segments, while demand would recover gradually, we do not foresee it returning to normal this fiscal. In our view, AUM is likely to grow at a ~10% CAGR over the next two years. On the asset quality front, the true picture should emerge only in 2HFY21 post the lifting of the moratorium. In our view, the company would have to meaningfully step up its provision buffer in 2HFY21.
6. Havells (Buy; TP-INR685)
Havells is among the largest players in the Consumer Electricals and Durables market, with a vast product portfolio. From being a prominent Cables and Wires player, the company has diversified into other products. Havells has a vast distribution network, with over 150,000 retailers and 9,500 direct dealers across the country. The acquisition of Lloyd in FY18 paved the way for the company to enter the lucrative Consumer Durables market in India. Currently, over 90% of Havells’ products are manufactured in-house, providing the company adequate levers for cost control. Our channel check suggests sound recovery in the B2C business, with scope for primary growth higher than secondary growth going into the festive seasons (owing to channel refilling). We forecast FY20–23E revenue/EBITDA/PAT growth of 9%/14%/12%. We maintain a Neutral as we await a better entry point on the stock.
7. Ultratech (Buy; TP-INR5600)
UTCEM has a strong pan-India distribution network and preferred supplier status for key infrastructure projects. This places it in a good position to tap into expected growth in both retail and institutional (non-trade) cement demand in India. The company is ramping up its under-utilized acquired capacities (Binani, Century). On the other hand, it also has a strong pipeline of projects and brownfield expansion potential, which offers visibility on long-term growth. We estimate 13%/27% CAGR in consolidated EBITDA/PAT over FY20–22E, driven by a 5% CAGR in volumes and lower operating/interest costs. The valuation is reasonable at 11.7x FY22E EV/EBITDA. The stock is also trading 30% cheaper v/s peer Shree Cement against the historical average of 10%.
8. Divi’s Laboratories (Buy; TP-INR3,520)
We are positive due to robust demand for DIVI’s products, improving profitability owing to backward integration, and incremental business from new capex. The major capex program would be completed in FY21, and the commercial benefit would start accruing in FY22. This would further enhance the earnings trajectory going forward. We believe DIVI to be well-placed to benefit from (a) renewed growth prospects for generic APIs, (b) its strong relationship with innovators, which is improving the scope of business in CRAMS (Contract Research And Manufacturing Services), supported by strong chemistry skill sets, manufacturing capacity/capabilities, and minimal compliance risk, and (c) capex support to meet the future requirements of customers. We expect a 33% earnings CAGR over FY20–22E, led by increased business prospects from Custom Synthesis and Generics as well as ~600bp margin expansion on better operating leverage.
9. Infosys (Buy; TP-INR1,355)
INFO’s performance during the last few quarters indicates that some of the investments made in the previous years toward re-skilling, re-energizing the salesforce, etc., are now paying off. The deal pipeline remains healthy. We expect margin expansion of ~370bp over FY20–22E. Infosys should be a key beneficiary in terms of recovery in IT spends in FY22. Within the sector, our relative preference for Infosys over TCS is premised on the company’s headroom for margin expansion.
10. Teamlease Services (Buy; TP-INR2,700)
Encouraging rebound in the unemployment situation (as reflected in CMIE data) and the hiring outlook (as reflected in the recent TeamLease hiring outlook survey) corroborate our view. Also, the Upper House of the Parliament has passed the three labor codes, i.e., Industrial Relations, Social Security and Occupational Safety, and Health and Working Conditions. Thus, fixed-term contract-based employment would only see increased demand, driven by the evolving nature of the businesses. These labor reforms should benefit both employers and employees. These laws should accelerate the formalization of the Staffing industry, and drive long-term growth. TeamLease should be among the biggest direct beneficiaries. Stable realizations and aggressive cost rationalization should enable the company to report robust margin expansion in FY21E. We expect a ~31% PAT CAGR over FY20–22E.
(By Siddhartha Khemka, Head – Retail Research, Motilal Oswal Financial Services Ltd)
Disclaimer: These stock recommendations have been made by Motilal Oswal Financial Services. Readers are advised to consult their financial planner before making any investment.