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Published on 17/07/2021 6:07:51 PM | Source: Axis Securities Ltd

Top Picks and Sectoral Outlook By Axis Securities Ltd

Posted in Market Outlook| #Market Outlook #Axis Securities Ltd

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Q1FY22 Earnings Commentary Critical; Long-Term Constructive Trends Remain Intact

Axis Top Picks basket has delivered an excellent 82% return since its introduction in May’20 (3% in Jun’21), beating the NIFTY return of 1%. While NIFTY returns stayed limited, the broader market continued to outperform the benchmark, indicating significant market strength. Macroeconomic newsflow was mixed with inflation rising ahead of estimates. COVID-19 cases have continued to decline at a healthy rate and the vaccination drive has taken off. Meanwhile, new COVID-19 variants such as Delta plus continue to pose threats to the economic recovery which has already been hampered by lockdowns. The hospitality sector has been one of the most impacted sectors and it is witnessing a significant number of closures. Sectors such as IT, Telecom, Pharmaceuticals, FMCG, and Commodities as well as the rural segment have not been much impacted by the lockdowns. However, the impact of new lockdown measures on the BFSI sector will be critical and management commentary after the Q1FY22 results will be most crucial. The market continues to see a robust performance from the Small and Mid Cap stocks as these indices once again delivered a healthy performance during the month. We add a recently initiated coverage stock Orient Cement to the list of our top picks while booking profits in ACC which has delivered healthy double-digit returns. We also book profit in PI industries which has delivered excellent returns during the month and add Ashok Leyland as a ‘recovery play’ in the CV cycle. Our top themes are as follows:

Q1FY22 earnings commentary to be critical: Q1FY22 earnings are very likely to be a mixed bag. Post-strong Q4FY21 earnings, the consensus further upgraded its earnings estimate (~5%) with significant upgrades coming in the Metals & Mining sector. Interestingly, even after the imposition of lockdowns in Q1FY22, earnings for the BFSI sector have seen marginal upgrades in the last two months. The BFSI sector is seeing a good number of upgrades in its corporate book because of rising commodity prices but the Retail, SME, and MSME sectors are experiencing intense pressure on account of lockdowns. We believe the lockdown challenges are more likely to manifest into lower credit offtake instead of a serious increase in the NPAs. However, consensus expectations continue to remain high and some disappointments are likely. Management commentary stands critical. We continue to maintain our BFSI picks in our top picks unchanged. IT and Pharma will be critical sectors to focus on as they were unaffected by the lockdowns.

The Pharma sector has seen strong tailwinds, both in the domestic as well as in the international space, and is more likely to outperform in the near term. FMCG margins will be critical as the sector faced input cost pressures and the impact of price hikes is yet to be seen. Commentary on the volume growth in discretionary consumption will be very important.

Volatility continues to reduce, indicating continuance of strong bull market: While the markets seemed volatile on a few occasions during the month, the spook index (India VIX) continued to trend downwards. India VIX has trended down to 14 now, which is significantly lower than the long-term average of 22. Lower VIX is a significant positive for the Small and Mid Cap stocks which continued to deliver strong returns during the month. We believe VIX may go up during the Q1FY22 results but do not expect a meaningful rise in the index, which means a sharp market correction is unlikely.

Mid Cap, Small Cap, and Large Cap Value to remain key allocation themes: Our market themes remain unchanged as these continue to deliver strong returns. In the last month, Small and Mid Cap indices delivered 6% and 4% returns, respectively. Value investment style outperformed the Growth and Quality investment style by a significant margin while beating the Large Cap NIFTY index by a healthy margin as well. We believe these themes will continue to deliver strong returns over the medium term and recommend allocation in these strategies.

Raise December NIFTY target to 17400: In our COVID 2.0 note, we had cut our NIFTY earnings by 6% and subsequently our NIFTY target by 6%. However, post Q4FY21 results and significant upgrades across the sectors, our estimates have also seen upgrades by 8%. This is primarily driven by upgrades in the Metals & Mining sector which has seen robust results and high metal prices. Consequently, our Dec’21 NIFTY target has also been upgraded to 17400 (22x FY23E earning) as we maintain our target multiple. Overall, we remain constructive on the market and believe that the dips should be utilized to build positions in the above-mentioned themes.

 

Based on the above themes, we recommend the following stocks:

ICICI Bank, SBI, Federal Bank, Equitas Small Finance Bank, Varun Beverages, Camlin Fine Sciences, Mold-Tek Packaging, Amber Enterprises India, Minda Corporation, Steel Strips Wheels, Lupin, Tech Mahindra, Bharti Airtel, HCL Technologies, Orient Cement, Ashok Leyland

Axis Securities Top Picks

 

Sector Outlook

Automobiles

Current View - Equal Weight

Outlook :- While the Indian automobile sector has seen a significant improvement in demand and most categories are seeing good traction, the current lockdowns are expected to have an unfavorable impact on the demand scenario. Moreover, the rising input costs are wreaking havoc in the Auto companies with leading companies such as Maruti reporting margin disappointment. Auto companies do expect demand revival and many companies offer decent upside from the current levels. However, the sector remains a mixed bag for now as lower-than-expected volume may result in weaker-than-expected margins. We downgrade the sector to Equal Weight from Over Weight.

 

Banking and Financial services

Current View - Equal Weight

Outlook :- The BFSI outperformed the broader market from November to February as the COVID-19 challenges were less significant than anticipated and banks were better prepared. However, the re-imposition of lockdowns will have an impact on the banks. Even as Axis Bank and ICICI bank reported a good set of numbers, the economic challenges cannot be wished away and the banks will bear the brunt of the challenges. The pick-up in credit demand as the economy gradually recovery remains to be seen. We downgrade the sector to Equal Weight and remain watchful on the developments in the sector.

 

Capital Goods

Current View - Equal Weight

Outlook :- The sector attained normalcy at the end of FY21 with Q4FY21 being supported by a rise in the Gross Fixed Capital Formation. The government’s Capex cycle continues to be robust while house registrations in the metro cities continue to witness strong traction. It is only a matter of time that the private Capex cycle will pick up which will aid the capital goods sector. We upgrade our stance on the capital goods sector to Equal Weight from the prior Underweight stance.

 

Cement

Current View - Equal Weight

Outlook :- The cement sector has had pricing power in Q4FY21 and managed to withstand tough times. We maintain our stance to Equal Weight as we foresee better pricing scenario evolving, moving ahead. Demand scenario is also picking up in the number of regions which has been a positive surprise. Overall, we find the cement sector has been able to cope better than expected. Hence, we maintain our outlook.

 

Consumer staples

Current View - Equal Weight

Outlook :- The consumer staples sector witnessed a good demand recovery and posted solid top-line growth in Q4FY21. However, gross margin pressure was clearly visible due to RM headwinds. While the sector has strong earnings visibility and best-in-class return ratios, the expensiveness versus other sectors limits the upside as earnings visibility will improve across the board. We maintain the FMCG sector to Equal Weight.

 

Consumer Discretionary

Current View - Equal Weight

Outlook :- While the consumer discretionary space is witnessing a strong revival and many categories are normalizing, the current lockdowns are posing a serious challenge to the recovery. However, with recovery in the COVID-19 trajectory, the outlook of the sector is improving. We continue with the Equal Weight stance and remain watchful on the development in this space.

 

Information Technology

Current View - Equal Weight

Outlook :- Large IT companies continued with a growth momentum in Q4FY21 led by strong deal closures and the in-line performance on the margins front. The sector is in a re-rating cycle and this trend is likely to persist over the medium term. The information technology space is marked by companies having strong balance sheets and play on the current trend of digitization. Even at current levels, the IT sector valuations are reasonable. Thus, we recommend an Overweight stance on the sector.

 

Metals and Mining

Current View - Equal Weight

Outlook :- The Metals & Mining sector has seen a significant pricing uptrend with an improvement in the global scenario. This trend is likely to persist in the medium term and Metal stocks are likely to perform well. We upgrade the sector to Over Weight.

 

Oil and Gas

Current View - Equal Weight

Outlook :- Oil marketing companies benefited from the inventory gain and better GRMs in Q4FY21. OMCs delivered better performance overall. The sector’s bottom line is likely to stay stable on account of higher crude prices and the likelihood of high refining margins due to improved balance on supply and demand. Upstream companies may surprise positively in the scenario of higher-than-expected crude prices. We upgrade the sector from Underweight to Equal Weight.

 

Pharmaceuticals

Current View - Equal Weight

Outlook :- Q4FY21 results were a mixed bag with a not-so-encouraging performance from the US business. Margins were strong but a large portion is factored in into the market prices. For the domestic formulation companies, cost-saving measures were the biggest driver in their Q4FY21 performance. We believe moderate recovery is likely to continue in domestic Pharma revenues while significant improvement in operating metrics is needed for further re-rating. We foresee risks to this and continue with an Equal Weight stance on the sector.

 

Real Estate

Current View - Equal Weight

Outlook :- The real estate sector is witnessing record registrations in the metro cities. Demand has picked up as real estate prices are low and interest rates are very attractive. The sector is likely to see more traction in 2021 and hence we upgrade real estate to an Equal Weight stance.

 

Specialty Chemicals

Current View - Equal Weight

Outlook :- The specialty chemicals sector has been one of the sunrise sectors of the country. India has been gaining a global market share in this space leveraging its capabilities and supply chain realignment from China to India. We believe Indian companies would gain further ground as companies reduce dependence on China after the COVID-19 pandemic and shift their supply chains to India. Apart from the long-term supply chain shift theme, many specialty chemicals form a part of essentials and the facilities have started opening up post-lockdown relaxations. The decline in raw materials prices would also support margins and reduce working capital needs. However, input costs are a passthrough for most companies and benefits may be limited. Overall the specialty chemicals industry is likely to continue to perform well in the medium term. We recommend an Over Weight stance on the sector.

 

Telecom

Current View - Equal Weight

Outlook :- Telecom has become the most critical sector during the current challenging times to keep the businesses up and running. Even before the COVID-19 outbreak, the sector was seeing an improved pricing environment. The industry is highly consolidated with two strong and one weak player in the wireless space. We recommend an Over Weight stance on the sector.

 

Nifty Events Update: Range-Bound Performance in Jun’21

* The Indian equity market touched an all-time high of 15869 on 15th June, up 3% from the previous high on 15th Feb. Multiple factors are driving the market including a) Downward trajectory of Covid-19 cases, b) Robust Q4FY21 performance, c) Unlock trade, and d) Positive global cues.

* The volatility index continues its downward trajectory. Currently, VIX is trading below 14 level vs. the long-term average of 22, indicating a positive setup for the market with limited downside. If VIX continues to head southward, it will trigger a further rally in the broader market.

* The vaccination drive has picked up in Jun’21 vs. vaccine shortages in the month of May’21. In our opinion, vaccinating a significant part of the population will take ~5 to 6 months.

 

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