By: Mr. Jyoti Roy , DVP- Equity Strategist, Angel Broking Ltd
Indian equities closed in the green for the third month in arrow with the benchmark Nifty up by 2.8% for the month driven by FII flows. FII flows for the month stood at `47,080 crore which is the highest during the calendar year. Markets were also supported by better than expected Q1FY2021 numbers along with continued improvement in underlying economic conditions.
Global markets have recovered sharply from the lows in March with the S&P 500 at all time highs with the S&P 500 closing the month at 3,500 which was 8.5% higher than its Jan closing levels. While the initial phase of the rally from the March lows was led by fed induced liquidity the second phase of the rally from July was driven by improvement in the global economy. The Indian economy also continued to improve in August which was reflected in high frequency data like Auto sales and PMI numbers. Auto companies reported another month of strong sequential growth with Maruti Suzuki reporting a 17.1% yoy increase in August domestic sales as compared to a 1.1% growth in July while Hero Motocorp reported a 6.5% yoy growth in motorcycle sales. The manufacturing PMI for August also pointed to continued improvement as it improved to 52.0 from 46.0 in July.
Post Unlock 1.0 in June there had been a significant improvement in economic activities from May till the third week of July. However state Governments imposing localized lockdowns in July let to tapering off growth from the last week of July. Due to lockdowns in April and May there is pent up demand which along with inventory buildup prior to the festive season and further opening up of the economy under unlock 4.0 should lead to improvement in economic activities. We expect the rural, essential and digital theme to continue playing out over the next few quarters given revenue visibility and strong growth prospects. We therefore continue to maintain our positive outlook on sectors like Agrochemicals, IT, Telecom, Two wheelers and tractors. However we also expect the recovery theme to gather strength in the near future due to continued improvement in the economy. Within the recovery theme we believe that sectors like low ticket consumer durables, cement, hotels and multiplexes should do well.
Key risks which can derail the recovery rally are 1) Surge in infections as the economy is opened up further 2) Delay in vaccine production as compared to timelines expected by markets 3) Growth faltering significantly as compared to market expectations post festive seaso
Endurance Technologies (Target INR 1,316)
Endurance Technologies Ltd is one of India’s leading automotive component manufacturers with operations in India and Europe. It mainly caters to two and three-wheeler OEMs in India and supplies aluminum casting products to four-wheeler OEMs in Europe. Post Covid19, evolving consumer preference for lower ticket priced means of private transport amid pressurized incomes & awareness around social distancing are expected to act as tailwinds for domestic 2-Ws in India, 4-Ws across developed nations. We believe that Endurance Technologies will be one of the key beneficiary of pickup in demand in 2 wheelers in India given that it is a key supplier of components to 2 wheeler companies in India.
Swaraj Engines (Target INR 1,892)
Swaraj Engines is engaged in the business of manufacturing diesel engines and hi-tech engine components. Diesel Engines manufactured by the company are specifically designed for tractor application with the company being the key supplier of tractor engines to M&M which reported a strong growth of 27% YoY in its Tractor division for the month of July 2020. We expect strong demand for tractors going forward due to robust Rabi crop production, hike in MSP and a normal monsoon which will be beneficial for Swaraj Engines. At current levels Swaraj Engines is available at a significant discount to historical valuations.
Hawkins Cooker (Target INR 5,556)
Hawkins Cookers Ltd (HCL) operates in two segments i.e. Pressure Cookers and Cookware. Over the last two years, the company has outperformed TTK Prestige (market leader) in terms of sales growth ~13% vs. ~4% in Cookers & Cookware segment. Cooking gas (LPG) penetration has increased from 56% in FY2014 to 80% in FY2019, which would drive higher growth for Cookers & Cookware compared to past. Going forward, we expect HCL to report healthy top-line & bottom-line growth on the back of government initiatives, new product launches, strong brand name and wide distribution network.
Reliance Industries (Target INR 2,366)
RIL has built up a dominant presence in Refining, Petrochemicals, Telecom and Retail businesses. JIO Platforms which houses the telecom business has attracted investments from marquee investors like Facebook, Silver Lake Partners, General Atlantic, KKR, etc. of INR 1.52 lakh cr. Investments by such marquee names in Jio platforms has not only helped the company to become debt free but also reaffirms our confidence in the management’s ability to transform the company from a brick and mortar to a digital play. Potential listing of the digital and retail business over the next 3-5 years would also lead to significant value unlocking for shareholders in the long run.
Metropolis Healthcare (Target INR 2,156)
Company has posted a better than expected set of numbers for Q1FY21 while management has guided for further improvement in business for Q2. While Non Covid revenues are back to above 80% of pre Covid levels, revenues from Covid related tests will more than make up for any shortfall in revenues during Q2. With further opening up of the economy we expect non Covid revenues to reach pre-Covid level in Q3FY21. We are positive on the company given expected long term growth rates of ~15% CAGR, stable margins profile and moderating competitive intensity due to consolidation in the Industry
Hero Motocorp (Target INR 3422)
Hero Moto Corp is India’s leading Motorcycle manufacturer with an overall market share of 54%. In FY2020 the company kept its market share intact. Entry level motorcycles in rural India are posting a faster rebound in sales post Covid -19 given good monsoon and shift from public transportation to personal vehicles. Hero Motocorp continued to out-perform the 2Wheeler space and reported a 6.5% yoy growth in motorcycle sales for August 2020 with sales volumes recovering to pre Covid levels. Hero Motocorp remains one of our top picks in the two wheeler space on the back of strong demand from rural India and market share gains.
Persistent Systems (Target INR 1,276)
Persistent Systems is one of the leading service providers to independent service vendors (ISV). The company has a very strong presence in Hi tech, manufacturing and life science segments which ware amongst the least impacted sectors due to Covid-19. The Company has posted a very strong set of numbers for Q1FY21 with dollar revenue growth of 3.1% qoq. Services business grew by 1.8% qoq to USD 108.2mn. Company has also reported improvement in margins due to tight cost control. Persistent has won a large deal during the quarter which will ramp up over the next few quarters. We expect the company to post strong revenue and profit growth between FY20-FY22 given negligible impact of Covid-19 on FY21 numbers, strong deal wins, ramp up of existing projects along with margin expansion.
Radico Khaitan (Target INR 514)
Radico Khaitan Ltd (RKL) is a leading manufacturer of Indian Made Foreign Liquor (IMFL). It has a strong pan-India presence with growing sales in the premium brands like Magic Moments Vodka and 8PM Premium Black Whisky. During FY2020, RKL has outperformed the IMFL industry by 12% growth and we expect the company to continue outperforming the IMFL industry going forward. Over the last 5 years, RKL has increased premium product volume mix (high margin business) from 24% to 29% and this trend is expected to continue. The company has healthy balance sheet along with free cash flow and higher profitability and is trading at a discount to peers and offers value at current levels.
JK Lakshmi Cement (Target Rs. 328)
JK Lakshmi promoted by Singhania group is a predominantly north India cement company with capacity of 13.3mn tonne predominantly based out North India which is the most favored region for the cement industry given better demand supply dynamics. Company had also posted a good set of numbers for Q1FY21 due to favorable regional presence. Despite the sharp fall in volumes cement companies were able to maintain their margins due to lower power and fuel costs which is expected to continue due to continued low crude prices. JK Lakshmi is our top pick in the mid cap cement space given that it is trading at a significant discount compared historical averages as well as peer group.
HCL Technologies (Target INR 793)
HCL Technologies is amongst the top four IT services company based out of India and provides a vast gamut of services like ADM, Enterprise solutions, Infrastructure management services etc. HCL Tech also posted a better than expected set of numbers for Q1FY21 as revenues were in line with street estimates though margins and profits came in above estimates due to cost control by the company. Management commentary was also strong as they highlighted that deal pipeline has improved significantly since March led by cloud related services. Management guidance of 1.5-2.5% qoq growth in revenue in constant currency terms for the rest of the year also provides comfort. At current prices the stock is trading at a significant discount to the other large cap IT companies like Infosys and TCS and offers value at current levels given market leader status in Infrastructure management.
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