Motilal Oswal’s 10 stock picks for September 2020

The key facets thought-about for creating this basket are – 1) Strong companies with visibility of income for the following 12 to 24 months, and a pair of) Relatively decrease affect of post-Covid shopper behaviour.

Renewed investor curiosity is being witnessed within the fairness market, which is clear from the efficiency of the Nifty and the Mid-Cap Indices in the course of the previous 12 months (Nifty up 5% and Mid-Cap Indices up 8%). We have additionally seen greater retail exercise on the exchanges (retail share within the money section is at an all-time excessive – 72%).

Here’s a stock basket curated by the MOFSL Research Team to assist retail buyers take part within the market.

The key facets thought-about for creating this basket are:

1. Strong companies with visibility of income for the following 12 to 24 months.
2. Relatively decrease affect of post-Covid shopper behaviour.

One can even think about constructing such basket by the SIP route:

1. TCS

Deal wins had been stronger for TCS. More importantly, continued traction in massive offers, a wholesome pipeline, and higher resilience in BFSI are encouraging components. Management believes the worst affect of COVID-19 is behind (each when it comes to income and profitability) whilst some variables similar to pricing and dealing capital cycles warrant an in depth watch. TCS has a historic monitor file of adapting to a number of enterprise challenges and know-how change cycles. Additionally, it has constantly maintained its market management, best-in-class operational metrics, and excessive return ratios. While the height of COVID-19-led uncertainty could also be behind, near-term detrimental surprises associated to demand, pricing, and collections can’t be dominated out. Nevertheless, TCS ought to be capable to higher navigate by these challenges (v/s the remainder of the trade). Over the medium time period, we anticipate TCS to be a key beneficiary of the COVID-19-driven enhance in know-how depth throughout verticals.

2. Infosys

Infosys delivered sturdy beat on each income and margin entrance in its Q1FY21 earnings. Notwithstanding the upper variable payouts, the corporate delivered sturdy margin growth. Notably, this was witnessed in 1 / 4 that has confronted important disruption on each the demand and provide fronts. Deal wins (~USD1.7b, ex-Vanguard) and the deal pipeline each stays wholesome. The reinstatement of income (0–2% YoY, CC) and margin (21–23%) steerage is a key morale booster. We anticipate Infosys to be a key beneficiary when it comes to recovery in IT spends in FY22. Additionally, because the COVID-19-led disruption eases, we anticipate additional growth in margins as investments stabilize and back-ended productiveness advantages kick in. This ought to translate into sturdy outperformance on EPS progress (v/s the sector). As its outperformance v/s TCS continued on this quarter, we anticipate the valuation divergence to slender (to 10%).

3. Dr. Reddy’s

Dr Reddy’s (DRRD) delivered sturdy 30% YoY progress in 1QFY21 earnings, led by a superior present in Pharmaceutical Services and Active Ingredients (PSAI) / EU and different rising markets. We anticipate a 21% earnings CAGR over FY20–22, led by a gross sales CAGR of 6% within the US, 19% in DF, and 23% in PSAI, supported by 340bp margin growth. DRRD is well-placed, supported by: a) restricted value erosion within the base enterprise, b) sturdy ANDA launches for the US section, c) bettering profit from value rationalization, d) a positive demand-supply situation within the PSAI section, and e) synergy profit by the addition of the Wockhardt portfolio.

4. Laurus Labs

After a protracted wait, the efforts in the direction of product improvement/ constructing manufacturing base are mirrored within the phenomenal monetary efficiency of Laurus Labs. In truth, 1QFY21 redefines the earnings evaluation over close to to medium time period. LAURUS has proven sturdy enchancment in efficiency, with PAT doubling to INR2.5b in FY20 and coming in at INR1.7b in 1QFY21. We anticipate 2.7x FY20 earnings for FY21, primarily led by a doubling of formulation gross sales, 30% YoY progress in every API and CDMO section supported with ~780bp margin growth. We anticipate the API enterprise to have a 20% CAGR within the API section over FY20–22. We stay constructive on Laurus on the again of superior execution throughout income segments, leading to growth of ROE to 32% and ample levers to maintain the earnings momentum over the medium time period.

5. Bharti Airtel

BHARTI has delivered sturdy execution in the previous few quarters, with trade main income progress, ARPU enhance and 4G subscriber provides. This ought to assist Bharti generate wholesome FCF/subsequent deleveraging sooner or later. However, any tariff hike or change within the construction of value plans could be to leverage growing knowledge progress, which stays the important thing progress lever and will stretch past 1-2 quarters. With SC verdict out on AGR fee timelines, we anticipate Bharti to have the ability to handle the fee with FCF post-interest of>INR100b/INR200b in FY21/FY22, with no tariff hike built-in and internet debt of INR1,095b in FY21, together with the AGR legal responsibility (internet debt to EBITDA of two.8x on pre-Ind-AS 116). With this verdict, stability sheet would weaken. We imagine that with the Smartphone market largely settled and prevailing low ARPUs, there’s a sturdy case for value hike. We imagine that Bharti has the perfect hedged place. In order to outlive, if VIL triggers a value hike or if the market turns duopoly, Bharti would profit considerably in each instances, with a possible EBITDA enhance of>100–120b.

6. Reliance Industries

RJio enjoys market management place in a 4-player trade with stretched stability sheet of opponents. Thus, it might leverage its place as a value maker to drive ARPU. Furthermore, the corporate is within the course of of remodeling from a telecom participant to a digital firm with a capability to increase income stream to a number of classes. The greater a number of captures the digital income alternative, anticipated positive aspects from any potential tariff hikes, rising market share and potential rationalization of tax levies for the sector, which aren’t constructed into our estimates. In a deal that would effectively form the Organized Retail sector in India, RIL, by its retail subsidiary, Reliance Retail Venture Limited (RRVL), introduced the acquisition of Future Group’s Grocery and Apparel Retail codecs on slump-sale foundation at INR247b not too long ago. We anticipate sturdy income/EBITDA CAGR of 27%/49% over FY20-22E. Jio Platforms has raised INR1,520.6b throughout 13 buyers with RIL holding ~66.48% fairness stake on absolutely diluted foundation. Of the whole funds raised, INR229.8b could be retained in Jio Platforms whereas the remaining could be used for optionally convertible desire share (OCPS). Our premium valuation underscores Reliance Retail’s aggressive footprint addition and the current Jiomart led on-line alternative, which might provide big progress potential over time.

7. Hero Motocorp

HMCL has posted a notable working efficiency in these robust instances. The narrative round rural demand is constructive, however provide chain ramp-up and broad-base demand are necessary for demand sustainability. Considering the favorable outlook for rural, HMCL ought to proceed to see good demand recovery. However, contemplating sharp value enhance during the last two years, we see the danger of an antagonistic combine limiting margins and EPS progress (8% CAGR over FY20–23E). Our goal a number of is at a ~13% low cost to the five-year common PE of 18.4x, factoring a altering progress profile, aggressive positioning, and modifications within the RoE profile. Sustained market share positive aspects in Premium Motorcycles and Scooters might act as re-rating drivers. We improve our EPS estimate by 9% for FY21 to issue quicker quantity recovery.

8. HDFC Bank

HDFCB has been capable of ship its common earnings progress trajectory. However, the COVID-19 pandemic has induced volatility on sure working parameters like payment earnings and opex. This in flip has closely dented mortgage origination throughout retail segments. Overall efficiency of the financial institution ought to stay regular and we anticipate the financial institution to offset near-term strain on different earnings through tight management over opex. RBI approving the appointment of Mr Sashidhar Jagdishan as new MD & CEO addresses a key overhang. Moreover, succession by an inside candidate augurs effectively to spice up investor confidence and proceed the stainless efficiency skilled by the financial institution underneath the management of Mr Puri. We anticipate HDFCB’s sturdy legal responsibility franchise and the fixed-rate nature of the ebook to assist margins even because the financial institution maintains greater liquidity to navigate by the disaster. On the asset high quality entrance, slippages are more likely to decide up in 2HFY21 as a result of COVID-19-led disruption, which might hold credit score prices elevated. However, greater provisioning buffers ought to restrict the general affect on earnings. We estimate HDFCB to ship 17% earnings CAGR over FY20-22E and RoA/RoE of 1.9%/16.9% in FY22.

9. SBI Life

SBILIFE’s sturdy parentage and large department community offers it with a definite distribution benefit over its friends, serving to it to take care of low value ratios and capitalize on the big clientele of SBI (449m), thus, offering it with a long-term structural progress story. SBILIFE has reported an enchancment in persistency pattern over time, led by give attention to garnering a greater high quality enterprise and need-based promoting. thirteenth month persistency improved to 86%. It maintains the best 61st month persistency at 60% (v/s friends), and thus, is supported by wholesome progress in renewal premium. SBILIFE can be seeking to optimize its product combine and is targeted on bettering its aggressive positioning within the Protection/Annuity enterprise. This ought to assist VNB margin growth to achieve ~21% by FY23E, which ought to drive 17% CAGR in VNB over FY20-23E. SBILIFE is in a candy spot given its sturdy distribution community, value management and entry to its mum or dad SBI’s massive buyer base. Overall, we anticipate working ROEV to normalize towards 18% ranges with Embedded Value (EV) reflecting 16% CAGR over FY20-23E.

10. Ultratech Cement

UTCEM’s outcome highlights the execution of its deliberate value rationalization and de-leveraging roadmap. Despite detrimental working leverage (volumes down 32% YoY), the corporate reported the best ever EBITDA/t of INR1,416, led by value discount throughout heads of expenditure. Net debt additionally declined by INR22b (13%) QoQ to INR147b (1.7x EBITDA). UTCEM’s market combine has improved submit acquisitions, with the stronger markets of northern/central India contributing ~45% to volumes. Besides sturdy FCF, non-core asset gross sales ought to additional assist de-leveraging. The stock can be buying and selling 35% cheaper than peer Shree Cement v/s the historic common of 10%.

(By Hemang Jani, Head Equity Strategist, Broking & Distribution, Motilal Oswal Financial Services)

Disclaimer: These stock suggestions have been made by Motilal Oswal Financial Services. Readers are suggested to seek the advice of their monetary planner earlier than making any funding.

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