Equity Investment Strategy-January 2022 PDF

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TOP PICKS October 20201Naveen Kulkarni |naveen@axissecurities |###TOP PICKSJanuary 2022TOP PICKSNear Term Volatile but Long Term ConstructiveWe wish a ‘Happy New Year’ to all our readers as we turn the final page of 2021 and welcome 2022 with great enthusiasm. May the New Year bring joy, peace, and ...

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TOP PICKS

January 2022

January 2022

TOP PICKS Near Term Volatile but Long Term Constructive

2021, with its strong closing, has now laid a robust foundation for 2022, which is expected to be the year of balance sheet strength

We wish a ‘Happy New Year’ to all our readers as we turn the final

driven by significant improvement in corporate profitability. With

page of 2021 and welcome 2022 with great enthusiasm. May the New

current valuations offering a limited scope of further expansion, an

Year bring joy, peace, and happiness to all of you and your family.

increase in corporate earnings will primarily drive the market returns

2021 has been a remarkable year for the equity market with a robust

moving forward. Against this backdrop, our core themes of Digital,

bull run led by outperformance in the broader market. Since its

Telecom, Banking, Rural, Staples, and Consumer Discretionary

inception in May’20, our Top Picks basket has delivered an

continue to remain relevant in 2022 as well. In our Top picks, we book

astounding return of 124%, significantly higher than the 87% return

profit in Navin Fluorine which has delivered outstanding returns and

delivered by Nifty 50 over the same period. Dec’21 was a volatile

ADD Bata India as a consumer discretionary play. Upcoming Union

month marked by a weakness in the global market due to rising

Budget will be critical for Manufacturing, Banking and Infrastructure

concerns over inflation and faster tapering. Moreover, the advent of

sectors.

the new Covid-19 variant kept volatility high and forced equity

Our key themes are as follow:

investors to adopt a more cautious stance. Our Top picks basket, however, resiliently sailed through the volatile times and delivered market-beating returns of 5.3% during the month.

Value and Quality: Value and Quality stood as our top-performing styles in the last one month while Growth continued to lag. Large Caps is likely to catch up in the near term. The Momentum theme has seen good traction in

Returns for the year were broad-based, primarily on account of higher

recent months followed by Value and Quality themes. The growth theme,

participation across all stock categories as well as in the sectors that

which has continued to lag, presents a curious case. While Value continues

had exhibited relatively narrower participation in the pre-pandemic

to be a robust theme over a slightly longer time horizon, we believe the

years. Nifty delivered an excellent return of 24% for the year which

Quality theme is likely to outperform the current levels considering a

stood significantly better than the returns it posted in the previous

notable market correction and significantly increased volatility in the last

three years. Nifty Midcap 100 and Nifty Smallcap 250 delivered 46%

three months. Furthermore, though Large caps have outperformed Small

and 62% returns respectively in 2021, which stood superior to the

and Mid Caps in the last 3 months, Value seems to be emerging in the

previous years’ return as well.

Small and Mid Cap stocks, providing attractive investment opportunities in the broader market.

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January 2022

TOP PICKS Volatility rises but not in the spook zone yet: Dec'21 was a volatile

Earnings momentum is the key: We maintain a Nifty target of 20200: The

month and the rising concerns over the new variant kept volatility high,

earnings momentum would be the critical factor for the market performance

making equity investors more cautious. Any further increase in the Covid-

moving forward. While the earnings momentum in the past few quarters have

19 caseload will be a short-term negative for the market. But even amidst

been strong, the future outlook of the earnings trajectory remains more critical at

the volatile market conditions, the VIX in the domestic market ranged

this juncture. We expect the robust earnings trajectory to sustain in Q3FY22 and

between 16-21 levels during the month, indicating a limited market

onwards and maintain our Dec’22 NIFTY50 target of 20200, valuing it at 22x

downside. The VIX is nowhere in the spook zone of 30 which generally

FY24E earnings.

results in a significant market correction. However, it is nonetheless important to manage portfolio risk by focusing on stocks having excellent earnings trajectories.

Based on the above themes, we recommend the following stocks: ICICI Bank, HCL Technologies, Bajaj Auto, Tech Mahindra, Maruti Suzuki

Focus on Q3FY22 earnings and Union Budget: The near-term focus will be on the Q3FY22 earnings and Union Budget - 2022. The IT is sector likely to post another robust quarter after a positive outlook posted by the global IT major Accenture. Overall demand scenario would be a key

India, State Bank of India, Bharti Airtel, Federal Bank, Dalmia Bharat, Varun Beverages, Ashok Leyland, Bata India Ltd, Krishna Institute of Medical Sciences, Equitas Small Finance Bank, Mold-Tek Packaging, Amber Enterprises India

monitorable. Price hikes are expected in certain pockets to offset rising costs while some margin improvement is likely to be visible with some cooloff in raw material prices. The Union Budget 2022 is expected to be growthoriented given the state election lined up in over 5 states in 2022. The consequent higher government spending will help the economy to gain further growth momentum. We believe policy reforms such as Atmanirbhar Bharat and the PLI scheme are likely to continue in 2022 and receive further push.

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TOP PICKS

January 2022

Table of Contents Axis Securities Top Picks ....................................................................................................................................................................................... 5 Performance of Asset Classes .............................................................................................................................................................................. 6 What Happened Since 18th Oct ............................................................................................................................................................................ 10 What happened since Mar-20 ............................................................................................................................................................................... 14 Style Indicator .......................................................................................................................................................................................................... 15 India’s performance vis-à-vis peers ................................................................................................................................................................... 17 Market Indicators ..................................................................................................................................................................................................... 18 India Valuation Index .............................................................................................................................................................................................. 24 India’s Nifty Index Vs. VIX ..................................................................................................................................................................................... 32 FIIs are net sellers in the market ......................................................................................................................................................................... 33 What happened during 2015 tapering? ............................................................................................................................................................. 35 Macro Indicators ...................................................................................................................................................................................................... 37 Other Macro Indicators .......................................................................................................................................................................................... 38 Company Section .................................................................................................................................................................................................... 39

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January 2022

TOP PICKS

INVEST IN ONE CLICK

Axis Securities Top Picks Category

Company Name

Large Cap

ICICI Bank Ltd

Sector

Stock

Target

Upside

12 Month 12 Month Dividend Fwd PE Fwd P/BV Yield

TR

TR

TR

TR

Financials

740

975

32

24.6

3.2

0.3

5.3

8.9

18.1

1.9

Information Technology Consumer Discretionary Information Technology Consumer Discretionary

1,319

1,520

15

26.8

5.5

2.0

13.1

4.9

36.5

0.4

3,249

4,500

38

18.3

3.5

4.3

-0.1

-14.7

-18.6

1.1

1,791

2,060

15

27.8

5.7

0.8

12.3

31.7

70.2

-0.1

7,426

8,500

14

52.9

4.2

0.6

4.7

5.4

0.3

1.7

Financials

460

645

40

11.2

1.5

0.9

-1.2

3.5

10.1

1.5

Large Cap

HCL Technologies Ltd

Large Cap

Bajaj Auto Ltd

Large Cap

Tech Mahindra Ltd

Large Cap

Maruti Suzuki India Ltd

Large Cap

State Bank of India

Large Cap

Bharti Airtel Ltd

Communication Services

684

780

14

81.9

5.7

NA

-3.9

2.1

34.0

1.0

Mid Cap

Federal Bank Ltd

Financials

83

125

51

9.3

1.0

0.8

-5.8

1.0

-1.5

1.2

Mid Cap

Dalmia Bharat Limited

Materials

1,848

2,520

36

31.8

2.6

0.2

1.1

-10.5

-2.3

2.2

Mid Cap

Varun Beverages Ltd

Consumer Staples

888

1,050

18

55.0

9.2

0.3

0.1

-3.4

22.7

-1.0

Mid Cap

Ashok Leyland Ltd

Industrials

122

175

43

89.5

5.2

0.5

4.6

-3.4

3.6

3.1

Consumer Discretionary

1,872

2,300

23

139.7

12.3

0.2

-1.3

1.9

18.0

-0.1

Mid Cap

Bata India Ltd

Small Cap

Krishna Institute of Medical Sciences

Health Care

1,426

1,600

12

39.6

8.7

NA

11.7

23.5

47.0

5.0

Small Cap

Equitas Small Finance Bank

Financials

60

78

31

4.7

1.8

NA

-2.7

-2.4

3.0

1.1

Small Cap

Mold-Tek Packaging Ltd

Materials

806

920

14

33.9

7.4

0.9

13.9

37.4

67.2

0.1

Small Cap

Amber Enterprises India Ltd

Consumer Discretionary

3,316

3,690

11

66.6

6.4

NA

2.4

-3.3

12.5

0.3

Source: Company, Axis Securities, CMP as on 30thNov 2021

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January 2022

TOP PICKS Sector Outlook Sector

Current View

Outlook While the Indian Automobile sector has seen a significant demand improvement and most categories are witnessing good traction, the current lockdowns are expected to have an unfavourable impact on the demand scenario. Moreover, the rising input costs are wreaking havoc in the Auto companies with leading

Automobiles

Equal Weight

companies such as Maruti reporting margin disappointments. The auto sector does expect demand revival and many companies offer decent upside from the current levels. However, the sector remains a mixed bag as of now, as lower-than-expected volume may result in weaker-than-expected margins. We downgrade the sector to Equal Weight from Over Weight. The BFSI outperformed the broader market from Nov’20 to Feb’21 as the COVID -19 challenges were less significant than anticipated and banks were better prepared. However, the re-imposition of lockdowns will adversely impact their performance. Even as Axis Bank and ICICI bank reported a good set of numbers, the

Banking and Financial services

Equal Weight

economic challenges cannot be wished away and the banks will have to bear the brunt of the prevailing challenges. The pick-up in credit demand as the economy gradually recovers remains to be seen. We downgrade the sector to Equal Weight and remain watchful on the developments in the sector. The sector attained normalcy at FY21 end, with Q4FY21 being supported by a rise in the Gross Fixed Capital Formation. The government’s Capex cycle continues to be robust and house registrations in the

Capital Goods

Equal Weight

Metro cities continue to witness strong traction. The private Capex cycle is expected to pick up soon, further supporting the Capital Goods sector. We upgrade our stance on the Capital Goods sector to Equal Weight from the Underweight stance before. 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 is also

Cement

Equal Weight

picking up in the number of regions which has been a positive surprise. Overall, we believe the Cement sector has been able to cope better than expected. Hence, we maintain our outlook to Equal Weight.

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January 2022

TOP PICKS Sector Outlook (Cont’d) Sector

Current View

Outlook The Consumer Staples sector witnessed a good demand recovery and posted robust top-line growth in Q4FY21. However, Gross Margin pressure was clearly visible due to RM headwinds. While the sector

Consumer staples

Equal Weight

has strong earnings visibility and best-in-class return ratios, the expensive valuations vis-à-vis other sectors limits the upside potential even as the earnings visibility improves across the board. We maintain the FMCG sector to Equal Weight. While the Consumer Discretionary space is witnessing a strong revival and many categories are normalizing, the current lockdowns are posing serious challenges to the recovery rate. However, with

Consumer Discretionary

Equal Weight

improvement in the COVID-19 trajectory, the outlook of the sector is improving. We continue with our Equal Weight stance and remain watchful of the development in this space. Large IT companies continued their growth momentum in Q4FY21, led by strong deal closures and inline performance on the margins front. The sector is in a re-rating cycle and this trend is likely to persist over

Information Technology

Over Weight

the medium term. The IT space is marked by companies having strong balance sheets and play on the prevailing digitization trend. Even at current levels, the IT sector valuations are reasonable. Thus, we recommend an Overweight stance on the sector. The Metals & Mining sector has seen a significant pricing uptrend with an improvement in the global

Metals and Mining

Over Weight

scenario. This trend is likely to persist in the medium term and Metal stocks are likely to perform well. We upgrade our stance on the sector to Over Weight. Oil Marketing companies benefited from the inventory gain and better GRMs in Q4FY21. Furthermore, OMCs delivered better performance overall as well. The sector’s bottom line is likely to remain stable on

Oil and Gas

Equal Weight

account of higher crude prices and the likelihood of high refining margins due to improved supplydemand balance. Upstream companies may surprise positively in the scenario of higher-than-expected crude prices. In this view, we upgrade the sector from Underweight to Equal Weight.

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January 2022

TOP PICKS Sector Outlook (Cont’d) Sector

Current View

Outlook

Pharmaceuticals

Equal Weight

Q4FY21 results for Pharm were a mixed bag with a not-so-encouraging performance from the US businesses. While margins were strong, a large portion has already been factored 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

Equal Weight

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 our stance on Real Estate to an Equal Weight.

Over Weight

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 by 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 fr...