Telecom, healthcare, consumer may dominate post-COVID world; 12 stocks to look at

COVID-19 has created an unprecedented disruption in the market, hitting sectors and stocks across the board.

Experts and analysts expect a change in market leadership in the post-COVID world in which telecom, healthcare, speciality chemicals, and rural consumers may dominate other sectors.

"Every crisis creates opportunities for certain segments, which often creates new market leaders. Post COVID-19 pandemic, some of the themes or sectors we believe could emerge as leaders are telecom, healthcare, speciality chemicals, while one can look at rural consumer space as a recovery play," said Siddharth Khemka, Head of Retail Research at Motilal Oswal Financial Services.

With the lockdowns and work from home, telecom as a sector has seen a rising usage of phone and data.

Moreover, a higher transaction of subscribers from 2G to 4G has also been witnessed which will lead to a rise in ARPUs.

"With consolidation phase over in telecom, we can expect improving tariffs and ARPUs along with low CAPEX going ahead to support financials over the next 2-3 years. Bharti Airtel is our preferred pick in the space followed by Jio through Reliance Industries," Kemka said.

Healthcare is a defensive play. Though the sector had been under pressure for the last few years, the pandemic has opened up a lot of opportunities for the sector.

"We have not only seen an improved regulatory environment but also higher demand. We like diversified players like Dr. Reddy’s. Some unique plays would be API manufacturers (Divi’s Lab, Alkem), diagnostic labs (Dr. Lal Pathlabs) and medical insurance (ICICI Lombard) in the overall healthcare space," said Khemka.

Indian specialty chemical manufacturers are benefiting from the increasing trend of de-risking of procurement from China by global chemical leaders. Besides, depreciation of the rupee and sharp correction in crude prices are also expected to benefit the sector.

"We like companies like PI Industries and SRF in this space," Khemka said.

The rural economy is looking attractive due to various leavers such as good Rabi crop season, forecast of a normal monsoon, urban migrant labourers going back to the villages, government spending and an increase in MSP.

"These factors are likely to boost demand for the rural economy. Within the rural plays one can look at segments such as tractors (Mahindra & Mahindra), two-wheelers (Hero MotoCorp), and select FMCG (Hindustan Unilever and Britannia)," said Khemka.

Jyoti Roy, DVP, Equity Strategist, Angel Broking believes while it will take some time for the urban economy to recover from the COVID-19 impact, the rural economy will continue to do well.

"We expect sectors like agrochemicals, chemicals, pharma, telecom and tractors should continue to do well going forward given better revenue visibility," Roy said.

Here are 12 stocks from the above-mentioned sectors that can give double-digit returns in one year.

Analyst: Pankaj Pandey, Head – Research, ICICI direct

Sumitomo Chemical India | Buy | LTP: Rs 267.90 | Target price: Rs 315 | Upside: 18%

"We believe with the recent integration of Excel Crop into the company, the company can achieve revenue synergies with the help of wider distribution reach across different parts of the world. Additionally, Excel Crop manufactures a few technicals captively, which will allow the merged entity to reduce dependence on imports and increase captive consumption. This should expand gross margins in medium to long term," said the analyst.

"Apart from this, we believe with the recent pandemic, majority of the sectors are impacted due to demand and supply-side challenges, while agri sector is immune to a certain extent and this should benefit the players like Sumitomo Chemical. Further, recent locust impact along with a rise in few technical prices, which Sumitomo manufactures, should translate into better performance going ahead," the analyst said.

Dabur | Buy | LTP: Rs 462.20 | Target price: Rs 520 | Upside: 13%

Dabur India derives nearly 45 percent of its sales from rural India. The company is increasing its direct distribution presence to 60,000 villages (currently 52,000).

The analyst highlighted that some of the immunity-boosting categories like Chawavanprash and honey are popular in smaller cities and towns. Moreover, with increasing health cautiousness, these products are gaining traction. Further, the company also launched five new products in the healthcare space along with an immunity booster kit.

The company stated a 400 percent surge in Chyawanprash demand and 80 percent growth in honey in the last few months inducing it to expand the capacity of these products to meet the current demand.

"We believe health supplements would be driving the growth and could see structural demand improvement given increasing consumer awareness about health and immunity. The company with a strong product portfolio and new lunches are best positioned to leverage the opportunity. Moreover, villages and smaller towns have been relatively less impacted by lockdowns, which should benefit to drive earnings," said the analyst.

Ajanta Pharma | Buy | LTP: Rs 1,494 | Target price: Rs 1,730 | Upside: 16%

The overall FY20 performance was robust, both on the sales and margins with the growth of 26 percent and 23 percent, respectively.

While African tender business remains volatile, the core branded business continues to register healthy growth.

"Calculated focus, healthy margins and return profile and lighter balance sheet are some key differentiators for Ajanta. The company remains a play on global branded generics space. In a recent update, we arrived at our target price of Rs 1,730 based on 24 times FY22E EPS of nearly Rs 72," said the analyst.

Dr Reddy's Laboratories | Buy | LTP: Rs 4,120 | Target price: Rs 4,615 | Upside: 12%

As per the analyst, notwithstanding Q4 related gyrations, the overall narrative of calibrated launches and focus on sustained cost rationalisation, especially on SGN&A front and R&D spend continues.

"We expect continuum in operational improvement due to strong growth from branded markets, control on overheads and reduction in regulatory spend, now that most facilities including Srikakulam API plant (VAI) are out of USFDA embargo," said the analyst.

Strong FCF generation and a healthy balance sheet are some legacy strongholds for the company.

"Despite the recent rally, the expected margin expansion and earnings upgrade still leave scope for upside. We recently upgraded the stock to buy and arrived at a target price of Rs 4,615 based on 22 times FY22E EPS of nearly Rs 209.7," said the analyst.

Analyst: Vikas Jain, Senior Research Analyst at Reliance Securities

Bharti Airtel | Buy | LTP: Rs 567.45 | Target price: Rs 720 | Upside: 27%

The company remains the beneficiary of being an emerging duopoly with a large subscriber base and regular price hikes, higher data consumption due to work from home, digital payments and OTT platforms.

Lesser CAPEX requirements in the near future are also among the key positives for the stock.

"It has scaled an all-time high breaking its 10-year range with strong volumes and recent correction provides a good opportunity for a target of Rs 720 levels over the next year," said the analyst.

Biocon | Buy | LTP: Rs 390.90 | Target price: Rs 470 | Upside: 20%

Biocon is one of the innovation-led companies and has developed and commercialised a differentiated portfolio of novel biologics, biosimilars, and complex small molecule APIs in India and several key global markets, as well as, generic formulations in the US and Europe.

"It is one of the consistent outperformers in the pharma space and we believe it will continue to outperform as new revenue streams, subsidiary companies innovations would drive growth in earnings and continue to enjoy superior valuations," said the analyst.

Aarti Industries | Buy | LTP: Rs 933 | Target price: Rs 1,100 | Upside: 18%

A leading speciality chemicals company in benzene-based derivatives with integrated operations; its plants are located in western India with proximity to ports and diversified into the pharmaceutical segment as additional growth.

"Multi-year contract with an agrochemical major and other contracts would contribute strong revenues and earnings growth in the coming years," said the analyst.

Hindustan Unilever | Buy | LTP: Rs 2,119 | Target price: Rs 2,520 | Upside: 19%

Hindustan Unilever remains one of the strong rural consumer companies with multiple products across segments.

The recent merger with Glaxo Consumer has further boosted its product pipeline. Integrating its existing supply-chain management for incremental revenues with minimised cost structure will increase profitability.

"Debt-free balance sheet with a shorter working capital cycle, higher ROE, and 25-30 percent market share for its various products are the key positives to own the stock after a 20 percent correction from its all-time high," said the analyst.

Analyst: Jyoti Roy, DVP, Equity Strategist, Angel Broking Ltd

IPCA Labs | Buy | LTP: Rs 1,595.45 | Target price: Rs 1,900 | Upside: 19%

The company derives 54 percent of its revenues from domestic generic and API business.

"We expect the company to outperform the Indian pharmaceutical market (IPM) by 8-10 percent per annum over the next few years," said the analyst.

PI Industries | Buy | LTP: Rs 1,621.15 | Target price: Rs 1,784 | Upside: 10%

PI Industries is a leading player in providing custom synthesis and manufacturing solutions (CSM) to global agrochemical players.

The CSM business accounted for 66 percent of the company’s revenues in FY19 and is expected to be the key growth driver for the company in the future.

Coromandel International | Buy | LTP: Rs 669.15 | Target price: Rs 735 | Upside: 10%

Coromandel International is India’s second-largest phosphatic fertilizer player, engaged in the business of fertilizers, specialty nutrients and crop protection.

Covid-19 impact on the company's business has been minimal as its business is part of essential services.

"IMD forecasts of normal monsoon bode well for its business given that sowing is up by 13 percent in its addressable market. Enhanced sowing during the Rabi season in the south has led to good demand for agri inputs in the company’s key markets," said the analyst.

Analyst: Bhavesh Gandhi, Lead Analyst – Institutional Equities, YES Securities

Alembic Pharma | Buy | LTP: 858.50 | Target price: Rs 1,100 | Upside: 28%

"We rate Alembic Pharma as a conviction buy as the company brings solid visibility of revenues and profits and is a justified candidate for rerating against peers," said the analyst.

Alembic is set to monetize Rs 2,000 crore worth of CAPEX which would drive a 20 percent CAGR surge in ex-Sartans US revenues.

Key risks include deceleration in US business and slower than expected domestic growth which would adversely impact margins.

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