'See Nifty near 13,500 by next Diwali; earnings recovery in midcaps to be sharper than largecaps'

Jyoti Roy believes that a 10-12 percent upside in Nifty is possible in the markets over the next one year, citing increasing likelihood of a second US stimulus package coupled with low interest rates globally and increasing likelihood of vaccination starting in the beginning of 2021.

The DVP- Equity Strategist at Angel Broking expects both cyclical and defensive sectors will continue to do well.

Going forward, he expects the broader markets will do well as compared to the benchmarks and within broader markets cyclical should do well given revival in earnings in FY22. But the recovery is likely to be uneven with different sectors charting out different recovery path.

Edited excerpts:

Q: What is your reading on the market rally happened so far and what is your outlook for the market by next Diwali. Where do you expect the Nifty by next Diwali - 13,000 or 14,000 or 15,000 and why?

We believe that it should not be difficult for the Nifty to trade closer to levels of 13,500 by next Diwali. While the Indices may appear expensive bases on FY21 EPS estimates one needs to keep in mind that earnings are going to be adversely impacted this year due to the Pandemic. However markers are trading at P/E multiple of around 18.5x based on consensus EPS estimate for FY2022. Therefore the markets are trading at around 18 percent premium to historical average based on one-year forward earnings estimates. While markets are not cheap at current levels, they are also not very expensive and therefore we believe that a 10-12 percent upside are very much possible in the markets over the next one year. Increasing likelihood of a second US stimulus package coupled with low interest rates globally should also result in a supportive global market. Increasing likelihood of vaccination starting in the beginning of 2021 should also provide support to the markets.

Q: What is your advise to investors on this Diwali (Samvat 2077) and what is the strategy they should adopt going ahead, considering the current market and economy condition?

We believe that the investors should stay invested in the markets despite any short term volatility in the markets. We believe that investors’ portfolio should be a blend of cyclical as well as defensive sectors. We also believe that investors’ portfolio should consist of a blend of largecap growth stocks along with a blend of very high quality midcap names with strong business franchises.

The Indian economy has witnessed a strong acceleration over the past few months led by manufacturing with the PMI reading of 58.9 for October being the highest since mid 2008. While manufacturing has led the rebound growth in the services sector has been relatively muted so far. However services PMI reading of 54.1 for the month of October is the first reading above 50 since March and points to green shoots of recovery for the services sector. We expect the economic recovery to continue from here on led by continued acceleration in the services sector which should provide support to the markets.

Q: What are those sectors which one should always keep in the portfolio and why?

As pointed earlier we expect both cyclical and defensive sector will continue to do well. Going forward we expect the broader markets will do well as compared to the benchmarks and within broader markets cyclical should do well given revival in earnings in FY22. However we expect the recovery to be uneven with different sectors charting out different recovery path. Within cyclical sectors we are positive on Auto, cement and low ticket consumer durable as demand has rebound at a much faster rate and is expected to remain strong. We also expect sectors with revenue visibility will continue to do well. We expect sectors like Agrochemicals, chemicals, two wheelers and tractors along with IT and Pharma will continue to do well given strong growth dynamics.

Q: What are those top stocks (across largecap, midcap and smallcaps) one should buy on the first day of Samvat 2077 (Laxmi Pujan) and why?

Few of the stocks which investors can look to add to their portfolio are Cholamandalam Investments, Galaxy Surfactants, HCL Technologies, Hawkins Cooker and Metroplois Healthcare.

Cholamandalam Investment | Target: Rs 362

Cholamandalam Investment has one of the most diversified AUMs in terms of product mix and geographical presence. The company has posted a very good set of number for Q2FY21 and has given AUM growth guidance of 12-15 percent for FY2021 while asset quality has also improved. A diversified product mix will help capture growth in the LCV, tractor, and 2W segment. Adequate capital adequacy, declining cost of funds and strong parentage provide comfort. The company will benefit significantly from stabilization in the operating environment.

Galaxy Surfactants | Target: Rs 2,075

The company has been increasing its share of high margin specialty care products in its portfolio which now accounts for around 40 percent of its revenues while the balance is accounted for by the performance surfactant business. The company has a very strong relationship with MNC clients and supplies raw materials to them not only in India but also in US, EU and MENA region. Though the company’s operations had been impacted due to the Covid-19 outbreak in Q1FY21 we expect revenues to bounce back strongly in Q2FY21 given the company’s exposure to the personal and home care segment and recovery in the specialty segment.

HCL Technologies | Target: Rs 1,051

HCL Technologies is amongst the top four IT services company based out of India with a strong presence in Infrastructure management service. The company has posted a good set of numbers for Q2FY21.driven by strong execution and rebound in demand while deal pipeline also remains strong across service lines, verticals and geographies. HCL Tech will be the biggest beneficiary of migration from public to hybrid cloud given its market leader status in Infrastructure management. At current prices the stock is trading at a significant discount to the other large cap IT companies like Infosys and TCS and offers tremendous value at current levels given market leader status in Infrastructure management.

Hawkins Cooker | Target: Rs 5,992

Hawkins Cookers (HCL) is one of the leading player in Pressure Cookers and Cookware segment. Over the last two years, the company has outperformed TTK Prestige (market leader) in terms of sales growth around 13 percent versus around 4 percent in Cookers & Cookware segment. Cooking gas (LPG) penetration has increased from 56 percent in FY2014 to 80 percent 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.

Metropolis Healthcare | Target: Rs 2,360

Company has an asset light model with a strong Balance sheet having cash and cash equivalents to the tune of Rs 235 crore as on June 30, 2020. From 62.6 percent revenue de-growth (including covid testing) YoY in April 2020, the company has registered 40 percent revenue growth in September 2020 as COVID revenue is an additional source of revenue for the company. Non-COVID business is almost back to the normal. We are positive on the long term prospects of the company given expected long term growth rates of around 15 percent CAGR, stable margins profile and moderating competitive intensity.

Q: Majority of experts feel September quarter earnings were better-than-expected and management commentaries were also good so far. Do you really expect FY22 to be a great year in terms of earnings and have you revised earnings estimates upwards for FY22?

The earnings season so far has been head of estimates led by strong economic recovery in Q2FY21 led by pent up demand and gradual opening up of the economy. The earnings beat were across sectors including Banking, Cement, IT, NBFC and other cyclical. We expect upgrade in consensus EPS estimates for FY2021 and FY2022 post the Q2 earnings season which should provide support to the markets.

Q: Most of experts feel the Samvat 2077 would be a year of midcaps and smallcaps over largecaps. Do you really believe so and why?

We believe that midcaps could outperform largecaps over the next one year given expectations of faster earnings recovery for midcaps. Earnings for midcap companies were severely impacted due to the COVID-19 crisis given greater operating leverage as compared to largecaps. Therefore earnings recovery for midcaps is going to be sharper as compared to large caps in FY2022 as the economy keeps improving. However it is possible that the rally in midcaps may be back ended as investors may prefer to stick to large caps for now till the time there is absolute certainty on the vaccine front.

Q: Interest rates are very low now and the builders are offering properties at discounted prices. Do you think the demand will revive now, and is the Samvat 2077 right time to invest in real estate or real estate stocks?

We definitely see a revival in real estate demand next year driven by lower interest rates, increasing affordability and greater interest from NRIs. While interest rates have come down significantly over the past 12-18 months there is still scope for some more correction in interest rates as full transmission of the RBIs rate cuts are yet to happen. While we are already seeing increase in demand from the pandemic lows we should see further improvement in demand once mass vaccination starts sometimes in early 2021. Therefore we think that demand will keep increasing gradually from here on and one can look at investing in real estate once there is greater clarity on the vaccine front.