Risk appetite, strong earnings to push Sensex above 50,500 in 2021, says Prashanth Tapse of Mehta Equities

Prashanth Tapse, AVP Research, Mehta Equities, is confident that the year 2021 will be a happy one for markets, with the Sensex galloping past 50,500 helped by an improved risk appetite and healthy corporate earnings.

Tapse, who thinks India is on the cusp of a cyclical recovery, has been advising investors to keep booking profits every time the market makes fresh near-term highs, and there have been plenty of them.

He is betting big on small and midcaps and thinks they will keep outperforming the frontliners. In an interview to Moneycontrol's Sunil Shankar Matkar, Tapse cautions that “black swan” events like the coronavirus outbreak are likely to be more frequent and investors’ portfolios should be able to weather such storms. Edited excerpts:

Q: The benchmark indices have gained 13 percent in 2020 and are up 82 percent from the lows of March. Do you expect the market to report double-digit gains in 2021 as well?

Yes, we do expect the stock market to continue gains in 2021, as traders in domestic markets are seen simply riding this bullish optimistic wave as India is seen as a strong destination as is reflected in the FIIs inflow, which simply seems to be unstoppable. Having said that, the markets will seemingly maintain volatility in the short and medium term. In the long term, the resumption of economic activity and the eradication of the coronavirus threat will dictate investor sentiment. Looking ahead, continued improvements in global risk appetite and better-than-expected corporate earnings will further boost Indian equities. Hence, we remain bullish and see the Sensex scaling above 50,500 in CY2021.

Q: Broader markets have outperformed the frontliners in 2020. Most experts believe the trend will sharpen in 2021, do you agree?

We expect the broader markets (small and midcaps) to continue outperforming frontliners (largecaps) due to higher expectations in earnings growth as well as the effect of cost rationalisation helping corporates to do better. Besides expansion of the market, we believe the broader cap segment performance will gather more steam on the back of lower valuations relative to largecaps.

We believe markets are discounting all the possible optimistic factors as India is on the cusp of a cyclical recovery. Market consensus suggests India's GDP to contract 1-2 percent in Q3FY21 and growth may turn positive in Q4. The sharper-than-expected rebound in India's economy Q2 GDP growth has turned out to be better-than-anticipated, falling by just 7.5 percent against the massive contraction of 23.9 percent in the first quarter. However, we expect the whole year's growth will be in the negative zone. Rising demand and falling infection rates have tempered growth expectations. India's GDP is likely to rebound to 8.5 percent in 2022 which is best in any Asian economics.

Q: IT and pharma sectors have reported strong returns, followed by FMCG, capital goods, metals, consumer durables, telecom and auto but banks have underperformed. Which are the sectors that can rally in the new year and which are the sectors investors should avoid?

IT, pharma, speciality chemicals, healthcare, consumer discretionary and BFSI would continue to perform well in 2021 and sectors which one should be underweight on are power, reality, entertainment and tourism.

Q: Almost a similar number of companies launched IPOs in 2020 as in 2019. Will the primary market remain as strong in 2021 and which are the IPOs to look forward to?

I believe the Indian stock market will continue its movement in 2021 and the primary market will also mirror the same story. Looking ahead, continued improvements in global risk appetite and expected improvement in domestic economic activity reflecting a rise in GDP growth will further boost Indian equities. IPO pipeline will continue to remain strong as there are quality IPO’s lined up and the mood is optimistic Over the past four-six months, many quality companies have hit the market and also rewarded investors in a big way. We see a few dozen companies wishing to grab market sentiment such as Kalyan Jewellers, Sarvoday SFB, ESAF SFB, Nazara Technologies, Antony Waste Management and RailTel Corp are in line to launch IPO in December 2020-January 2021. Others like Indigo Paints, Stove Kraft, Samhi Hotels, Apeejay Surrendra Park Hotels, Zomato and the nation's financial behemoth LIC are in the pipeline on or before March 2021.

Q: What are the key risks and triggers to watch out for in the coming year?

After the pandemic-induced shock in 2020, there are a few risks that still need to be monitored carefully and need to start looking ahead, towards the opportunities and challenges that COVID-19 has presented us. The length and depth of the current economic crisis will depend on solving the healthcare crisis with an exit plan. Meanwhile, many governments are trying to returning economic activity back to normal, which we believe is the biggest concern.

COVID-19 has irreversibly changed investment behaviour, as now it is very clear that "black swan" events, which were considered to happen once in a life, are now likely to be more frequent in different ways. If we just look back at the big market meltdowns, the dotcom bubble in 2001, the financial crisis in 2008 and now COVID-19. This means investors' portfolios have to be better positioned to weather these kinds of storms with proper asset allocations considering risk and reward. The biggest risk which we see is global liquidity dries up because of the Fed policy.

Q: Which are your top five bets for 2021?

Tata Motors | Target: Rs 220

We believe Tata Motors has a lot of potential. It has remained a high beta stock because of a lot of news flow from JLR Europe, China market and Brexit uncertainty but now tables have turned and improvement is being witnessed in both JLR and Tata Motors domestic business. If investors are looking for a multibagger, Tata Motors could be a strong candidate from current levels. Hence we recommend investors to accumulate with a target of Rs 220-250 in the next 9-12 months investment period.

Rationale:
a) Upcoming scrappage policy can help create demand in the commercial vehicles (CV) segment.
b) New launched to drive domestic business

c) Plan to achieve zero-debt target by FY24

HDFC Life | Target: Rs 800

For investors looking for a high-quality business with consistent earnings growth, HDFC Life offers the best in class investment opportunity at current levels. We see an opportunity for the insurance industry amid COVID-19. We believe people will start realising the importance of insurance and the backing it provides in trying times like the current ones. HDFC Life continued to be the market leader in terms of total new business received premium, with a leading market share in the private sector compared to others. Hence we believe the stock to deliver steady returns over the medium term with a target of Rs 800.

Rationale:
a) Structural play for a very long period of time.
b) Under penetration and new segments developing.

c) Demand for insurance has increased given COVID, 2021 may see much faster growth.

Sequent Scientific | Target: Rs 220

New guard Carlyle is well known for great turnarounds and SeqQuent has a good story to see. Carlyle will utilise its global network, industry knowledge and operating expertise in healthcare to develop SeQuent on its business expansion strategy, enhance its operations, and help the company drive sales and product innovation. SeQuent is a pure-play animal healthcare company with global operations and provides active pharmaceutical ingredients (APIs), formulations, and analytical services in over 100 countries, with manufacturing operations in India, Spain, Turkey, Germany and Brazil. Overall, based on the rationale we understand, the stock can deliver healthy returns over the long term with a target of Rs 220.

Rationale:
a) American private equity investor The Carlyle is now the new guard (Promoter)
b) SeQuent is a pure-play animal healthcare company with global operations.
c) Strong API and formulation businesses in the evolving animal health industry.

d) Increasing demand for animal protein, rising awareness about food safety.

IRCTC | Target: Rs 1,800

Post unlocking of the economy, the business has been recovering gradually for the company and is expected to recover to pre-COVID levels only in FY2022 and once normalcy comes back, IRCTC will outperform from here. Given the monopolistic nature of the business and strong growth expected post FY2021, we are positive on the company.

Rationale:
a) Company enjoys a monopoly with zero competition, has a decent track record of operating performance with ROE of 26 percent.
b) Strong entry barriers in internet ticketing and catering.

c) Huge long-term opportunity to run and manage private trains operations.

SBI Cards and Payment Services | Target: Rs 1,050

We believe SBI Card is a multi-year growth story and presents an opportunity to participate in a lowly penetrated industry. SBI Card has a solid foothold, healthy asset quality, brand image and increasing market share should continue to support the company's performance

Rationale:
a) The second-largest credit card issuer in India, with 18.1 percent market share.
b) Proxy to the fast-growing digital payments space in India and the only listed card company.

c) Credit card spends in India witnessed 32 percent CAGR over FY15-19 to reach Rs 6 lakh crore and is expected to reach Rs 15 lakh crore by FY24.

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