Top stocks for Diwali 2020 : Fundamental Muhurat picks by Kotak Securities

Analysts believe banks, NBFCs, automobiles, oil & gas, telecom, utilities, capital goods, cement and metals could come into focus in Samvat 2077. Analysts at Kotak Securities expect an upside between 20 and 39% in most of these sectors. "As we advance towards getting the vaccine (by middle of next year) and economy gets back to normalcy, we can expect the economy driven sectors to outperform the defensives in Samvat 2077. The potential upside in most of these sectors based on our one year price targets ranges between 20 & 39% (vs single digit potential upside in Nifty-50)," says the brokerage. Since most of the economy driven sectors are prone to market correction one should have an accumulation strategy in them rather than investing at one go.

Here are the top stock recommendations for Diwali 2020 by Kotak Securities:

Axis Bank

Target price: ₹600, upside of 11%

Axis Bank’s 2QFY21 core operating profit growth was ~20% yoy driven by 11% yoy revenue growth on the back of 20% yoy Net interest income (NII) growth. In 2QFY21, loan growth was 11% yoy. Net interest margin (NIM) improved to 3.6% largely on lower cost of funds down which was down to 4.6%. Cost-to-income ratio trended down to 38% in 2QFY21 (vs 42% in FY20). "We like the bank for its superior franchise at inexpensive valuation and believe it would come out of this crisis relatively stronger. We expect earnings growth of 24.5% in FY22E and 25.4% in FY23E. Axis Bank trades at 1.5x FY22E book value. We are valuing the bank at 1.9x book and ~15x on September 2022E Earnings per share for RoEs (Return on equities) of ~12% in FY22E and around 14% in FY23E.

Bajaj Auto

Target price: 3,900, upside of 31%

Domestic motorcycle retail demand has reached 90% of the last year levels and export motorcycle retail demand has reached 90-95% of the last year levels for the company, which is encouraging. "Strong long-term growth potential in export geographies where the company has already established itself as a formidable player. We expect export volume mix to improve to 52% in FY23E from 47% in FY20," says Kotak Securities. The Brokerage also expects the company's sales volume to grow by 20.5% in FY22E and 14.6% in FY23E.

L&T

Target price: 1,300, upside of 36%

L&T indicated a strong prospect pipeline of ₹6.1 lakh cr spread across domestic ( ₹4.8 lakh crore) and international ( ₹1.3 lakh crore). Kotak Securities believe, which should start materializing in coming quarters with bunching up of a few orders. "We expect profits to grow by 86.9% and 21.0% in FY22E/FY23E, respectively," says the brokerage.

Ambuja Cements

Target price: 300, upside of 19%

Expansion plans and cost-saving projects provide a strong growth visibility. Company is increasing capacity in North India, the most profitable region in the country. "We expect standalone business volume growth of 15% in CY21E and 13% in CY22E and capacity utilization increase from 76% in CY20E to 93% in CY22E. We estimate earnings per share (EPS) to grow at a compounded annual growth rate (CAGR) of 19% over CY20-22E led by capacity expansion which will drive volume CAGR of 14% in the same period," says the Brokerage.

"Strong growth visibility, a robust balance sheet and attractive va luations. Stock is trading at a steep discount to its 10-year mean of 13x EV/EBITDA (Enterprise Value / Earnings Before Interest, Taxes, Depreciation & Amortization) and peers," the brokerage adds.

ITC

Target price: 260, upside of 50%

Cigarette volume dipped a bit in July and Aug (after normative levels in June) due to local lockdowns but have picked up again in September. FMCG core portfolio (75% of FMCG ex-stationery) is tracking well except for slight moderation in biscuits. ITC has been able to develop strong brands in select categories. New product launches have picked up momentum in the past few years. "The stock offers a good combination of (1) inexpensive valuations (13X Sep 22E PE), (2) healthy dividend yield (6%) and (3) promise of solid LT growth in FMCG. We do not see any structural negative emerge for ITC from the ongoing pandemic," says Kotak Securities.

Bajaj Finserv

Target price: 8,000, upside of 31%

In 2QFY21, Bajaj Life Individual annual premium equivalent (APE) was up 19% yoy. Strong growth in high-margin non-par business (1.5x yoy) led to 1.1x yoy growth in gross value of new business (VNB) in 1HFY21. The brokerage houseexpects Bajaj Life to deliver pre-overrun VNB margins of 23% in next two years. " We are rolling over our fair value to ₹8,000 (September 2022E) from ₹7,600 earlier.

SBI Life Insurance

Target price: 1,100, upside of 37%

In 2QFY21, SBI Life reported 0.5% yoy/0.2% qoq expansion in value of new business (VNB) margin to 18.9% on the back of sharp growth in the protection business at 70% yoy; individual protection was up 58% yoy. SBI Life’s solvency ratio increased to 245% in 2QFY21 as compared to 195% in 2QFY20, higher-than-regulatory requirement of 150% and internal threshold of 180%. The broker expects improving business momentum in 2nd half.

Infosys

Target price: 1,400, upside of 27%

Infosys impressed with excellent results and a significant beat on revenues, EBIT (Earning before interest and tax) and net profit in Q2FY21. Infosys’ new deal wins hit a new high of US$270 cr. Net new deals at US$270 cr was 2.2x of the previous high achieved in Sep-18. Infosys won 16 large deals, highest ever.

"We expect earnings to grow by 12.2% in FY21E, 12.0% in FY22E and 13.2% in FY23E. We expect Return on Equity of 26.8% in FY21E, 27% in FY22E, & 27.6% in FY23E," says the brokerage.

Hindustan Zinc

Target price: 295, upside of 32%

Hindustan Zinc’s (HZ) 2QFY21 revenues increased by 25% to ₹5,660 crore led by higher metal volumes & silver prices. Volumes increased by 8%/30%/51% yoy for zinc/lead/silver. Stronger than expected demand recovery in China, mine supply disruptions, buoyant sentiments and higher liquidity supported 30% increase in zinc prices from March lows. "The Board has approved an interim dividend of ₹21.3/share. We expect dividend yield of 10% and 9.5% in FY21 and FY22, respectively. HZ’s strong growth visibility, high payout, Free cash flow yield and inexpensive valuation suggest attractive risk-reward," says Kotak Securities.

Bharti Airtel

Target price: 710, upside of 56%

"We believe Bharti remains a solid medium-term bet on (1) improvement in sector fundamentals (regardless of whether the end game is a 2-player structure or a 3-player one) and (2) sustained solid execution," says Kotak Securities. The brokerage house expects Bharti to report free cash flow of ₹17,227 crore during FY21-23E period. Bharti has sufficient cash on books with no liquidity issues.