Samvat 2079: From Ultratech to RIL, stock picks to fire up the new year

After a muted year of negative returns for the overall market, hopefully the new Samvat will be a happy hunting ground for investors. RAM PRASAD SAHU reads the tea leaves

The year gone by was a volatile one for markets. This trend could continue in the near term, given the multiple uncertainties related to the Russia-Ukraine stand-off, global and domestic rate-hike cycles, global economic slowdown, and more importantly, staggering inflation.

Indian markets have been resilient and outperformed most emerging market peers. With expectations of a rebound in the second half of 2022-23 and softening inflation, most brokerages are betting on the twin themes of domestic recovery and rising consumption.

After collating key picks from over 15 brokerages, here are some top picks recommended by at least two brokerages offering 10 per cent or more returns over the next one year.

ULTRATECH CEMENT

• India’s largest cement company is expanding capacity aggressively to gain incremental market share and tap into the rising demand from the infrastructure and housing sectors
• The organic expansion plan of 40-42 million tonnes per annum across the country will improve its market position and help it gain market share, especially in East India
• Notwithstanding commodity price inflation, the focus on cost control measures has helped UltraTech Cement exhibit resilient performance in the past few quarters (fourth quarter of 2021-22 and first quarter of 2022-23), says KRChoksey Research
• Healthy volumes and improved realisations are expected to drive revenue growth, while the focus on efficiency and cost control will help retain margins
• Religare Research expects the company to post an annual growth in net profit of 27 per cent over the next three years, led by capacity addition, higher utilisation, and improved realisations
• Increased competitive intensity from new players like Adani is a monitorable

HAVELLS INDIA

• The country’s largest and most diversified listed electrical consumer goods player has strong presence across product categories, including switchgears, cables and wires, lighting fixtures, and consumer appliances
• The total addressable market of Rs 2 trillion, with product portfolio revenue growth of 15 per cent in 2021-22 through 2024-25 (estimated), offers long-term growth runway
• A good mix of business-to-business and business-to-consumer segments makes Havells India a beneficiary of investment and consumption trends, says BNP Paribas Research. Potential catalysts, according to BNP, include volume market-share gains in various categories and bottoming out of margins
• Strong brand, robust balance sheet, and focus on improving the profitability of its Lloyd business makes Havells an attractive stock in the fast-moving electrical goods space, says Ashika Stock Broking

INFOSYS

• The country’s second-largest information technology services firm is likely to be a major gainer of the digital transformation demand across the world
• Low exposure to legacy services, strong digital credentials, and ability to structure and win integrated and complex transformation deals are positives that will power industry-leading growth, says Kotak Securities
• Robust order book and strong execution led to a revision in revenue guidance for 2022-23 to 15-16 per cent. Infosys has enough levers to keep/improve the operating profit margins in the 21-22-per cent band
• Considering the strong deal wins, rising share of digital business (about 61.8 per cent of revenue), likely margin improvement, and consistent capital allocation policy are reasons for a ‘buy’ recommendation, says Reliance Securities

ASHOK LEYLAND

• The only pure-play commercial vehicle maker is expected to be a key beneficiary of a demand revival in the infrastructure and mining segments
• The passenger (bus) segment, too, should benefit, with the unlocking of educational institutions and return-to-office trends
• New model launches and revival in the bus segment will help Ashok Leyland gain market share, says Prabhudas Lilladher. Overall volumes are scheduled to rise by over 20 per cent during 2021-22 (FY22) through 2024-25
• Operating profit margins are expected to improve in the current quarter sequentially due to higher operating leverage and lower raw material costs. Axis Securities expects margins to improve from 4.6 per cent in FY22 to 7.8 per cent in 2022-23 and 11 per cent in 2023-24
• Given the target prices (including the value for Hinduja Leyland Finance), investors can expect returns of over 20 per cent in the next one year

MAHINDRA & MAHINDRA

• Healthy response to new launches is helping the company improve its order book, volumes, and gain market share
• In addition to the internal combustion engine-based units, Mahindra & Mahindra is also eyeing the electric vehicle (EV) segment aggressively. It plans to launch five EVs under the Mahindra Born Electric brand over the next few years
• The company is the market leader in the tractor sector, with 40 per cent share. Volume gains are expected to reflect both on revenue growth and the overall margins
• Kotak Institutional Equities expects mid-single digit growth in tractor segment volumes, given normal monsoons and healthy reservoir levels  
• In addition to growth prospects for its key segments, what drives the investment argument in its favour are the reasonable valuation.

BHARTI AIRTEL

• Easing competitive pressures and a rising average revenue per user (ARPU) should help the No. 2 telecommunication services player by subscriber market share make revenue/margin gains
• The increase in ARPUs continued in the April-June quarter, rising to Rs 183 (2.8 per cent quarter-on-quarter)
• While the near-term ARPU target is Rs 200, on the back of price hikes and customer upgrade, Prabhudas Lilladher Research believes the sector’s wireless revenues will increase 17.7 per cent annually over 2021-22 through 2024-25, on the back of an ARPU increase
• Higher operating profit with similar capital expenditure has led to free cash-flow generation, which improved 66.2 per cent over 2019-20 through 2021-22
• Competitiveness, increasing ARPU leading to margin expansion, and attractive valuation of 6.9x enterprise value-to-operating profit are key positives for Bharti Airtel, says Nirmal Bang Research

ICICI BANK

• It is India’s second-largest private sector bank in terms of asset size. Its retail-facing profile has helped it to mobilise low-cost deposits and maintain a healthy current account savings account ratio
• The bank is likely to deliver sustainable earnings growth over the medium term, driven by strong loan growth, margin expansion, credit cost moderation, and healthy operating profitability, says Sharekhan Research
• The balance sheet is now more resilient. Its stringent underwriting practices and lower exposure to contextually vulnerable segments will help the bank become even stronger, says HDFC Securities
• Brokerages highlight that ICICI Bank has been a pioneer in technological innovation and expect its digital initiatives to improve operational efficiencies by cutting costs and lowering the cost-to-income ratio

STATE BANK OF INDIA

 

• The largest bank in India has a diversified loan book and one of the best liability franchises, with a current account savings account ratio of 45 per cent
• Retail consumption, corporate demand, and agriculture improvement due to monsoon and government capital expenditure are driving State Bank of India’s growth
• Tightened system liquidity, too, helps as corporates turn towards banks for satisfying their working capital requirements, says Anand Rathi Research
• It has navigated the pandemic exceedingly well, with gross and net non-performing assets (NPAs) at 3.9 per cent and 1 per cent, respectively
• YES Securities does not foresee any material asset quality risks and expects NPA ratios to improve further and credit costs to be limited
• While net interest margins declined in the first quarter of 2022-23, margins are expected to improve on account of repricing of loans and deployment of excess liquidity

HDFC BANK
 

• It is the largest private sector lender in the country with a loan book of Rs 14.8 trillion
• Focus on fee income growth, continuous investments in digital initiatives, and controlled credit costs backed by strong underwriting have enabled HDFC Bank to outperform its peers, says Nirmal Bang Research
• Net interest margins are expected to improve gradually over 2022-23. More than 50 per cent of the loan book is floating as the loan book gets repriced with a lag in deposit rate revision. Besides, the mix of loans with higher share of retail will also help in margin expansion, observes Ashika Stock Broking
• At the current price, the stock is trading at 2.5x its 2023-24 book value, which is lower than the historical average of 3.3x one-year forward valuation

RELIANCE INDUSTRIES

• The country’s largest listed company by market capitalisation is a play on three key segments of energy, retail, and telecommunications (telecom)
• The energy business of Reliance Industries is one of the best in class, with the highest complexity globally and the lowest cost structure, thus enabling it to have stable and higher margin profile against peers, says Ashika Stock Broking
• Aggressive expansion of the retail channel, both in the physical and in online properties, as well as multiple tie-ups and acquisitions, are expected to expand revenues for the business which accounts for a fifth of its revenue
• Improvement in the average revenue per user, expansion of its broadband footprint, and strong spectrum holdings should help the market leader expand its presence and gain market share
• Even as the financial services is being demerged, there could be further value unlocking with a separate listing of the retail and telecom business
• Foray into newer segments like green energy should also create value in the long run