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Equity markets ended FY21 with stellar returns on the back of sharper-than-expected economic and corporate earnings recovery. Overall, Nifty gained 71% in FY21 crossing the 15k mark for the first time. The broader market sharply outperformed with gains of +102% /126%, respectively.
4QFY21 is yet again expected to be strong for corporate earnings. We expect PBT/PAT to grow 98%/76% YoY for the MOFSL Universe in 4QFY21. 14 of the 20 sectors are expected to post >20% YoY earnings growth. Nifty sales/EBITDA/ PAT should grow 18%/26%/65% YoY in 4QFY21E. Metals, Private Banks and Automobiles are expected to drive ~60% of the incremental 4QFY21 PAT growth.
The Nifty is expected to end FY21 with healthy 13% earnings growth (EPS of INR533), the highest since FY11, despite the challenges posed by the COVID-19 pandemic. The expectations for FY22E earnings are running high with over 30% growth in Nifty FY22E EPS.
However, the recent resurgence in COVID-19 cases may pose a risk to the growth estimates. Hence the pace of vaccination will assume crucial importance.
Here are Motilal Oswal’s 10 stock picks for April 2021:
1. Voltas CMP-948 TP-1170
# Voltas’s 3QFY21 earnings were 31% better than our expectation, led by better than-expected execution in the EMP segment, strong volume growth in the UCP segment, with ongoing cost rationalization leading to higher margin.
# It has retained its numero uno position in Inverter Air Conditioners/Room Air Conditioners (RAC) with a market share of 21.8%/26% in Dec’20. Valuations are expected to remain elevated going into the summer season, with high expectations as well as likely announcement of a detailed PLI scheme for the AC industry.
# We increase our FY21E/FY22E/FY23E EPS estimate by 5%/11%/15% owing to the strong performance in 3QFY21.
2. Ultratech CMP-6539 TP-8110
# UltraTech’s 3QFY21 result was impressive on multiple counts. UTCEM’s strong pan-India distribution network and preferred supplier status for key infrastructure projects place it well to tap into expected growth in both retail and institutional (non-trade) cement demand in India.
# While it is ramping up its under-utilized acquired capacities, it also has a strong pipeline of expansion projects that offers strong growth visibility. We estimate a 14%/28% CAGR in consolidated EBITDA/PAT over FY20–23E, driven by a 7% volume CAGR and lower operating/interest cost.
3. Britannia CMP-3693 TP-4575
# The management’s efforts in the last few years on a) expanding distribution, b) boosting R&D capabilities, c) successful implementation of its low unit packs strategy, d) consistent cost rationalization, e) investments in boosting overall and regional manufacturing capabilities and f) its new regional strategy are resulting in consistently widening moats over peers in Biscuits as well as in the broader Food category.
# Immense structural opportunity, remarkable track record, RoEs of over 40% superior to most consumer peers, and an attractive risk reward ratio on FY23E earnings, lead us to be positive on Britannia. Maintain Buy.
4. Sun Pharma CMP-633 TP-740
# SUN Pharma delivered higher-than-expected profitability on: a) better traction in Specialty portfolio/US Generics, and b) extended benefit of lower opex.
# SUNP filed 10 ANDAs and received 15 approvals in 9MFY21. Its ANDA pipeline remains robust, with 90 approvals pending.
# We believe SUNP’s RoE is at a trough and would improve with 22% earnings CAGR, led by 9%/7%/10% sales CAGR in DF/US/RoW and 340bp margin expansion over FY20-23E.
# We are positive on SUNP due to: a) continued benefit of lower opex in the Branded segment, b) further ramp-up in the Specialty portfolio, c) strong ANDA pipeline and d) market share gain in the US Generics segment. Maintain Buy.
5. Aurobindo Pharma CMP-915 TP-1100
# Aurobindo Pharma delivered an operationally in-line 3QFY21 performance. A gradual revival is seen in global injectable sales and improved traction in the Oral Solids portfolio. ARBP is progressing well on a) the vaccine opportunity, b) enhancing the Injectables portfolio, and c) building the Biologics portfolio.
# We remain positive on ARBP on the back of a) complex injectables, supported by manufacturing capabilities/capacity, b) healthy business prospects for APIs over 3–5 years, c) the improving profitability of the Europe business, d) its good position to cater the vaccine opportunity over the medium term, and e) reduced financial leverage. Maintain Buy.
6. Cadila Healthcare CMP-505 TP-550
# Cadila Healthcare (CDH) posted in-line 3QFY21 results, led by a superior performance in India/EM, partly offset by a dip in US sales. Cadila (CDH) and Celgene (innovator) have reached an agreement to settle the litigation pertaining to g-Revlimid in the US.
# We remain positive on CDH on account of its strong ANDA pipeline (comprising injectables), NCE portfolio, and outperformance in DF.
# The vaccine opportunity may be a potential trigger over the medium term. We value CDH at 22x (in line with its three-year average) 12M forward earnings to arrive at TP of INR550. Maintain Buy.
7. SAIL CMP-93 TP-106
# We see Steel Authority of India (SAIL) as the best play on higher steel prices as it: 1) is backward integrated with captive iron ore, 2) has a higher operating leverage due to high conversion cost, and 3) has a higher financial leverage.
# With limited capex, higher pricing should drive significant deleveraging and boost equity value. We estimate net debt to decline by INR232b (INR56/sh, 76% of CMP) over FY20-23E to INR305b. We also expect higher dividend payouts going forward (implying ~5% yield), supported by strong FCF of INR19/sh (25% yield).
# We are raising our FY22E/FY23E EBITDA estimate by 34%/37% and TP by 28% on expectation of higher realization and volumes. Maintain BUY.
8. JSPL CMP-414 TP-452
# JSP achieved its highest ever quarterly EBITDA/PAT in 3QFY21 supported by a strong pricing environment. Net debt fell QoQ to INR256b, implying a net debt/ EBITDA of 2.35x.
# We expect margin to be extremely strong in the near term (INR23,300/t in 4QFY21E) supported by high prices and benefit of Sarda inventory.
# We raise our FY21E/FY22E EBITDA estimates by 11%/4%, to factor in strong pricing trends. JSP is the least levered Indian steel company and we expect net debt to fall further to INR183b (1.6x of EBITDA) by Mar’22, which should drive a re-rating. Reiterate Buy.
9. Cyient CMP-687 TP-780
# Cyient’s 3QFY21 revenue growth at 4.7% QoQ in USD terms (v/s our estimate of 3%) was led by a 24.8% increase in DLM. Spends in verticals like Communication and Energy and Utilities have started picking up.
# We expect a rebound in ER&D spending. The management’s strategy to leverage these spends, led by a refreshed GTM strategy and increased focus on large deal wins, should dwell well with its growth performance.
# We expect CYL to deliver 12% revenue CAGR over FY21-23E. Supported by a better-than-expected revenue and margin outlook, we upgrade our FY21E/FY22E/FY23E EPS estimate by 4.5%/14.2%/6.5%. Upgrade to Buy.
10. Mphasis CMP-1700 TP-2020
# Impressive deal wins over the last two to three quarters and a healthy deal pipeline would likely drive near term growth. Strong traction in Direct International should continue to drive overall performance.
# Guidance on its ability to defend margin is a key positive. The ability to win multiple large digital transformation deals proactively and under vendor consolidation scenarios indicates strength in its sales and delivery capabilities.
# Higher exposure to largely stable verticals (BFSI – ~63% of revenue) should also help mitigate risks to some extent. We value the stock ~21x FY23E EPS. Maintain Buy.
(By Motilal Oswal Financial Services)
Disclaimer: These stock recommendations have been made by Motilal Oswal Financial Services. Readers are advised to consult their financial planner before making any investment.
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