Axis Top Picks for April 2021

New Fiscal; New Hope!

Axis top picks have delivered a solid 63% return since introduction in May 2020, beating NIFTY 50 by a significant margin. The fiscal year ended on a strong note for the equity markets with all the sectors delivering positive returns. Metals and IT registered the strongest gains while FMCG grew the slowest. Autos and Realty also delivered solid returns during the fiscal. The pharmaceuticals sector registered solid returns during the peak of the pandemic but lost steam in the last few months. While FY21 was very strong aided by cheap valuations and a low base but March was a mixed bag. The high beta sectors like BFSI saw profit booking while defensives like FMCG and Pharma registered some gains. Nonetheless, the market structure continues to remain positive. As we embark on the new fiscal, the focus is clearly on earnings growth and sustenance of demand momentum. Even as some areas are seeing the waning of demand momentum because of the fulfilment of pent up demand but the structural trends are still positive. There also challenges emerging on account of a sharp rise in input costs which will impact the earnings across sectors where commodities such as metals are key input costs but new areas of growth like improving fixed capital formation are emerging. The structure has is a significant long term positive as the capacity creation phase delivers solid returns.

We have made key changes to our top picks with the addition of SBI, Equitas SFB, ACC, Camlin Fine Science, and Minda Corp while we book profits in NOCIL, Manappuram, Endurance, Canfin Homes, and JK Lakshmi Cement. Our December NIFTY target remains unchanged at 17,200. Our key ideas are as follows:

Broad-based returns in FY21: In FY21, NIFTY delivered 78% returns which was higher than most of the emerging markets. India was one of the top-performing equity markets in the world even beating the highly coveted NASDAQ tech index. However, the year started on a very sombre note with the imposition of lockdown and major concerns for the banking sector. As the year progressed and quarterly results were declared, it was observed that India Inc managed the crisis much better than expectations. Losses were mitigated better than expectations and as the economy started opening up, the demand scenario was much better than expectations. The IT sector reported a very strong momentum of deal wins through the year.

The momentum got stronger through the entire year and the sector was clearly the second-best performing sector after the metals sector. We believe that IT will continue to deliver good returns in FY22 also as tail winds for the sector continue to be robust. The metals and mining sector also saw a sharp increase in commodity prices and Steel was one of the best-performing commodities in FY21. Even as IT and Metals were the top-performing sectors, all the other sectors delivered solid double-digit returns. The NIFTY midcap 100 and NIFTY small cap 250 more than doubled beating the large cap NIFTY 50 by a significant margin indicating the broad-based returns of FY21.
The market returns in 2018 and 2019 were quite narrow with the top 10 stocks dominating the market.

Focus on Q4 earnings and the commentary for FY22: Post Q3 earnings, the NIFTY 50 index saw solid earnings upgrades but margin challenges have emerged recently. Q4 will be benefited from a low base but margins will be critical. IT and Metals will report one of the best earnings trends but it is quickly getting factored into the prices. Earnings for mid and small caps will be closely watched as they will set the tone for FY22. The auto sector will be another critical sector as margin trends have been weak for the sector bellwether Maruti and Hero could also face similar challenges with further impact on account of inventory issues. BFSI will still hold the key but the trends from large private banks like ICICI continue to remain very strong. Overall, Q4 should be a continued improvement on Q3 but operating performance will be very closely watched.

Mid cap, Small cap, and Large Cap Value will be key themes for FY22: Mid and Small caps have outperformed the large caps by a significant margin in FY21 but we believe that this trend is likely to sustain in FY22 as well as earnings growth is expected to be very strong for the broader market. Generally, during periods of higher earnings growth, mid and small caps register strong earnings growth and outperform the large caps. Value as a theme outperformed quality, growth and momentum by a very large margin and this trend is also likely to sustain as broader economic recovery aids such investment styles.

Maintain December NIFTY target 17,200: Earnings growth for the entire decade from 2010-2020 was quite sluggish with an earnings CAGR of ~7%(doubling in 10 years). However, the current expectations build for earnings doubling in the next 4 years translating to an earnings CAGR of ~18% which is quite significant.

Based on the above themes we recommend the following stocks:

ICICI Bank, SBI, Equitas SFB, Federal Bank, Bharti Airtel, HCL Tech, Tech Mahindra, Varun Beverages, RelaxoFootwears, Amber Enterprises, Camlin Fine Science, Minda Industres, Steel Strip Wheels. Lupin& ACC