AXIS TOP PICKS: More Growth and More value

Axis top picks have delivered a whopping 46% return since introduction in the month of May (+11% in November) beating the benchmark. The month of November turned out to be one of the strongest months for Indian equities with an across the board rally. Mid and small caps registered very strong growth, but also the much underperforming banking sector also wiped out significant losses and was the second best performing sector after the metals sector. Rally was seen across the financial services sector including the PSU banks which have lagged significantly. In the last month edition of top picks, we had added 4 new stocks to our top picks with focus on BFSI, small and mid caps. As our allocation in the BFSI space has increased significantly, we will continue to maintain our allocation in the sector even after the solid rally. We book profit in Cholamandalam which has rallied by 33% in just one month and replace it with Federal bank.

With the strong rally seen in the month of November, the markets could take a breather in the month of December. Economic indicators have improved with GDP for Q2FY21 was better than expectations. However, the impact of pent up demand has also started to recede and sustenance of demand across the sectors could pose challenges. While there are challenges, the opportunities in the market are also significant. There is still value in BFSI, IT, Telecom, small and mid cap stocks. Our top picks orientation will continue towards adding beta and market dips should be viewed as a buying opportunity. Our key ideas are as follows:

Strong rally in the BFSI sector: The month of October saw a very strong rally across the top banks with Kotak Bank being the top performer among the frontline private banks. This traction continued in the month of November with the BFSI rally broad-basing. Small and mid cap NBFCs also performed during the month with the Nifty Financial services index registering 23% gain. The NSE private bank index was up by 24% while the NSE PSU bank index was also up by 24%. The key reason for the rally is that the market now believes that the orientation of the sector has changed from capital protection to growth while the challenges of NPA may not be as severe as they were believed to be at the beginning of Q2FY21. The management commentary across the board was largely upbeat.

Q2 FY21 results beat expectations; NIFTY target for December 2021 at 14,600: In NIFTY 50 companies, 34 companies beat earnings expectations in Q2 by a reasonable margin. While a significant portion of the beat has been on account of better margins which is attributable to cost management but recovery of revenues has also been better than expectations. With the significant beat as a backdrop, we have raised our earnings estimates for FY21/22 by 6%/8% and introduced FY23 earnings. We arrive at December 2021 target by valuing the NIFTY at 20x FY23E earnings of 730 translating to our target of 14,600.

Mid and small caps outperform and likely to gain more traction: In the month of November the NIFTY midcap 100 index and NIFTY small cap index delivered 16% and 13% returns respectively, outperforming the benchmark NIFTY which delivered a return of 11%. Mid and small cap indices have outperformed the large cap indices over longer time frames of 6 months and one year also by a significant margin. Also, small and mid caps present with both better value and growth proposition over the medium term. We continue to remain bullish on the mid and small cap theme and recommend more allocation in the space.

Growth combined with value is a win-win proposition: Even as the Indian equity markets have reached an interesting point the market offers multiple plays. Value plays like Metals, Banks, NBFCs and others have started delivering solid returns but also the small and midcap space marked by discretionary consumption, retail, autos and others have delivered returns. Thus, the market is rewarding handsomely across both the themes. Hence, combination of the two themes continues to deliver the most rewarding returns.
Based on the above themes we recommend the following stocks:

ICICI Bank, Manappuram Finance, Canfin Homes, Federal Bank, Bharti Airtel, HCL Tech, Tech Mahindra, Varun Beverages, CCL Products, Biocon, Minda Industries, NOCIL, Endurance Technologies, Steel Strip Wheels and Dr Reddy’s