NIFTY target raised to 17400 + Top 16 Small Cap, Mid Cap and Large Cap Stocks To Buy

Q1FY22 Earnings Commentary Critical; Long-Term Constructive

Trends Remain Intact

Axis Top Picks basket has delivered an excellent 82% return since its introduction in May’20 (3% in Jun’21), beating the NIFTY return of 1%. While NIFTY returns stayed limited, the broader market continued to outperform the benchmark, indicating significant market strength. Macroeconomic newsflow was mixed with inflation rising ahead of estimates. COVID-19 cases have continued to decline at a healthy rate and the vaccination drive has taken off.

Meanwhile, new COVID-19 variants such as Delta plus continue to pose threats to the economic recovery which has already been hampered by lockdowns. The hospitality sector has been one of the most impacted sectors and it is witnessing a significant number of closures. Sectors such as IT, Telecom, Pharmaceuticals, FMCG, and Commodities as well as the rural segment have not been much impacted by the lockdowns. However, the impact of new lockdown measures on the BFSI sector will be critical and management commentary after the Q1FY22 results will be most crucial.

The market continues to see a robust performance from the Small and Mid Cap stocks as these indices once again delivered a healthy performance during the month. We add a recently initiated coverage stock Orient Cement to the list of our top picks while booking profits in ACC which has delivered healthy double-digit returns. We also book profit in PI industries which has delivered excellent returns during the month and add Ashok Leyland as a ‘recovery play’ in the CV cycle. Our top themes are as follows:

Q1FY22 earnings commentary to be critical: Q1FY22 earnings are very likely to be a mixed bag. Post-strong Q4FY21 earnings, the consensus further upgraded its earnings estimate (~5%) with significant upgrades coming in the Metals & Mining sector. Interestingly, even after the imposition of lockdowns in Q1FY22, earnings for the BFSI sector have seen marginal upgrades in the last two months. The BFSI sector is seeing a good number of upgrades in its corporate book because of rising commodity prices but the Retail, SME, and MSME sectors are experiencing intense pressure on account of lockdowns. We believe the lockdown challenges are more likely to manifest into lower credit offtake instead of a serious increase in the NPAs.

However, consensus expectations continue to remain high and some disappointments are likely. Management commentary stands critical. We continue to maintain our BFSI picks in our top picks unchanged. IT and Pharma will be critical sectors to focus on as they were unaffected by the lockdowns. The Pharma sector has seen strong tailwinds, both in the domestic as well as in the international space, and is more likely to outperform in the near term. FMCG margins will be critical as the sector faced input cost pressures and the impact of price hikes is yet to be seen. Commentary on the volume growth in discretionary consumption will be very important.

Volatility continues to reduce, indicating continuance of strong bull market: While the markets seemed volatile on a few occasions during the month, the spook index (India VIX) continued to trend downwards. India VIX has trended down to 14 now, which is significantly lower than the long-term average of 22. Lower VIX is a significant positive for the Small and Mid Cap stocks which continued to deliver strong returns during the month. We believe VIX may go up during the Q1FY22 results but do not expect a meaningful rise in the index, which means a sharp market correction is unlikely.

Mid Cap, Small Cap, and Large Cap Value to remain key allocation themes: Our market themes remain unchanged as these continue to deliver strong returns. In the last month, Small and Mid Cap indices delivered 6% and 4% returns, respectively. Value investment style outperformed the Growth and Quality investment style by a significant margin while beating the Large Cap NIFTY index by a healthy margin as well. We believe these themes will continue to deliver strong returns over the medium term and recommend allocation in these strategies.

Raise December NIFTY target to 17400: In our COVID 2.0 note, we had cut our NIFTY earnings by 6% and subsequently our NIFTY target by 6%. However, post Q4FY21 results and significant upgrades across the sectors, our estimates have also seen upgrades by 8%. This is primarily driven by upgrades in the Metals & Mining sector which has seen robust results and high metal prices. Consequently, our Dec’21 NIFTY target has also been upgraded to 17400 (22x FY23E earning) as we maintain our target multiple. Overall, we remain constructive on the market and believe that the dips should be utilized to build positions in the above-mentioned themes.