Top 10 Stocks To Buy Now: Research Report By Axis Securities

AXIS TOP PICKS: TIME FOR RISK CALIBRATION

Axis Top picks basket delivered a return of 9.4% (6% in June) since the launch in the month of May with 9 out of 10 picks registering positive gains. Our long-term themes of uptick in Digital, Telecom, Rural, Supply chain shifts and Consumer staples remain intact but we also see the positive impact of pent up demand helping Automobile and Cement sectors in the near term. We upgrade both the sectors to equal weight. We make changes to our top picks as we book profits in Escorts which has delivered a whopping 45% return since May and also cut losses in Aarti Industries because of the deal loss. We add ITC and CCL products in our top picks as we find value buying and small cap allocation increasing. Our key ideas are as follows:

Broad-based recovery across sectoral indices but some degree of fatigue setting in: While NIFTY Index was up 5% in June, the NIFTY PSU Bank Index was the top performing index for the month delivering 18% return during the month. The previous month top performers like NIFTY Autos, Commodities and Metal underperformed during the month on account of profit booking. The last week of June saw most sectors in red except for IT and FMCG. The market for the month of July will be focused on quarterly results commentary, impact of opening up of economy and challenges of the pandemic being still around.

IT, Consumer and Telecom to be back in focus with quarterly earnings season: Markets eventually follow earnings trajectory. IT, Consumer and Telecom are likely to post better earnings and demonstrate better earnings growth trajectory in the upcoming results. The economic risks continue to remain quite high with FY21 likely to see a 4% compression in GDP. Even as bulk of the compression was in Q1FY21, the impact of the compression will be seen in the forthcoming quarters as it will manifest in slower growth rate.

BFSI performance will be critical but valuations continue to remain attractive: BFSI is the largest sector in terms of NIFTY allocation. As we indicated in the last month top picks review that valuations in the sector are attractive and investors should slowly increase their allocation to the sector. The sector continued to deliver in the month of June with NIFTY bank delivering 7% return with many stocks delivering solid double digit returns. Even at current levels the valuations in the sector continue to remain reasonable but stock picking and focusing on quality will continue to remain the themes in the sector. We maintain top ideas in the sector unchanged but increasing allocation in calibrated manner will deliver reasonable returns. The quarterly earnings commentary will be closely followed as making sense of results on account of moratorium will pose challenges.

Value, Mid and Small caps seeing increased allocation: Value investing continued to outperform growth investing theme in the month of June. However, after significant period of underperformance mid caps and small caps picked up steam. While the broader economic challenges will continue to persist but quality mid and small cap names will see increased allocation as they will see consistent uptick in business in the forthcoming quarters. Pricing power will be a key factor in picking mid and small caps.

No more valuation comfort across the board; Stock picking holds the key: Except for the BFSI sector, there is limited valuation comfort across sectors. NIFTY on FY20E earnings is trading at 23x. The market has breached the mean valuations on the upside we find the market not cheap even after considering the earnings are at cyclical bottom. We estimate FY22E NIFTY earnings at 590 and assigning an 18x target multiple we arrive at December 2020 NIFTY target of 10,620. Thus with limited upside, we find stock picking and playing the right themes will be the key.