Top Stock Picks For 2019 By ICICI-Direct

Which sectors will find favour?

Real Estate

• The commercial segment remains the sweet spot. The office space’s annual absorption of ~46 msf is likely to exceed anticipated average annual supply of 41.2 msf in FY19E-21E. Furthermore, with vacancies in quality and well-located office spaces expected to decline in top cities, we expect lease rentals to go up. Even several recent marquee commercial space investments by Blackstone, GIC etc., shows optimism within this space. We like Phoenix Mills within this space given its top quality assets portfolio

• On residential front, demand in residential realty showed initial sings of revival (3% YoY sales volume growth in H1 2018) after grappling with demonetization, GST, RERA for last two years. The affordable & mid-segment housing remains the silver line in residential market, which is driving sales volumes. However, with NBFC liquidity crisis post IL&FS episode, volume recovery could pause in the interim. We would be closely monitoring further developments on this front

• We expect our coverage companies to achieve sales volume growth of 26.4% CAGR to ~9 msf in FY18-20E. We like Oberoi Realty, which has quality land bank and robust launches planned ahead

Retail

• Post implementation of demonetization and GST, organized retail is in a sweet spot given the low penetration of ~ 12% and opportunity of market share gains from the unorganized players. Jewellery (organized share of ~15%) and Apparel Retail (organized share of ~20%) are poised to grow at CAGR of ~ 18% in FY18-FY21 driven by higher discretionary spends.

• The strategy of retailers with respect to optimizing store size, closing loss making stores and increased share of high margin private labels (500 to 1000 bps higher gross margin than national brands) have yielded better margin profile for the retail players in the recent times. We anticipate EBITDA margin expansion to sustain with margins improving by 130 bps from 9.2% in FY18 to 10.5% in FY20 for our coverage universe.

• With major headwinds largely behind, greenshoots were visible in H1FY19 with revenue growth of ~ 15% in spite of shift of festive season and fewer wedding dates. We expect stronger performance from H2FY19 with FY19/FY20 revenue growth of 18%/17%. We prefer Apparel and Jewellery retailers with Aditya Birla Fashion & Retail, Trent and Titan being our preferred picks.

Pharma

• We expect Pharma companies to continue their pursuit of product and cost rationalisation in order to improve profitability and return ratios in the backdrop of US specific headwinds

• We expect downward revision of R&D and other related expenses and more focus on marketing costs for Specialty and Biosimilars. Waning concerns on Chinese raw material sourcing and moderating crude prices besides improving operating leverage is likely to contribute to margin expansion

• Most companies in the sector are moderating capex plans to focus on better RoCE. Only specific API players have augmented capex to tap Chinese shortage opportunities

• On revenues front, we expect normalised growth in key geographies and lower base to drive growth- US(~30% of coverage revenues)- FY18-20E CAGR- 17%; India- (~22% of coverage revenues)FY18-20E CAGR- 14%

• We expect I-Direct healthcare coverage revenues, EBITDA and PAT to grow at a CAGR of 15.2%, 18.3% and 24.3% in FY18-20E. We prefer Divi’s Labs Aurobindo Pharma, Sanofi and Apollo Hospitals

Telecom

• We are witnessing early glimpse of the industry heading towards a strong two player industry (Airtel and Jio) as Vodafone Idea continued to be weak amongst them despite ambitious fund raising announcements. In terms of data usage, we expect data volumes to continue to grow at healthy pace, albeit in low teens on a high base. The pricing has been stable for the last six months. Hence, we believe there seems to be no downward risk in tariffs from here. The only negative covenant is the aggressive push of Jio phone from Jio. We expect ARPU to grow in double digits in FY20 aided by introduction of minimum recharge packs by incumbents.

• On the operators front, we prefer Bharti Airtel, which is well funded (preparing a war chest of ~Rs 30,000 crore through various fund raising options to take on any competitive pressure coming from Jio)

• In the telecom product space, the segment is in a sweet spot given the robust global demand especially from on account of transition to 5G and domestic traction from Bharatnet. We expect Sterlite Technologies to report ~38% earnings CAGR over FY18-20E (vs. ~40% in FY15-18).