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India Equity Strategy Report - Quarterly flipbook - HDFC Securities

Posted On: 2020-11-19 04:38:22

Mr. Varun Lohchab, Head Institutional, HDFC Securities

Quarterly flipbook: Q2 - Upgrades at last!

Q2FY21 was a strong quarter, beating expectations across most sectors, led by margin surprises and in-line revenue performance. Revenues rebounded at a faster pace than costs post the lockdown, resulting in earnings beat. Key highlights of the quarter: (1) Q2 margins beat estimates across multiple sectors such as Cement, IT, Chemicals, Pharma, Paints, Durables, AMCs, Brokers, Gas Distribution etc. due to (a) sharp cost-cutting initiatives leading to lower SG&As (A&P, travel expenses, etc.) and (b) improved pricing power in the wake of lower competition; (2) positive management commentaries on Sep/Oct exit run-rate of revenues as unlocking led to sharp demand rebound in multiple sectors; (3) market share gains for the larger companies; (4) much improved collection trends for lenders; (5) continued uptick in capital markets activity, leading to strong performance for brokers and exchanges.

70% of our coverage universe of 150 stocks beat Q2 earnings and 65% of them saw earning upgrades for FY21/FY22, which is quite commendable. Q2FY21 saw aggregate PAT beat of 30% resulting in 4.1/2.4%% PAT upgrade for FY21/FY22. Given the positive base effect from Q4, markets would focus more at QoQ trends in revenues and costs compared to Q2 levels, which has become a benchmark. Given the sharp rally in markets and Nifty valuations at 21x FY22 PE, absolute upsides look capped at index level. However, we still see a favorable risk-reward on the economy-facing sectors and spotting bottom-up investment ideas across sectors for next 12-24 months.

Our preferred sectors continue to be IT, Chemicals, Pharma, Telecom, Insurance, large Banks, Cement, Durables and Gas while we remain underweight on Consumption (Staples, Discretionary and Autos). Our large-cap picks in the model portfolio include Infosys, ITC, SBI Life, ICICI Bank, Axis Bank, L&T, Bharti. Within mid-caps, we like Mphasis, Max Life, IGL, Radico, Gujarat Gas, Crompton Consumer, Alkyl Amines, Galaxy Surfactants, JK Cement, and KNR Construction.

Q2FY21 results: Cement, Banks and IT were the standout performers- Significant and broad-based earnings beat were visible in Cement, Banks/NBFCs and IT, leading to strong EPS upgrades for FY21/FY22. Chemicals, Pharma, and Gas Distribution stocks also delivered positive margin surprises. Earning misses were more prevalent in Consumer Staples, Consumer Discretionary (ex-Paints), Energy, and Insurance. So, what happens to FY21/FY22 earnings?

Given Q2 trends and management commentaries for our coverage universe, we have seen aggregate PAT change by 4.1%/+2.4% for FY21/FY22. We are now building in +3.3%/+37.1% YoY growth for aggregate PAT for FY21/FY22 respectively. Nifty consensus EPS for FY22 has also increased by 2-3% post Q2.

Our view: Index absolute upsides capped, bottom-up opportunities still visible across sectors as economic recovery plays out in FY22/FY23- While our sector preference has remained largely unchanged in last 6 months, post sharp rally of 70% from March lows and valuations at 21x FY22 PE, index upsides look capped for next 6 months. However, we still see enough bottom-up investment ideas across most sectors. The economy-facing ones like Banks, Cement, Infrastructure, Real Estate, Utilities, and Gas still have room for re-rating while IT, Pharma look fairly valued with earnings driven upsides. Consumer Staples and Discretionary face PE de-rating risks, given stretched valuations.

Model portfolio: increasing bias towards economy facing and value sectors. We further add weights in ITC, UNSP and SBI. Also adding GAIL and GSPL to portfolio.

Source: Equity Bulls

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