7 Stocks for Your Portfolio

FY 2021 has been a phenomenal year for equity as an asset class. The question is whether FY 2022 will build on the gains of FY 2021 or will the markets shed some of the weight? Yogesh Supekar discusses in detail how FY 2021 has panned out while the DSIJ Research Team shares their top seven picks to enlighten investors’ portfolio

An unbelievable price recovery in stock prices after the Nifty made lows on March 23, 2020 has placed it at a kissing distance of a level of 15,000 by the end of FY21. Nifty recovered by almost 93 per cent from its lows it made for itself in March 2020. At the same time, Nifty Small-Cap 100 index recovered by 141 per cent and Nifty Mid-Cap 100 index recovered by 116 per cent. This goes to show that the broader markets outperformed when the markets recovered from the pandemic-related crash. Within Nifty, if we consider the performance of the top 15 stocks, the returns work out to an impressive 156 per cent from the March lows while that of the bottom 35 Nifty stocks stands at 76 per cent from the March lows.

If we consider the global market performance in FY21, NASDAQ stands with its returns at 73 per cent. Nifty 50 was the second-best index in FY21, gaining 71 per cent, followed by MSCI Emerging Market index which was up by 55 per cent. S & P 500 was up by 54 per cent while the MSCI World index and the German DAX gained by 51 per cent each. This goes to show the broad-based rally in equity markets across the globe led by technology stocks and the Indian benchmark index. What is interesting to note is the speed at which the recovery took place.

After touching lows of 7,610 levels in Nifty, the key benchmark index managed to cross its then existing all-time high levels of 12,430 in November 2020. These exhilarating seven months of market moves were aided by FIIs pumping in more than Rs 27,272 crore in the Indian markets. While FIIs were net buyers in FY21, DIIs were net sellers to the tune of Rs 12,757 crore. Within the mutual fund space, the mid-cap funds on an average delivered 85.72 per cent returns while the small-cap funds delivered 104.56 per cent returns in FY21, as per the data published by AMFI. Technology funds with 106.88 per cent returns and automotive funds with 101.48 returns were amongst the top performing mutual fund categories in FY21.

Equity Market Outlook

The uniqueness of the equity market in 2021 is that it has not shed its momentum from the previous years with several stocks that did well in 2020 continuing to do well in 2021. It is normal for the markets to shed some weight after having ramped up more than 70 per cent gains in the past one year alone.

The table below highlights the top 20 stocks of 2021 with market capitalisation greater than Rs 1,000 crore that did well in 2020.

HDFC Securities

Commodity inflation to impact 4QFY21 profitability for autos: The commodity prices over the past six months are up sharply - aluminum (+26%), copper (+32%), crude (+55%), steel (+55%). In our discussion with Bajaj Auto, the company highlighted that the impact on margins will be 300-400bps. Most OEMs are highlighting similar views, with margin impact varying between 200-400bps due to the above. While OEMs will benefit from improved operating leverage as volumes normalise over FY22-23E, the extent of margin improvement will be contained due to the above.

INTERVIEW

Ajit Mishra
VP (Research), Religare Broking

“Investors Should Maintain a ‘Bottom- Up’ Approach”

What is your outlook on markets for CY 2021?
We reiterate our positive view on markets for CY 2021 citing healthy demand, earnings’ recovery and supportive global markets. However, it would not be a smooth ride as the recent spike in corona virus cases has raised the fear of strict restrictions and possibly a lockdown in certain states. Further, rising bond yields and depreciating rupee would also hurt markets like India. Amidst all this, we feel investors should maintain the ‘bottom-up’ approach and use intermediate corrective phases to accumulate quality stocks with medium to long-term investment horizon.

Which Nifty stocks may surprise with earnings positively in your view?
We believe Cipla, Bharti Airtel and Mahindra and Mahindra could surprise on the upside this quarter. Cipla has a strong product portfolio and its growth will be driven by new product launches as well as geographical expansion and good traction in the pharmaceutical sector. Bharti Airtel has seen healthy traction in its user base and the increasing number of 4G subscribers bodes well for the company’s ARPU. For Mahindra and Mahindra, strong demand recovery and a focus on tightening capital allocation would aid margin improvement for the company.

Will mid-caps and small-caps outperform large-caps in 2021?
Many mid-cap and small-cap stocks have performed well driven by prudent management teams, strong corporate governance and healthy long-term growth prospects. We believe companies in the mid-cap and small-cap space still have strong potential for growth and many companies can outperform in 2021. On the flip side, markets are trading at premium valuation and also the rising number of virus cases in India may impact sentiments and so one should be cautious in the selection of stocks and prefer investing in a staggered manner.

The bullish sentiment has pushed the PE multiples higher and there is fear amongst investors that the valuation may not be sustainable. While investors are right as the period of PE expansion may be over, what investors need to realise is that the period of earnings’ expansion has started. With quality earnings’ growth the valuations will not look as expensive. The table below compares the valuations with last year when the markets crashed.

Clearly enough, the valuations are looking rich when compared to the previous year. However, there are ample opportunities in the broader markets. According to Raghu Kumar, the cofounder of RAIN Technologies, a trading technology and automation services provider, “Generally speaking, when the markets generate out-sized returns, mid-caps and small-caps tend to outperform large-caps. As of now there is a lot of uncertainty regarding new strains of the corona virus and their impact on the markets. However, businesses will eventually continue running as per usual once the vaccination programme gathers steam which means the markets should go back to hitting new highs. In this type of environment, we expect small-caps and mid-caps to outperform large-caps this calendar year.” The table below highlights the outperformance of small-caps and mid-caps in 2021, simply building on the momentum witnessed in 2020.

If we look at the sectoral performance in FY21 we find that the Metal index, IT index and Auto index dominated along with the small-cap and mid-cap indices. The graph below highlights the performance of various sectoral indices in FY21. It is expected that the top gainers of FY21 will continue to do

well in FY22 as well. With economic recovery on cards, ample liquidity available and vaccination expected to be in full swing, the risk factor for the markets is that too much of good news may push the stock prices to unsustainable valuations in certain sectors. However, we are not there yet and clearly there is more upside left to the markets. The commodity prices may remain firm with crude oil expected to recover owing to improving demand conditions even as copper, now considered as the new oil, continues to shine. Steel prices are expected to be firm, leading to optimism in the metal sector. US President Joe Biden has unveiled a USD 2 trillion infrastructure plan after announcing a USD 1.9 trillion US fiscal stimulus which was approved in early March.

INTERVIEW

Nirali Shah
Head of Equity Research, Samco Securities

“Nifty Bank May Surprise the Street”

Which sector stocks may outperform in the coming quarters?
Corrections due to uncertainties in the market provide good opportunities for investors to invest in deep value stocks for the long term and as experts say, when it rains gold, one should put out the bucket and not the thimble. Similarly, corrections are a good time to adjust asset allocation and currently cyclical stocks and defensives like IT and pharmaceutical look as strong bets to outperform indices in the coming quarters. With a faster-thanexpected demand for metals globally, base metal prices have continued to inch upwards. This certainly has been a blessing in disguise for many steelmakers which charged up to fresh multi-year, multi-month highs. It is expected that this momentum may continue as long as base metal prices continue their upward journey and government’s infrastructure push will also provide the necessary boost to the metal sector. On the technology front, IT players are key beneficiaries of future innovations and new-age digital and cloud-based solutions; hence, the continued deal momentum in this space will aid the top-line in the IT sector.

Which Nifty stocks may surprise with earnings’ positively in your view?
Nifty Bank is one sector which can surprise the street given that a number of banks have been disclosing pro-forma NPAs since the last two quarters contrary to the belief that the true picture is much worse because of the stay granted on classification of NPAs by the Supreme Court. Hence, Q4FY21 should witness more realistic stress and may not throw large surprises. A number of banks had been proactive and raised funds during the initial stages of the lockdown last year and hence the actual stress impact will be far lower on a bank’s profitability. Kotak Mahindra Bank is one such bank which very well fits this description.

The USD 2 trillion infrastructure plan is the first part of what is likely to a USD 4 trillion plan. Such a huge stimulus by the US aiming for infrastructure projects is expected to keep the metal prices firm and equity markets healthy. The market will start taking cues from the earnings this season. In the previous two quarters companies have been able to beat street expectations. Due to superlative performance, the earnings’ estimates have been raised by the street. A strong results’ season is expected again this quarter; however, the positive earnings’ surprise may be lower when compared to the previous two quarters.

Conclusion

While there is no doubt that the rising corona virus cases and the earnings’ trajectory will decide which way the market goes, investors will be keenly watching what happens to the inflation levels and how the global markets perform. As of now, the outlook on the US markets is bullish with experts placing a target in excess of the 4,400 level for S & P 500 in 2021. The US markets, while looking expensive when PE multiples are considered, looks attractive when low interest rates and reasonable growth prospects are factored in. Globally, the equity market rally is expected to continue in 2021, supported by economic recovery, earnings, inflows, and relatively lower volatility when compared to 2020.

Abundant liquidity and reduced volatility are leading to a bullish undertone in the equity markets with few systemic flows, hedge fund positioning, retail buying and share buy-backs expected to create a huge demand for stocks in 2021. The Indian market, so far in CY21, has seen some selling by FIIs. The economy is expected to recover in CY21 with faster recovery expected in the second half of 2021. Initially, investors were worried about economic recovery but are now worried about a very rapid pace of recovery in the economy that is putting pressure on the interest rates. In the second half of the current year, it is expected that at least 60-70 per cent of the western world population and nearly half of India’s population will be vaccinated.

This would mean that there will be less severe cases and even fewer deaths due to the virus. In the second half there will be a good chance of re-opening of economies across the globe. The evidence so far suggests that the countries with the most successful vaccination programs, namely, the UK, Israel and the US, are experiencing a sustained downtrend in new infections and hospitalisation rates. In India, after the initial hiccups, the vaccination drive is expected to gather pace. There is ample liquidity and the fiscal policy has been expansionary, which is expected to support economic growth going ahead. The recovery and the speed of economic recovery have ensured that there is a spurt in demand for cyclical stocks.

Cyclical stocks have been the highlight of this recovery not only in Indian markets but in the US markets as well. Metals are showing no signs of respite even as the steel prices are expected to remain firm for more than a year owing to surge in demand. Recently, the markets were spooked by the rising bond yields. Usually the equity markets should easily navigate the rising bond yield given the prospects of higher economic growth. However, if the yields are rising on concerns of the monetary policy being tightened, the equity markets may see a sharp correction. That said, there are visible signs of economic growth prospects and the US Federal is unlikely to raise interest rates in the coming two years at least. Emerging markets should, in such a case, expect to outperform the developed world. Investors should not be surprised if emerging markets deliver higher double-digit returns in 2021.

According to several estimates, the global economy is expected to grow by 5.8 per cent, US economy by 5.5 per cent, China by 9.2 per cent, emerging markets as a group by 7.3 per cent while India is expected to grow by more than 12 per cent in 2021. The Indian markets are expected to benefit from global recovery as exports may improve significantly. The rural markets have shown resilience so far. Investors can take advantage of the current volatility and construct a portfolio keeping in mind a sharp economic recovery which suits cyclical stocks and small and medium-sized companies. IT, pharmaceuticals and FMCG may also delivery a satisfactory performance in 2021. Keeping in view our bullish stance on equity, we recommend stocks highlighted in the table below for inclusion in one’s diversified portfolio.

Housing Development Finance Corp. Ltd.

CMP (Rs ): 2573.55

BSE CODE: 500010  Face Value(Rs ) : 2 52 Wk  High/Low : 2,895.35/ 1,486.45  Mcap Full ( Rs  Cr.) : 4,64,254.63

HERE IS WHY

Strong Balance
Sheet Margin
Expansion Collection Efficiency

HDFC Ltd., one of the biggest housing finance companies (HFCs) in India, has always been one of the favourite HFCs of FPIs and DIIs. HDFC provides housing finance to individuals and corporates in India while it also provides construction finance to real estate developers along with lease financing. HDFC is often viewed as a play on India’s housing sector, which offers huge opportunities and challenges. While there are millions of Indian families with aspirations of becoming house owners and searching for homes within their budget, there is a huge piling up of inventory across India. According to the Ministry of Housing and Urban Affairs, under the PMAY, over 1 crore homes have been sanctioned, of which 33.5 lakh houses have been completed and 64 lakh units are already under construction.

HDFC, with its sound balance-sheet and ample liquidity, is able to tap this huge opportunity. There is visible growth in individual loans for HDFC, which forms more than 75 per cent of its total AUM. The rising level of individual loans indicates that business is reverting to the pre-pandemic levels. The margins have improved for HDFC sequentially even as the competition from banks may put pressure on its spreads.

Growth from non-individual loans could provide the muchneeded cushion in the coming quarters. HDFC is expected to gain market share at a time when very few HFCs are focusing on the liability side and a majority are struggling with asset growth. HDFC has higher provisioning in its balance-sheet which allows it to absorb any negative shocks that may emerge from non-individual portfolios in the event of a real estate sector slowdown.

On the quarterly front, the net interest earned by the bank in the third quarter of FY21 came in at Rs 30,079.70 crore as against Rs 29,369.72 crore in the corresponding quarter of the previous fiscal, an increase of 2.4 per cent. The total income in Q3FY21 was Rs 37,522.92 crore, a rise of 4.11 per cent from Rs 36,039 crore in Q3FY20. The profit after tax increased by 18.09 per cent to reach Rs 8,758.29 crore in Q3FY21 from Rs 7,416.48 crore in Q3FY20. For Q3FY21 the GNPA percentage was 0.81 per cent as compared to 1.42 per cent in the same quarter in the previous fiscal year. In Q3FY21 the capital adequacy ratio stood at 18.9 per cent as against 18.5 per cent in Q3FY20. Net interest earned by the bank in FY20 came in at Rs 1,14,812.65 crore, an increase of 16 per cent from Rs 98,972.05 crore in FY19. The total income earned by the bank in FY20 was Rs 1,38,073.47 crore, an increase of 18.41 per cent from Rs 1,16,597.92 crore earned in the previous fiscal. The profit after tax in FY20 surged up by 24.57 per cent to reach Rs 26,257.32 crore as against Rs 21,078.14 in FY19.

The company reported GNPA ratio of 1.26 per cent for FY20 and 1.36 per cent for FY19. In FY20, the CRAR ratio was 18.5 per cent whereas in FY19 it was 17.1 per cent. Improving asset quality, robust individual disbursements, margin expansion, improving collection efficiency and lower cost of funds are the key triggers for re-rating HDFC Ltd. Also, positive developments in the real estate sector and the gush of liquidity in the system make HDFC a compelling BUY.

Tube Investments of India Ltd.

CMP (Rs ): 1121.15

BSE CODE: 540762   Face Value(Rs ) : 1   52 Wk High/Low : 1,250.00 / 307.00   Mcap Full ( Rs  Cr.) : 21,617.66

HERE IS WHY

Strong revenue growth
Strong free cash flow
Market leadership

Tube Investments of India (TII) is a part of the renowned Murugappa Group which has a diversified manufacturing presence across segments of cycles and accessories, metal forming products such as door frames, fine blanking products and chains, engineering items such as precision steel tubes and strips, gears and gearboxes. The company’s three main verticals are engineering, metal formed products and bicycles.

In line with its growth strategies, the company has forayed into TMT bars and the truck bodybuilding business and is additionally exploring opportunities in optic lens and other vision systems for the automotive industry. TII derives about 50 per cent of revenues from the automotive space and the balance from other sectors, including railways.

TII is a market leader in the domestic bicycle space. With the ongoing pandemic situation there is an increasing demand for bicycles in both western countries and in India. There is a definite shift in trend from public transport to personal mobility in western countries. TII stands to benefit from such a shift in demand.

The Indian bicycle industry is the second-largest in the world after China and is estimated to be worth upwards of Rs 5,500 crore as of FY19. As of FY19 the TII’s market share stands at 23 per cent in the overall market while the market share for premium products is 28 per cent. Some of the leading bicycle brands owned by TII are Hercules, BSA, Ladybird and Roadeo.

TII is a market leader and preferred Indian supplier in CDW tubes and is also a major manufacturer with the engineering expertise to offer customised, application-specific CRSS and tubular products. TII is also a market leader in automotive drive and cam chains and industrial chains while also being a preferred supplier for roll-formed car doorframes in India. It also has the reputation of being a global manufacturer of world-class safety critical components for the automotive industry. One of the key strengths of TII is its robotic automation and high-precision fabrication capabilities for the railway sector.

As regards its financial performance, on the consolidated financial front, net sales and other operating income for Q3FY21 were Rs 1,699.99 crore, a rise of 56.33 per cent as compared to net sales of Rs 1,087.44 crore for Q3FY20. The operating profit for Q3FY21 was reported to be Rs 242.87 crore, an increase of 60.11 per cent as against Rs 151.69 crore reported for the same quarter of the previous fiscal year. There was a rise of 33.18 per cent in the net profit for the Q3FY21 at Rs 108.61 crore when compared to Rs 81.55 crore for the third quarter of the previous fiscal year.

Looking at the annual trend, net sales and other operating income were reported to be Rs 4,750.39 crore for FY20, declining by 17.71 per cent when compared to Rs 5,773.05 crore for FY19. In FY20, operating profit rose by 7.18 per cent to Rs 640.82 crore as against Rs 597.89 crore for FY19.

The company reported net profit of Rs 313.27 crore in FY20 as against net profit of Rs 259.68 crore in FY19, increasing by 20.64 per cent. The ability of TII to strategically focus and deliver on major metrics such as revenue growth, profitability, RoCE and free cash flow makes this company an attractive bet. Hence, we recommend BUY.

J. K. Cement Ltd.

CMP (Rs ): 2877.10

BSE CODE: 532644   Face Value(Rs ) : 10   52 Wk High/Low : 3,146.00/ 1,041.55   Mcap Full ( Rs  Cr.) : 22,225.98

HERE IS WHY 

Rising cement prices
Improving market share
Capacity expansion

JK Cements is one of the largest cement players in North India. It manufactures grey cement, white cement and white cement-based wall putty. The current capacity of grey cement is 10.5 MTPA while that of domestic white cement is 0.6 MTPA, second only to UltraTech. The manufacturing of putty has an installed capacity of 0.7 MTPA. JK Cements has manufacturing facility in Fujairah (UAE) for both white cement and grey cement in a 90:10 joint venture with the Government of Fujairah. The cement manufacturer has plans on reaching an annual capacity of 18 MTPA by FY23. The company will be setting up an integrated greenfield plant for grey cement of 4 MTPA through its wholly owned subsidiary at Panna in Madhya Pradesh. A split grinding unit is also on the cards in Uttar Pradesh with a capex of Rs 2,970 crore.

Analysing the financial performance of JK Cements, on the consolidated financial front, net sales and other operating income for Q3FY21 were Rs 1,832.71 crore, an increase of 24.52 per cent as compared to net sales of Rs 1,471.78 crore for Q3FY20. The operating profit for Q3FY21 was reported to be Rs 480.55 crore, an increase of 53.68 per cent as compared to Rs 312.70 crore reported for the same quarter of the previous fiscal year. There was a jump of 74.81 per cent in the net profit for Q3FY21 at Rs 217.28 crore when compared to Rs 124.30 crore for the third quarter of the previous fiscal year. Looking at the annual trend, net sales and other operating income were at Rs 5,801.64 crore for FY20, registering gain of 10.32 per cent when compared to Rs 5,258.68 crore for FY19.

In FY20, operating profit rose by 41.97 per cent to Rs 1,298.77 crore as against Rs 914.83 crore for FY19. The company reported net profit of Rs 483.39 crore in FY20 as against net profit of Rs 263.63 crore in FY19, clocking handsome gain of 83.36 per cent. The demand for cement is likely to see a gradual pickup mainly driven by increased government spending on infrastructure and affordable housing through schemes like Pradhan Mantri Awas Yojana–Urban (PMAY-U), Pradhan Mantri Awas Yojana–Rural (PMAY-R) and Pradhan Mantri Gram Sadak Yojana (PMGSY). Additionally, key infrastructure projects on roads, metros and irrigation would drive demand for the overall economy. JK Cements is one of the volumes leaders in the cement space and has clocked volume jump of more than 20 per cent on YoY basis in two consecutive quarters.

With capacity expansion in place and the management’s efforts to improve on its cost efficiencies, JK Cements is in a sweet spot operating in a market scenario with firm cement prices. It is expected that the up-gradation of plants and increased clinker utilisation will help control costs. Strong demand for cement and the favourable pricing environment, especially in North India, are the key triggers for the counter.

Decent revenue growth can be expected in the coming quarters, aided by improving market conditions in the southern and western regions as well. Increased putty capacity will help JK Cements consolidate its position in the white cement and putty markets. Better than industry volumes, prudent and timely expansion strategy, improving market condition and a decent price environment makes JK Cement a compelling BUY.

Tech Mahindra Ltd.

CMP (Rs ): 1010.60

BSE CODE: 532755 Face Value(Rs ) : 5 52 Wk High/Low : 1,081.35 / 490.10 Mcap Full ( Rs  Cr.) : 97,852.36

Tech Mahindra is a part of the USD 21 billion Mahindra Group, a global federation of companies divided into 11 business sectors that provide insightful solutions at a global scale across 20 industries. Tech Mahindra offers innovative and customer-centric digital experiences, enabling enterprises, associates and the society to rise and move forward. It is a USD 5.2 billion organisation with 1,21,900+ professionals across 90 countries helping 997 global customers, including Fortune 500 companies. The company is focused on leveraging next-generation technologies which consist of 5G, blockchain, cyber security, artificial intelligence, and more, which helps in end-to-end digital transformations for its customers globally. Tech Mahindra poses to be one of the fastest growing brands and amongst the top 15 IT service providers globally.

Indian IT and BPM companies are recorded to have set up over 1,000 global delivery centres in about 80 countries across the world. Also, India has become the digital capabilities’ hub of the world with around 75 per cent of global digital talent present in the country. Coming to the financial performance of Tech Mahindra, on the consolidated financial front, net sales and other operating income for the Q3FY21 were Rs 9,647.10 crore, which is a dip of 0.08 per cent as compared to net sales of Rs 9,654.60 crore for Q3FY20. The operating profit for Q3FY21 was reported to be Rs 2,116.40 crore, which gave an increase of 10.64 per cent as against Rs 1,912.90 crore reported for the same quarter of the previous fiscal year. There was a rise of 16.16 per cent in the net profit for the Q3FY21, being at Rs 1,289.60 crore when compared to Rs 1,110.20 crore for the third quarter of the previous fiscal year.

Looking at the annual trend, the net sales and other operating income were reported to be Rs 36,867.70 crore for FY20, thus rising by 6.12 per cent when compared to Rs 34,742.10 crore for FY19. In FY20, operating profit dropped by 2.48 per cent to Rs 6,701 crore as against Rs 6,871.10 crore for FY19. The company reported net profit of Rs 3,902.90 crore in FY20 as against net profit of Rs 4,354.30 crore in FY19, dropping by 10.37 per cent. The company can sense a strong traction in cloud, artificial intelligence and experience as well as security. Also, revival can be seen by the company in Europe and the manufacturing sector. The company has won new deals which amount to USD 455 million. The deals include being chosen by a leading communication service provider in the UK for implementing software-defined network-enabled 5G transport network.

It has also been engaged by an Indian aerospace company for ERP transformation. The company has also expanded its strategic alliance with BMC Software, a global leader in IT solutions for autonomous digital enterprise to enable digital transformation for global enterprises.

Tech Mahindra has successfully launched WORKSPACE NXT (workplace as a service), the latest version of its next-generation integrated digital workplace solution for enterprises globally. As the IT companies have proven their capabilities in delivering on-shore as well as off-shore services to global clients, emerging technologies now offer an entire new ambit of opportunities for top IT companies like Tech Mahindra in India. Hence, we recommend BUY.

Persistent Systems Ltd.

CMP (Rs ): 1956.15

BSE CODE: 533179 Face Value(Rs ) : 10 52 Wk High/Low : 2,098.05/ 460.00 Mcap Full ( Rs  Cr.) : 14,949.88

HERE IS WHY

Opportunities in digital business
Positive deal momentum
High margins

Established in 1990, Persistent Systems is a trusted global solutions partner, delivering digital business acceleration, enterprise modernisation and next-generation product engineering. The company has 30+ years of leadership in software engineering and digital transformation. It possesses the highest customer experience score of any company in the IT industry, as rated by ISG. The company works with a boutique mindset focused on enterprise clients moving their digital presence to the cloud. It serves 350+ clients annually.

Persistent Systems has 12,000+ employees with presence across 16 countries. The service lines of its business are digital business strategy, digital product engineering, CX innovation and optimisation, data-driven business and intelligence, identity, access and privacy and core IT modernisation. The company provides solutions to various sectors, including banking, financial services, insurance, healthcare, life sciences, industrial, software and technology.

Considering the operational and financial performance of Persistent Systems, on the consolidated financial front, net sales and other operating income for Q3FY21 were Rs 1,075.40 crore, an increase of 16.55 per cent as compared to net sales of Rs 922.73 crore for Q3FY20. The operating profit for Q3FY21 was reported to be Rs 212.49 crore, an increase of 34.24 per cent as against Rs 158.30 crore reported for the same quarter of the previous fiscal year. The net profit rose by 37.53 per cent for Q3FY21, at Rs 120.92 crore when compared to Rs 87.93 crore for the third quarter of the previous fiscal year. The annual trend depicts that net sales and other operating income were at Rs 3,565.81 crore for FY20, thus rising by 5.94 per cent when compared to Rs 3,365.94 crore for FY19.

In FY20, operating profit dipped by 2.99 per cent to Rs 624.64 crore as against Rs 643.89 crore for FY19. The company reported net profit of Rs 340.29 crore in FY20 as against net profit of Rs 351.68 crore in FY19, dropping by 3.24 per cent. The company has delivered a strong performance for the recent quarter with significant progress on all the major business metrics. In terms of employee numbers, there was net addition of 1,600+ FTEs in this quarter. In the third quarter of FY21, the company recorded new orders worth USD 302 million in TCV terms, which is one of the healthiest from the time the company has started measuring it over the last five quarters.

The company has also completed acquisition of Capiot Software in the first week of November 2020. This resulted in addition of 200 Capiot employees to the Persistent Systems’ family and it also took its hands-on capabilities on MuleSoft, TIBCO and Red Hat platforms.

The company’s prediction across verticals remains optimistic with guidance for sustainable 12 per cent plus EBIT margins. The company’s signing of multiple long-term contracts with leading brands bundled with cost optimisation via off-shoring gives an intuition to strong earnings’ growth in the long term. Hence, observing the healthy deal momentum and expanding demand in the digital technologies, we recommend BUY.

Sun Pharmaceutical Industries Ltd.

CMP (Rs ): 646.05

BSE CODE: 524715 Face Value(Rs ) : 1 52 Wk High/Low : 653.70 / 434.25 Mcap Full ( Rs  Cr.) : 1,55,005.21

HERE IS WHY

Robust product pipeline
Strong profit growth
Strong domestic franchise

Sun Pharmaceutical Industries is the fourth-largest specialty generic pharmaceutical company in the world with global revenues of over USD 4.5 billion. The company is supported by more than 43 manufacturing facilities and provides high-quality, affordable medicines, trusted by healthcare professionals and patients, to across more than 100 countries. Sun Pharmaceuticals is ranked 11th in the US’ generics market and ranked No. 1 pharmaceutical company in India. It has 36,000+ employees on its rolls. The product portfolio of the company consists of specialty products, branded generics, complex generics, pure generics and APIs.

Medicine spending in India is expected to grow at 12 per cent over the next five years, taking India to become one of the top 10 countries in this category. Medicines for cardiovascular ailments, anti-diabetes, anti-depressants and anti-cancer are in an increasing trend. In the future, attractive growth in domestic sales will depend on the ability of companies to optimise their product portfolio towards chronic therapies for the same.

Looking at the operational and financial performance of Sun Pharmaceuticals, on the consolidated financial front, net sales and other operating income for Q3FY21 were Rs 8,836.78 crore, which is an increase of 8.36 per cent as compared to net sales of Rs 8,154.85 crore for Q3FY20. The operating profit for Q3FY21 was Rs 2,721.09 crore, an increase of 38.74 per cent as against Rs 1,961.28 crore reported for the same quarter of the previous fiscal year.

The net profit gave a significant increase of 87.37 per cent for Q3FY21, recording at Rs 1,918.11 crore when compared to Rs 1,023.71 crore for the third quarter of the previous fiscal year. The annual trend indicates that net sales and other operating income were reported at Rs 32,837.50 crore for FY20, clocking gain of 12.98 per cent when compared to Rs 29,065.91 crore for FY19. In FY20, operating profit inched up by 3.99 per cent to Rs 7,625.74 crore as against Rs 7,333.08 crore for FY19. The company reported net profit of Rs 4,186.79 crore in FY20 as against net profit of Rs 3,209.32 crore in FY19, registering gain of 30.46 per cent.

Sun Pharmaceuticals focuses on creating a well-trained and scientifically-oriented sales representatives’ team with strong performance track record. It has also recently expanded the sales force strength to enhance geographical and doctor reach and improve brand focus. The company aims to maintain leadership in existing markets through focus on innovative solutions. It also bears a focus to invest to further build the speciality pipeline.

On the US generics front the company is going through calibrated product rationalisation. The specialty segment also looks promising as a result of its robust product pipeline. Greater contribution from specialty and strong domestic franchise is predicted to be capable of churning the product mix towards a more remunerative business by FY23.

We can see that the Indian Government has taken various steps to reduce costs and bring down healthcare expenses. With the speedy introduction of generic drugs into the market remaining in focus, the Indian pharmaceutical companies are expected to benefit from the same. Hence, we recommend BUY.

Axis Bank Ltd.

CMP (Rs ): 669.35

BSE CODE: 532215 Face Value(Rs ) : 2 52 Wk High/Low : 800.00 / 333.05 Mcap Full ( Rs  Cr.) : 2,05,075.01

HERE IS WHY

De-risking balance sheet
Leadership position in digital space
Improving asset quality 

 Axis Bank is the third-largest private sector bank in India. An entire spectrum of financial services to customer segments covering large and mid-corporates, MSME, agriculture and retail businesses is offered by Axis Bank. The bank has coverage of 4,528 domestic branches (including extension counters) with 12,044 ATMs and 5,433 cash recyclers spread across the country. The international offices of Axis Bank focus on corporate lending, trade finance, syndication, investment banking and liability businesses. With a balance-sheet size of Rs 9,15,165 crore as on March 31, 2020, Axis Bank has been able to achieve consistent growth with a five-year CAGR (2014-15 to 2019-20) of 15 per cent each in total assets, deposits and advances.

A spike in spending on infrastructure, speedy implementation of projects and continuation of reforms will provide additional boost to growth in the banking sector. The factors suggest that India’s banking sector is likely to record robust growth as the rapidly growing businesses will turn to banks for their credit needs. In addition to this, the advancement in technology has brought mobile and internet banking services to the fore. It is predicted that India’s digital lending will reach USD 1 trillion by FY23 as a result of the five-fold increase in digital disbursements.

On the quarterly front, the net interest earned by the bank in the third quarter of FY21 came in at Rs 7,373 crore as against Rs 6,453 crore in the corresponding quarter of the previous fiscal, an increase of 14 per cent. The other income in Q3FY21 was Rs 3,776 crore, a dip of 0.3 per cent from Rs 3,787 crore in Q3FY20. The profit after tax declined by 36 per cent to reach Rs 1,117 crore in Q3FY21 from Rs 1,757 crore in Q3FY20. For Q3FY21 the GNPA percentage was 4.55 per cent, which can be seen as a decrease by 45 bps YoY. Its capital adequacy ratio including profits for 9MFY21 was at 19.31 per cent. Net interest earned by the bank in FY20 came in at Rs 63,715.68 crore, an increase of 13.68 per cent from Rs 56,043.65 crore in FY19. The total income earned by the bank in FY20 was Rs 80,057.67 crore, an increase of 13.98 per cent from Rs 70,232.40 crore earned in the previous fiscal.

Profit after tax in FY20 declined by 62 per cent to reach Rs 1,878.75 crore as against Rs 5,047.09 in FY19. The company reported GNPA ratio of 4.86 per cent for FY20 and 5.26 per cent for FY19. In FY20, the CRAR ratio was 17.53 per cent whereas in FY19 it was 15.84 per cent. Along with robust operating performance, Axis Bank saw steady growth in stable and granular retail deposits. The bank was well-capitalised with adequate liquidity buffers. It depicted a balanced performance across the business segment and also retained leadership position in the digital space. It is also focusing on strengthening and de-risking its balance-sheet by improving asset quality metrics.

Axis Bank has expanded to 100 roles across the Axis group. Also, access to new talent pools in the 50+ positions filled. The bank has established hybrid working model across the organization. The leaders and mid-management in large corporate offices have led the way. Axis Bank also aims to lay underway on a virtual role offering for internal employee base. The company also focuses on reaching millions of unbanked and underbanked Indians. Taking a leadership position in digital banking is one of the leading aims listed by the bank. The bank also reported that it is witnessing significant value creation happening in subsidiaries from ‘One Axis’ platform.Hence, expecting the bank’s asset quality to remain steady, we recommend BUY.