ET Wealth | 7 scrips with bounce-back potential

The stock market has bounced back from the March lows, thanks largely to the liquidity push of global central bankers. While this is good news for investors, it is time to be careful now. Experts believe the easy part of the rally is over and some segments of the real economy may take much longer to recover than is being perceived by stock prices right now. In other words, fundamentals will come back into play once the dust settles and investors holding fundamentally weak counters may get hurt.The entire price action in the stock market is not illogical. Only investors should understand the logic correctly. They should not restrict the analysis to the recently declared first quarter numbers or even the numbers expected for the entire 2020-21. For example, the share price of Titan has moved up even after it declared a quarterly net loss, the first time in its history. Though there will be recovery in coming quarters, Titan is also expected to report a 42% fall in its net profit during 2020-21 as per analysts’ consensus estimates. The upmove was because market participants are expecting a speedy recovery in Titan’s fundamentals in the coming years. The company’s net profit is expected to zoom by 114% in 2021-22.Titan is not an exception. Though not as bad as expected, most companies reported significant earnings fall during the first quarter of 2020-21 and many are expected to close the year with lower earnings. This is why experts want investors to disregard the entire 2020-21 as an abnormal year and concentrate on companies that are expected to report better earnings in 2021-22.Since the base of 2020-21 will be low, almost all companies will report better numbers in 2021-22. So, a comparison between the expected earnings in 2020-21 and 2021-22 will not throw up meaningful results. “Since many companies will be recouping their sharp earnings decline in 2020-21, their 2021-22 earnings may go back only to 2019-20 levels. So, it is better one compares the growth with 2019-20,” says Pankaj Pandey, Head of Research, ICICI Direct.The lopsided earnings growth is another factor investors need to be careful about now. For example, some sectors have actually benefitted from the Covid crisis. “While sectors like pharma and telecom have benefitted from the crisis, sectors like IT have shown fast adaptation to the new normal,” says Sachin Relekar, CIO – Equity, LIC Mutual Fund. Instead of going down, earnings of companies from these sectors will be up in 2020-21 and will rise further in 2021-22.However, investors need to be careful in this space too. “Several companies from ‘Covid immune sectors’ have run up very fast. Their valuations are now beyond the pre-Covid levels and, therefore, expensive,” says Gaurav Dua, Head – Capital Market Strategy, Sharekhan.The other basket of opportunity are sectors or companies affected by the present crisis, but which are likely to recover from it faster. Their earnings in 2021-22 will go beyond the 2019-20 levels. Titan is a good example. Its EPS is expected to reach Rs 21.05 in 2021-22, 24% more than its 2019-20 EPS of Rs 16.91. Though the expected earnings growth between 2019-20 and 2021-22 will be lower compared to the first basket, the investment opportunity is greater. “Due to the deep earnings cut expected in 2020-21, valuation is still reasonable for many companies in the Covid recovery play basket,” says Dua.Hopes of an early solution to the Covid crisis is also keeping the market sentiments high. However, the entire mess cannot be blamed on Covid. “The economy was growing slowly even before Covid. Once Covid comes under control with the development of a vaccine, the market’s focus will shift back to other problems,” says Relekar of LIC Mutual Fund.Worries have already started building up about what will happen after 31 August when the second moratorium ends. The market knows about this problem, which explains why some stocks from the banking, financial services and insurance (BFSI) segments are still quoting at reasonable valuations. “BFSI could show good recovery in 2021-22, and is valued reasonably now due to moratorium uncertainties. PSU is another space that has good potential and valued reasonably due to issues peculiar to them,” says Deepak Jasani, Head of Retail Research, HDFC Securities.While the market continues to worry about the 31 August deadline, most banks have already taken steps to allay fears. “Most banks have acted proactively and have made decent floating provision and also raised enough capital to meet any eventuality,” says Naveen Kulkarni, CIO, Axis Securities.In our cover story this week, we have looked at stocks that could bounce back with a vengeance in 2021-22. We first shortlisted companies from the BSE 200 that are expected to do better in 2021-22 compared to 2019-20. Companies from both the Covid immune and Covid recovery baskets got included in the list. The next step was to see whether this improved performance in 2021-22 was already factored in the price. We did that by reaching out to market experts. Here is the final list of companies selected by them.Alkem LabThe pharma sector has outperformed the broader market in the past one year and experts believe the rally will continue. “Despite the recent rally, the risk reward is still favourable for the pharma sector because of its huge underperformance in the past couple of years. While domestic oriented companies are doing well now, exporters will benefit in coming years because of the ‘China, Plus One’ strategy,” says Pandey of ICICI Direct. Cost savings due to Covid, jump in sales to US to prove beneficial 77820035Among mid-caps, Alkem Laboratories is a good pick due to its high exposure to domestic formulations (63% of its sales). On the export front, US generic business grew by 38% and other markets grew by 9% y-o-y during first quarter. With around 70 products being marketed and 58 ANDAs pending for approval with US FDA, its US sales trajectory is expected to improve. Cost savings due to reduced travel expenses is another reason why analysts are upgrading the earnings forecast for Alkem. “The recent increase in EPS estimates factor in the cost savings on reduced travelling expense and robust traction in US generics,” says Gautam Duggad, Head of Research, Motilal Oswal Securities.Bata IndiaBata India, the largest retailer and leading manufacturer of footwear in India with more than 1,500 retail stores, has not recovered much from its March lows due to severe contraction in its first quarter numbers. Its first quarter revenue contracted by 85% y-o-y because buyers can postpone shoe purchases. Sales hit by Covid; may bounce back after normalcy returns 77820046Bata also reported a net loss of Rs 101 crore compared to a net profit of Rs 101 crore during same period last year. Though around 80% of the stores are already operational and some sales happening, the company is expected to close 2020-21 will a significantly lower EPS of Rs 6.76 compared to the Rs 25.59 it reported for 2019-20. However, its sales and earnings are likely to pick up once normalcy returns and its EPS is expected to jump to Rs 30.51 in 2021-22. “A strong brand with strategy to consistently improve margins by favourable change in product mix makes Bata an attractive play in the consumer discretionary space. The counter is now trading 30% lower from its peak and therefore, offers an attractive entry point,” says Dua.Bharti AirtelTelecom may be the only sector in India that has benefited from the pandemic. Leading companies Bharti Airtel and Vodafone had reported big losses following the Supreme Court verdict on AGR that imposed a huge tax liability on them. The price war initiated by Reliance Jio and the resultant price cuts only added to their losses. Work-from-home has improved usage and bottom line 77820099While Vodafone is still struggling, Bharti Airtel has begun to show better numbers. Its loss per share is expected to fall to Rs 6 in 2020-21 and a turnaround is expected in 2021-22. Its average revenue per user (ARPU) is also expected to recover because of the increased data consumption due to work from home culture and reduced competition from Jio and Vodafone. Due to the financial troubles of Vodafone and BSNL, the telecom sector is becoming a virtual duopoly. Bharti Airtel has significantly outperformed the Sensex in the past one year, but experts feel all the good news is yet to be factored in the price. “ARPUs going up can result in a significant jump in its net profit in coming years and this should result in further rerating. Bharti Airtel’s market cap is also still much lower compared to their investment,” says Kulkarni of Axis Securities.SBI LifeInsurance, life as well as health, is another sector that has benefitted from the pandemic and leading players like SBI Life stand to gain. “SBI Life has a big advantage due to its bancassurance with SBI. Diversified product mix and strong distribution capabilities will pave the way for faster growth and market share gain for SBI Life,” says Kulkarni of Axis Securities.Bancassurance tie ups to drive growth in sales 77820109Though there was some pressure on new policy additions in the first quarter due to the lockdown, new business premium has started showing signs of revival. SBI Life is expected to close 2020-21 with a small earnings growth. More importantly, its distribution reach has increased further after it tied up with UCO Bank to provide insurance solutions via their 3,086 branch network in June. This should accelerate its new business premium growth.SBIThe uncertainty about NPAs after moratorium has kept the valuations of banks down. However, experts say investors should use this as an opportunity to pick banks that can withstand these shocks. “Since the expected jump in NPAs is already priced in, we are positive on large public and private sector banks,” says V. K. Vijayakumar, Chief Investment Strategist, Geojit Financial Services.Embedded value of subsidiaries make stock look inexpensive 77820137Analysts are bullish on SBI because of several other reasons. “SBI valuations are inexpensive. It has one of the strongest deposit franchises and also has embedded value due to its subsidiaries,” says Jasani of HDFC Securities. SBI is the holding company for several big financial services companies (like SBI Life Insurance mentioned earlier) and its valuation will look even cheaper if the embedded value of these investments are factored in.Titan IndustriesAfter a deep cut in 2020-21, Titan’s earnings are expected to bounce back smartly due to several favourable factors. First, jewellery sales have started picking up after the relaxation in lockdown. Sales could reach pre-Covid levels by the fourth quarter of 2020-21. Though high gold prices have reduced jewellery demand, investment demand is rising.Rise in demand could shore up sagging sales after Covid 77820156“Recovery in retail jewellery sales has been quite strong and could continue to surprise as seen in earlier disruptions. Covid will quicken the consolidation in jewellery industry and Titan is expected to gain market share further,” says Dua of Sharekhan. Better designs, large network and strong brand are pulling customers from local jewellery to Titan. Titan has also launched innovative tools which enable customers to do video chats with jewellery sales team and select the jewellery design before visiting the store.UPLUPL is the best example of a company that will do well in 2020-21 and do better in 2021-22 and is still valued at reasonable levels. Just like pharma companies, chemical exporters are also benefitting from the global shift happening out of China. Improving market share, global footprint will lead to re-rating 77820171The recent acquisition of Arysta, a US-based life science company, has helped UPL increase its standing in the global agrochemical industry and also to reduce cost (its fixed overheads came down by 8% in the first quarter due to merger synergies). “Despite the recent upmove, UPL is still valued reasonably and its re-rating should continue due to continued market share gains, margin improvement on the back of synergies and reduction in net debt,” says a recent Emkay report.

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