6 stocks worth betting on in FY 2021-22

We are on the threshold of another quarterly results season and corporate numbers are expected to be rosy for the fourth quarter of 2020-21. “There will be high topline growth in the fourth quarter because of the low base in the same period last year,” says Deepak Jasani, Head of Retail Research, HDFC Sec. However, increase in commodity prices and transportation costs will give rise to margin pressures in some pockets and this may moderate the earnings jump. “Margin expansion that happened during the previous quarters may not happen in the fourth quarter. However, absolute net profit growth will be fabulous because of the 66% earnings decline last year,” says Sujan Hajra, Chief Economist and ED, Anand Rathi Shares & Stock Brokers.Great 2021-22 aheadCompanies are expected to report a good set of numbers for 2021-22. “Management commentaries hint at strong earnings growth in 2021-22 and at the aggregate level, we feel the earnings growth will be more than the 30% growth estimated by analysts now,” says Anshul Saigal, CIO, Kotak PMS. Hajra feels the earnings growth can be more than 40% in 2021-22. “Earnings growth will be propelled by no lockdowns this year—though there might be increased restrictions—compared to two months of lockdowns during 2020-21. This additional two months can push the revenues and earnings by 10%,” he says. Lower corporate tax rate is another reason for this earnings jump. Several companies remained in the old tax regime to exhaust their accumulated losses and they may shift to the new regime only from this financial year.Structural story for someWhile it is just an earnings bounce back for many, it is a structural growth story for a few sectors and companies. In other words, the growth will continue beyond 2021-22. We have used the following methodology to shortlist the stocks worth considering. 82003225First, we shortlisted BSE 100 companies that are expected to report at least 15% earnings growth between 2020-21 and 2021-22. To make sure that the growth is not just a dead cat bounce, we have imposed a minimum CAGR of at least 10% between 2019-20 and 2021-22. Though the list of companies was long, the positives were already factored in most cases and their market prices had shot up. So, we pruned the list to counters with at least 10 buy recommendations and 15% upside from the current price and the list was fine tuned further based on our direct interaction with experts.Petronet LNGThe natural gas segment was not impacted much by Covid-triggered disturbances and did well in 2020-21. However, these companies are expected to do well in 2021-22 as well because of the structural story—natural gas is cheaper than petroleum products. While the city gas distribution companies will report stable growth, natural gas importers like Petronet LNG is expected to see a growth jump. “Petronet LNG is expected to show robust volume offtake in 2021-22 and 2022-23 because benign LNG prices will ensure its high imports, in turn allowing full utilisation at Dahej on its expanded capacity, and the completion of the Kochi-Mangalore pipeline will raise utilisation at the Kochi terminal,” says a recent HDFC Sec report. While its Dahej LNG terminal is operating at full capacity, Kochi terminal was a drag and is operating now at 20% capacity. However, completion of the Kochi- Mangalore pipeline will help it to raise capacity utilisation levels to 30% in 2021-22. Capacity utilisation from Kochi terminal will increase further in coming years, once the gas pipeline is extended to Bengaluru and expansion of city gas distribution in cities where the line is already passing through like Kochi, Calicut, Mangalore, etc.State Bank of IndiaSeveral finance companies now figure in the list of growth companies and corporate facing banks are leading the pack. “Corporate oriented banks can do well for a couple of years because some of the earlier write downs are getting reversed now,” says Anand Shah, Head of Investments – PMS & AIF, ICICI Prudential AMC. This segment had faced several disruptions like demonetisation, GST, Covid, etc in the past and were forced to write off NPAs. For example, several corporate-oriented banks will benefit from the recent NPA resolution of Bhushan Steel. Due to these reversals, incremental credit costs will be less in coming years. “In addition to write backs, expansion in net interest margin (NIM)— bank’s recent reduction in deposit rates were more than the lending rates —are also helping,” says Hajra. SBI, the biggest commercial bank in India by loan size, will benefit the most from this structural recovery. SBI continues to report good numbers and is expected to report a jump in earnings in 2021-22 as well. It is also quoting at low valuations. “With the back-book sufficiently provisioned and potential build up in stress in line with the best-in-class private sector banks, we see potential for a meaningful narrowing of SBI’s valuation discount to its private bank peers,” says a HDFC Sec report. HDFC BankWhile corporate facing banks will report bigger bounce backs, there is no need for investors to avoid stable performers among consumer-facing banks.While its detailed results for the fourth quarter will come out later, initial set of number on deposits and advances show continued growth for HDFC Bank. For instance, its loan growth for the quarter was at 13.9% y-o-y and 4.6% q-o-q. The corporate segment reported higher loan growth — 21% y-o-y and 4.5% q-o-q— due to increased working capital demand from better rated companies. While total deposits growth rate was only slightly higher than loan growth —16.3% y-o-y and 5% q-o-q—it was able to report strong growth rate for current and savings account (Casa). Its Casa grew by 27% y-o-y and 12.5% q-o-q; helping HDFC Bank to increase its Casa ratio to 46% at the end of March 2021from 43% as on December 2020 and 42.2% as in March 2020. This increased Casa share and resultant fall in cost of funds is good for its earnings growth. “We believe that strong Casa traction should partially offset pressure on NIM emanating from higher growth in the relatively low-yielding corporate portfolio,” says a recent Emkay report.Crompton GreavesDespite doing well in 2020-21 and recent jump in raw material costs, consumer-facing companies are expected to do well in 2021-22 also. “Consumer facing sectors are seeing demand tailwind. Though their raw material prices are going up, most of them will be able to maintain margin by increase in price,” says Anshul Saigal, CIO, Kotak PMS. Most FMCG companies are quoting at lofty valuations. However, companies from segments like consumer electrical are still quoting at reasonable valuations. With strong brand, wide franchise network, robust financials and pan-India distribution, Crompton Greaves is a good example of revival in consumer-facing business. Demand has recovered for its consumer-centric categories like fans, lighting, etc. Since consumer-centric categories account for 85% of its sales mix, growth should continue here. It is also gaining market share because of the constraints faced by unorganised players due to the pandemic. Accelerated growth at Crompton should continue due to shift towards e-commerce and increased market share gain in rural areas.“Between 2019-20 and 2023-24, Crompton is expected to report a revenue and net profit CAGR of 10% and 12% respectively aided by robust industry prospects, potential share gains, new launches, cost control measures and a sturdy balance sheet,” says a recent Jefferies report.SBI Life Insurance coIncreased claims due to covid notwithstanding, life insurance companies did well in 2020-21. The pandemic increased awareness about insurance and SBI Life Insurance’s collections from products like term insurance went up. However, Ulips were another story. Fall in Ulips collection due to market turmoil in the first half of 2020-21 was a shock. With the stock market rallying, recovery started in the Ulips notwithstanding, life insurance companies did well in 2020-21. The pandemic increased awareness about insurance and SBI Life Insurance’s collections from products like term insurance went up. However, Ulips were another story. Fall in Ulips collection due to market turmoil in the first half of 2020-21 was a shock. With the stock market rallying, recovery started in the Ulips space. However, the government struck by making gains from Ulips taxable if the annual contribution is more than Rs 2.5 lakh. SBI Life won’t be impacted much because of its retail focus.Though covid disturbed agency growth in 2020-21, it remains the company with the second-highest agent network. Therefore, growth should come back from the agent network in 2021-22. “While the Ulips business is recovering, SBI Life continues to witness strong momentum in the protection and annuity businesses. We expect its growth to revive further from 2021-22,” says a Motilal Oswal report.Dr Reddy’s LabPharma is another growth story that will play out in 2021-22 and beyond. “Though pharma sector did not suffer in 2020-21 and they have a higher base, select pharma companies will continue to do well in 2021-22,” says Shah of ICICI Prudential AMC. Among the pharma companies, Dr Reddy’s Lab is still reasonably priced and is also expected to report high growth rates in 2021-22 due to several factors. Increased domestic growth and increasing its product launches in the US, which account 37% of its revenues, are among the factors. “Dr Reddy has several legs to its global growth like 17 US launches in the first half of 2020-21 and Revlimid settlement, etc. India business growth will be driven by Avigan and the acquired Wockhardt portfolio,” says a recent Jefferies report. Due to its early mover advantage, Dr Reddy’s Lab already has a strong footing in Russia and neighbouring countries and its strategic tie-up for the Russian covid vaccine Sputnik should help the company to increase sales there.Also Read: Why Dr Reddy is a stock pick of the week *Expected earnings growth between 2019-20 and 2020-21** Expected earnings CAGR between 2019-20 and 2021-22Source: Bloomberg; Compiled by ETIG Database

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