Top Picks for 2021 - YES Securities

Highlights:

The stock market recovery is indeed incredible, surpassing previous lifetime high. Notwithstanding the uncertainty on many economic fronts, we believe that the worst is over for the stock market. With regards to the Covid crisis, the market assessment is that rural India is largely unaffected, large number of urban cases are restricted to only few cities and the overall case curve is falling. Commentary from Moderna and Pfizer, the leaders in the vaccine race, is highly encouraging. Mobility has improved across the board, suggesting the economy well poised on the path of recovery.

Coming to the economy, high frequency indicators have been in positive territory. Manufacturing and industrial activity is on a V shaped trajectory. Service sector is back in expansion mode after a prolonged period of weakness. Rural Economy has been the most resilient, thanks to various fiscal measures. The Economist Intelligent Unit believes that economies of India and South Korea will be the first to bounce-back from this pandemic. We wouldn't be surprised to see a 15%+ nominal GDP growth in FY22, on the back of low base of FY21. Corporate earnings in Q2 FY21 have been strong, with only a 10% fall in revenues from pre-covid levels. Disruptions over the past five years have depressed earnings, however, strong expansion is due, as history reckons that an era of strong reforms generally precedes sharp rebound in corporate profitability.

After the Income statement, let's come to the Balance Sheet. Crisil ratings estimates that 99% of large companies from their study of 3,500+, with a loan exposure of Rs250mn or more, are unlikely to opt for RBI's one-time debt restructuring. We agree, since even in the worst Covid hit quarter of Q1 FY21, interest coverage ratios were comfortable for India Inc. What's more, corporates have strengthened their balance sheets by raising capital in record numbers, surpassing levels achieved in 2017 and 2019. Likewise, the Indian banking system is much stronger and collection efficiency has gone up. Networth of NSE500 companies (ex Financials) has risen 7.6% in H1FY21 and debt/equity has come down to 1.24x from 1.32x.

They say, don't fight the Fed! What we're witnessing is a massive liquidity injection globally. Central bankers are pumping in money @ of $1bn+ every hour. Interest rates have been lowered with a promise to keep them subdued, for as long as necessary. With the US Dollar on a sideway or downward journey, capital will flow to emerging markets like India. Even back in India, the RBI, through cuts in Repo rate and several open market operations, have materially lowered the yield curve. Home loan rates, for instance, were possibly never this low, as they are today. Highly rated businesses are borrowing at 7%, versus 12% only few years ago. Besides actively managed funds, Indian equities are also likely to receive passive fund flow after the MSCI rejig in its favour.

Coming to valuations, they don't appear to be in dangerous territory to us, as widely perceived. Optically, values may appear high, but when seen in context of where the cost of capital is, lack of opportunities in other asset classes, they certainly seem reasonable. If earnings play catch-up, in the two out of the next four years, then valuations will start looking cheap to the present naysayers. The market structure also looks promising, after a long consolidation since 2018, and volatility coming off from elevated levels.

There are no denying concerns around the fiscal deficit, sustenance of small businesses, jobs and the like, but a market rally hardly ever expects to have all ticks marked in its favour. Importantly, a host of factors lend credible support to the market cycle - besides the positives mentioned above, a benign crude and commodity environment benefits equities. We also expect a big manufacturing push in India with strong government support, lowered taxation and global players looking for an alternative to China. Reports suggest our government is targeting to provide incentives to the tune of US$23bn to draw-in, corporates to make in India.

All-in-all, we believe the market will run up ahead of, and in anticipation of, an ensuing economic recovery. Yes, the year 2020 was largely about survival, both health-wise and finance-wise. But, this is also the opportune time to tweak and tighten your portfolio. 2021 could well be akin to the year 2003, from a market standpoint. In our reckoning, the best for the market lies immediately ahead.

Top Picks: Sobha Ltd, Deepak Nitrite, PNC Infra, TCI Express, CreditAccess Grameen, HDFC Limited, ICICI Bank, Kansai Nerolac Paints, Gillette India.

Source : Equity Bulls

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