January 2021
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New Year Picks – January 2021
New Year Special
A Promising start to a new year
India’s economic recovery from the Covid lows has been quicker than expected
and has come as a pleasant surprise for the markets. While India’s recovery from
the pandemic lows was slow to begin, we have witnessed a strong acceleration in
economic activities over the past few months due to reopening of the economy and
festive demand. News flow on the vaccine front continues to be positive as various
countries like the US and UK have started their vaccination program which gives us
hope that the Covid situation should improve significantly by the second half of
2021. Continued monetary and fiscal stimulus by central banks and Governments
has led to a global risk-on environment despite sharp increase in Covid-19 cases
globally. Given the positive sentiments we see continued momentum in cyclical
sectors like auto, banking and consumer durables. We also expect that sectors with
strong revenue visibility like chemicals, IT and pharmaceuticals will also continue
to do well.
India’s economic recovery has been quicker than expected
High frequency indicators like PMI numbers, power demand etc. continues to point
to a quicker than expected recovery in the economy. The manufacturing PMI for
November at 56.3 points to continued strong rebound in manufacturing. Though
this is lower than October’s print of 58.9, last three month’s PMI numbers point to
a strong acceleration in the manufacturing sector. Services PMI at 53.7 for the
month of November also points to a solid pace of expansion despite falling from
54.1 in October.
Government stimulus and RBI’s easy monetary policy to support recovery
The Government has announced various rounds of stimulus measures including
the most recent `2.65 lakh Cr. Atmanirbhar Bharat 3.0. The RBI in its latest MPC
meeting has guided that they will maintain their accommodative stance well into
FY2022 despite high inflation. The various fiscal and monetary measures
announced by the Government and the RBI will support the economic recovery.
Vaccination and US stimulus package leading to risk-on environment globally
After months of delay the US Government has successfully passed the second US
stimulus package of USD 900bn which is a positive development for the markets.
Moreover various countries like the US and UK have started their vaccination
program which gives us hope that the Covid situation should improve significantly
by the second half of 2021. Positive developments on the vaccine front along with
continued fiscal and monetary support from Governments and central banks is
leading to a risk on rally despite a surge in Covid-19 cases globally.
We expect the broad based rally to continue for now
The rally in the past few months has become broader with more sectors
participating in the rally. We expect the rally in cyclical sectors will continue for now
given the risk-on environment globally and expect sectors like auto, BFSI,
consumer durables and cement will continue to outperform. While we expect
cyclical sectors will continue to do well we also continue to remain positive on
chemicals, IT and Pharma given strong revenue visibility in these sectors.
Top Picks
Company
CMP (`)
TP (`)
Auto
Swaraj Engines
1,416
1,891
NRB Bearings
102
118
Banking/NBFC
Bandhan Bank
413
525
IDFC First Bank
37
44
Chemicals
Atul Ltd
6,386
7,339
Galaxy Surfactants
2,000
2,284
IT
Persistent Systems
1,490
1,677
Pharma & Healthcare
Metropolis Healthcare
1,949
2,593
Narayana Hrudayalaya
441
500
Others
Gujarat Gas
380
450
Hawkins cooker
5,866
6,776
JK Lakshmi Cement
333
422
Whirlpool India
2,509
3,032
Source: Company, Angel Research
Note: Closing price as on December 29, 2020
January 2021
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New Year Picks – January 2021
New Year Special
India’s economic recovery has been quicker than expected
India’s pace of economic recovery has been quicker than expected and has
pleasantly surprised the markets. While India’s recovery from the pandemic lows
was slow to begin, we have witnessed a strong acceleration in economic activities
over the past few months due to reopening of the economy and festive demand.
While the economy continued to improve gradually till August there was a
significant acceleration in recovery from September onwards due to unlocking of
the economy and strong festive demand. Moreover the various stimulus packages
provided by the Government is also helping the ongoing recovery process. The
November PMI numbers point to continued acceleration in economic activities
across manufacturing and services.
The manufacturing PMI for November at 56.3 points to continued strong rebound
in manufacturing. Though this is lower than the reading of 58.9 in October, the
last three month PMI numbers point to a very strong acceleration in the
manufacturing sector. Services PMI at 53.7 for the month of November also points
to a solid pace of expansion despite falling from 54.1 in October.
Exhibit 1: Manufacturing has led the economic recovery
Source: Company, Angel Research, Bloomberg, IHS Markit
While the manufacturing sector has led the rebound in growth so far the services
sector which accounts for ~60% of the economy is still lagging. However with
significant portion of the economy being opened up under unlock 4.0 and 5.0 we
are witnessing a rebound in the service sector. The Services PMI has now been
above the 50 mark for two months in a row and points to green shoot of recovery
in the services sector.
While manufacturing has led the first leg of the economic recovery we expect the
services sector will lead the second stage of the recovery. We expect continued
improvement in the services sector as demand is coming back for even the worst
impacted sub sectors like travel, tourism and hospitality.
We expect the services sector will lead
the next leg of the economic rebound
High frequency data point to quicker
than expected recovery in economy.
Services PMI reading above 50 for two
months in a row now
January 2021
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New Year Picks – January 2021
New Year Special
RBI’s accommodative stance to help transmission of rate cuts
The Reserve bank of India (RBI) in its bimonthly MPC meeting maintained status
quo with the benchmark repo and reverse repo rates being left unchanged at 4.0%
and 3.35% respectively. This was in line with market expectations which had
expected to RBI to maintain rates despite high inflation level of 6.7%. Though
inflation is likely to remain at the higher end of the RBI’s target range of 2-6% in
the foreseeable future the RBI continued with its accommodative stance and has
indicated that they are willing to look through higher inflation numbers.
Exhibit 3: Rate cut of 250bps by RBI in current cycle
Source: RBI, Angel Research, Bloomberg
While the RBI has cut the repo rate by 250bps since the beginning of the current
easing cycle in early 2019, lack of transmission has so far prevented the full
benefits from flowing into the hands of the borrowers. This is reflected in very high
spreads between the repo rate and the G-Sec rate which is hovering between 180-
200bps. This is largely due to elevated inflation and high levels of government
borrowings expected this year. However we expect spreads between the overnight
rate and the G-Sec rates normalize gradually through FY2022 due to pick up in
Government revenues along with fall in inflation levels to 4.6-5.2% by the first half
of FY2022 from peak of 7.6% in October 2020.
Exhibit 5: RBI expects Inflation rates to cool off going forward
Source: RBI, Angel Research, Bloomberg
RBI to maintain accommodative stance
well into FY2022.
January 2021
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New Year Picks – January 2021
New Year Special
Government Stimulus packages to also help recovery
The Government and the RBI have also announced stimulus packages of `30lakh
Cr. so
far
. While the RBI has announced monetary measures of
`
12.7lakh Cr. so
far the Government too has announced fiscal measure of `17.2lakh Cr. so far.
The government had announced a fiscal package of `11.0lakh Cr. under
Atmanirbhar Bharat 1.0 in the month of May’20 post which it has announced
various other fiscal packages culminating with the most recent `2.65 lakh Cr.
Atmanirbhar Bharat 3.0.
Providing support to the rural economy and SME’s had been the key focus area for
the Government in all the stimulus packages announced so far by the Government.
However in the last stimulus package there was a clear focus on boosting domestic
manufacturing along with providing support to the real estate sector. The measures
announced so o far by the Government should help support the current economic
recovery given its focus on critical sectors like agriculture, manufacturing and real
estate which are key employment generators.
Exhibit 6: Atmanirbhar Bharat 3.0 package (` cr.)
List of major announcement under Atmanirbhar Bharat 3.0 (INR Cr.)
Boost for Atmnanirbhar Manufacturing (PLI)
1,45,980
Support for Agriculture – Fertiliser Subsidy
65,000
Housing for All - PMAY-U
18,000
Industrial Infrastructure and Domestic Defence Equipment
10,200
Boost for Rural Employment
10,000
Boost for Infrastructure – equity infusion in NIIF Debt PF
6,000
Atmanirbhar Bharat Rozgar Yojana (overall Rs 36,000 cr)
6,000
Boost for Project Exports – Support for EXIM Bank
3,000
Total
2,65,080
Source: GOI, Angel Research
Fiscal package announced by the Government
Pradhan Mantri Garib Kalyan Package (PMGKP) +
1,92,800
Atmanirbhar Bharat Abhiyaan 1.0
11,02,650
PMGKP Anna Yojana – extension of 5 months from Jul - Nov
82,911
Atmanirbhar Bharat Abhiyaan 2.0 (12th October)
73,000
Atmanirbhar Bharat Abhiyaan 3.0
2,65,080
Fiscal Measures announced by RBI so far
RBI measures announced till 31st Oct 2020
12,71,200
Total
29,87,641
The stimulus packages have been in line with the Governments strategy of
providing targeted support to the most critical sectors given the lack of fiscal space
to provide direct stimulus to the economy in the form of large cash spending.
However we believe that more needs to be done in the form of direct spending by
the Government and expect that the Government will step up its direct spending in
the next few months of FY2021.
Government stimulus packages have
been focused on key employment
generating sectors.
We expect increase in direct
Government spending going forward.
January 2021
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New Year Picks – January 2021
New Year Special
Positive global sentiments will lead to continued strong FII flows
After months of delay the US Government’s has successfully passed a USD 900bn
second stimulus package. This is a positive development for the markets especially
in the backdrop of a surge in Covid-19 cases in Europe and the US. The surge in
Covid-19 cases has led to many countries implementing restrictions and social
distancing guidelines which are expected to lead to a pullback in global economic
activity in the fourth quarter of 2020.
The US Fed too has stepped up its quantitative easing program post the US
elections. This will lead to continued surge in global liquidity which will result in
continued FII flows into emerging markets including India.
Exhibit 8: US Fed stimulus driving global flows
Source: Company, Angel Research, Bloomberg
Market view and outlook
We believe that opening up of the economy along various stimulus measures
announced by the Government and the RBI should lead to continued improvement
in the economy. Global sentiments are expected to remain buoyant given that
development on the vaccine front has been better than market expectations.
Moreover continued fiscal and monetary support from Governments and central
banks will also provide support to the markets despite a surge in Covid-19 cases
globally.
The rally in the past few months has become broader with more sectors
participating in the rally. We expect that the rally in cyclical and beaten down
sectors will continue for now given the risk on environment globally. We believe
that auto, BFSI, consumer durables and cement should continue to do well. We
also expect the rural, essential and digital theme to continue playing out over the
next few quarters given revenue visibility and strong growth prospects. We
therefore continue to maintain our positive outlook on sectors like chemical, IT,
and Pharmaceuticals.
We expect broad based rally to
continue for now.
Second US stimulus package is a
positive development for markets.
January 2021
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New Year Picks – January 2021
New Year Special
Exhibit 10: Rationale – Angel Top Picks
Company
CMP (`)
TP (`)
Rationale
Auto
Swaraj Engines
1416
1,891
Strong recovery in the tractor industry (due to robust Rabi crop, hike in MSP & a normal
monsoon) will benefit players like Swaraj Engines.
NRB Bearings
102
118
We expect company to post strong recovery in topline led by rebound in demand in domestic
auto sector. Exports to also register strong growth led by existing as well as new customers.
BFSI
Bandhan Bank
413
525
Strong deposit base & low cost of funds coupled with diversification away from West Bangal and
MFI along with stable NIM's and RoE's will lead to a retaing for the bank
IDFC First Bank
37
44
We believe efforts to built retail liability franchise, fresh capital infusion and provision taken on
the wholesale book will help to tide over this difficult time.
Chemicals
Atul Ltd
6,386
7,339
Atul has very strong chemistry skill sets and will be one of the biggest beneficiaries due to
shifting of production from China
Galaxy Surfactants
2,000
2,284
We expect strong growth for the company due to exposure to personal and home care segment
and recovery in the specialty segment
IT
Persistent Systems
1,490
1,677
Company has won deals worth USD 150mn in Q1Y21 and management has highlighted
strong deal pipeline which will drive growth in H2FY21.
Pharma & Healthcare
Metropolis Healthcare
1,949
2,593
We are positive on the company given expected long term growth rates of ~15% CAGR,
stable margins profile and moderating competitive intensity.
Narayana Hrudayalaya
441
500
We are positive on the hospital sector with Narayana Hrudayalaya well placed for growth of 10-
15% CAGR. We expect capex to be very limited in the near future and cash flows to improve
significantly.
Others
Gujarat Gas
380
450
Company witnessing strong demand growth from the Industrial sector due to fall in gas prices
and also due to environmental concerns of using petcoke as a feedstock in manufacturing
sector
Hawkins cooker
5,866
6,776
Gaining market share with peer, strong demand post Covid-19 and increase in penetration of
cooking gas to drive higher growth.
JK Lakshmi Cement
333
422
It is trading at a significant discount compared to other north based cement company such as JK
Cement as well as historical valuation.
Whirlpool India
2,509
3,032
Going forward, we expect healthy profitability on the back of a strong brand, wide distribution
network, capacity expansion & strengthening product portfolio.
Source: Company, Angel Research
January 2021
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New Year Picks – January 2021
New Year Special
Exhibit 11: Top Picks Valuation Table
Market Cap
(` cr)
CMP
(`)
Sales
(`)
PAT
(`)
ROE
(%)
P/E
(x)
FY21
FY22
FY21
FY22
FY21
FY22
FY21
FY22
Auto
Swaraj Engines
1,718
1,416
774
899
66
86
16.2
17.1
25.9
19.9
NRB Bearings
985
102
697
898
33
72
6.8
13.2
29.7
13.8
Chemicals
Atul Ltd
18,943
6,386
3,946
4,981
697
837
17.8
18.0
27.2
22.6
Galaxy Surfactant
7,092
2,000
2,797
3,223
272
324
21.4
21.2
26.0
21.9
IT
Persistent Systems
11,391
1,490
4,077
4,645
408
513
15.2
16.7
27.9
22.2
Pharma & Healthcare
Metropolis Healthcare
9,960
1,949
990
1,163
173
217
26.3
26.4
57.6
45.8
Narayana Hrudayalaya
9,015
441
2,643
3,930
(60)
235
-
18.5
-
38.4
Others
Gujarat Gas
26,179
380
9,428
12,522
1,442
1,517
33
26
18.2
17.3
Hawkins cooker
3,102
5,866
658
750
59
80
32.5
42.4
52.4
39.0
JK Lakshmi cement (Standalone)
3,923
333
4,151
4,505
315
333
14.5
17.0
12.5
11.8
Whirlpool India
31,843
2,509
5,607
6,448
337
485
18.4
26.5
94.5
65.7
Source: Company, Angel Research
Exhibit 12: Top Picks Valuation Table – Banking/NBFC
Particular
Market Cap
(` Cr)
CMP
(`)
NII
(` Cr)
PAT
(` Cr)
EPS
(`)
ROE
(%)
P/BV
(x)
FY21E
FY22E
FY21E
FY22E
FY21E
FY22E
FY21E
FY22E
FY21E
FY22E
Bandhan Bank
66,516
413
13,019
15,179
3425
4725
21.3
29.3
20.8
24.0
3.8
3.1
IDFC First Bank
20,818
37
7,138
9,139
76
1793
0.1
3.2
0.5
8
1.2
1.1
Source: Company, Angel Research
Note: CMP is Closing price as of December 29, 2020
January 2021
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New Year Picks – January 2021
New Year Special
Research Team Tel: 022 - 39357800 E-mail: [email protected] Website: www.angelbroking.com
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Ratings (Based on expected returns Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)
over 12 months investment period): Reduce (-5% to -15%) Sell (< -15)
January 2021
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New Year Picks – January 2021
New Year Special