In 2020, shares of companies in two sectors i.e. Pharma and IT rallied smartly. As we go into 2021 with a few vaccines coming into the market, it is ideal to play the recovery theme for next year. In this scenario, cyclical stocks and defensives along with a clear focus on growth and value should deliver the goods. Since most of the economy-driven sectors are prone to market correction, one should have an accumulation strategy in them rather than investing at one go. Here are the hand-picked stocks that could potentially win in 2021.
ICICI Bank is a leading private sector bank in India. Its subsidiaries include India’s leading private sector insurance, asset management, and securities brokerage companies, and among the country’s largest private equity firms. The ICICI Bank stock is down 27% in 2020 and is well-placed to perform in 2021 given its reasonable valuation of less than 2.5 times book value.
Larsen & Toubro (L&T), among the Top 10 of the ‘Fortune India 500’ list, is an Indian multinational engaged in engineering, procurement, construction projects, defense, and services with over $21 billion in revenue. After remaining basically flat throughout 2020, the L&T stock trades at 14 times FY23 E&C earnings, and valuations offer room for upside given historical levels an all-round improvement in ordering and execution environment.
Ambuja Cement, a part of the global conglomerate LafargeHolcim, is among the leading cement companies in India. It has a cement capacity of 29.65 million tonnes with 5 integrated cement manufacturing plants and 8 cement grinding units across the country. The Ambuja Cement stock hasn’t moved much in the last 3 years, but a re-rating is on the card given volume growth visibility, improving energy efficiency, rationalizing fixed cost, and generating tangible logistical synergies with subsidiary ACC. The stock trades at a reasonable 13 times CY21E EV/EBITDA.
Hindustan Unilever Limited (HUL) is India’s largest Fast-Moving Consumer Goods company with its products touching the lives of nine out of 10 households in the country. It is a dependable company with the right growth matrix like a broad-based portfolio straddling across the price-value spectrum, a sharp focus on cost savings, and execution prowess vs peers. Though the stock is priced at 53 times FY23 EPS, the debt-free company with a high return on equity, improving margins is a potential winner.
Bharti Airtel isa global telecommunications company with operations in 18 countries across South Asia and Africa. The company ranks amongst the top three mobile operators globally. Airtel is India’s largest integrated telecom provider and the second-largest mobile operator in Africa. After an early teen percentage gain in 2020, the stock seems poised for better days on the back of market share gains led by network quality, higher average revenue per user, consistency in growth in revenue as well as EBIDTA, and better margins than peers.
Infosys, the fastest wealth creators in the 1995 to 2020 period, is the poster child for India’s IT services. Despite rich valuation after a 68% jump in 2020, Infosys remains a top preference in Tier-1 companies due to large deal success, resilient portfolio, potential to deliver best of the peer group USD revenue and PAT, and high payout ratio despite regular acquisitions. Over the years, execution has separated the boys from the men, and Infosys has been a gentleman, on account of all-round growth, utilities-like earnings stability, and financial strength.
SBI Life Insurance, one of the most trusted private life insurers in the country, offers a favorable risk-return ratio given a rather quiet 2020. The company continues to report steady growth in the Protection business, while the ULIP business is expected to see a gradual recovery. Expect growth to revive meaningfully from FY22. Improvement in the persistency rate and cost ratios has been commendable, with a rosy future in terms of ratios (RoEV) and margins (VNB).
Asian Paints is synonymous with paints in India. While the stock always trades at a premium valuation (currently over 51 times FY23 earnings), Asian Paints sustains levels given improving growth visibility and strong market share gains coupled with a sustainably higher level of margins. Strong cash accretion potential, robust distribution penetration in new markets and products, higher dividends and inorganic growth are plus points. It has always been one of the most profitable companies (by average return on equity) in Corporate India.
HDFC Asset Management is one of the leading AMCs in India. With improved equity markets, the equity AUM for AMCs has been rising sequentially. HDFC AMC is focusing on improving its fund performance, doing new product launches, and changing the investment strategy of schemes. Debt inflows should increase in line with the improvement in FCF generation for India Inc. With tight cost controls, profitability will continue to improve for HDFC AMC. The stock valuations at FY23 P/E of 29 times seems fair and is poised to deliver reasonably good earnings growth going forward.
Jubilant Foodworks holds the master franchise rights for two international brands, Domino’s Pizza and Dunkin’ Donuts. The stock is currently trading at 51 times FY23 earnings and looks set to see some upgrades given the strong performance and nearâ€term outlook. Continued market share gains especially with the strong adoption of the delivery channel coupled with the resumption of store addition, should deliver strong top-line growth. Margins are also set to sustain at higher levels with lower discounting, structural cost-saving initiatives, delivery charges, and shutdown of lossâ€making stores. The Jubilant Foodworks stock is a solid mediumâ€term discretionary play.
