34912In view of reduced inflation and expenses, will it be right to invest in IT stocks?

One of the biggest lessons COVID-19 has taught is to never let a good crisis go to waste. In the last financial year, there was the covid-19 pandemic, lockdowns, and negative GDP but Indian stock markets have overcome all odds and posted their best performance in a decade in FY21.

With India currently reeling under the second wave of Covid-19. An analysis of the US, Russia and Europe suggests that daily case additions in the 2nd and 3rd wave have been 1.4-12x than the first wave. The wave has lasted for 2- 3 months. A prolonged pandemic spread and an increase in restrictions may curb economic activity in FY22, which may further defer revival in FY22.

All this has made Indian stock markets very volatile hence staggered buying or Systematic Investment Plans (SIP) in stocks is the best way to beat the market volatility and benefit from any future falls and have a better margin of safety.

SIP in stocks

A SIP in stocks works on the same principle as the systematic investment plan in a mutual fund. You buy shares instead of mutual funds units.

One can do a SIP by purchasing a fixed quantity of shares at specific intervals or stocks within a fixed amount at regular intervals. It is the ideal method of investing for long-term investors. It helps you make the best of the unpredictable market by adopting a disciplined investment strategy.

HDFC Securities’ Retail Research has prepared a list of large-cap stocks which can be used by investors who seek to invest in them systematically over the next few years.

Reliance Industries

“Reliance Industries is looking to expand into multiple new digital products and services. It is building capabilities at scale toward (a) AI-based products – education platforms, computer analytics tools, speech and language recognition products, (b) 5G technology, along with its technology partner Qualcomm, and (c) applications for video conference – JioMeet, digital payment – JioUPI, connectivity – Jio STB, and Jio Fiber, among others,” said the report by HDFC Securities.

The company is India’s largest retailer by revenue and profitability. The company’s strong market position is reflected in its leadership position across several formats and has been supported by consistent growth, added the report.

Infosys

Infosys has guided revenue growth of 12-14%, which represents strong growth potential despite a robust FY21 performance. The company expects healthy traction in large deals, traction in digital technologies, healthy deal pipeline ($9.4 billion net new out of $14 billion won). A recent deal with Daimler will support growth in the vertical in FY22E, noted the report.

Hindustan Unilever

HUL is a play on consumption growth in India. It has proved its ability to implement effective price hikes and to grow ahead of market. Disruptive times are particularly hard on unorganized players, which may lead to HUL gaining market share. HUL has the best of breed earnings growth potential in the longer term owing to its diversified portfolio, execution strengths, stated the report.

ICICI Bank

The brokerage firm believes that ICICI Bank’s digital offerings for its retail segment are now maturing in terms of customer penetration, adoption and hyper-personalisation reflecting in speedier customer acquisition and better productivity. Incrementally, the bank’s comfort and confidence in kick-starting growth in its corporate portfolio holds a gradual re-rating potential on the back of reducing concentration risk from a single growth/profit engine.

State Bank Of India (SBI)

HDFC Securities is of the opinion that SBI is almost immune to any liability-side risks at this juncture, given its expansive, granular deposit base and government’s majority holding. It is better placed to curtail asset quality worries than many other large banks because of its quality of loan book. Moreover, ample provision coverage will curtail incremental loan loss provisions. After a prolonged period of stress, the Indian banking sector had finally entered into resolution and recovery phase. With this, corporate-facing banks like SBI with huge corporate book size had a lot to gain.

ITC

ITC is one of the leading FMCG companies in the country and at such low valuations, we feel there is very limited downside potential with the risk-reward ratio in the current market scenario in favor of ITC. Profitability and cash generation are heavily skewed towards the cigarettes business; any slowdown there could have an impact on the company’s performance. Upcoming investment trends like more emphasis on ESG investing and the single-digit growth rate (6%) in the cigarettes business are near term overhangs, stated the report.

Larsen & Toubro

L&T’s order inflow correlates to India’s economic growth. Over the past few years, the Indian economy has faced challenging years, and this year was further accentuated by the pandemic, which delayed recovery for L&T. However, the National Infrastructure Pipeline (NIP) indicates spends of Rs.111 lakh cr over the next five years and L&T with its diverse presence and capabilities would be the biggest beneficiary of the same.

Sun Pharmaceutical

HDFC Securities believes Sun Pharma’s share of injectables, specialty, biosimilars, and complex products in US revenues is expected to increase significantly over the next 3-4 years. Improving the quality of pipeline in the US will not only ensure that the growth rate holds up but will also drive higher profitability. The brokerage remains positive on the stock given a strong management team, robust balance sheet, strong earnings growth expected over FY20-23E and compelling valuations.

HDFC Life Insurance Company

HDFC Life is a long-term compounding growth story. The company’s focus on superior product mix with a greater focus on high margin business, diversified distribution mix and high technology focus puts company ahead of the curve. Share of low margin ULIP business (as a % to total APE) has been consistently contracting from 46% in FY17 to 23% as of Q3FY21. At the same time, high margin pure individual protection business share (as a % to total APE) has grown by 2x during the same time, said the brokerage firm in the report.

Bajaj Auto

Bajaj Auto has negligible debt levels and is likely to maintain its debt-free status, given that its annual capex requirement of ~Rs 500-800cr can be easily met through internal cash accrual of Rs 2500-3000cr post dividend payout. Return ratios continue to remain strong above 20%.

Dabur

The broking house expects the company to gain market share across its domestic core portfolio through its focused power brands strategy, innovation across portfolio, aggressive above-the-line spends and improvement in its distribution reach.

Tata Motors

The operating performance of the company has improved significantly on the back of a recovery in volumes coupled with favorable mix and cost savings. Its market share in the PV segment improved from 4.8% at the end of March 2020 to 7.8% at the end of December 2020. The company is looking to turn the entire portfolio of JLR electric by 2025. The company will invest about £2.5 billion a year to drive its electrification plans, develop connected services, and data-centric technologies for its luxury vehicles. In the domestic market, it plans to invest Rs 1,850 cr.

(Disclaimer: The recommendations in this story are by the respective research and brokerage firm. Money9 & its management do not bear any responsibility for their investment advice. Please consult your investment advisor before investing.)