The top picks basket from Axis Securities generated a positive return of 0.7% since February 1, 2023, outperforming the Nifty 50 index, which fell 1.7% over the same time frame. This outperformance was truly commendable, particularly in the light of February's high volatility and the indices' mixed performance.
In addition, the basket of its top picks has generated a remarkable return of 149% since its inception in May 2020, a figure that is noticeably higher than the 87% returns recorded by the Nifty 50 during the period. In the light of this, the brokerage continues to support its thematic method of choosing top choices.
Let's look at its best selections for March.
ICICI Bank Ltd is one of India's biggest private sector banks, with operations in the retail, corporate, and insurance sectors. It is backed by a solid liability franchise and a balanced mix of retail businesses.
The bank maintained its momentum for growth in the third quarter of FY23, recording a decent advances growth of 20/4% year-on-year (YoY)/ quarter-on-quarter (QoQ), which was fueled by consistent growth in the retail portfolio. Retail, commercial banking, and SME segments all saw increases of 23/38%/25% year over year. Mortgages, personal loans, and credit cards, which grew by 19/42/52% YoY, were the primary drivers of retail growth.
The brokerage in its report said that the bank does not intend to cap the mix of these segments in the overall portfolio. It expects the bank to continue delivering healthy growth of 19% compound annual growth rate (CAGR) over the medium term.
Outlook and Valuations
"The bank has been outperforming its peers and has been firing on all cylinders. ICICIB has ticked most boxes on growth, margins, and asset quality. Higher loan growth, improving operating profits, and a strong provision buffer coupled with a strong deposit franchise will help the bank achieve return on average equity (ROAE)/ return on average assets (ROAA) expansion over FY23-25E. On the valuation front, we believe the bank continues to be on a comfortable footing. We maintain a 'buy' on the stock with a target price of ₹1,150 per share," said the brokerage in its report.
Tech Mahindra Ltd exceeded brokerage expectations in the third quarter of FY23, reporting revenue of ₹13,734.6 crore, up 3.4% on a quarterly basis and 1.8% on a quarterly basis (in constant currency terms).
The communications, media, and entertainment sectors experienced a meagre QoQ growth of 1.9%, while manufacturing experienced a flat QoQ growth of 0.0%. The banking, financial services, and insurance (BFSI) verticals showed a de-growth of 0.5% QoQ, retail transport & logistics grew by 6% QoQ, and technology also grew by 3.3% QoQ.
The majority of the verticals experienced significant growth, but they are anticipated to soon report long-term growth supported by a robust deal pipeline.
"We believe Tech Mahindra has a superior services mix and multiple long-term contracts that are well-spread across the verticals, reducing its dependency on any one vertical. Furthermore, we foresee healthy tractions in Communications and Enterprise verticals which will greatly accelerate the company’s revenue growth moving forward. We recommend a 'buy' rating on the stock and assign a 12x price–earnings ratio (P/E) multiple to the company’s FY25E earnings of ₹96.3/share to arrive at a target price of ₹1,300/share. The target price implies an upside of 17% from the current market price," said the brokerage in its report.
According to the brokerage's analysis, the company's net realisations increased by 8.3% QoQ (up 16% YoY) in Q3FY23. The management announced a price increase in January 2023 and stated that the increase in average selling price would be driven by a greater percentage of SUVs in the sales mix, demand for newer models, and increased car sales. Even when placing orders, the majority of them are for larger vehicles.
Both gross margin and earnings before interest, taxes, depreciation, and amortisation (EBITDA) margins increased in the third quarter of FY23, driven by a better mix (higher SUV share), commodity benefits, foreign exchange benefits (yen depreciation), and a decrease in overhead costs, which were largely offset by an increase in sales promotion costs.
"The company expects to outpace the industry growth rate; good order booking for newly launched Jimy and Fronx; Hedged for Dollar,Yen exposure for FY23. Strong order book, higher share of premium SUVs in the sales mix will drive the revenue/EBITDA/PAT growth in FY23-25. We maintain our 'buy' rating on the stock 28x P/E on FY25E earnings per share (EPS)," said the brokerage in its report.
According to the brokerage report, the bank's loan growth remained robust on the business front in Q3FY23 at 19%/4% YoY/QoQ as opposed to 21/5% YoY/QoQ growth in Q2FY23. Additionally, wholesale books saw a significant increase of 18% YoY. Agri was up 12% YoY, and small and medium-sized businesses (SME) were up 14% YoY. Retail book growth also remained strong at 18% YoY, driven by growth in all categories, particularly Xpress Credit (up 26% YoY) and Home Loans (up 14% YoY).
Outlook and Valuations
According to the brokerage's report, the bank's asset quality performance has been steadily improving, and with new stress formation being comparatively low, this has led to a normalisation of credit costs. A higher proportion of floating rate book in the overall mix will help the management keep net interest margins (NIMs) at the current level, which they are confident will hold. Therefore, the bank's main strengths include stable NIMs, strong advances growth, improving asset quality, a strong deposit franchise with a healthy current account savings account (CASA Ratio), stable operational expenditure (Opex) ratios, and sufficient capital.
"Among public sector undertakings (PSU) banks, SBI remains the best play on the gradual recovery of the Indian economy on account of its healthy provision coverage ratio (PCR), robust capitalisation, strong liability franchise, and improved asset quality outlook. We believe normalisation in credit costs and improved growth outlook should lead to double-digit ROEs of nearly 16.5% over FY23-25E. We maintain our 'buy' rating on the stock with a target price of ₹750/share," said the brokerage in its report.
Infosys Ltd reported revenue of ₹38,318 crore for Q3FY23, exceeding the brokerage's estimates. Operating earnings for the company was ₹8,242 crore, up a healthy 4.7% on a sequentially basis.
Deal wins for the company for the quarter remained strong at $3.3 bn. Although the management expects it will flatten in the upcoming quarters, attrition stayed flattened in Q3FY23, with a rate of 25%.
According to the brokerage's report, the majority of the verticals experienced significant growth and will probably continue to do so in the near future, supported by a healthy deal pipeline.
"The management has guided double-digit growth in FY23 in the backdrop of robust deal wins. Additionally, higher offshoring, better utilisation, and lower attrition are likely to expand the company’s operating margin moving forward. We recommend a 'buy' rating on the stock and assign a 22 x P/E multiple to its FY25E earnings of ₹82.2/share to arrive at a target pric of ₹1,800/share, implying an upside of 21% from the current market price," said the brokerage.
Despite a 23 basis point rise in the cost of funds in the third quarter of FY23, the company maintained net interest margins (NIMs). The brokerage in its report stated that its heartening to see the management put margin protection first. Customers in all industries are progressively feeling the effects of higher interest rates thanks to the company.
The brokerage expects the company to report margins of around 9.8% over FY24-25E.
Outlook and Valuations
"The company’s digital initiatives and business transformation are key positives and are currently progressing well with sequential improvement visible across metrics. With the digital transformation journey likely to be completed by FY23, we believe it should contribute meaningfully to the overall growth. We believe the marginal compression in NIMs will be offset by improved fee income, improving opex ratios, and stable credit costs, thereby enabling Bajaj Finance to deliver superior return ratios moving forward. We recommend a 'buy' rating on Bajaj Finance with a target price of ₹7,400 per share," said the brokerage.
The brokerage in its report stated that the cigarette tax rise is less than theirs and the street's expectations. Given the nominal increase in the NCCD rate and the fact that NNCD only makes up 10% of the overall cigarette tax, the brokerage estimates that the cigarette companies will need to raise prices by 1-3%, based on the length of the cigarette.
Valuations and Outlook
“We believe the narrative around the ITC is getting stronger as all its businesses are on right track – Stable cigarette volume growth led by market share gains and new product launches; FMCG business reaching the inflection point as its EBIT margins expected to inch up from 7.7% in FY22 and would be driven by – the ramp up in the outlet coverage, effective implementation of the WIMI strategy, driving premiumisation, leveraging technology on demand and supply side; and moderation of raw material input cost; Strong and stable growth in hotels as travel, wedding, and corporate activities pick up ; Steady and decent performance in paperboard and agri business witnessed in last few quarters. Moreover, reasonable valuation among entire FMCG pack provides huge margin of safety. Based upon above thesis we maintain our high conviction 'buy' on ITC with target price of ₹460 per share, ” said the brokerage.
In Q3FY23, the company recorded positive growth in volume, revenue, earnings before interest, taxes, depreciation, and amortisation (EBITDA), of 11%/23%/56% YoY. During the quarter, it recorded EBITDA margins of 19.2% and EBITDA per tonne of ₹1022.
Outlook and Valuations
"We believe the company is well-positioned to grow its revenue and profitability moving forward, supported by increasing cement demand in its key markets in both trade and non-trade segments, cost optimisation measures, and increasing premium cement sales aided by capacity expansions. The stock is currently trading at 14x FY23E and 10x FY24E EV/EBITDA respectively. We recommend a 'buy' rating on the company and value the stock at 12xFY24E EV/EBITDA to arrive at a target price of ₹2,120 per share, implying an upside potential of 15% from current market price," said the brokerage.
In contrast to the brokerages' expectations of ₹3,590 crore, Polycab India recorded revenue of ₹3,715 crore. 10% year-on-year revenue growth was achieved, with the cables and wires sector seeing strong volume growth.
Outlook and Valuations
"Polycab continues to maintain its leadership position in the organized C&W segment with a market share of over 24%. With a strong distribution network and a strong brand recall, the company continues to gain market share in Wires & Cables and fast-moving electrical goods (FMEG) segments. Furthermore, the entry into the extra high voltage (EHV) Cables segment will aid revenues in the medium to long term. The management has set a revenue target of around ₹20,000 crore by FY26, led by faster and more profitable growth in the B2C segments and industry-leading growth in the B2C business," said the brokerage.
High-rated corporate and retail loans are being gradually incorporated into Federal Bank's lending portfolio. With a CASA plus Retail TD of over 90% and one of the highest Liquidity Coverage Ratios (LCR) among banks, the bank's liability franchise is still robust. Levels of restructuring are also in check.
"Key positives are increasing retail focus, strong fee income, adequate capitalization, and prudent provisioning. Federal Bank remains well-poised to deliver a strong RoA/RoE of 1.2%/14-15% over FY24-25E. We maintain a 'buy' rating on the stock with a target price of ₹170 per share," said the brokerage.
The brokerage in its report stated that the company is well placed under current market situation as early onset of summer season is expected to drive overall beverage sales across regions. Further, initial report on possible El-nino (deficit rainfall) could delay the rural recovery which would lead the entire FMCG pack under wait-and-watch mode. Hence, in this current volatile market situation, the brokerage expects the company to provide better earning visibility than other FMCG peers in the near term.
"Varun Beverages has been in our top picks portfolio since long and we continue to remain positive on the stock on a mid to long term basis. We estimate revenue/EBITDA/PAT CAGR of 17%/21%/25% over CY22-24E based on the above mentioned rationales. We maintain our 'buy' rating on the stock with the target price of ₹1,500 per share," said the brokerage.
Improved freight utilisation, expansion in end-user sectors, and pent-up replacement demand are all contributing to the cyclical recovery of medium and heavy commercial vehicles (MHCV) and light commercial vehicles (LCV). The local commercial vehicle (CV) market is anticipated to expand by 9% YoY in FY24E, according to ICRA. According to Crisil, the bus sector is likely to outperform in the long run over the low base, and total CV demand is predicted to increase by 10-12% CAGR over FY22-27.
Valuations and outlook
"With improved profitability (raw material softening), market share gains (increased demand), new and superior product offerings in the pipeline to cater to growing IC and EV demand; and a focus on better services, the company remains well-positioned to benefit from the CV upcycle," said the brokerage.
With revenue compound annual growth rate (CAGR) of 19% and new patient registration CAGR of 24.6% over FY16-FY19, Healthcare Global Enterprises has been outpacing industry development. The company has established a robust nationwide network of 25 centres, which is 2x the size of the direct rival.
"The is expected to turn around its operating profitability with operating EBITDA margins improving by 680 basis points over FY21-FY24E, majorly driven by operating leverage driven by the increase in Average Occupancy rates (53%-58%); increase in average revenue per occupied bed (ARPOB) led by the increase in international patients and high end works, and operating leverage in new centers that have already achieved breakeven. Given variable and fixed costs comprise 35% and 65% in hospitals respectively, we believe strong operating leverage in new centers may improve margins to 12%-15% over FY21-FY24E," said the brokerage.
"Bioenergy in domestic business, the overall demand-supply gap of ethanol, increased interest in grain-based distilleries and decarbonisation impetus is auguring well for Praj along with development in other key verticals. Praj is a key beneficiary of multiple tailwinds provided by the bio-economic revolution, giving strong growth and revenue visibility for the next 3-5 years. The company's key growth levers remain strong and therefore we maintain our 'buy' rating with a target price of ₹550 valuing the company at 35x FY24E," said the brokerage in its report.
The management remains confident as it has raised its volume growth forecast from 15% to 20-25%. Furthermore, the company's overall topline development of close to 40% in FY23 should be aided by a 10-15% price growth. It also hinted at domestic branded company reaching ₹200 crore in FY23 as it expanded into new regions.
"We remain positive on CCL Products given, strong footing in the International markets as it continues to gain market share and access new business, cost-efficient business model, doubling of Vietnam's capacity from the current 13,500 MT to 30,000 MT and new capacity expansion in India leading to strong volume growth visibility for the next 2-3 years, capacity addition in the value-added products, and foray into high margin branded retail business," said the brokerage.
Because the government is putting more emphasis on infrastructure investment, the road industry is developing well. An organised entity like PNC Infratech should benefit from the National Highways Authority of India's (NHAI) tightening of the standards for bidding on road projects.
Considering strong and diversified order book position, healthy bidding pipeline, new order inflows, emerging opportunities in the construction space, the company’s efficient and timely execution and strong financial credence, the brokerage expects the company to report revenue/EBITDA/of 18%/22% respectively over FY22-FY25E.
"We recommend a 'buy' rating on the company and value the stock at 11x FY25 earnings per share (EPS), and hybrid annuity model (HAM) portfolio at 1x book value to arrive at a target price of ₹390 per share, implying an upside potential of 42% from current market price," said the brokerage.