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With Diwali just around the corner, market investors are looking for opportunities that will will welcome Goddess Lakshmi in style. Looking to make this possible for investors is this brokerage which has been busy in identifying top stocks for Diwali. Amber Enterprises, APL Apollo Tubes, Asian Paints, Bharti Airtel  to  HDFC Life, here are Sharekhan’s top Diwali stock picks. Read on and make your Diwali that much brighter!    

1) Amber Enterprises has emerged as a market leader (in volume terms ) in the Indian room air-conditioner (RAC) original equipment manufacturing/ original design manufacturing (OEM/ODM) industry with 70.7% in RAC OEM/ODM industry and 24.4% market share in the overall RAC market in FY2020.

Amber Enterprises has strong growth tailwinds as RAC (room air-conditioner) sales volumes in India are projected to clock a 13.7% CAGR over FY2020-FY2025 while RAC OEM (original equipment manufacturing) / ODM (original design manufacturing) would record a 19.5% CAGR led by rising disposable incomes, urbanisation, lower RAC penetration (8%), extreme climatic conditions and rising construction activities.

The government recently banned imports of air conditioners with refrigerants which were amended from free to prohibited category providing opportunities for players like Amber in both completely-built units and component sourcing.

Key risks:

Slowing demand in key categories, delay in launch of new products and increase in raw-material prices would act as key risks to earnings estimates in the near to medium term.

2) APL Apollo Tubes (APL) is India’s largest structural tubes manufacturer with a market share of 50% (up from 40% in FY2020). The company has consistently expanded its capacity from 53,000 tonnes per annum (tpa) in FY2006 to 2.6 mtpa in FY2020 through the organic and inorganic route. The company has a distribution network of 800 and over 50,000 retailers.

Rise in share of high-margin products, cost rationalisation and higher operating leverage would expand EBITDA margin sharply to Rs. 3,761/tonnes in FY2023E (versus Rs. 2,923/tonnes in FY2020).

Key risks:

Delayed recovery in demand from construction and infrastructure projects and a substantial rise in steel prices could hurt earnings outlook. Any rise in competition could impact volume growth.

3) Asian Paints has a strong distribution reach of over 65,000 dealers / over 6,00,000 retailers across India, Asian Paints is market leader in the decorative paints segment with a 55% market share. Decorative paints form 85% of the overall domestic market, which makes it a consistent play among peers. Consumer shifting to trusted brands in the post-pandemic era; rapid urbanisation, sustained innovation with high quality products and uptick in rural demand will help Asian paints to deliver consistent volume growth of high single digit to low double digit in the near term.

Management’s vision is to become a top player in the home décor space. Through organic/ inorganic initiatives, the company ventured into bathroom fittings and modular kitchen space. It has recently introduced products in home furnishing, furniture and lighting products to expand its portfolio.

With a sturdy balance sheet, consistent cash flows and cheery dividends, Asian paints remains one of the better picks among consumer players with a 14% earning CAGR over FY20-23E. The stock is trading at 52x its FY2023E.

Key risks:

Slowing demand in key categories, delay in launch of new products and increase in raw-material prices would act as a key risk to earnings estimates in the near to medium term.

4) Bharti Airtel is India’s second-largest telecom player, with a diversified strategic non-telecom business (homes, enterprise and DTH), strong digital capabilities and robust network coverage. It has a stake in Bharti Infratel and also has a presence in Africa. Bharti Airtel is well-positioned given a favourable market structure (moving towards a two-player market) and continued weakness in Vodafone Idea (losing market share). Bharti is expected to hugely benefit from consolidation in the sector, given increasing ARPU and a low smartphone mix.

Greater 2G to 4G upgrades, digital strategies, greater postpaid subscribers and bundling of other services (DTH and broadband) would help Airtel drive ARPU. Digital strategies have been helping the company to acquire quality customers, increase wallet share, reduce churn rate and eliminate waste. Sharekhan remains positive on Bharti, considering its strong EBITDA performance, continued growth in 4G subscriber base and potential improvement in free cash flows.

Key risks:

Increasing competition could keep up the pressure on realisations. Any slowdown in data volume growth could affect revenue growth.

5) HDFC Life is the leading life insurance player, promoted by HDFC Ltd (50.14% stake). The company offers a wide and balanced range of individual and group insurance solutions for protection, pension, savings, investment etc. The company has a pan-India reach with over 400 branches and stable partnerships with new age tie-ups and partnerships, including with HDFC Bank.

The enviable combination of brand + distribution supplemented by product and technological innovations, make it one of best Insurance franchises in India. The insurance sector has a huge growth potential in India, due to factors like a large protection gap, the expanding per capita income etc. Capable players like HLIC, armed with the right mix of products, services and distribution mix are likely to gain disproportionally from it.

Key risks:

A slowdown in business operations and higher slippages/bond downgrades due to economic weakness may impact earnings outlook.

6) Info Edge is India’s largest listed Internet technology player, operating in online recruitment, real estate, matrimony and other businesses. It also invests in start-ups and has been successfully aiding growth of companies such as Zomato and Policybazaar.

The Covid-19 outbreak has created a shift in consumer behaviour, which would drive significant online adoption across categories (insurance, food delivery, e-commerce, gaming, online education and tele-medicines). Despite a slowdown, business momentum at Zomato and PolicyBazaar remains stable.

With its dominant market share and strong cash-flow generation capabilities, any slowdown in the economy would provide the company an opportunity to gain market share among close peers. With the recent QIP, Info Edge has a cash balance of Rs. 33 billion that would be largely used for big-ticket M&As in one of its operating businesses.

Key risks:

Intense competition from both international and domestic players in the recruitment business could affect the growth trajectory and margins of the recruitment business.

7) IPCA Labs is a fully-integrated Indian pharmaceutical company, manufacturing more than 350 formulations and 80 APIs for various therapeutic segments. Ipca is a therapy leader in India in the anti-malarial segment.

IPCA sees a double-digit growth trajectory to sustain for both API and Formulations segments. IPCA is witnessing strong demand traction in the API segment and is implementing de-bottlenecking to ease out the capacity constraints, which would drive growth over the next two years. The formulations business is expected to grow at a healthy pace. The domestic formulations segment too is expected to improve. IPCA sees margin expansion in FY2021, to be driven by favorable mix, operating leverage and lower costs.

Strong revenue growth and margin expansion, almost near-nil remedial costs, a sturdy balance sheet and healthy return ratios augur well for Ipca.

Key risks:

Regulatory risk including delay in regulatory clearance of Pithampur and Pipariya plants.

8) Kotak Mahindra Bank is one of India’s leading financial services conglomerates. The group has a wide distribution network through branches and franchisees across India and offers a wide range of financial services including commercial banking, stock broking, mutual funds, insurance, investment banking, etc.

Improving liability profile augurs well for long-term sustainability; CASA ratio of 57% (highest among peers) indicates the strength of the bank’s liability franchise. Going forward, the bank is to shift focus on growth which augurs well.

Kotak Mahindra Bank has been able to consistently grow and gain market share in advances as well as its deposits in the last 5 years. This is despite maintaining a cautious stance (a key differentiator) of the bank’s quality of management which has been able to side-step and calibrate its sector wise growth much ahead of the industry.

Kotak Mahindra Bank’s strong operating metrics, prudent and agile leadership team, well capitalized balance sheet, as well as the quality of its subsidiaries (formidable players in its own segments) provide long-term value. The recent capital issue provides the bank with wherewithal to pursue inorganic opportunities as well.

Key risks:

A prolonged lockdown and consequent rise in NPAs can pose risks to profitability

9) Larsen and Toubro (L&T) is a best-in-class EPC company, and dominates the domestic EPC market along with consistent revenue growth, large room to grow in absolute revenue terms, business diversification, and operating profitability and an early beneficiary to benefit from the revival in the capex cycle.

The company remains at the forefront to reap benefits from the recently-announced Atma Nirbhar Bharat scheme from the government with its diversified businesses across sectors like defence, infrastructure (roads, railways, metros, DRC), heavy engineering, IT (digitalisation).

Order inflow pipeline remains robust and provides healthy visibility for bagging orders ahead. It also remains focussed to divest its non-core assets which will enhance the balance sheet and aid the RoCE expansion further. L&T is better poised to ride any uncertainties owing to multiple levers such as a strong business model, diversified order book, and healthy balance sheet.

Key risks:

Slowdown in the domestic macro-economic environment or weakness in international capital investment can affect business outlook and earnings growth.

10) SRF is a chemical-based multi-business entity that manufactures industrial and specialty intermediates. The company’s diversified businesses cover Technical Textiles, Chemicals (fluorochemicals and specialty chemicals) and packaging films.

The company is expected to deliver healthy growth in the chemical business led by the opportunities created by the China Plus one strategy adopted by global players coupled with government thrust on the Aatma Nirbhar Bharat initiative so as to reduce import dependence and be self-reliant.

SRF’s focus is to expand share of speciality chemicals and add niche products in the chemicals segment and value-added products in packaging film business to bode well for margins.

The company’s balance sheet is likely to strengthen further despite expansion plans as strong cash-flow generation to support capex.

Key risks:

Slowdown in off-take from user industries and concerns over product price correction can impact revenue growth. Input cost price volatility might hit margins.

11) Tata Consumer Products is one of largest players in the branded tea space in domestic and international markets such as Europe and Canada. With the merger of Tata Chemicals’ consumer business, it has become a household name in India with a strong portfolio of brands in branded tea, salt and pulses.

The merger of Tata Chemical’s consumer business brings a lot of synergistic benefits in the form of expansion of product portfolio, scale-up in distribution reach and rise in contribution of domestic business to 60%. These synergies provide a large scope to achieve sustainable growth in the coming years (along with margin expansion of 2-3% over the next 2-3 years).

Key risks:

Slowdown in the domestic consumption; heightened competition from new players and spike in the key input prices would act as a key risk to our earnings estimates in the near term.

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12) Tech Mahindra is India’s fifth-largest I.T. outsourcing company. Over the past decade, Tech Mahindra has successfully transformed from a telecom-focused player to a company with a wide portfolio of differentiated offerings in the enterprise segment.

Tech Mahindra is well-placed to capitalise opportunities from three mega-trends i.e 5G, connected devices and telecom-media convergence, given its early investments in network capabilities, investments in IPs, platforms and partnerships to develop an ecosystem play.

Management expects double-digit growth over the next couple of years on the back of anticipated growth in the enterprise segment, potential 5G opportunities and strong deal wins. Sharekhan prefers Tech Mahindra on the back of anticipated improvement in growth in the enterprise segment, 5G opportunity and scope for a rise in margins.

Key risks:

Any hostile development with respect to the current visa regime would affect employee expenses. Further, a delay in pick-up of 5G-related spends would affect revenue estimates.

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