Diwali stock picks: Axis Bank, Bajaj Auto, Bharti Airtel, Bajaj Finserv, ITC to Infosys, here are stocks to buy

Diwali 2020 is almost here and investors are looking for some choice stock picks they can make good profit from going forward. Brokerages have been on the job and here we provide a number of stock picks that will see some good returns flowing. So, from Axis Bank, Bajaj Auto, Bharti Airtel, Bajaj Finserv, ITC to Infosys, here are some great stocks to buy. 
  
Axis Bank:

Kotak Securities maintains Buy at Rs 525 for target of Rs 600 (14% potential upside) in 12 months

Axis Bank’s Q2 FY21 core operating profit growth was 20% yoy driven by 11% yoy revenue growth on the back of 20% yoy Net interest income (NII) growth. In Q2 FY21, loan growth was 11% yoy. Net interest margin (NIM) improved to 3.6% largely on lower cost of funds down which was down to 4.6%. Cost-to-income ratio trended down to 38% in Q2 FY21 (vs 42% in FY20). Asset quality was stable in Q2 FY21 but the stressed book has increased due to Covid. Gross Non-performing loans (NPLs) went down to 4.2% & Net NPL to 1% in Q2 FY21. Kotak securities expect Gross NPLs to decline in the medium term. Retail loans as a percentage of overall loans has gone up from 45% in FY17 to 53% as on 2QFY21. CASA ratio of 44% is in line with peers. Kotak Securities expect overall NIMs to remain at 3.5-3.6% in FY22-23E. Banks superior franchise at inexpensive valuation and believe it would come out of this crisis relatively stronger.

Bajaj Auto:

Kotak Securities believes their Sum of Total Parts (SoTP) based fair value stands at Rs 3900 (33% potential upside), they value standalone business at Rs 3788 per share based on Discounted Cash Flow (DCF) methodology and add Rs 112 for company’s stake in KTM.

Domestic motorcycle retail demand has reached 90% of the last year levels and export motorcycle retail demand has reached 90-95% of the last year levels for the company, which is encouraging. The company will be following a three-fold strategy to gain market share in the domestic two wheeler market, aggressive product launches in 125 cc segment, retaining dominant position in sports motorcycle segment and providing innovative offerings in top-end of entry motorcycle segment. Also, Strong long term growth potential in export geographies where the company has already established itself as a formidable player will be important to watch. Kotak Securities expects export volume mix to improve to 52% in FY23E from 47% in FY20. Company is able to maintain operating margins at current challenging times. In Q2 FY21, the company reported operating margin of 17.7% (+110 bps yoy and +440 bps qoq). Kotak Securities expects the company's sales volume to grow by 20.5% in FY22E and 14.6% in FY23E.

L&T:

Kotak Securities maintains buy rating, with target of Rs 1300 (38% upside) in next 12 months.

Sharp improvement in Engineering & Construction revenues on qoq basis was led by improving manpower availability and easing of supply chain issues. Performance is still down yoy but is expected to improve sharply during the second half of FY21. L&T indicated a strong prospect pipeline of Rs 6.1 lakh cr spread across domestic (Rs 4.8 lakh cr) and international (Rs 1.3 lakh cr), which should start materializing in coming quarters with bunching up of a few orders. Kotak Securities envisage a meaningful recovery in second half of FY21 based on (1) a strong order inflow pipeline and (2) favorable gross margin trends sustaining. Existing order backlog can drive a 25% yoy growth in execution in absence of supply chain issues. While the domestic market contributes the majority of order inflow and backlog, L&T is achieving diversification in regions beyond the Middle East. Net working capital as a percentage of sales has remained flat qoq during the quarter on improved collections from the government which resulted in improving operational cash flows during the quarter.

Ambuja Cement:

Kotak Securities maintains buy with target of Rs 300 (13.5% potential upside)

Expansion plans and cost-saving projects provide a strong growth visibility. Company is increasing capacity in North India, the most profitable region in the country. Company’s standalone earnings were significantly above our and consensus estimates on higher volumes and lower costs. Kotak Securities believes the renewed focus with ACC, after various management changes in the last one year, is reaping benefits. Kotak Securities expects standalone business volume growth of 15% in CY21E and 13% in CY22E and capacity utilization will increase from 76% in CY20E to 93% in CY22E. Estimate earnings per share (EPS) to grow at a compounded annual growth rate (CAGR) of 19% over CY20-22E led by capacity expansion which will drive volume CAGR of 14% in the same period. Company has a net cash equivalent to 17% of market cap and 4-7% free cash flow (FCF) yield in CY20-22E.

ITC:

Kotak Securities says buy with target of Rs 260 (53% potential upside)

Cigarette volume dipped a bit in July and Aug (after normative levels in June) due to local lockdowns but have picked up again in September. FMCG core portfolio (75% of FMCG ex-stationery) is tracking well except for slight moderation in biscuits. ITC has been able to develop strong brands in select categories. New Product launches have picked up momentum in the past few years. Discretionary/out of home (OOH) portfolio is witnessing some recovery (lower salience of juices/deo’s in Q2 would also help optically). Stationery sales continue to be depressed as schools are shut and weakness in topline continues for hotels but losses are likely to moderate as compared to Q1 levels. Kotak Securities believes concerns around cigarette taxation in view of stretched government finances and rising focus on ESG-compliant investment are more than adequately priced in. The stock offers a good combination of (1) inexpensive valuations (13X Sep 22E PE), (2) healthy dividend yield (6%) and (3) promise of solid LT growth in FMCG. Kotak Securities do not see any structural negative emerge for ITC from the ongoing pandemic.

Bajaj Finserv:

Kotak Securities says buy with target of Rs 8000 (38% potential upside)

In Q2 FY21, Bajaj Life Individual annual premium equivalent (APE) was up 19% yoy. Strong growth in high-margin non-par business (1.5x yoy) led to 1.1x yoy growth in gross value of new business (VNB) in first half of FY21. Expect Bajaj Life to deliver pre-overrun VNB margins of  23% in next two years. § In 2QFY21, Bajaj General reported a combined ratio of 97.4% (Down 5.3% yoy). Profit after tax growth was 13% yoy. Claims ratio improved 0.9% yoy to 70.8% with most reduction in motor (Down 3% to 65%). Lower expense ratio also boosted earnings. Kotak Securities expects 26% yoy increase in VNB (pre cost overrun) in FY21E on the back of 5% yoy increase in APE and 380 bps yoy margin expansion in Bajaj Life. In Bajaj General, we expect combined ratio to decline 3.8% yoy to 97% in FY21E. Performances of both the subsidiaries were encouraging & Bajaj Finance adds 67% of total value to Bajaj Finserv. Holding company discount for Bajaj Finance remains high at >50%. Bajaj Finserv remains our preferred vehicle to play Bajaj Finance.

Infosys:

Kotak Securities says buy Infosys with target of Rs 1400 (28% potential upside)

Infosys impressed with excellent results and a significant beat on revenues, EBIT (Earning before interest and tax) and net profit in Q2 FY21. Infosys delivered strong sequential revenue growth of 4% in constant currency in Q2 FY21. Company has raised revenue growth and margin guidance for FY21E. Infosys’ new deal wins hit a new high of U.S. $270 cr. Net new deals at U.S. $270 cr was 2.2x of the previous high achieved in Sep-18. Infosys won 16 large deals, highest ever. Large deal pipeline remains strong as clients look to accelerate digital transformation programs and focus on automation and cost efficiency. FY21 EBIT margin guidance band is raised to 23-24% from 21-23% earlier. Kotak Securities have raised FY21-23 EPS estimate by 8-9% after Q2 FY21 results.

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Bharti Airtel:

Kotak Securities says buy with target of Rs 710 (57% potential upside)

Kotak Securities believes Bharti Airtel remains a solid medium-term bet on (1) improvement in sector fundamentals (regardless of whether the end game is a 2-player structure or a 3-player one) and (2) sustained solid execution. Management said that the current tariffs are still at low levels. They have guided for Average Revenue Per User (ARPU) to move to Rs 200 in the short term and Rs 300 in the medium term. Kotak Securities expects Bharti Airtel to report free cash flow of Rs 17227 cr during FY21-23E period. Bharti Airtel has sufficient cash on books with no liquidity issues. Bharti Airtel can look at asset opportunities but the decision for the same will not be based on pressure to reduce net debt. Bharti is looking to develop new streams of revenues and drive efficiencies through its digital platform. Besides this, the company is also seeing good growth in the enterprise solutions and has recently launched Airtel IQ, a cloud-based omni-channel communications platform.