Top 10 Dussehra Picks

In our Dussehra exclusive, we bring together an assorted list of exclusive Top 10 picks from our research analysts.

Central Depository Services Ltd (CDSL): CMP – 460 TGT 625

• Central Depository Services (India) Ltd (CDSL) is the first listed Indian securities depository based in Mumbai.
• The main function of CDSL is to facilitate holding of dematerialized securities enables securities transactions to be processed by book entry.
• CDSL facilitates holding and transacting in securities in the electronic form and facilitates settlement of trades on stock exchanges.
• Only 3% of the people have Demat account in India therefore big opportunity lies for depository companies.
• Duopoly market where CDSL holds 52% market share and growing rapidly as compared to NSDL because it is focusing more on retail investors/traders.
• We may be at the cusp of a long-term trend, similar to what played out through the 1980-2000 era in the US capital markets. During that period, retail participation, which was around 5-6% in the early 80s, ramped up to 45.7% by early 2000.
• There is huge scope for growth in other investment instruments like the bond market which will be a trigger for growth in CDSL.
• Its subsidiary CDSL venture ltd is a key player in eKYC.
• Its subsidiary CDSL Insurance Repository Ltd which helps policyholders to keep an insurance policy in electronic form will help CDSL to create another avenue for growth.
• Asset light business with no debt.
• It trades with 55-60% EBIDTA margin with more than 15% ROE which is expected to rise further.
• Risk: A brutal fall in the Equity market and any change in technology may disrupt the business.

HDFC Life Limited (HDFC LIFE): CMP – 564 TGT 675

• HDFC Life Limited is a long-term life insurance provider with its headquarters in Mumbai, offering individual and group insurance services.
• HDFC Life's products include Protection, Pension, Savings, Investment, Health along with Children and Women plans. The company also provides an option of customizing the plans, by adding optional benefits called riders, at an additional price.
• As compared to other developed economies, India remains vastly under-insured, both in terms of penetration and density. The ‘protection gap’ in India is amongst the highest in the world at 92.2% as of 2014.
• Despite the recent COVID-19 outbreak dampening growth projections for economies across the globe, the structural story for insurance remains intact. Insurance remains a multi-decade opportunity in the Indian context and insurers are well poised to maximize the long-term growth potential of the industry.
• The proportion of the insurable population (people between the ages of 20 and 64) is expected to touch almost 1 billion by 2035, thus outlining the need for long-term savings and protection plans.
• The number of people above the age of 60 years is expected to triple by 2050 as compared to 2015, thus providing insurers with an opportunity to tap the retirement space by way of offering long-term income and annuity products.
• Within the private sector, the top 7 insurers account for 78% of the market (in terms of individual WRP) in FY 2020. (Weighted Received Premium).
• Life insurance penetration in India, which is measured as a ratio of premium to GDP rose marginally from 2.74 in 2018 to 2.82 in 2019 while density which is measured as the ratio of premium to total population also increased marginally from 54.0 in 2018 to 58.0 in 2019.
• The share of the working population is expected to reach 40% in 2030. With the rise in the working population, the sale of pure protection products as well as ULIPs is on the rise.
• With rising per capita incomes and growing nuclear families, there is a need for increased coverage.

Bajaj Finserv Ltd. (BAJAJFINSRV): CMP – 5831 TGT 7500

• Bajaj Finserv Limited, a part of Bajaj Holdings & Investments Limited, is an Indian financial services company focused on lending, asset management, wealth management and insurance.
• It has an umbrella of financial services including loan, life insurance, general insurance, mutual fund, stock broking, credit card, etc which all are going to witness decent growth.
• We can expect value unlocking in the future when the company may plan to list some of its subsidiaries.
• It is a holding company of Bajaj Finance which is a leader in retail finance and has a low cost of funding.
• It is likely to bring disruption in the stock broking industry because of its low brokerage plan.
• During the year, the Company incorporated a wholly-owned subsidiary called Bajaj Finserv Health Ltd. Over time, this entity is expected to create a digital ecosystem in the healthcare segment connecting customers with service providers in the healthcare space such as doctors, hospitals, nursing homes, pharmacies, diagnostic centres, and the like by offering a complete range of products including financial solutions.
• The company is continuously working on innovative products to cater to the needs of retail consumers.
• It is maintaining ROE of more than 15% consistently.

Divis Laboratories Ltd. (DIVISLAB): CMP – 3068 TGT 4200

• Divis Laboratories Ltd. is an Indian pharmaceutical company. It produces active pharmaceutical ingredients (APIs) and intermediates for the manufacture of generic drugs.
• One of the leading Active Pharma ingredient (API) players in the world which has six multi-purpose manufacturing facilities from two sites with all support infrastructure like utilities, environment management and safety systems.
• Covid19 has disrupted the global supply chain mainly for the Pharma industry where the world is looking for an alternative option other than China for their API need where India is going to play a major role in the World Pharma Industry.
• The Indian government has set aside Rs . 10,000 crore ($1.2bn) for the pharmaceutical industry to shift the country away from its reliance on active pharmaceutical ingredients (APIs) produced in China.
• In an attempt to prevent a similar occurrence in the future, the Indian government plans to finance the construction of three bulk drug parks, through an investment of Rs. 3,000 crore over the next five years.
• The government will create a production-linked incentive scheme for the promotion of domestic manufacturing of critical drug intermediates and APIs in the country.
• Indian Pharma companies are expected to do well due to their scale, cost advantage, and a preference for increased sourcing from India. Most of the investors, therefore, are interested in API manufacturers, domestic formulations businesses and drug makers that specialize in acute chronic diseases
• Divis Lab has well experienced and has quality management.
• Stock is trading at PE of 53 but ROE of 25% which is likely to rise further justifies premium valuations.
• It is generating around 40% of the operating profit margin.

PNC Infratech Limited (PNCINFRA): CMP – 172 TGT 225

• PNC Infratech Ltd (PNC) is an Infrastructure construction, development and management company; expertise in the execution of projects including highways, bridges, flyovers, airport runways, industrial areas and transmission lines
• The infrastructure sector is going to play a key role in recovery in the economy and similar to capital goods sectors, the Infra sector didn’t perform post-2007.
• One of the quality company which stands strongly against sector headwinds.
• PNC Infra has delivered good profit growth of 43.39% CAGR over the last 5 years
• The executable order book stood healthy at Rs15,525cr which is 3.2x FY20 revenue, provides revenue visibility.
• PNC remains our preferred pick in the EPC space given its robust order book, comfortable working capital cycle, healthy return ratios and lean balance sheet. Notwithstanding near term hiccups on account of Covid-19, PNC is likely to tide over with resilient fundamentals.

SRF Limited (SRF): CMP – 4422 TGT 5550

• SRF Limited is a chemical-based multi-business conglomerate engaged in the manufacturing of industrial and specialty intermediates. The company has operations in three countries namely India, Thailand and South Africa and an upcoming facility in Hungary and has commercial interests in more than seventy-five countries.
• Chemical is another space where India is likely to gain a major share of the world chemical industry as the world is looking for alternatives to China whereas China itself is shutting many chemical plants due to pollution control measures.
• Over the last 5 years, SRF has incurred CAPEX of INR 53b – constituting 63% of the CAPEX incurred over the last decade. Thus, CAPEX intensity has increased in the last 5 years. SRF plans to spend INR12-13b on CAPEX in FY21 across geographies and segments.
• Lower refrigerant prices, weak demand in end-user industries due to a slowdown in the auto sector, and tepid demand from the white goods segment due to COVID-19 impacted this segment. However, exports continued to improve. Going forward, the management expects better demand from the replacement market and faster utilization (from 3 years expected earlier) in the recently commissioned hydrofluorocarbon (HFC) capacity.
• SRF's Chemical Business saw robust growth during Q4 on strong demand from agrochemical and pharmaceutical customers. In FY20, growth was well over the previously guided 40-50% growth rate. The segment clocked revenue over INR 1,650 crore, an over-60%-growth-rate during the fiscal, due to strong demand and improving capacity utilization. The management guided at a 20-25% growth rate in FY21, led by a strong order book. Trends from the Pharma segment and Latin American markets continue to improve. This segment will be a major growth driver for SRF as its contribution to the revenue mix improves (~23% in FY20 from ~15% in FY19).
• The company was successful in achieving its guided growth rate of 40-50% for FY20 in the Specialty Chemicals business and registered revenues of ~16.5bn for the full year.
• Specialty Chemicals contributed ~Rs 16.5bn out of the total Chemical business revenues for FY20. Speciality business delivered a healthy performance due to strong export demand especially coming from its Agro and Pharma customers and improved utilization levels on its enhanced capacities.

Siemens India Ltd (SIEMENS): CMP – 1280 TGT 1550

• One of the world’s biggest producers of energy-efficient, resource-saving technologies, Siemens is a pioneer in infrastructure and energy solutions, automation and software for industry and is a leader in medical diagnosis. Siemens also provides business-to-business financial solutions, rail automation and wind power solutions.
• It is said that tough times act as an opportunity where Governments across the world need to take major steps to bring the economy on the track where Capex will play a major role, therefore, we are bullish on capital good space which didn’t give any return since 2007.
• Valuations are attractive and the cycle is likely to turn upside for this sector.
• Make in India and make for the world theme is likely to act as a catalyst for the company.
• The company remains focused on Digitization and localization, creating smart infrastructure.
• It is a virtually a debt-free company with ROCE of around 19%.

Larsen And Toubro Infotech Ltd (LTI): CMP – 3061 TGT 4100

• LTI is a global technology consulting and digital solutions company helping more than 420 clients succeeds in a converging world, with operations in 32 countries. LTI helps clients in digital transformation with LTI’s Mosaic platform enabling clients mobile, Analytics, IoT and cloud journeys.
• The technology sector may continue to outperform due to major disruption in word post Covid19 where stock picking will remain a key factor.
• L&T Infotech (LTI) is one of the fastest-growing midcaps IT companies in India. It is part of the L&T group and provides services like ADM, Enterprise solutions, Infrastructure management services, etc.
• LTI has been growing significantly faster than both mid and large-cap peers have over the past few years on the back of strong deal wins.
• Promoters held 74.53% stake in the company as of March 31, 2020, while FIIs held 9.46%, DIIs 7.19% and public and others 8.81%.
• LTI is maintaining ROE of more than 30% for the last 3 years.
• LTI Management is optimistic & confident about the future growth potential capitalizing its core strategy (Digitizing the core, Data-driven organization, Experience transformation, and Operate to transform) with customer centricity as the key engagement tool.

Bajaj Auto Ltd (BAJAJ-AUTO): CMP – 3082 TGT 3700

• Bajaj Auto is the world’s sixth-largest manufacturer of motorcycles and the second-largest in India. It is also the world’s largest three-wheeler manufacturer. The company is based in Pune, Mumbai with plants in Chakan (Pune), Waluj (near Aurangabad) and Pantnagar in Uttarakhand. Bajaj Auto is India’s largest exporter of motorcycles and three-wheelers.
• The only company to witness revenue growth at the time of slowdown in the auto sector.
• Social distancing and lockdown are acting as the key driver for the growth in the two-wheeler industry.
• We expect the Company to fare well in the current environment on the back of its diversified portfolio mix and dual focus on entry and premium segment.
• Bajaj Auto is also coming up with new models in the premium segment and already has a strong market share in the 2-wheeler export market. We believe that going forward; the premium segment along with exports will drive the next leg of growth in 2 wheeler industry over the long term.
• Bajaj Auto is working towards its goal of achieving a market share of ~24% in the domestic 2W market. Its current market share stands at ~19% in the motorcycle segment as of Q1FY21. Management expects the market share gains to be driven by innovative product launches.
• Bajaj Auto brought its historic brand back to life with the launch of the next-generation Chetak in an electric avatar
• We remain positive on the long term growth prospects of the Company owing to 1) strong financial profile of the company, 2) Diversified portfolio mix (domestic 2W, 3W, EV and exports) 3) Innovation in products with a dual focus on entry and premium segment 4) Its ability to sustain profitability despite weak volumes/ exports 4) Partnerships with global MNCs and new product launches.

Dixon Technologies Ltd (DIXON): CMP – 9800 TGT 13000

• Dixon Technologies (India) Limited is the largest home-grown design-focused and solutions company engaged in manufacturing products in the consumer durables lighting and mobile phones markets in India.
• Its diversified product portfolio includes (i) consumer electronics like LED TVs; (ii) home appliances like washing machines; (iii) lighting products like LED bulbs and tubelights downlighters and CFL bulbs; (iv) mobile phones and (v) CCTV & Digital Video Recorders (DVRs).
• Contract manufacturing is going to be the next big theme India as the world is looking for an alternative option for China and the Indian government is continuously focusing on the electronic segment for “Make in India” boost where tag line of Dixon technologies “Brand behind brands” itself tells a lot about the company.
• Rising manufacturing costs in other economies, growing labour costs in China & tendency by bigger original equipment manufacturer (OEMs) to outsource manufacturing instead of building their infrastructure is driving the growth of the EMS market in India. More & more brands are going to focus on branding & distribution & manufacturing as part of the value chain will be outsourced
• Market leader in the industry who does contract manufacturing for big brands like Samsung, Panasonic India Pvt. Ltd, Philips Lighting India Ltd, Haier Appliance (I) Pvt. Ltd, Gionee, Surya Roshni Ltd.
• Dixon Ltd has entered into an agreement with the Chinese big brand Xiaomi for the manufacturing of Smart LED TV.
• The increasing penetration of the internet has led to a surge in mobile phone demand, leading to a significant rise in production. Dixon currently manufactures feature phones, smartphones, PCBA for mobiles with a backward integration framework.
• It has also entered into medical device equipment manufacturing and management is very optimistic about it.
• It has entered into a new line of business to manufacture set-top boxes where Jio is its key client.
• Valuations are overstretched but we believe that it has the potential to see multifold growth in the next decade by looking sector outlook, management commitments and its product portfolio.