Prabhudas Lilladher remains positive and believes that the current uptick could be the start of the next multi-year cycle. Their Picks of 2018 have given 29.5% returns in the past 2 years while last year’s picks have given 12% return in a volatile environment while Model portfolio has given 25% return with 8% NIFTY outperformance. Prabhudas Lilladher believes that current uncertainty is a passing phase and return to normalcy will result in several beaten down segments bouncing back strongly from FY22. They continue to favor companies with strong balance sheet and sustainable business moats in the long term. From Large Cap they picked Hindustan Unilever, ICICI Bank, Infosys, Ultratech Cement and Dr. Reddy’s Labs.
1) HUL remains one of the best given strong growth and margin outlook, high FCF conversion (5-year average of >90%), 95% dividend payout and 18.2% PAT CAGR over FY1-23.
Prabhudas Lilladher expects strong growth in coming couple of years led by:
a) Gradual recovery in personal care post-Covid
b) Market share gains in Laundry and Personal wash due to aggressive pricing
c) Distribution and integration benefits from Glaxo Acquisition.
Prabhudas Lilladher remains structurally positive on HUL given its strategy around emerging categories, increasing distribution, digital market and strength in Supply chain. They estimate HUL to post EBIDTA CAGR of 15.9% over FY20-23 led by 200bps margin expansion. BUY with a DCF based target price of Rs 2502.
2) ICICI Bank has emerged as one of the preferred private banking franchise with a strong CASA (40%), tech led domination, market share gains in key retail products (65% of loans), calibrated strategy in corporate lending with little legacy NPAs and +200bps of COVID provisions. ICICI Bank is on track to achieve strong return ratios of 12-15% by FY23/FY24 led by lower provisioning and strengthening core income. Prabhudas Lilladher maintains a strong conviction BUY with target price of Rs 520.
3) Infosys stays top pick in the I.T. sector as it benefits from near term margin defence and long term growth acceleration from DX/cloud/AI mega trends. Fastest growth large cap in our coverage universe, higher tailwinds to margins from work from home/anywhere & overall strong portfolio. Its industry leading performance reiterates deep client relationships; high quality execution and recovering competitiveness should drive quality earnings growth that deserves to be re-rated.
Infy as we believe higher multiple is justified due to following factors:
a) Strong revenue acceleration
b) Best in class metrics along with broad based recovery
c) Excellent supply chain mechanism
d) Strong dividend payouts
e) All time high deal wins
4) Ultratech Cement by its dominant size (23% market share) with capacity of 114.8mtpa and highly efficient operations, Prabhudas Lilladher believes that Ultratech Cement stands out as the best candidate to play recovery in the sector. Upcoming 9mnt capacity would further drive the earnings growth. High share of trade volumes (70% in Q2 FY21) and successful integration of acquired assets (Century cement, JP associate and Binani cement) would provide sustainability to their margins. Prabhudas Lilladher maintains BUY rating with target price of Rs 5400.
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Dr. Reddy’s Laboratories:
5) Dr. Reddy’s Laboratories fortune turned around after Erez Israeli (CEO from CY-19) laid down the roadmap for transformation of the organization by ensuring clear strategic focus, effective cost management for sustainable growth. DRL is one of the few companies whose all plants stands cleared by U.S.FDA and have a strong product pipeline with high value and limited competition products like gCopaxone, gNuvaring, gVascepa, gKuvan and gRevlimid. Its domestic formulations is also expected to outperform the IPM by 400- 500bps once Covid concern fades while emerging markets would also spur growth with new launches. DRL had been delivering EBITDA Margins 20%+ even before lockdown on a consistent basis. With better cost control than peers and strong product pipeline for U.S. and EM, Prabhudas Lilladher estimates EPS CAGR of 15% over FY20- 23E and value DRL at Rs 5964.