IndiGo To Britannia, Stocks Morgan Stanley Added Or Removed From Its Focus List

Morgan Stanley removed five Indian companies from its focus list and added another five that suit its theme of buying stocks “sensitive to an economic recovery and interest rates”.

The research firm excluded Just Dial Ltd., Britannia Industries Ltd., IndusInd Bank Ltd., Bharat Electronics Ltd., and Mahindra & Mahindra Financial Services Ltd., according to a report co-authored by its equity strategists Ridham Desai and Nayant Parekh, and equity analyst Sheela Rathi.

It included Avenue Supermarts Ltd., which operates supermarket chain DMart; Shriram Transport Finance Ltd., Havells India Ltd., Axis Bank Ltd. and InterGlobe Aviation Ltd., parent of India’s largest airline IndiGo.

“The changes to our focus list reflect what we characterise as a stock picker’s market with modest headline index returns but significant churn underneath,” the report said. Morgan Stanley’s pecking order of preference is:

• Domestic cyclicals, rate sensitives, global cyclicals, defensives exporters
• Large caps, small caps

The research firm in its May 18 note had said Indian stock market’s return prospects are seen to improve in the second half of 2021. There is ample alpha opportunity or chance to beat the benchmarks. While Covid-19 trends remain key in the near term, it said policy actions and earnings will likely have a larger impact.

Here’s Morgan Stanley’s take on the stocks it added to its focus list:

DMart

• DMart was one of the best reopening plays in our coverage last year. Store footfall recovered to 96% of the previous year’s level by December and the stock outperformed the Sensex by 12% between October and mid-March.
• The relative peak in Maharashtra’s new [Covid-19] cases and vaccination programme point to a faster demand recovery versus last year.
• The company is better positioned in the online delivery platform as it caters to five large cities versus one city last year.
• Delay in industry consolidation has strengthened DMart’s market share position.
• Remain bullish on DMart’s long-term growth opportunity, given the large addressable market for grocery retail, with 96% unorganised share.

Shriram Transport

• Core fundamental strength of Shriram Transport is a highly profitable franchise given its moat and scale in the used vehicle financing business.
• With over 25% market share in used commercial vehicle financing, it is one of the few lenders in India that has generated an organic book value per share CAGR of 17% between FY11 and FY20 without raising equity capital.
• While the outlook for the second half of FY22 has turned uncertain because of the second wave of Covid-19, Shriram Transport’s resilience in a Covid-impacted FY21 positions it well for FY22.
• It strengthened the balance sheet in terms of both leverage and provisioning coverage (at strongest-ever levels) and yet delivered a return on equity of 12%.
• Shriram Transport is one of the few financials that delivered a better-than-expected FY21 but valuation at 1.4x one-year forward price-to-book is at about 20% discount to its 10-year average.
• The risk of disappointment on assets under management growth is lower relative to many other financials given low starting point of expectations (10% in FY22).

Havells India

• Havells enjoys a strong leadership position across key product segments as its brand is positioned as “mass premium”, has new product/category introductions, effective advertising and strong brand recognition.
• Reasonably large proportion of Havells' business competes with the unorganised market and in the current market environment, Havells is in a sweet spot to continue gaining share given its stronger supply chain and in-house manufacturing.
• When viewed in context of a sharp increase in commodity cost, the ability of taking price hikes is weaker for unorganised players.
• Forecast India’s fast-moving electrical goods industry revenue to be $28.5 billion over the next five years, at an 8% CAGR.

Axis Bank

• Axis Bank is well positioned for a strong earnings recovery, as Covid related challenges subside.
• It has exited FY21 with a strong balance sheet, both capital and coverage have improved materially.
• Further, the bank has accelerated current and savings account growth over the past year at 15% YoY growth on daily average basis in FY21 versus 10% YoY in FY20.
• “As loan growth improves in the second half of FY22, we see margin expansion as well — this coupled with lower credit cost will help drive strong improvement in return on assets and equity over next two years.”
• Subsidiaries are also doing very well. Valuation at 1.8 times its FY22 book value is attractive against the above backdrop.

IndiGo

• IndiGo’s cost structure and strong balance sheet relative to peers will be an advantage as the industry recovers.
• Over FY20-21, the company has gained share in Indian market and over FY23-24, it is expected to gain share in international markets.
• In FY20, IndiGo’s cost of available seat kilometer was about 20% below peers. With fleet shifting to fuel-efficient options, the CASK gap versus peers will widen.
• It is also attractively valued versus its own history as it traded at 8.5x median multiple pre-Covid (Nov. 15-Jan. 20).