Motilal Oswal says while Liquidity and rates remain supportive; earnings are revived. Despite the COVID-related challenges, the Nifty has ended CY20 with a 15% return. A 80% reduction in active COVID-19 cases since Sep’20; strong corporate earnings in Sep’20, which resulted in upgrades; and faster than anticipated economic and demand recovery, along with a supportive liquidity and interest rate backdrop, have provided the necessary triggers. Economic indicators continue to turn positive which could start the next upgrade cycle and liquidity flows across Emerging Markets could remain strong which bodes well for Indian markets. As vaccination in India commences from 16 Jan’ 21, we expect the demand recovery to gather pace. Motilal Oswal also expects the government to prioritize growth in its forthcoming Budget. Motilal Oswal picked SBI from PSU Banking space, ICICI Bank from private Banking space and Ashok Leyland from auto sector as their top picks for 2021.

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1st pick is SBI: Earnings normalization begins

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Motilal Oswal thinks that SBI appears well positioned to report strong uptick in earnings as uncertainty recedes significantly. Collection trends improved to 97% & restructuring of upto 1% of loans expected. Further, SBI legacy issues in the corporate NPA cycle are now largely behind. SBI carries a healthy PCR of 88% on corporate NPA. Expect credit costs to normalize from FY22E. SBI is focusing on building a granular and high-quality portfolio. With retail growth back to pre-COVID levels and improving trends in Home loans, Auto loans, Gold loans, etc.
Motilal Oswal expects gradual deployment by SBI of excess liquidity toward incremental retail demand. Also, improvement in cost of funds is likely to drive margins, and thus, enable strong NII growth. Funding cost is yet to bottom out for SBI. Motilal Oswal believes earnings normalization cycle has begun for SBI as the uncertainty due to COVID has receded significantly.

2nd pick is ICICI Bank: Operating performance resilient; technology remain key driver

ICICI Bank appears firmly positioned to deliver healthy sustainable growth, supported by continued investments in technology and expansion in its digital offerings. New digital innovations have positioned the bank well to gain incremental market share across key product lines. ICICI Bank is seeing strong demand recovery in consumption loans, with disbursements in secured loans having surpassed pre-COVID levels.

Business Banking and Rural Banking would be other strong growth drivers for ICICI Bank. The bank expects the corporate restructuring book to be 1% of loans and guided for normalization of credit cost in FY22.

3rd Pick is Ashok Leyland

Motilal Oswal says Ashok Leyland is on track to make a comeback. While M&HCV has started showing some signs of initial recovery, LCV is back at pre-COVID levels. M&HCV is expected to make a strong recovery in the second half of FY21. Moreover, continued traction for LCV would enable strong recovery at the company level. The normalization of working capital has enabled QoQ reduction in net debt by Rs 12 bn. Ashok Leyland is focused on expanding and creating new revenue and profit pools. De-risking of the M&HCV business, along with the expansion of nascent businesses are key focus areas for Ashok Leyland.

Unlike the previous cycles, Ashok Leyland is on a very strong footing (lean cost structure and negligible debt) and is focused on adding new revenue/profit pools. Ashok Leyland seems to be in a better position to come out stronger and grow faster than the industry within 2–3 years.