Daily COVID cases have eased to around 100,000, much lower than the 400,000 peak in May, raising hopes of unlocking of the economy. This is also one of the key reasons for the massive rally in equities which has pushed benchmark indices to new record highs.
After rallying 6.5 percent in May, the Nifty50 has gained a further 1 percent in the first 6 trading sessions of June, as momentum picked up. With a sharp drop in COVID-19 cases, several states have decided to ease the lockdown-like curbs that were imposed to curtail the spread of infections.
Which stocks should investors pick to play the unlock trade?
Experts said that unlock trade will be different in 2021 compared to 2020 since the lockdown this year was partial. They expect sectors such as hospitality, travel, and entertainment to benefit the most from pent-up demand.
“In the previous unlock theme, automobiles first performed then consumer discretionary while BFSI was the last to pick up,” Naveen Kulkarni, Chief Investment Officer, Axis Securities said. “This time it will be different as the pent demand will be varied across sectors. Small ticket discretionary could do well but the major pent-up demand is in travel and hospitality,” he added.
Mayuresh Joshi, Head of Research – Equity, William O’Neil India puts the unlock trade theme more succinctly: “It will again be all about entertainment, entertainment, and entertainment or Eat, Drink or Be Merry.”
Joshi picked 7 stocks that are likely to do well in the unlock trade for Moneycontrol
Burger King is the fastest-growing quick-service restaurant (QSR) chain in India. It operates in 270 restaurants including sub-franchisees across India as of December 2020 and has plans to open about 50 restaurants in FY22, 70 restaurants in FY2023 and 80 restaurants in FY2024, and 700 restaurants by December 2026.
The stock listed in the second week of December 2020 and gained over 92.2% on the debut day. It gained over 40 percent in the next two trading sessions. Recently, the stock reclaimed its 21-and 50-DMA.
Institutional sponsorship for the stock decreased during the last quarter. Almost 11% decrease in the number of shares held by them. ROE of negative 28% indicates weak business.
Burger King sales recovered to pre-covid levels in H2 FY21. Same-store sales growth or from SSG point of view, it recovered 85% YoY in terms of sales in January compared to the previous year. The company expects growth of 5%-7% from FY20 and from FY23 in SSG.
The company also expects a gross margin of 65.5% for FY22 and after two years, it expects an improvement of 150 basis points to 67%.
Westlife Development Limited operates quick-service restaurant brands such as McDonald’s in western & southern India, through its wholly-owned subsidiary Hardcastle Restaurants Pvt. Ltd. (HRPL).
The company started to recover in October when Maharashtra finally opened up for dine-in. Its dine-in recovered 75-80% of pre-COVID levels, even with night curfews and the 50% capacity constraint.
The company has also launched a new packaging innovation called EatQual to foster inclusion across their restaurants. EatQual enables consumers with limited upper arm mobility, to enjoy McDonald’s burgers as easily and have the same delightful experience at the restaurant.
In terms of technicals, after hitting an intraday low at Rs 271.25 on May 27, 2020 the stock has rallied up to 83%. In due process, the stock has done a formation of a cup with handle base and breakout on February 26, 2021, and after having a gain of around 4 to 5% it started moving lower.
Currently, the stock is forming a stage 2(b) cup-with-handle base. It has a poor EPS of 25, and the MarketSmith Relative Strength (RS) rating of 35 is weak. However, the number of funds and shares held by the fund has increased.
(Note: The MarketSmith Relative Strength (RS) rating shows you which stocks are the best price performers by measuring the stock’s performance over the previous 12 months)
PVR’s financials were hit in FY21 due to COVID-19-related lockdowns. In Q2 FY21, it reported operations revenue of just Rs 8.7 crore, which rose to Rs 39.0 crore in Q3, which were significantly less compared with operations revenue of Rs 877.3 crore in Q3 FY20.
As part of Unlock 5, the Government of India allowed cinemas to resume operations from October 2020, subject to their respective state’s approval.
Barring two states, all others allowed cinemas to open with 50% occupancy. Thus, as part of the resultant cost-cutting initiatives, PVR had to lay off some employees, slash salaries temporarily, and seek waivers on rent and maintenance charges for the lockdown period.
Q4 FY21 loss widened to Rs 289 crore versus a loss of Rs 74.5 crore in Q4 FY20. Revenue was down 60% y/y to Rs 263.3 crore. Margin contracted 19.1% y/y to 9.5%.
PVR Cinemas is the market leader in terms of screen count in India. As part of unlock plan, the Government of India allowed cinemas to resume operations from October 2020, subject to their respective state’s approval. Barring two states, all others allowed cinemas to open with 50% occupancy.
India is predominantly a young country, with more than 60% of the population aged below 35. This segment of the population is a discerning consumer of entertainment.
Furthermore, increasing disposable incomes, rising urbanization, rapidly expanding transport networks, and robust population growth are factors expected to support the increase in demand for entertainment in the long term.
Inox Leisure is one of the largest multiplex chains in India with a diverse distribution of screens countrywide. At the end of Q4 FY21, it had 648 screens across 69 cities. Inox focuses on regional content more than its peers, most of which rely heavily on English and Hindi movie content.
The second wave of COVID-19 affected Inox’s operations severely. It had to renegotiate terms with landlords on rent and CAM. Most movie producers and distributors deferred releases in the wake of screen closures in many parts of the country.
A big-screen release is the most favorable financial option for producers as well as distributors. They would therefore postpone most big-budget releases until they could showcase it on the big screen.
Even in the current situation, Inox has strong liquidity with more than Rs 130 crore, including undrawn limits of Rs 87 crore. It passed a resolution to raise up to Rs 300 crore. Additionally, in case of an emergency, it owns six properties and a head office, which, as per market valuation, can raise up to Rs 350 crore via a ‘sale-lease back’.
Jubilant FoodWorks Limited (Jubilant) is one of India’s largest foodservice companies. It owns master franchise rights of three major international brands: Domino’s Pizza, Dunkin’ Donuts, and Popeye’s.
According to Jubilant’s website, it currently operates more than 1,345 outlets for Domino’s Pizza, Dunkin’ Donuts, and Hong’s Kitchen and has 30,000+ brand ambassadors committed to delivering value to customers.
As with most food service companies, Jubilant also took a hit to revenue during the nationwide lockdown in 2020 and the recent partial lockdown. Sales nearly halved in Q1 FY21, after which it started its gradual climb to recovery.
United Spirits is the world’s second-largest spirits maker in terms of volume sales. It is a subsidiary of Diageo. Its major brands are Mc Dowell’s No 1, Black Dog, Johnnie Walker, Antiquity, Signature, Royal Challenge, Smirnoff, and Vat 69.
The company’s strengths include its scale and geographical diversity. Its 50 manufacturing facilities are spread across the country. It has a strong distribution network and a state-of-the-art technical center to address grievances.
The company believes in the long-term story even if the short term is full of uncertainty. It has various reasons to be optimistic. In India, around 17M people are expected to be added to the legal drinking age (LDA) category over the next three to five years.
Radico Khaitan Limited (RKL), formerly known as Rampur Distillery, commenced operations in 1943. It is a major supplier of bulk spirits and is well known countrywide. It started its portfolio with 8PM Whisky, along with Magic Moments, and Old Admiral Brandy, these are the company’s four millionaire brands. Including these, RKL owns 15 brands.
In Q4 FY21, net revenue from operations grew 18.7% y/y. The quarter saw a 7.8% volume growth in the Indian-made foreign liquor (IMFL) segment, led by the Prestige & above category, which increased 15.4%.
Gross margin for the quarter contracted 143bps y/y to 48.4%, but expanded 170bps to 50.3% for the full year FY21. Finance cost decreased 45.3% y/y from Rs 8.5 crore to Rs 4.6 crore.
Due to its strong capital structure and stable profitability, RKL’s cost of borrowing is one of the lowest in the industry. Net debt has been declining for the last six years. Hence, its finance costs were also on a downtrend.
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