Page 66 - UDYAMA FINAL final for web

Steep Depreciation: With the steep spike in 3Q 2020 earnings we revise
With the weak foreign currency reserve position, our Market Earnings forecast upwards despite a
high foreign currency debt repayment and possible partial lockdown in 4Q 2020:
spike in consumer demand triggering higher We have adjusted our earnings outlook 4Q upwards
imports are likely to result in a steep depreciation in pushing 2020E earnings to a dip of 16% from the
2021. We expect LKR to depreciate approximately previous dip of 22%. 2021E earnings growth is
maintained at 19%. With the adjustment of 4Q 2020
earnings upwards absolute earnings for 2021E is
now closer towards 2019.

ASPI target of 7,000-7,500:
The market has already achieved our fair value target
of 7,000-7,500 for 2021E which illustrates a PER of
14.0x-14.5x. We believe market is attractive when
the market trades below a forward PER of 14.0x -
14.5x. We maintain our fair value target for 2021E at
7,000 - 7,500.
Equity Market: Cut Portfolio Increase cash
allocation to 10%
Earnings Outlook Upgraded

Earnings recover faster than anticipated:
The earnings dip in the 1Q and 2Q was quite steep,
but 3Q2020 has shot up amidst the strong recovery
in Food and Beverage, Capital Goods, Transporta-
tion and Material sectors. Genuine recovery was
witnessed in the F & B sector while selected compa-
nies in the Capital Goods and Transportation
sectors had a major benefit with a spike in demand
for their products and services due to Covid-19. Reduce Equity Exposure by ‘10%’ to 90% (from
100%):
Potential rise in Consumer Demand: We recommended investors to increase equity expo-
We are unlikely to witness any pressure on banking sure in their equity portfolios (equity allocated
rates during 1H 2021 as well, supported by the funds) to 100% in our Equity Strategy Reports
6-month lag effect between Government Securities released 12 months ago in Jan 2020. That was in a
and bank interest rates. The extended period of lower period where the ASPI was trading well below the
interest rates would have a favourable impact expected fair value. However, in the Bull Run the
towards consumers. We expect a rise in consumer ASPI has surged well over our expected fair value
demand during 1H 2021 to positively influence justifying a gradual reduction in equity portfolio.
earnings. Thereby, we raise our cash allocation in the equity
portfolio to 10% from the previous 0%.
Earnings for 2020E upgraded to -16% and growth
of +19% for 2021E:
With the improved earnings outlook, we upgrade
overall earnings expectations for 2020E improving
to -16% on the back of stronger than expected
outlook. Nevertheless, earnings growth expecta-
tions are maintained at +19% for 2021E. Despite
growth for 2021E being similar with the upgrade of
2020E earnings, absolute earnings for 2021E
improve closer towards 2019, indicating a strong
recovery for companies.
Dimantha Mathew
Head of Research
First Capital Research

64 January 2021