ITC, Maruti, ICICI, Power Grid, Vedanta: CLSA's top stock picks for 2017

As calendar year 2016 (CY16) draws to a close, research and brokerage house, CLSA, believes consumption, value and earnings visibility are the key themes that will do well in CY17 in the Indian context.

The slowdown due to demonetisation, CLSA said in a note, is unlikely to last materially beyond March 2017, and the stocks fallen due to the scare offer good buying opportunities.

That apart, CLSA's Christopher Wood believes India remains by far the best long term equity story in Asia. "It is remarkable how well the growth orientated stock market has held up given the continuing lack of an investment cycle, given that credit growth has only been rising in line with nominal GDP growth for the past five years and given that earnings growth has still not really bottomed out," he said in his recent weekly note, GREED & fear.

Adding: "All this raises the issue of how well Indian equities should do when the investment cycle resumes and credit growth picks up, though this will not be this fiscal year and probably not next fiscal year either."

Here are five stock ideas that CLSA believes that will do well in CY17:

ITC

Why buy?

ITC’s 12% correction over the last three months factors in most risks related to demonetisation as well as GST rate uncertainty.

CLSA expects a steady improvement in cigarette volumes and model in 4-5% year-on-year (y-o-y) growth in volumes from April 2017 onwards.

ITC’s valuations are reasonable at 26x one-year forward earnings, which is at almost one standard deviation below the past five-year average.

MARUTI SUZUKI

Why buy?

CLSA expects 12% volume compounded annual growth rate (CAGR) over FY17-19CL, driven by multiple new products, easing capacity constraints and demand normalisation post the demonetisation fall.

They forecast healthy 15% EPS CAGR over FY17-19 and see potential for faster earnings growth if the demonetisation impact is softer than expected.

Maruti Suzuki is viewed as the best large-cap play on Indian discretionary consumption.

ICICI BANK

Why buy?

Completion of key asset sale transactions (JPA and Essar) should ease currently elevated stressed loans at 9% of total.

The core franchise remains strong, with a Casa ratio of 46%, highest in the sector.

The stock is attractively priced, with valuations 30-50% below peers.

POWER GRID

Why buy?

CLSA forecasts a 50% rise in Power Grid’s regulated equity during FY16-19CL, which will not only accelerate earnings growth but also reduce the risk of equity dilution.

The firm is well positioned to deliver a 14% EPS CAGR over FY17-19CL.

Stock looks inexpensive despite a 30% rally year-to-date, trading at PE and PB of 11.5x and 1.8x FY18CL respectively on over 16% return on equity (RoE), lower than its long-term multiples.

VEDANTA

Why buy?

Vedanta will deliver strong volume growth over the next two years, driven by ramp-up of its new aluminium and power capacities.

Improving commodity price trends can lead to strong FCF generation which could turn Vedanta into a net cash company by FY19.

CLSA forecasts 32% EPS CAGR over FY17-19. BUY with a target price of Rs 300 (Rs 275 earlier)