Focus on large-cap scrips

It was a roller-coaster ride for the markets in 2016, thanks to  major events such as Brexit, Donald Trump’s victory and India’s note-ban move. 

Expectations of an earnings recovery for India Inc in the latter half of 2016-17 were dashed. Foreign funds exited India and other emerging markets on the hopes of further rate hikes by the US Fed and a stronger dollar. We enter 2017 with uncertainties on the impact of demonetisation on growth but the sentiment is cautiously positive. With mid-cap stocks having seen strong returns last year, their valuations are not cheap.

Thus, many experts are advising investors to focus on large-caps with good earnings visibility. Here is a list of stocks some leading brokeragesare recommending for 2017. Many of these companies are among the top players in their respective sectors. More importantly, their stock valuations, except for a couple, are close to the broader indices.
 

ICICI Bank

• Asset quality expected to improve from FY18, and is a key trigger for valuation re-rating
• Assets under the watchlist expected to see resolution and repayments in 2017, as deleveraging by certain highly levered corporate groups is gathering momentum
• Analysts expect a significant surge in deposits after the note ban, which will improve the yields and boost net interest margin in FY18
• The bank has a current and savings accounts (Casa) ratio of 46 per cent, the highest in the sector, and will support its ability to gain market share

 

HDFC Bank

• Strong earnings visibility, with expectations of 20 per cent plus growth over the next couple of years; even in the worst of times, earnings growth is strong
• Leadership position in payments and retail loans will enable it to leverage the digital platform efficiently after note ban
• Consistent show on asset quality, stable Casa and high provisions for bad loans are key positives

 

ITC

• ITC’s inexpensive valuations and sharp correction due to note ban, GST fears make it an attractive buy
• Annual cigarette volume growth to improve to four-five per cent gradually
• Healthy growth, improving profitability of the FMCG business a long-term positive
• Strong cash flows will fuel other businesses and reward shareholders
• Regulatory action a potential risk

 

Mahindra & Mahindra

• New launches expected to boost volumes. These have been under pressure due to higher competition and a weak product line-up
• Petrol options of top selling utility vehicles (UVs) should help recover market share in both  the urban and rural markets
• Tractor sales expected to improve on rural recovery, government stimulus. Could gain share, given presence across segments
• Higher share of tractors, sports UVs will improve margins as they are more profitable.
• While small commercial vehicles volumes are healthy, two-wheeler sales a concern
• Stock correction translates to favourable risk-reward

 

Tata Motors
 

• Jaguar Land Rover’s Discovery, Range Rover to boost FY18 volumes
• Contribution from China on market expansion, localisation should help volumes and  margins
• Operating profits to grow 16-17 per cent, led by 100 basis points margin expansion
• Commercial vehicle sales to rise in the March quarter due to pre-buying ahead of emissions deadline
• India car sales boosted by Tiago, market share gains on Xenon, Kite 5 and Hexa launches over the next year

 

Infosys
 

• Healthy revenue growth forecast for the financial year provides high visibility
• Continuous improvement in number and size of deal wins is a key positive
• Company focusing on contract renewal market 
• Rising automation will aid margins
• Expected industry-leading growth in FY17 and FY18
• Valuations, too, remain undemanding at 13 times FY18 estimated earnings
• Possibility of stringent visa norms and any fallout from Brexit key downside risks

 

Maruti Suzuki
 

• Strong product line-up, especially in the fast-growing sports utility vehicle segment, and upgrades are positives
• Start of Gujarat plant in the March quarter of FY17 to reduce Baleno, Brezza waiting period and boost sales
• Company relatively less impacted by note ban than peers; normalisation faster than sector
• Weakening yen to cushion the impact of higher raw material and other cost pressures
• Healthy 15 per cent annual earnings growth over FY17-19, driven by volumes and high margin product  sales

 

Power Grid Corp of India
 

• Undisputed leadership and a good project execution record in the national power distribution sector are strengths
• With plans for new projects over the next few years in place, provides good growth visibility
• Analysts expect 190-200 basis points increase in its return on equity ratio over FY16-19, as new investments get commissioned
• Strong support from telecom and consultancy revenues to also help expand its return ratios

 

HCL Technologies
 

• Strong positioning in fast-growing infrastructure management services and high annuity business are key strengths and will drive the company’s performance
• Lower exposure to the US market, where visa rules could be tightened, a key positive
• Margins are expected to improve, as the company focuses on cost efficiency, better revenue mix
• Valuations, too, appear attractive at 12 times the FY18 earnings
• Competition in infrastructure services and high exposure to Europe is a key risk

 

LIC Housing Finance
 

• Reasonably insulated from the note ban move, unless there is a sharp slowing in the property market, which could delay demand for housing loans
• The Seventh Pay Commission pay-outs to help counter the slowdown, as its customer profile largely comprises government employees
• Biggest beneficiary of falling bond yields and high exposure to salaried home buyers, especially government employees
• Stock reasonably priced compared to peers, even as growth rates are likely to be healthy

Price to earnings (PE) and price to book value (P/BV) are based on trailing 12 months financials ended September 2016; CMP is current market price as on December 30, 2016; Net income, net sales  and profit figures sourced from Bloomberg; Figures for buy/sell/hold denote number of analysts recomedations as per consesus reported after Nov 30, 2016 and figures inside the arrows indicate potential upside for the next 12 months based on analysts’ average target prices; E: estimates

Source: Bloomberg, Brokerages: CLSA, Credit Suisse, Kotak Institutional Equities, Bank of America Merrill Lynch, Macquarie, Morgan Stanley and Motilal Oswal Securities.                                                                                                                                                                                                                                                                       Data compiled by BS Research Bureau