Macquarie has bet on select India stocks as it remains overweight on domestic equities despite a sharp run-up.
The Sydney-based financial services provider listed eight stocks—seven large caps and one mid cap—picked using a bottom-up approach from its coverage universe of more than 120 companies, according to its focus list released on Dec. 7. Of these, Macquarie sees the biggest upside potential in Bharti Airtel Ltd., followed by HDFC Life Insurance Co. and Bharat Petroleum Corp.
That comes as the research firm remains ‘overweight’ on India even as benchmarks scaled new peaks. After tracking worst global selloff in more than a decade, Indian stocks saw a one-way rebound. The Nifty 50 has rallied 80% from its 52-week low of 7,511 on March 23, riding on optimism about a quicker-than-expected economic recovery, a potential Covid-19 vaccine and foreign inflows.
Macquarie shared a September note by Asia equity analyst Viktor Shvets to reiterate that India represents the best very long-term opportunity in emerging markets outside China, has a large domestic market and a stronger-than-average ability to implement more aggressive modern monetary theory policies.
The nation’s role in emerging markets is likely to rise as more Chinese names are blacklisted by ESG criteria, societal s and trustees of investment funds, it said.
But there are a few headwinds as well. India is the most expensive emerging market with one of the deepest likely downgrade cycle. Supply-side bottlenecks, erratic policies and gummed-up banks, too, are preventing the country from realising its full potential, the note said.
Focus List
Macquarie listed stocks from sectors including IT, telecom, infrastructure, pharma, oil & gas and financials as top picks. The seven large caps, with more than $10-billion market cap, on the list are expected to return in excess of 20% in six to 12 months, according to Macquarie. It expects the only mid cap in the focus list to nearly double during the period.
Here’s what Macquarie has to say...
Large-Cap Focus List
Infosys
- Rating: Outperform
- Price Target: Rs 1,410 apiece
- Expects to post the strongest U.S. dollar revenue growth in the large-cap Indian IT space
- Vanguard deal is expected to help it accelerate revenue growth rate to 12.5%-13.6% in the U.S. dollar terms in FY22-23
- Catalysts: Strong execution of order book, new deal wins
Bharti Airtel
- Rating: Outperform
- Price Target: Rs 690 apiece
- One of the strong incremental earnings momentum
- Sees EBIT margin improving to 25% in FY23
- Projects 6% CAGR over FY20-23 in subscribers and ARPU for Africa business
HCL Technologies
- Rating: Outperform
- Price Target: Rs 1,042 apiece
- To benefit significantly in cloud transformation
- Has invested significantly in non-linear software and products business unlike peers
- Catalysts: Deal momentum, revenue growth, margin improvement
Larsen & Toubro
- Rating: Outperform
- Price Target: Rs 1,370 apiece
- Strong order book and revenue visibility
- Capital allocation is improving
- Catalysts: Recovery in execution pace and progress on divestments
HDFC Life
- Rating: Outperform
- Price Target: Rs 849 apiece
- Multiple channels of growth to drive need-based selling
- Steady accretion of back book surplus, continued focus on cost management, early mover in selling, higher margin projects key positives
- Expects 20% profit after tax CAGR over FY20-23
Bharat Petroleum Corp
- Rating: Outperform
- Price Target: Rs 510 apiece
- Buying into upcoming privatisation but fully acknowledge timing uncertainties
- Valuation range around our base-case assumption is Rs 450-550 apiece
Dr. Reddy’s Laboratories
- Rating: Outperform
- Price Target: Rs 5,908 apiece
- Well poised for profitable growth with new launches across markets and improving productivity
- Expects launch of generics of Remodulin (type of high blood pressure in the lungs) and Vascepa (to reduce the risk of heart attack, stroke) in the next few months
- Incorporate an NPA of Rs 500 per share from the copy cat version of Revlimid (used to treat cancer)
- Catalysts: Vascepa generic launch, commencement of Covid-19 vaccine supplies
Mid-Cap Focus Idea
Hindustan Petroleum
- Rating: Outperform
- Price Target: Rs 400 apiece
- Core EPS to double over the next two years
- Benchmark refining margin going from awful to less bad as global demand gradually improves
- Base-case valuation range for HPCL is Rs 400-550 apiece
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