These 12 Stocks Made It To CLSA’s 2018 India Outlook

Institutional brokerage CLSA has identified nine stocks that investors can buy this year and three others which are potential ‘sell’ candidates.

Its recommendations are predicated on the belief that the trajectory of corporate earnings will improve meaningfully this year with the demonetisation and Goods and Services Tax-related disruptions out of the way, CLSA said in a strategy note. The foundation for long-term improvement in economic growth rates and corporate profitability has been laid, the brokerage said.

“Large equity raisings and bank recapitalisation should help accelerate a cyclical recovery,” CLSA’s India strategist Mahesh Nandurkar wrote in the report.

The two key themes for the year, according to CLSA, are the recovery in housing markets and peaking of non-performing loans in the banking system.

The Real Estate Regulatory Act will boost consumer confidence and prop up the housing cycle, the brokerage said. It expects nearly 50 percent of NPLs and bad loan ratios to fall on a year-on-year basis over the next two financial years.

Here are the top buying opportunities identified by CLSA.

Crompton Consumer

• Target price of Rs 310 implies a potential upside of 14 percent.
• Earnings growth sustained at over 20 percent given margin tailwinds and expected housing recovery.
• 32 times March 2019 EPS is justified.

Godrej Properties

• Target price of Rs 873 implies a potential upside of 26 percent.
• Beneficiary of RERA to drive sector consolidation.
• Expecting a strong 50 percent earnings CAGR over FY18-20.

HDFC

• Target price of Rs 1,900 implies a potential upside of 12 percent.
• Best play on the housing market recovery.
• Mortgage business trades at an attractive 15 times March 2019 EPS.

ICICI Bank

• Target price of Rs 380 implies a potential upside of 22 percent.
• The NPL cycle has peaked and the resolution process should help.
• Adjusted book at 1.8 times March 2018 looks attractive.

IndusInd Bank

• Target price of Rs 2,060 implies a potential upside of 26 percent.
• One of the fastest and most stable growth profiles.
• Price-to-book of 4.3 times March 2018 is not cheap, but the premium justified.

L&T

• Target price of Rs 1,500 implies a potential upside of 21 percent.
• Beneficiary of the government’s infrastructure push, especially in roads and urban.
• Should benefit from real estate recovery as well.

Lupin

• Target price of Rs 1,030 implies a potential upside of 17 percent.
• Implied U.S. valuations at distressed levels.
• Early resolution of USFDA issues could lead to re-rating.

Mahindra & Mahindra

• Target price of Rs 885 implies a potential upside of 20 percent.
• Beneficiary of the expected rural pick-up.
• One of the cheapest consumption plays with a 12-13 times implied auto business multiple.

NTPC

• Target price of Rs 200 implies a potential upside of 16 percent.
• Project commercialisation to drive a 25 percent CAGR in regulated equity over FY17-20.
• Attractive valuation despite lower return on equity.

Here are CLSA’s top sell ideas for the year.

Shriram Transport

• Target price of Rs 1,000 implies a potential downside of 31 percent.
• Rising bond yields are a negative.

Colgate

• Target price of Rs 1,000 implies a potential downside of 7 percent.
• Unfavourable risk-reward as it trades at 39 times March 2019 earnings.
• Much better alternatives available.

HPCL

• Target price of Rs 405 implies a potential downside of 0.2 percent.
• Stock builds in excessive optimism around its open offer, which may not materialise.