Axis Bank, Godrej Consumer, Mahindra Among Credit Suisse’s 39 Global Growth Stock Picks
Three Indian companies have made it to Credit Suisse Group AG’s list of global growth stocks, at a time the new coronavirus pandemic has roiled equity markets worldwide.
Axis Bank Ltd., Godrej Consumer Products Ltd. and Mahindra & Mahindra Ltd. are among the 39 GARP—growth at a reasonable price—stocks recommended by the research firm for long-term investors, according to a report authored by Richard Kersley.
Credit Suisse has identified the growth stocks evenly distributed across its Americas, Europe, the Middle East and Africa, and Asia-Pacific coverage, the report said.
“The template has been to look for companies presenting attributes of GDP+ top line growth, high barriers to entry, consistency in track record and valuations that do not fully reflect these merits.”
This comes at a time the coronavirus pandemic has stalled economic activity, and the International Monetary Fund has already declared a recession. Equity markets across the world witnessed the worst selloff in more than a decade before recovering some losses as large economies started announcing stimulus.
According to Credit Suisse, while markets are more than likely to remain prone to volatility in the weeks ahead, policy steps taken by governments and central banks, together with supportive valuations, should see the lows for equity markets hold. It recommends increasing equity exposure into any weakness.
Here’s what Credit Suisse has to say about the Indian firms in its GARP stocks list:
Target Price: Rs 460 apiece
- 65 percent of banking assets in India still rest with public sector banks, which have been shedding market share over last two decades to their private peers.
- Private banks have outpaced the system growth consistently through deeper market penetration and market share gains and are a secular trend in the sector.
- Post Covid-19 outbreak disruption, stock has corrected more than 50 percent in a month and now trades at about 1 time its forward book value of equity per share.
- A significant delay in ending lockdowns and subsequently, stretched out recovery process will remain a key risk as that can lead to asset quality deterioration in times of loan book consolidation.
Godrej Consumer Products
Target Price: Rs 630 apiece
- Company has a strong track record of innovation led growth, which will help it in its smaller categories like handwash, liquid detergents and baby care.
- Expects 10-12 percent revenue growth after the Covid-19 impact is reflected in FY21.
- Earnings growth is likely to be stronger at 14-15 percent due to improving mix and cost savings initiatives.
- Stock trades at 31 times FY21 and 27 times FY22 earnings, a 40 percent discount to sector leader Hindustan Unilever Ltd.
- With similar growth opportunity but higher international exposure, the stock should trade at a lower discount of 20-25 percent over HUL.
- Africa business continues to remain volatile due regular disruptions and currency fluctuations.
Mahindra & Mahindra
Target Price: Rs 390 apiece
- M&M is the largest tractor and small commercial vehicle manufacturer in India, with around 45 percent share in both segments.
- Tractors are the main cash cow growing at a 5-6 percent compounded annual growth rate and can continue to do so for the next 8-10 years.
- The company has a much larger opportunity in implements (farm equipment), which is yet a nascent business in India.
- While several moving parts increase variability, M&M can sustain 6-8 percent growth rate for several years.
- M&M now trades at 9.9 times FY21 and 6 times FY22 core earnings (ex-listed sub value at 20 percent hold co discount).
- This is 60 percent discount to passenger vehicle leader Maruti Suzuki India Ltd. and about 40 percent discount to a much smaller tractor maker Escorts Ltd.
- This discount can be lower as it accounts for high amount of cash outflows to make up for deficits at M&M’s unlisted subsidiaries.
- Near-term risks primarily stem from a longer-than expected lockdown.
- Sustainable tractor growth being lower-than-expected and agri-implements opportunity not fructifying as expected.