After seven days of relentless gains, the domestic equity market turned jittery on Thursday at record levels. While there remain concerns over rising valuations across the market, analysts said many of the stocks can deliver strong returns from here on.
“India still represents the best very long-term opportunity in the emerging markets basket outside of China. Also, unlike China, India’s business and political climate, while complex, has the backbone of common law, rules and dispersion of power. As a result, the nature of relationship between private and public sectors in India is different to China’s, leaving greater room in India for the traditional private sector,” said foreign brokerage Macquarie.
The brokerage said unlike ASEAN or LatAm, which are largely cyclical, India has a greater secular capacity while its best companies are also some of the better ones globally.
The brokerage has come out with a list of eight stocks that it said have the potential to rise up to 100 per cent over the next one year. They are:
Bharti Airtel | Target Rs 690 | 37% upside
Macquarie said the stock peaked in May, as it pulled back on technical factors such as a drop in MSCI weightage and concerns over the industry’s ability to raise Arpu with Vodafone-Idea back in the fray and Jio cutting prices in the postpaid segment.
“However the big picture for us remains one of strong incremental earnings momentum and we consider 7 times FY22 EV-Ebitda attractive. It noted that India’s mobile ARPUs have already recovered by 50 per cent to Rs 157 and expected it to gradually increase to Rs 190 in FY23. Besides, the brokerage said price discipline and progressive content reduction in the prepaid segment. It is observing 4G and postpaid migration to larger data packages and content bundles.
In the case of its Africa business, the brokerage projected a 6 per cent CAGR FY20-23 in both subscribers and ARPU. It expects the addition of Amazon Web Services (AWS) to be significant as Airtel’s Enterprise business today is mostly based on capacity rather than services. Lastly it sees EBIT margins improving from 15 per cent (Q1FY20) to 20 per cent (FY22) to 25 per cent (FY23). The price target of Rs 690 suggests a 37 per cent potential upside for the stock over Wednesday’s closing price.
Infosys | Target Rs 1,410 | Upside 20%
Infosys, Macquarie said, ranks among the best in its five-factor model for rating capabilities and competitive positioning of the largecap IT companies.
“We expect Infosys to post the strongest dollar revenue growth in the large cap Indian IT services space over FY21-23 aided by strong deal wins. Recent large deal wins like the Vanguard deal should help it to accelerate revenue growth rate to 12.5-13.6 per cent in dollar terms in FY 22-23, in our view.
The brokerage said the bulk of investments is already done and revenue growth is picking up for Infosys, as it expects the IT firm’s margins to improve from hereon. Its target of Rs 1,410 on the stock is based on 26 times September 2022 earnings per share (EPS).
“Broadly, we expect Infosys to trade at a 20 per cent plus premium to MSCI India in view of a 28-29 per cent RoE outlook and visibility on growth,” it said.
HCL Tech | Target Rs 1,042 | Upside 19.7%
Macquarie said HCL Tech will benefit significantly in cloud transformation spending globally as enterprises prepare for cost savings and improving technology adoption. The IT firm ranks strong in its five-factor model for rating the capabilities and competitive positioning of large cap Indian IT companies. “Products and platforms have strong client traction around ecommerce, security and collaboration tools. Tracking at an annualised revenue run-rate of $600 million, in-line with its business plan. HCL Tech, unlike its peers, has invested significantly in non-linear software and products businesses in past few years which now form 37 per cent of total revenues with growth headway,” it said valuing the stock at 18 times September 2022 EPE.
L&T | Target Rs 1,370 | Upside 16%
Macquarie said L&T has a strong order book and revenue visibility. While order award decisions are getting deferred during the Covid-led disruption, L&T has mentioned a strong prospects pipeline of Rs 6,00,000 crore ($80 billion) of tenders over the next 12-18 months. In the meantime, the existing order book of Rs 3 lakh crore, or $40 billion, provides revenue visibility for over two years in the core EPC business.
“Capital allocation is improving. Divestments of non-core assets is an ongoing process releasing Rs 13,000 crore of equity capital in the last five years. We expect further release of Rs 5,000 crore of equity capital in the next 2-3 years through divestments of Nabha Power and Hyderabad Metro which will improve RoE and shareholder returns,” it said.
Analysis of Bloomberg Consensus estimates and target prices implies current holdco discount at 21 per cent, much higher than the historical average of 4 per cent over the last four years. The market cap-to-order backlog also stands at multi-year lows at 0.5 times, the brokerage said.
HDFC Standard Life | Target Rs 849 | Upside 30%
HDFC Life’s balanced product mix coupled with constant product innovation has enabled it to manage business cycles over the years, Macquarie said, while expecting HDFC life to deliver 23 per cent APE and 29 per cent VNB (value of new business) growth compounded annually over FY20-23. The highest among its coverage universe.
“Multiple channels of growth to drive need based selling – HDFC life’s diversified distribution mix consisting of 300+ partners (incl 50 new ecosystem partners), supplemented by 420 branches and 1,06,000 agents enables it to cater to the wide spectrum of customers across geographies,” it said.
“Steady accretion of back book surplus, continued focus on cost management, early mover in selling high margin products has enabled HDFC life to deliver robust VNB expansion over years and depicts management’s focus on profitable growth. We expect HDFC life to deliver a 20 per cent PAT CAGR over FY20-23,” Macquarie said.
BPCL| Target | Upside 14-39%
Macquarie said it is a buyer of BPCL due to the upcoming privatisation by the government, albeit fully acknowledging the timing uncertainties. Its base-case target for the stock is Rs 510 per share, applying 6 times EV-Ebitda for refining at an average $6 per barrel GRM over the next five years, 8 times EV-Ebitda for marketing and pipelines on 3-4 per cent per annum steady-state volume growth and margins.
“Our target price implies an Enterprise Value of $19 billion, 12 times PE, 9 times EV-Ebitda and 1.9 times P/BV on FY23E. The valuation range around our base-case assumptions is Rs 450-550 share. Our bull-case SOTP is Rs 690 per share , assuming $7 per barrel refining margin and 6 times EV-Ebitda for refining, 10 times EV-Ebitda for marketing, 8 times EV-Ebitda for pipelines and a subjective 20 per cent control premium,” it said. The access to 17,000 fuel retail stations, gas stake in PLNG and IGL and LNG operations in Mozambique, in addition to ability to take control unlike ONGC-HPCL makes BPCL a key attraction from an acquirer’s perspective, Macquarie said.
Dr Reddy’s Labs | Target Rs 5,908 | Upside 17%
Macquarie said that Dr Reddy’s Labs is well poised to deliver profitable growth. It forecast 24 per cent EPS CAGR over FY20-23, thanks to new launches across markets and improving productivity.
“Apart from interesting molecules launched recently like gCiprodex and gKuvan, we expect DRL to launch gRemodulin and gVascepa in the next few months. With renewed focus, DRL has been performing well in India, finally outperforming IPM after being a consistent underperformer,” it said.
Driven by portfolio maximisation and higher focus, we expect Europe, PSAI and China to be strong medium-term growth opportunities for DRL, Macquarie said. The brokerage said the market is still not fully reflecting The company’s steadfast focus on fortifying ex-US growth and better productivity.
HPCL | Target Rs 400 | Upside 83%-151%
Macquarie expects HPCL’s Core EPS may double over the next two years. The key drivers of this include:
A 115 per cent expansion in refining over the next four years, within which 55 per cent will be done by FY22 related to brownfield expansions at the Mumbai and Vizag refineries. The broker expects an improvement in product mix at the expanded 15 mtpa Vizag refiner. In addition, it expects benchmark refining margins going from awful to less bad as global demand gradually improves. Lastly there is a possible upside from higher-than-modelled marketing margins related to BSVI and higher exports of lubricants, Macquarie said.
“The prize remains fuel retail. HPCL operates 16,000 stations pan-India. In terms of SOTP contribution, marketing accounts for 60 per cent of our fair value. HPCL’s longer-term capex allocation towards gas (20 city-gas concessions, LNG/Charra terminal), ethanol, renewables is important from an energy transition standpoint albeit with little earnings impact over the next three years,” it said.
HPCL’s base-case valuation range for HPCL is Rs 400-550 per share based on SOTP, peer multiples, own multiples, transaction comps, residual income. The Rs550 per barrel outcome is simply the ONGC-HPCL transaction of 2018 adjusted for growth in book value.
“Our base case SOTP assumes 6 times EV-Ebita for refining, 8 times for marketing and no control premium,” it said.
Credit: Stocks-Markets-Economic Times