6 Large-Cap “High Conviction” Stock Picks From CLSA

CLSA (Credit Lyonnais Securities Asia) has issued a report in which it states that it is ‘overweight’ on discretionary, financials, IT, real estate and utility stocks and ‘underweight’ on staples, energy, healthcare and material sector. It is ‘neutral’ on the industrial and telecom sector.

CLSA has identified 6 large-cap “high conviction” stocks which it recommends for investment.

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Bharti Airtel: Target price Rs 413

Bharti Airtel is best placed to ride the data boom in India, which will contribute nearly 50 per cent of its incremental mobile revenue over FY14-17CL. There is regulatory clarity after the February 14 spectrum auction wins and, despite higher payments and capex, its hefty cash flow should enable balance-sheet improvements. Meanwhile overseas, Bharti’s African operations are improving. The stock is at an inflection point with multiple triggers and based on 7.5x forward EV/Ebitda for India and 5x for Africa operations.

Grasim Ltd: Target price Rs 4900

Grasim (through 60%-sub, UltraTech) should be a key beneficiary of improving fundamentals in the Indian cement industry. The segment forms 70 per cent of its Ebitda. The profitability in the VSF business is also close to bottoming out and should see a recovery by FY16. Despite a strong 24 per cent EPS CAGR, the stock currently builds in a 45 per cent discount to fair value and implied cement assets are attractively priced at US$110/t.

ICICI Bank Ltd: Target price Rs 1650

ICICI Bank’s technology initiatives will boost customer additions and lift cross-selling ratios, driving growth in Casa deposits, domestic loans and fees. CLSA expects profits to rise around 60 per cent by FY17 and deleveraging by large corporates to ease asset-quality concerns.

ROE has improved by 600bps from recent lows and is likely to expand further to 19%, arguing for a rerating.

Maruti Suzuki India Ltd: Target price Rs 3000

Maruti Suzuki offers multiple new product triggers over FY15-16 and will execute a new export strategy, which will drive strong volume growth. Indian auto demand has started to pick up and CLSA expects a strong revival in FY16.

This will ease discounts, which along with operating leverage benefits will lift margins over FY15-17. Competition is high, but is stable in cars. Maruti Suzuki offers robust FY14-17 EPS CAGR of 34 per cent.

ONGC: Target price Rs 530

ONGC is Indian government’s flagship upstream company and among the top-five players in Asia. Driven by a 59 per cent decline in oil subsidies over the next two years as diesel subsidies are eliminated, post-subsidy crude realisation for ONGC will rise from US$41/bbl to US$50/bbl, despite its assumption of 100 per cent subsidy burden for upstream names.

This, along with the doubling of the domestic gas price, will ensure a 22 per cent EPS CAGR over two years.

SBI: Target price Rs 3160

SBI enjoys a strong deposit franchise and is leveraged to the economic recovery. Reforms should benefit the bank in three ways: rationalisation of asset-allocation norms supports growth and ROE, an increase in foreign shareholding limits help to meet capital needs and the government could allow management to be lot more independent. Over FY14-17, there will be a 20 per cent profit CAGR and valuations are still reasonable.