The Nifty's steep underperformance to global markets has led to a moderation in valuations, leading to CLSA suggesting that the fall in sentiment towards India is a good contra buy signal.
For the quarter ended September, the Nifty 50 index fell roughly 3.5 percent, which makes it the second-worst performer among major markets and marking its steepest quarterly underperformance versus emerging and Asian markets (ex-Japan) in around 14 years.
“With EPS cuts largely equating to the fall in the Nifty, the absolute valuation of the Nifty remained as elevated as at the start of the quarter and India remains the most expensive EM after Taiwan,” said the Hong Kong-based brokerage.
Nevertheless, the underperformance of Nifty 50 has brought India’s valuation premium compared to emerging markets and Chinese benchmarks to a four-year low. CLSA also noted that based on its proprietary India-bull bear index, the sentiment has fallen to an extremely bearish zone, with only 10.1 percent optimistic on India. “This has historically been a good contra buy signal,” added the broking house.
The brokerage listed 25 domestic stocks that are ‘underdogs,’ including NTPC, Oil & Natural Gas, DMart, DLF and Varun Beverages, with some counters offering an upside potential of up to 70 percent.
CLSA on ONGC
According to CLSA, ONGC is currently pricing a Brent crude price lower than the current price, which has limited downside given a big increase in OPEC supply is more or less over.
The management's confident commentary on driving strong production growth over the next three years is encouraging. ONGC continues to offer an attractive dividend yield of around six percent, which is one of the highest amongst the Indian large-cap stocks.
“ONGC is trading in line with its historical average PE and c.20% below the global peer average PE and that of Oil India. We find this attractive in the context of promising production growth prospects,” added the brokerage.
CLSA on NTPC
As NTPC is India's premier power generator, the firm faces no carbon risk. Further, NTPC's plan to expand in order to meet India's energy security should address growth concerns on its core business.
The firm is focused on its transition agenda, which validates CLSA's view of NTPC being a leader in the energy transition space, and is on track to meet its goal of 60GW NFE by FY2032.
CLSA on Avenue Supermarts
CLSA said DMart continues to benefit from a strong business model built around low operating costs, which enable it to offer competitive consumer prices. This, in turn, drives higher sales velocity and scale, while also reducing costs and reinforcing what the brokerage described as a “virtuous loop.”
This helps DMart capture market share in a price-sensitive retail environment. The firm also noted that DMart’s rapid expansion of its private-label portfolio is expected to power the next phase of market share growth.
CLSA on DLF
CLSA said that given DLF's robust rental growth outlook and steady growth in residential presales, the brokerage sees DLF delivering an annual return of around 18 percent, which includes an annual dividend yield of one percent, for the next five years.
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