Citi advises investors to stay with defensives, removes Yes Bank from model portfolio

Citigroup highlights top 10 stock ideas which could give decent risk-to-reward to investors:

Ambuja Cements:

Citigroup expects cement prices to rise over the medium term as M&A activity slows. Additionally, there is a shift in Ambuja’s strategy to focus on profitable growth even though the merger with ACC has been delayed, added the report.

The view is based on 1) strong volume growth since 2017, 2) limestone mines acquisition, 3) plans to commission new clinker capacity and 4) cost focus.

Lafarge’s global strategy includes utilising the best asset base to grow faster than the market, and more investments in growth plus markets (India could benefit). Current valuations provide an attractive entry point.

Coal India (CIL):

CIL’s current valuation are 1-SD below mean and offers a 7 percent dividend yield. Citigroup is constructive on 1) e-auction price support, 2) realization upside from linkage auctions, 3) strong volume growth and 4) limited cost pressures (wage negotiations concluded in FY18).

HDFC:

Citigroup believes that HDFC Ltd will maintain its strong earnings momentum with healthy AuM growth and relatively stable spreads backed by a strong funding franchise.

The company has maintained its spreads in the narrow range of 2.20-2.35 percent over a long period of time irrespective of the interest rate environment. It has a well-balanced ALM profile and is adequately capitalized.

ICICI Bank:

ICICI Bank has been focusing on addressing their corporate asset quality issues which have led to higher slippages/NPA in the past.

The bank is well positioned to leverage its strong liability and retail lending franchise with retail now constituting 58 percent of the total loan book and CASA ratio at 51 percent.

The share of the overseas business, which is lower yielding, continues to decline. With NPA recognition in the last leg, the focus will shift to recoveries and core growth/profitability.

ITC:

ITC is a key holding in the consumer space in our view - positive trends in the key cigarette business, i.e. continued positive volumes are a near-term catalyst, coupled with a stable mix.

This should drive 11% EPS CAGR and 17 percent FCF CAGR respectively over FY18-20E. Valuation discount is compelling vs. peer group. ITC is perhaps the only major consumer stock trading in-line with its last 5 year historical average of 28x 1-year forward P/E.

Maruti Suzuki India:

For the overall Indian PV industry, we expect 10/11% YoY growth in FY19/20 respectively. Maruti should continue to gain market share, given a strong product portfolio. Citigroup expects domestic volume growth rates of 13/12% YoY over FY19/20 respectively.

Currently, the stock is trading at ~12.4x 1-year forward EV/EBITDA, which is close +1 SD above mean but a significant pullback from recent highs of 18x.

While there could be near-term risks to earnings given the way currencies have moved, it does seem adequately priced into the recent stock price moves.

NTPC:

NTPC trades at 10.9x P/E and 1.2x P/BV FY20E. The stock trades 1 standard deviation below historical (since January 2005) mean on both parameters.

Commenting on the business outlook, Citigroup said that Coal related under-recoveries have been more or less resolved from July 2018. Logistical issues faced by NTPC for domestic coal transportation have eased after it signed a MoU with the Indian Railways in Apr18 and paid ~Rs50bn advance towards haulage charges.

NTPC is targeting capacity addition and commercialization of ~4.8GW in FY19E and 4-5GW addition in FY20E. Over the next 3-4 years, capitalization should exceed capex implying RoE expansion as equity invested in under-construction projects starts earning returns.

Petronet LNG:

Petronet LNG is a key beneficiary of India’s rising LNG imports, and its capacity expansion is well timed against this backdrop.

With 90 percent of the post-expansion Dahej capacity already tied up under long-term take-or-pay / use-or-pay contracts and given the significant capital efficiency & scale benefits associated with successive brownfield expansions at the facility, the company offers strong volume and earnings visibility notwithstanding the start-up of new terminals.

Sun TV:

Citigroup thinks that the stock price correction on a YTD basis is overdone and the current valuations at 15x FY20E EPS are attractive, pricing in most concerns. Earnings delivery is expected to be healthy as ad momentum sustains.

Tamil Nadu digitalization boosts domestic subscription revenues (~Rs3.8bn additional revenues by FY20E). The global investment bank estimates 13%/19% consolidated revenue / EPS CAGR over FY18-20E.

UPL:

Citigroup expects 13 percent revenue CAGR with 140bps of improvement in margin over FY18-20E (without incorporating the recent Arysta acquisition), largely driven by higher volumes and market share, the introduction of more proprietary products and better cost efficiencies.

The India season was good and early signs from Latin America (largest market) are encouraging as well, pointing to good earnings momentum over the rest of FY19.

The global investment bank believes UPL’s well-diversified business model is resilient to transient market disruptions and would allow it to consistently grow ahead of the market.

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