Among top picks, CLSA bets on ONGC, NTPC, Coal India are top buy ideas among non-fin PSUs, and among financials, prefer SBI.
The public sector companies, especially public sector banks, had a roller-coster ride in 2018, but now CLSA has said that investors should not ignore PSUs in 2019 as the risk-to-reward ratio is looking fairly attractive.
The state-owned enterprises (SOEs) are trading close to all-time lows at a forward PE of 8.8x. Valuations, when compared to Nifty, appear even more compelling at a 50 percent discount, said the note.
According to CLSA, slowing domestic flows is a risk and it can lead to market de-rating. A similar view was shared by UBS in a report released earlier this week.
“Benign liquidity has supported India’s premium valuations and increased local flows into the equity market. Although liquidity has started to normalise post the tight phase in H2 2018, easy money of the past three years is unlikely to be back in a hurry,” said the UBS report.
“Historical returns have supported retail flows historically, and this too, is now less of support. UBS-Financial Conditions Index also suggests waning support for flows and returns,” it added.
The global investment bank has given a target of 10,000 for Nifty in its base case scenario which translates into a fall of 8 percent from Tuesday’s closing of 10,886.
“Our base case Nifty target for 2019-end is 10,000, implying a downside of 7 percent, while our upside/downside scenarios also suggest unattractive risk-to-reward,” said the report. While GDP growth may recover a bit, political and policy uncertainty keeps us cautious, it highlighted.
The global investment bank is overweight IT, private banks and property. It remains underweight on industrials/infrastructure and small and midcaps.
UBS further said that it has more neutral/underweight sectors than overweight, similar to 2018. It recommends investors to take more stock-specific calls rather than sector-specific calls.
CLSA in a report highlighted that the pressure to expand the farmer welfare programme ahead of the 2019 national elections is high for PM Modi. A possible announcement of a nationwide direct farmer support scheme is quite likely in the Budget on February 1, or possibly even earlier.
A Telangana-style scheme could cost Rs 1.2 trillion, further complicating fiscal math, as it could be a recurring liability. The RBI’s possible large dividend might help just one time.
The GST-led tax revenue shortfall of 75-80bps of GDP is not reflected in the reduced govt expenditure for FY19 due to off-balancesheet funding, which is not a sustainable solution and will create its own problems later and distort the reported fiscal deficit for FY19.“We expect the ‘real’ govt expenditure growth to slow down. The impact on capex will be even greater if the farmer support scheme is implemented. ITC should see some relief rally, as the budget is unlikely to tinker with tobacco taxation,” added the report.