After the government's Budget announcements that are being seen as growth-focussed, global brokerage house Macquarie has tweaked weightage in its model portfolio. It has significantly increased weight for the stocks in theme 'value state-owned asset plays' by 600 bps to 18 percent now.
This essentially means it gives preference to the themes where the weight has been increased in its model portfolio. The research firm has kept a strong weight in 'digitalization' (around 25 percent), 'financialisation' (around 17 percent), 'building India' (12 percent), while it has lowered weight in the relatively expensive 'consumption' theme by 700 bps to 7 percent.
Macquarie still carries a 6-8 percent weight on other themes like 'Make in India', 'gas based economy', 'rural & commercial vehicle recovery'.
Macquarie also added weight to State Bank of India, the country's largest lender, around the Budget. "With the government's renewed focus on infrastructure and better use of digital channels in onboarding customers, we believe SBI is well poised to grow its loan book at around 1.2x system growth. Well provided on legacy assets," it reasoned.
The brokerage also increased weight for L&T by 200 bps to 8 percent, as record order backlog, strong tendering prospects, well-managed balance sheet and infra push in the recent budget could trigger a further re-rating of core business.
LIC Housing Finance is the fresh addition in its portfolio as it is a value play (1.0x PBV) supported by pick up in home loan demand, and builder NPL resolutions.
"While not an unconstrained force, India has a greater than average ability to pursue aggressive fiscal and monetary policies. We do not see India's latest fiscal estimates as threatening either its currency, credit ratings or liquidity," said Macquarie.
"In a deglobalising world, India has a major advantage of Continental size and large and liquid domestic economy. Importance of India's equity markets will rise even further, as China's equities get more isolated from EM and global flows," the brokerage added.
Macquarie agreed with Google, Facebook or Amazon, that India still represents the best very long-term opportunity in EM outside China (as shown in strong FDI over past 12 months).
"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 more traditional private sector. Also unlike ASEAN or Latin America, which are largely cyclical, India has a greater secular capacity while its best corporates are also some of the better ones globally," the brokerage explained.
India Focus Ideas
Macquarie feels following seven largecaps are likely to give more than 20 percent return; and one midcap stock has over 100 percent upside.
Largecap stocks
Infosys (Target: Rs 1,680 | Return: 28.8 percent)
The global brokerage has assigned 9 percent weightage to Infosys in its model portfolio, expecting the IT major to post the strongest US dollar revenue growth in the largecap Indian IT services space over FY21-23 aided by strong deal wins. Recent large deal wins like the Vanguard deal help accelerate growth.
HCL Technologies (Target: Rs 1,280 | Return: 33.6 percent)
HCL Technologies, with 8 percent weight in portfolio (which increased by 250 bps), is a significant beneficiary of cloud transformation spend globally as enterprises prepare for cost savings and improving technology adoption, said the brokerage, adding it has been gaining traction, as seen in recent large deal wins.
Bharti Airtel (Target: Rs 747 | Return: 25.1 percent)
Telecom operator Bharti Airtel, with 6 percent weight, has strong earnings momentum from FY22 with rising average revenue per user (ARPU) and margins, said the brokerage, adding Africa business potential is under-appreciated.
HDFC Bank (Target: Rs 2,005 | Return: 24.9 percent)
"HDFC Bank's (with 5 percent weight) performance is simply driven by book value compounding, within our estimates. The bank is offering the highest growth among the private sector banks. Multiple at 4x P/B is supported by sustainable around 18-20 percent return on equity (ROE)," said the brokerage.
BPCL (Target: Rs 510 | Return: 21.4 percent)
The brokerage has assigned 5 percent weight to BPCL in portfolio, saying government's privatization will unlock SOTP value. "Our base-bull case is Rs 510-690 with 25-75 percent upside."
Dr Reddy's Laboratories (Target: Rs 6,000 | Return: 23.5 percent)
Dr Reddy's has 4 percent weight in the model portfolio. "With strong launch momentum across markets, improving productivity and optionality from its COVID-19 vaccine contract, we expect Dr Reddy's earnings can surprise positively (Macquarie estimates 21 percent EPS CAGR over FY20-23)," said the brokerage.
HDFC Life Insurance Company (Target: Rs 849 | Return: 24.1 percent)
The brokerage has given a 2 percent weight to HDFC Life in its portfolio, citing sustainability of individual premium growth, higher sales of protection products leading to margin expansion and higher absolute VNB (value of new business) growth and long-term growth headroom.
Midcap
HPCL (Target: Rs 510 | Return: 121.7 percent)
HPCL, with 5 percent weight (which increased by 100 bps), is a deep value play at 5x FY22 estimated PE, said the brokerage, adding operating environment going from 'awful' to 'less bad' combined with capacity expansions drives a around 70 percent core earnings expansion by FY23 estimates.
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