CLSA on October 5 added HDFC Bank to its focus portfolio on the back of significant cool-off in relative valuations to peers. With this, CLSA has further raised its overweight stance on banks, investment analyst Vikash Kumar Jain said in a note.
CLSA's India focus portfolio now constitutes: Reliance Industries, HDFC Bank, ICICI Bank, Infosys, Larsen & Toubro, Axis Bank, Sun Pharma, ONGC, SBI Life Insurance, IndusInd Bank, Hindalco, BPCL and GAIL.
Ironically, CLSA's bullish stance on HDFC Bank comes weeks after several other foreign broking firms cut their target price for the stock because of prolonged merger pain.
Analysts expects HDFC Bank to experience a near-term decline in net interest margin (NIM), net worth, and asset quality after merging with parent company Housing Development Finance Corp. (HDFC) due to excess liquidity. The stock has fallen 11.18 percent in the past three months.
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CLSA's view on India
Under the macro set-up of a prolonged hawkish rate pause with no imminent growth slowdown, CLSA is now more overweight on banks along with energy and industrials, while IT and consumption remain its key underweights.
Jain noted that Nifty was the fourth best performing market in the world during the quarter ending September 2023, outperforming the MSCI EM and MSCI AxJ benchmarks.
Also Read: Foreign investors continue to reduce stake in HDFC Bank; can stock's weight double on MSCI?
The Nifty's consensus FY24 earnings per share was cut by 0.7 percent but FY25 saw an upgrade of 0.9 percent during the quarter. "India is expected to deliver the highest two-year EPS growth among the top 19 equity markets in the world with a 17 percent CAGR over FY23-25," as per the broking firm.
The Nifty's 12-month forward PE cooled off from 18.8x at the start of the quarter to 18.5x, though it is still at a 16.5 percent premium to its historical average.
The difference between India's 10-year bond yield and 12-month forward consensus earnings yield remained largely unchanged at 1.8 percentage points.
"It is still below the danger zone of 2. Equity valuations versus debt are much more extended in the US, France and the UK, and in EMs such as Thailand and South Africa," Jain said.
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In the quarter gone by, about 60 percent of the Nifty's constituents outperformed the benchmark led by NTPC, Coal India and L&T. UPL, HDFC Bank and Britannia were among the worst performing Nifty stocks.
"Our (CLSA) portfolio has outperformed the Nifty in all 11 quarters since inception in Jan 2021 and delivered a total return of 129 percent - outperforming the Nifty by 83.6 ppts in less than three years," the firm said.
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