Moneycontrol
Jan 05, 2018 09:17 AM IST | Source: Moneycontrol.com

CLSA sees Nifty touching 11400; top 9 picks for investors’ in 2018

CLSA expects earnings to dramatically improve to a 15-20 percent CAGR over the next two years as corporate earnings return to normal with the bad news already priced in.

 
 
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The Nifty has delivered a 12 percent annual return in INR terms over the past five years despite a weak 4 percent corporate earnings CAGR.

CLSA expects earnings to dramatically improve to a 15-20 percent CAGR over the next two years as corporate earnings return to normal with the bad news already priced in.

However, domestic and international liquidity factors have been quite favourable and the risk is on the downside. CLSA’s December 2018 Nifty target stands at 11,400 which offers a total return of around 10 percent, building in a 10 percent de-rating from the current multiple of 17.9x.

The Nifty currently trades at 17.9x one-year forward earnings and is 16 percent above the past five-year historical average. A strong improvement in earnings growth would be needed to deliver positive market returns, which is likely in our view.

Market performance at the beginning of the year will depend on the Union Budget which will be presented on 1 February 2018. It is possible the government could increase taxes on equities to fund the GST shortfall.

Here is a list of top nine stocks ideas from CLSA for the year 2018:

Crompton Consumer: BUY| Target Rs310| Return 13%

Crompton Consumer has set itself a target to be the fastest-growing company in the sector with an aim to create ‘disproportionate’ stakeholders returns. The company has a margin tailwinds with an opportunity to grow not only in its existing categories but also considerably expand its addressable opportunity.

A shorter credit cycle could help Crompton negotiate better vendor terms; offset near-term margin headwinds from higher ad and distribution expenses.

Expansion into a new category by leveraging its strong distribution network and brand recall could lead to further stock rerating.

Crompton’s strong returns profile, robust growth expectations, and improvement in FCF justify premium valuations. Crompton remains our most preferred pick in the consumer durables and affordable housing space.

Godrej Properties: BUY| Target Rs873| Return 26%

Godrej Properties is a direct beneficiary of RERA which drives sector consolidation. CLSA expects a strong 50 percent earnings Cagr over FY18-20.

A prolonged sector slowdown, rising consumer activism against poor delivery of presold apartments and Rera’s rollout has started driving sector consolidation.

Rera’s reforms are consumer-oriented in a previously unregulated sector. CLSA expects major consolidation in 2018. With execution as the main focus, Rera substantially raises compliance and working capital requirements and, as such, the sector’s entry barriers.

HDFC: BUY| Target Rs1900| Return 12.4%

HDFC is the best play on the housing market recovery. The mortgage business trades at an attractive 15x March 2019 EPS, said the CLSA note.

ICICI Bank: BUY| Target Rs380| Return 21.8%

The NPL cycle has peaked out and the resolution process should help. The adjusted book at 1.8x March 2018 looks attractive, said the CLSA note.

IndusInd Bank: BUY| Target Rs2060| Return 25.6%

IndusInd Bank is one of the fastest and most stable growth profiles. The price-to-book ratio or P/B of 4.3x March 2018 is not cheap, but the premium is justified.

L&T: BUY| Target Rs1500| Return 21.3%

L&T is the biggest beneficiary from the infra push, especially in roads and urban. The company should benefit from real estate recovery as well.

Lupin: BUY| Target Rs1030| Return 17.5%

Global pharma consolidation will gather steam in 2018 as challenging industry dynamics in the USA drive supplier-side consolidation whereas, in India, the government’s focus on improving quality and good manufacturing-practice compliance could increase market share at top companies.

Implied US valuations are already at distressed levels (c.2x FY19CL EV to sales). Going forward, early resolution of US FDA issues could lead to re-rating of the stock, said the CLSA note.

M&M: BUY| Target Rs885| Return 20%

M&M is a direct beneficiary of the expected rural pick-up. The automaker is one of the cheapest consumption plays with a 12-13x implied auto business multiple.

NTPC: BUY| Target Rs200| Return 16%

Project commercialisation is likely to drive a 25 percent Cagr in regulated equity over FY17-20. The power producer is already trading at attractive valuations despite a lower return on equity (ROE).

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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