2024 top stock picks: IIFL lists Axis Bank, BPCL, Bajaj Finance, Nykaa among ‘buys’; TVS Motor among ‘sells’
In a recent note, brokerage house IIFL Securities forecasted that it expects 1) Indian GDP growth sustaining at 6%+, 2) globally declining inflation and yields, but 3) weakening global growth thanks to monetary tightening over the last 2 years causing commodities price softness.
While monetary easing normally suggests commodities buoyancy, this time it is unlikely thanks to weak global demand (lag effect of monetary tightening) and improving supplies (especially crude), and this will help earnings, believes IIFL.
Sectors
The brokerage is ‘overweight’ on Private Banks, NBFCs (large diversified), Insurance, Cement, Real Estate, OMCs.
It is ‘underweight’ on IT, FMCG, and Auto; and ‘neutral’ on Pharma, and Capital Goods.
The brokerage noted that while lending financials have de-rated in the last 2 years significantly, as regulation has tightened, it expects better. Axis Bank and Bajaj Finance feature as its top ‘buys’.
“The building blocks for sustainable growth are in place – low corp/bank leverage, a potential breakout from a long period of underinvestment, significantly improved RoEs, govt. providing a capex thrust thanks to improving fiscal position. Through it all, lenders have de-rated, partly based on tightening regulation being perceived as unfriendly for growth. We look at this as protective regulation and a reason for growth to sustain without blow-ups, once it picks up. Expect lenders to re-rate,” it explained.
IIFL thinks Axis (followed by Indus Ind) can improve its PPOP RoA by 33bps, much higher than peers. Operationally there have been many improvements in the last few years – liability franchise improvement, much lower lumpy corporate loans and fees, and a higher share of retail are some features. Axis is significantly cheaper than its peers, and as the industry re-rates, should outperform the pack, it added.
Meanwhile, for BAF, it stated that BAF has recently had RBI breathing down its neck, and the NBFC sector has had more restrictive regulations taken out (e.g. increase in risk weights for unsecured loans), all of which will combine to bring down BAF’s breathless pace of expansion in the last 2 years. The stock has slowly de-rated and is now offering one of the best g-PE combinations (along with CIFC).
Apart from financials, it has also included UltraTech/JK Lakshmi Cement in its top picks in view of the likely demand kicker. It is also bullish on BPCL.
“BPCL (top pick) has the best mix of refining and marketing from amongst OMCs. A fear with OMCs is about their marketing margins getting hurt if the govt turns populist and suppresses retail/pump prices. But the NDA govt has a very strong chance in the general elections later this year, as per our analysis,” it noted.
Apart from these, it has 3 picks from the consumer space but none from FMCG.
“Several FMCG stocks outperformed in 2023, HUL being a notable exception. FMCG companies have been blowing hot and cold on rural recovery commentary. We would wait and besides, we are generally positive on markets and growth stocks, not the right setup for FMCG,” it noted.
But, IIFL pointed out that Trent has seen continuous EPS upgrades in 2023. Curiously, despite a 50 percent performance in the last 3 months, it is less rich compared to Nifty now, as EPS upgrades have been 32 percent. IIFL believes this will continue as the company is delivering positive surprises in value fashion (Zudio) where competition is not doing too well, holding its own in higher-priced fashion. It thinks Trent’s rich valuations will not stand in the way of outperformance in 2024.
Another ‘buy’ for IIFL is Nykaa, which has beaten off doubts on Tata and Reliance invading its BPC turn, and has curbed its losses on fashion, and is one of the internet stocks that has significantly underperformed in 2023. It expects the internet pack to record another good year, this time with Nykaa also perched on the wagon.
However, it is ‘underweight’ on IT (especially largecaps). The call is based on the expectation of further deterioration in the US growth numbers from the monetary tightening lag effect, invasion of turf by Global Capability Centres (GCCs), and productivity gains from AI (Artificial Intelligence).
Tech Mahindra is its top ‘sell’ in this space. Tech M is now more expensive than Infy/Wipro/HCL Tech, and seeing one of the biggest EPS downgrades in its universe, and IIFL expects its recent underperformance to continue through 2024.
Meanwhile, Info Edge is another internet stock that underperformed (wrt Nifty Midcap index and internet stocks) despite having in its core (Naukri) a substantial non-IT component, it noted. It is one of IIFL’s top SMID picks for 2024.
“Delhivery, a logistics company, which is positioned as an internet stock and was one of our best ‘sell’ calls of 2023, and we repeat it for 2024,” further informed the brokerage.
Apart from IT, it is also ‘underweight’ on auto.
“In 2023, all Auto OEM stocks outperformed Nifty, despite the volume growth across auto segments coming off substantially vs FY23. FY24 will see an average volume growth of 6%. In past cycles, deceleration in volume growth had been accompanied by de-rating in valuations. Commodities have already softened quite a bit, but at current levels, 15% EBITDA growth is possible for FY25 as EBITDA growth is good in Indian commodity-consuming sectors during soft commodity price periods. Volume numbers are likely to disappoint (Maruti’s order book has shrunk significantly in the last few months),” explained the brokerage.
It likes Motherson for its likely margin uplift, EPS accretive acquisitions showing up in numbers, and attractive valuations. Bajaj Auto and Balkrishna Industries (soft crude is a major support) would be honourable mentions as their exports can see revival from deep troughs. TVS (a top ‘sell’) has not only outperformed, but 75% of its performance is from PE-rerating, unusual even in this market, it added.
Here’s a look at its top ‘buy’ and ‘sell’ calls for 2024
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Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decision.
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Published: 09 Jan 2024, 04:35 PM IST
