12 stocks that are BofA Securities’ top buys from 7 sectors. Do you own them?
While BofA remained overweight on select domestic cyclicals such as industrials, financials and automobile stocks, it has marginally trimmed its ‘overweight’ stance on financials, given that while sector earnings visibility remains strong, bankex generally exhibits a strong correlation with the US bank index performance and hence could see some headwinds from negative sentiments on fears of a US recession.
“We see limited risks for the capex upcycle thesis on strong government intentions and a limited historical inverse correlation with rates cycle,” it said.
Here are top picks from the key sectors BofA Securities is bullish on:
Banks
HDFC Bank: At current valuations, the market appears to be pricing in most potential risks from the impending merger, leaving little room for any positive surprises on execution. BofA believes that the worries about the bank’s ROE-growth mix deteriorating are overblown. At the current price, given its strong growth-return mix, the risk-reward looks attractive in both absolute and relative terms.
ICICI Bank: Risk-reward is very attractive at the current multiple. The bank has delivered 15.5 RoE in the March quarter even with high capital levels and 17 per cent looks achievable in the next 2-3 years. While the consistency of earnings delivery is the key to re-rating, BofA believes that the recent correction has made valuations attractive.
Healthcare
Sun Pharma: Sun’s transition to specialty in the US is gaining pace and provides long-term visibility on earnings with limited dependence on US generic launches. While there was disappointment in specialty in the recent quarter, this was due to promotion with continued strong prescription trends for Ilumya and Winlevi that should help drive specialty growth in FY23 and FY24. In addition, there is the option to augment its specialty portfolio supported by its strong balance sheet.
Gland
Pharma: While the recent weakness in margin due to supply chain disruption has led to a correction in the stock, BofA believes the medium-term growth trajectory from its generic injectable CDMO focus should support 15 per cent plus margins at historical levels. Increasing competition in injectables should benefit Gland to access a newer customer base with limited dependence on new launches. Lastly, biosimilar CMO remains an upside that should help improve investor confidence on growth visibility beyond injectables.
Biocon: It is the only stock in India for biosimilars with the recent corporate action transforming the company from a development and manufacturing partner to an end-to-end global biosimilar producer. BofA believes stock performance will be supported by positive earnings momentum from its insulin glargine ramp-up, and earnings catalysts in the next 6 months with approval of Aspart, Beva and Aflibercept and lastly, value unlocking opportunity in the biosim sub in 2HFY24.
NBFCs
Bajaj Finance: Improving collection efficiency and declining bounce rates (better vs pre-COVID) support BofA’s view that the worst of asset quality stress is behind for
. While credit costs should normalize from elevated levels, higher-than-expected recoveries can drive earnings surprise, it said. Digital transformation and “Omnipresence strategy” can support even higher growth rates on a sustainable basis from FY24 onwards with improved sales velocity.
Life: The company had a strong growth trajectory and market share gains in FY22. Its growth outlook remains positive supported by cross-selling to SBI Bank (parent) customers. There is improving visibility on margin expansion with a rising share of higher-margin non-par savings and protection in H2FY23, BofA said.
Automobile
M&M: M&M has been one of BofA’s key picks this year. The thesis here is that UV business earnings will see a meaningful scale up on the back of solid new launches and the business is still undervalued with PE at 10-11 times vs peers at 20-25 times. The tractor business has bottomed out given the rural uptick and there is a lot of emphasis on unlocking value from the unlisted subsidiaries. Key catalysts for stock are new launch of Scorpio N towards end of June and an electric strategy unveil in mid-August.
Eicher: Easing of supply chain and opening of new model cycle from Q2 onward should drive strong volume growth. Execution on exports and margin has been commendable. Stock is trading at 20 times core earnings, BofA said.
IT
HCL Tech: The implied FY23 revenue guidance of 13-15 per cent for the services business suggests
‘s reduced growth delta with peers in comparison with prior years. BofA finds HCL Tech’s valuation relatively lower compared with the peer set and free cash yield attractive. The recent investor day saw the management talking about margins in detail in comparison to prior years, which could help going ahead. Levers like expanding to cheaper locations, and widening the pyramid were discussed. “Any surprise in coming quarters could help given already low investor expectations, partially on account of products & platforms business,” BofA said.
Real Estate
Lodha: There is fair amount of visibility towards the continuation of improvement in the balance sheet (debt reduction). Strong guidance of 25 per cent YoY growth in bookings and the current pipeline and business development activities (JDAs) suggest bookings may potentially remain strong even in FY24. After a recent correction of 30 per cent YTD, the scrip is currently trading much below NAV (30 per cent less than our NAV), hence comforting on valuations.
Cement
Ultratech Cement: The company’s 14 per cent capacity expansion by year-end is timely ahead of potential demand increase ahead of CY24 elections. Pan-India company and market leader by a distance, diversification prevents demand shocks on the overall portfolio. Recent examples of such shocks were the sand mining ban in the East, strike in Telangana, etc. Share of green power in the total energy mix to increase from 18 per cent currently to 34 per cent in FY24, to help reduce the profitability per ton gap with cost leader Shree. The uptick in rural demand is likely to help in the near term given that 40 per cent of overall demand comes from rural, BofA said.
(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)
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