Even as we come to the end of 2017 and investors may be on the lookout for top wealth creation opportunity in 2018 and beyond, Credit Suisse is betting big on two blue chip stocks in the upcoming year.
Even as we come to the end of 2017 and investors may be on the lookout for top wealth creation opportunity in 2018 and beyond, Credit Suisse is betting big on two blue chip stocks in the upcoming year. The global brokerage firm is bullish on the shares of SBI and ONGC. In its latest report titled- “India Market Strategy,” Credit Suisse says that while P/E for the Indian market is high, on a relative basis, it is not expensive. “In particular, the 2QFY18 earnings season turned out to be one of the best in three years and saw no earnings cuts. At this stage, it would be unwise to extrapolate, as it was aided by the earliest festival season in nearly a decade and post GST restocking. Furthermore, significant upgrades to energy and metals earnings offset cuts elsewhere,” the firm observed in its report.
Sharing its outlook for the markets and top bets, Credit Suisse says, “We are more comfortable owning stocks that are likely to benefit from steady global growth, and in particular beneficiaries of the withdrawal of China from export markets in polluting industries. We are therefore overweight energy and metals. Together with the likely write-back of provisions in steel NPAs, we also believe the recap should benefit the stronger PSU banks, and help drive a re-rating, even if only for 2-3 years.” We take a look at the global firm’s top two bets.
State bank of India has seen muted loan growth in the year and the stressed assets have also been elevated. However, Credit Suisse sees a pick-up in loan growth in 2018. “The bank has accelerated its provisioning on stressed assets, utilising its gains from the sale of the life insurance business to increase its stressed asset cover to ~34%. We expect SBI to be a significant beneficiary of the announced PSU bank recapitalisation. With the recent merger with its associate banks, we see minimal risk of SBI being asked to merge with the smaller, weaker PSU banks. As credit costs normalise in FY20E and NIMs improve, we expect RoEs to improve to >12%. With the stock trading at ~1x FY19 book (building in dilution and additional provisions), it remains attractive, especially compared to other corporate lenders (Axis),” the firm noted in its report. State Bank of India shares have risen by more than 27% in the year so far. Th shares closed at Rs 317.35 on NSE today. Credit Suisse has a target price of Rs 381 on the shares, implying an upside of more than 20% from the current market prices.
Credit Suisse is also bullish on the prospects of state-run oil and gas major ONGC Ltd on rising global prices and also improvement in capex efficiency among other factors. “The government has taken a multi-pronged approach to cutting subsidies on fuels: (1) regular monthly or fortnightly price increases (except during state elections); (2) direct transfer of LPG subsidy to lower leakage; (3) cuts in kerosene allocation to states,” Credit Suisse said.
“Additionally, ONGC has also shown a sharp operational improvement in the past year, with: (1) positive volume growth for the first time in a decade – with growth to continue in FY18/19; (2) improvement in capex efficiency, and disproportionately higher share of development drilling; (3) cut in rig-idling times. We believe both subsidy action and operational improvement remains under-appreciated by the market; at US$60/bbl oil prices, subsidy could fall to zero by end-FY20, which can drive a re-rating of the stock. Earnings should grow at 12% CAGR over FY17-20, helped by higher oil and gas prices. We see oil around the US$60/bbl mark as a sweet spot for the stock,” the firm observed in its report. ONGC shares closed at Rs 187.9 on NSE today. Credit Suisse has a target price of Rs 220 on the shares, implying an upside of more than 17% from the current market prices.