Morgan Stanley’s 12 Stock Picks For 2021

Growth is set to surprise on the upside because of improved policy traction, global recovery, accommodative monetary stance, strong farm output and robust corporate activity along with a peak in Covid-19 cases, Morgan Stanley said as it listed its most favoured investment themes in India for 2021.“Accelerating growth means that the concentration of market cap and profits may have peaked and return correlations across stocks with the equity market have risen to levels from where they tend to mean revert,” Ridham Desai and Nayant Parekh, equity strategists, and Sheela Rathi, equity analyst at Morgan Stanley, said in a note.Small and mid caps, the research firm said, could beat large caps and portfolio returns will more likely be driven by bottom-up stock-picking than top-down macro due to peaking concentration and intra-stock correlations. “Peaking correlations also imply that sector positions should narrow,” Morgan Stanley said, adding it’s overweight on consumer discretionary, industrials, financials, utilities and underweight on technology, healthcare and energy.Bharat Electronics Ltd., Britannia Industries Ltd., ICICI Prudential Life, IndusInd Bank, Just Dial Ltd., Mahindra & Mahindra Financial Services Ltd., PNB Housing Finance Ltd. and Tata Steel Ltd. entered into Morgan Stanley’s focus list for 2021. But Motherson Sumi Systems Ltd., ITC Ltd., HDFC Ltd., Sun Pharmaceutical Industries Ltd., Bajaj Finance Ltd., Havells India Ltd., State Bank of India and Interglobe Aviation Ltd. were excluded..Here are Morgan Stanley’s top 12 stock picks for 2021....Bajaj AutoRating: OverweightPrice target: Rs 3,900 apieceRationale:Well placed to benefit from urban demand rebound with its premium product mix and three-wheelers.High exposure towards fast-growing export markets implies a higher terminal growth rate.CNG network expansion to offset EV disruption risks.Expects Bajaj to become more aggressive on electric two-wheelers from 2022.High margin business recovery should drive RoE improvement.Valuations at a steep discount to the Nifty.Bharat ElectronicsRating: OverweightPrice Target: Rs 143Rationale:Has several competitive advantages.Diversified and large order book lends strong earnings visibility.Plans to reduce imports and proposed regulatory changes also beneficial.Best way to play India’s defence indigenisation story.Bharti AirtelRating: OverweightPrice Target: Rs 680 apieceRationale:Strong network, relatively stronger balance sheet and growing focus on digital products and platforms.Capturing a strong share of 4G additions.Free cash flow profile improving.Management making serious moves on the digital side.FY21 capex to be lower than that in FY20.BritanniaRating: OverweightPrice Target: Rs 4,287 apieceRationale:Strong tailwinds to food consumption habits.Will placed to capitalise on opportunities.Building larger distribution in rural India, increasing direct distribution, premiumising the portfolio will support growth.Expects to maintain leadership and grow biscuit portfolio.Becoming a total foods company will drive growth in the medium term.Valuations look favourable.DLFRating: OverweightPrice Target: Rs 299 apieceRationale:Improving the physical market and demand consolidation should benefit DLF.Quarterly pre-sales may double to Rs 1,000 crore in FY22.Large rental portfolio should grow 40-50% over the next two-three years.Demand drivers seem positive supported by steady commercial space and better affordability.Valuations look reasonable.ICICI PrudentialRating: OverweightPrice target: Rs 620 apieceRationale:Huge structural opportunity with demand being of essential nature.Leadership position in the individual protection business.Diversified distribution relative to peers including a strong bank channel.Expects strong pick-up in top-line and bottom-line growth in Q4 FY21 and FY22.Expects annual premium equivalent and value of new business growth to bounce back to more than 20%, which should see strong investor interest.Attractive valuations and underperformance versus markets drive overweight rating.IndusInd BankRating: OverweightPrice target: Rs 1,075Rationale:Well-positioned over medium-term given strong capital base, strong growth potential, high profitability and increasing share of retail.The balance sheet has improved meaningfully over the last few quarters.Underlying profitability is strong.Valuations in the current backdrop look attractive.“In our bull case, we expect returns to be about 100% over the next 12-15 months.”Just DialRating: OverweightPrice target: Rs 760 apieceRationale:Core business recovering; emerging business-to-business opportunity.Local search business could continue to recover over the next few quarters.Focus on B2B can drive up average realisations per campaign.Expects B2B revenue growth rates to pick up over the next few years.Larsen & ToubroRating: OverweightPrice Target: Rs 1,512Rationale:Increased visibility of capex bouncing back in FY22.Infrastructure demand remains strong.Some green shoots on private capex and defence.Stronger execution and new orders, the commencement of state orders, lower losses in Hyderabad Metro, improvement in ESG ratings.Mahindra & Mahindra Financial ServicesRating: OverweightPrice Target: Rs 215Rationale:One of the better-positioned NBFCs as it screens well on parentage, liquidity and capital.A beneficiary of a resilient rural economy.Expect normalisation of credit costs and decline in book funding costs to drive strong earnings and RoE recovery in FY22.“We expect RoE to be about 13% in FY22 and 17% in FY23, much higher than the cost of equity of 11.5%.”Valuations in current context look attractive.PNB Housing FinanceRating: OverweightPrice Target: Rs 495Rationale:Can give strong returns over the next 12 months.Parentage ensures access to liquidity and continued balance sheet strengthening.Expects normalisations in credit costs from FY22.Recent CEO change and ongoing optimism on a multi-year real estate cycle could pose upside risks.Valuations look attractive in the context of about 11% RoE in FY22 and 20%+ tier-I ratio following equity issuance.Tata SteelRating: OverweightPrice Target: Rs 840Rationale:Favourable macros, tight demand-supply dynamics and focus on deleveraging.Higher international steel prices to support strong spreads in India.Prices of iron ore are likely to stay high in the near term.Net debt levels will come off over the next five-six quarters in absolute terms.Expects de-leveraging to be sharper in the current cycle.Current spreads not yet in the price.

Morgan Stanley’s 12 Stock Picks For 2021

Small and mid caps can beat large caps and portfolio returns will more likely be driven by bottom-up stock-picking: Morgan Stanley

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