Jefferies has identified 21 stocks as its top picks for February in a list dominated by financial bets.
Top financial stocks picked by the brokerage include ICICI Bank Ltd., State Bank of India, IndusInd Bank Ltd., HDFC Life Insurance Co., Bajaj Finance Ltd., and Cholamandalam Finance Ltd., according to its note.
Other sectors featuring on the list include automotive, metal, capital goods and logistics, real estate, and more. Its top picks from the automotive sector comprise Tata Motors Ltd., Maruti Suzuki Ltd., and TVS Motor Co.
Other top bets are Tata Steel Ltd., Larsen and Toubro Ltd., Thermax Ltd., Macrotech Developers Ltd., Godrej Properties Ltd., Godrej Consumer Products Ltd., Sun Pharmaceutical Industries Ltd., Global Health Ltd., Indian Hotels Co., UltraTech Cement Ltd., Reliance Industries Ltd., and Polycab India Ltd.
Here's the full list of Jefferies' top picks for February:
Jefferies' View On Financials
ICICI Bank
Top financial pick as bank offers the best risk-reward across peers with superior growth, improved asset quality, and higher return on equity.
Bank is poised to leverage the growth pickup and gain market share in times of tighter liquidity and higher rates.
Strong digital capabilities enable the bank to ramp up unsecured lending business for retail loans as well as SME lending business.
State Bank of India
Well positioned to deliver healthy growth in earnings with an uptick in the top line and low credit costs.
The valuations look quite attractive, as the bank is confident of sustaining a return on assets of 1%.
With a strong deposit franchise that keeps its funding costs low and a high share in retail and corporate lending, it looks well-placed to deliver a 14% compound annual growth rate in loans over FY22–25.
IndusInd Bank
Poised to deliver a turnaround in return on assets.
Brokerage sees potential to ramp up lending in segments like merchant, MFI, and non-CV auto loans. These will help defend margins as well as lower credit costs.
Asset quality pressures are behind, as the bank has recognised and provided for most of the stressed books.
HDFC Life Insurance
The merger with Exide Life had diluted the margin profile, but the management has been able to achieve margin neutrality ahead of expectations.
Over the past 12-18 months, the company observed a slower rise in premium after the share-supply from Standard Life and Exide Life acquisition.
Expect HDFC Life to deliver a sector-leading 21% compound annual growth rate in annual premium equivalent and 25% in value of new business over FY23-25.
Bajaj Finance
Well positioned to deliver a healthy growth of 25% compound annual growth rate for the assets under management as it leverages on expansion into new markets and addition of new products.
In the next three to five years, it plans to enter new segments like CV/ CE financing, car loans (used and new), and micro-lending, among others, to capture the gaps in its existing portfolio and support growth over the medium term.
As per the brokerage, the potential opening-up of credit card business will open a large profit-pool opportunity and could account for 5-10% of profits over 2-3 years.
Cholamandalam Finance
Assets under management should grow at a 23% compound annual growth rate over FY22–25, led by strong growth in auto financing and growth in its non auto segment.
New businesses are seeing strong traction and, if executed well, could further boost growth.
Expect the company to deliver 19% net interest income growth despite some pressure on net interest margins.
Jefferies' View On Automotive Stocks
Tata Motors
As per the brokerage, confluence of improved strategy and cyclical recovery is driving a big turnaround in Tata's India business performance.
Early leadership in India EVs, and JLR focus returning to higher margin Land Rover models is a positive for the company.
Indian truck and passenger vehicle demand is recovering from the worst downturn in decades, and the brokerage forecasts a 12–13% compound annual growth rate in FY23–25E.
Tata has made a strong comeback in Indian passenger vehicles, with market share rising from 5% in FY20 to 14% in the first nine months of the current fiscal. This was driven by a strong SUV focus, improved products, and better brand positioning.
Tata has taken an early lead in electrification, with EVs now contributing around 10% of its India passenger vehicle volumes as compared to nearly 1% for the rest of the industry.
Tata intends to expand its electric passenger vehicle portfolio from three models at present to 10 by FY26. It is also expanding its EV availability from about 85 to around 165 cities as it expects the new attractively priced small car Tiago EV to see good acceptance in tier-2 and tier-3 cities.
Maruti Suzuki
The last two fiscals were among the toughest for Maruti, as the combined impact of a demand slowdown, chip shortages, a weak SUV presence, and a sharp metal price rally pulled down earnings per share by 50% over three years.
The demand, product, and margin cycles are now aligning favorably, which could almost quadruple the earnings per share over FY22–25E.
The Indian passenger vehicle industry is already witnessing strong demand, and the brokerage believes the replacement cycle along with a reverse shift from shared to personal mobility will drive an elongated up-cycle.
As per media reports, Maruti had an order book of 4,05,000 units at the end of January, which provides nearly 2.7 months of volume visibility.
Maruti's market share has slipped from 51% in FY20 to 41% in the first nine months of the current fiscal, mainly led by a weaker SUV presence, where it has just 18% market share as compared to 66% in cars.
Launch of mid-sized SUV Grand Vitara in 2022 along with two new SUVs and a long-range EV concept in Jan'23, in brokerage's view, denotes signs of a strategic shift at Maruti, complementing historical focus on affordability with an intention to address the rising aspirations of consumers.
We factor in Maruti's market share recovering slightly to 43% in FY24–25E. On a 3-5-year view, Maruti's electrification strategy would be key for its franchise.
TVS Motor
Two-wheelers have lagged in recovery, but the abnormal 35% fall over FY19-22 has created a very favourable base for the segment that is the core of Indian personal mobility.
Two-wheelers are expected to rise 20% in FY23E, followed by an 18% compound annual growth rate in FY23E–25E.
TVS has been improving its franchise across multiple segments with attractive product propositions. Its market share from FY17 to Feb. 28, 2023, is up because of the following factors: 15% to 24% in scooters; 11% to 14% in 125cc+ motorcycles; 16% to 25% in two-wheeler exports; and 21% to 42% in three-wheeler exports.
After a long period of subdued margins, TVS is narrowing the gap with peers. Its Ebitda margin has improved from average of just 6.4% in FY10-17 to 10% in the last six quarters.
Expect Ebitda margin to expand 11.5% in FY24–25E as Indian two-wheeler demand recovery and TVS' improving franchise drive better pricing power.
TVS has become more aggressive about EVs by making its E2W iQube more powerful and releasing new versions of it.Its electric two-wheeler registrations have risen from 6,000 units in the first quarter of the current fiscal to 29,000 in the third quarter.
TVS plans to launch multiple EVs across 2Ws and 3Ws over the next 12–18 months to further expand its portfolio.
Jefferies' View On Metals, Capital Goods And Logistics
Tata Steel
Steel price fell 40% from $860 in April 2022 to $515 in November 2022 but, since then it has recovered 24% to $640.
Indian HRC steel prices are up 9% to Rs 59,500 from its December 2022 bottom . It is currently inline with landed imports from China.
Expect Tata Steel's standalone Ebitda/tonne to improve to Rs 13,000 in the fourth quarter and further to Rs 14,700-15,600 in FY24-25E.
Brokerage likes Tata's improving asset footprint with Indian volumes rising from 33% in FY15 to 62% in FY22. Company's 5MTPA brownfield expansion should also start contributing to volumes by FY25.
Tata Steel Europe margins should improve sequentially as well as on better spreads, but it will likely remain in negative territory in the fourth quarter.
Expect Tata Steel's net debt to rise 32% annually in FY23E to Rs 6,740 crore, further the brokerage sees it falling to 26% cumulatively over FY23-25E to Rs 4,970 crore, which is 13% of the company's market cap.
Brokerage likes Tata Steel amid a potential cyclical recovery in China and improving margin profile of the India business.
Larsen And Toubro
According to the brokerage, Larsen And Toubro should benefit from execution and margin recovery as impact of supply disruptions and sharp commodity price rise ease.
The company is in a sweet spot as the Middle East and domestic businesses are doing well and there is an expectation of a higher order flow from the Middle East.
Brokerage believes that the peak of non-core investments in behind and L&T has the potential to surprise on execution and order flow expectations.
Thermax
Brand well placed for its larger agenda of being a leader in terms of clean water, clear air and clean energy in India.
Brokerage believes that the business model change points to a strong earnings recovery although thermal captive power is unlikely to grow and is being underappreciated by the market.
Thermal captive power projects account for just 10-15% of Thermax's revenues as compared to 50%+ in the earlier years. Above 70% of the orders are driven by green offerings.
Management focus is on leveraging its brand in green offerings, improving capital allocation, margin improvement and seeking new renewable energy (RE) growth avenues with global tie-ups.
Expect revenue to rise at 24% compound annual growth rate over FY22-25E, driven by a visible order book, and a product portfolio geared to benefit from industrial capex and ESG-linked spends.
Jefferies' View On Real Estate, Consumer, Energy Stocks
Macrotech Developers
Company is the largest listed developer by land bank and enjoys an almost even mix of premium and affordable housing segment; all of it based out of Mumbai.
Net debt has halved since listing on the back of fundraise via equity route and strong operational cashflows.
Management targets nearly 20% medium term pre-sales growth and has acquired projects on partnership model worth more than Rs 2,000 crore since its listing to deliver growth.
Lodha is also monetizing its largest 4,000 acre land bank. It has already monetized 300 acres and above through the development of digital infrastructure.
Godrej Properties
Among the top three residential developers by pre-sales and the only one with a diversified presence across four large tier-1 cities.
Company's target of Rs 1,000 pre-sales in the current fiscal is set be significantly exceeded.
Company has done well on securing new projects with Rs 2,750 worth of projects signed with nearly 90% of them on a buy-out route, instead of the partnership model that it favored earlier.
Company is staying ahead of the cycle in anticipation of rising land prices ahead. After the new acquisitions, the brokerage sees good visibility and expect the company to deliver on 20% medium term growth target.
Godrej Consumer Products
Faced several headwinds in the last 18 months, ranging from elevated input inflation, led by palm oil, slowdown in volume growth and a sharp decline in its Indonesia business.
Earnings were tepid in the first half of the fiscal, however the third-quarter saw a sequential recovery in both growth and margins.
Expect earnings growth to accelerate further in the upcoming quarter and FY24, led by a margin recovery across geographies.
Company is a good turnaround candidate as the new CEO, Sudhir Sitapati, is undertaking several structural initiatives, which should yield results over the medium term.
Reliance Industries
Current market price implies zero value to the e-commerce, green energy, FMCG, financial services and new oil-to-chemicals investments.
Expect possible upside to oil-to-chemicals earnings in FY24 if the Chinese demand recovers driving petrochemical margins to long term averages.
While there is a potential delay in tariff hike in the near-term, government's acquisition of equity in Vodafone-Idea improves the longer term tariff growth outlook.
Potential export duty withdrawal could remove a regulatory overhang as diesel margins have corrected.
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