Here’s why Macquarie is overweight on India; top stock picks with as much as 95% upside

Global investment bank Macquarie’s Asia equity strategist Viktor Shvets is overweight on India by 60 basis points, down from 130 basis points in December of 2019. Despite trimming the weight assigned to India, Viktor Shvets has not moved lower into the underweight category even though he terms India as the most expensive emerging market with one of the deepest likely downgrade cycles. For still remaining overweight on India, despite the sharp surge in equities since March, Viktor Shvets cites three reasons in a recent report.

Lack of alternatives has been cited as the primary reason why Macquarie is overweight on India. “We agree with Google, Facebook, or Amazon that India still represents the best very long-term opportunity in EM outside China. Also, unlike China, India’s business and political climate, while complex, has the backbone of common law, rules and dispersion of power,” the report said. Apart from this, India’s vast domestic market is also a reason for Macquarie’s approach in the times of de-globalisation. Lastly, Viktor Shvets said that India’s role in EMs is likely to rise as more Chinese names are blacklisted by ESG criteria, societal values and trustees of investment funds.

Stock picks with 24%-95% upside potential:

Infosys

Target price: Rs 1,410

“We expect Infosys to post the strongest US$ revenue growth in the large cap Indian IT services space over FY21-23E aided by strong deal wins. Recent large deal wins like the Vanguard deal should help it to accelerate revenue growth rate to 12.5-13.6% in US$ terms in FY22-23E, in our view,” Macquarie said. The global investment bank expects margins to improve for Infosys with bulk of investment done and revenue growth picking up. The target price would result in a 24% upside for the stock.

Bharti Airtel

Target price: Rs 690

Bharti Airtel’s share price has slipped owing to technical reasons such as its decrease in MSCI weightage and concerns surrounding telecom sector’s ability to increase ARPU. “However the big picture for us remains one of strong incremental earnings momentum and we consider 7x FY22 EV-EBITDA attractive,” the report said. Macquarie expects ARPU to further increase to Rs 190 by financial year 2023 on price discipline and migration to larger data packages. For Bharti Airtel’s Africa business it projects a ~6% CAGR FY20-23 in both subscribers and ARPU. The target price implies an upside of 39.7%.

HDFC Life

Target price: Rs 849

HDFC Life has a balanced product mix and the firm works constantly on product innovation. “We expect HDFC life to deliver 23% / 29% APE / VNB (value of new business) CAGR over FY20-23E – highest amongst our coverage universe,” they said. Macquarie expects HDFC Life to deliver a 20% profit after tax CAGR over the financial year 2020-2023. The target price implies a 32% upside.

Bharat Petroleum

Target price: Rs 510

The report said that Macquarie is a buyer of BPCL into the upcoming privatization by the government, although it fully acknowledges timing uncertainties around the same. Their target price applies 6x EV-EBITDA for refining at an average ~$6/bbl GRM over the next five years, 8x EV-EBITDA for marketing and pipelines on 3-4% pa steady-state volume growth and margins, 10% control premium. It also implies an Enterprise Value of $19 billion, 12x PE, 9x EV-EBITDA, 1.9x P/BV on financial year 2023. In a bull case scenario, assuming $7/bbl refining margin and 6x EV-EBITDA for refining, 10x EV-EBITDA for marketing, 8x EV-EBITDA for pipelines the target price for BPCL would be Rs 690.

Hindustan Petroleum Corporation

Target price: Rs 400

HPCL has the highest upside potential among these stock picks. The target price would mean an upside potential of nearly 95%. Macquarie expects core EPS to double over the next two year, aided by a 115% expansion in refining over the next four years, an improvement in product mix at the expanded 15 mtpa Vizag refinery, benchmark refining margins going from awful to less bad as global demand gradually improves, and possible upside from higher-than-modelled marketing margins related to BSVI and higher exports of lubricants.  

Among other stocks that Macquarie has in its India focus ideas include, HCL Technologies, Larsen & Toubro, and Dr Reddy’s.