Stocks for 2017

With so many uncertainties in the global and domestic economy, it is hard to identify stocks to invest for the full year. After all, there are a number of vagaries like the tone of the Union Budget, recovery in corporate earnings, the trade policy approach of Trump, economic pick-up in Europe and a revival in China. In the midst of all these uncertainties, we have identified 5 stocks that could give above average returns for the year 2017…

Infosys (CMP – Rs. 1000; Potential Upside 24.9%)

Despite a weaker guidance for the next year and concerns over tech spending expressed by Vishal Sikka, Infosys continues to be poised to grow to become a $20 billion company by 2020. The focus of the company in the last 3 years has been on adding high value clients, CEO level attention to key clients and a greater focus on new technology businesses. Despite its size, the company is likely to maintain an annual Dollar Revenue growth in the range of 9-10% in the coming years. At current valuations of 12-13 times forward earnings; we expect that the current pessimism could be a good time to accumulate Infosys from a long term standpoint.

Larsen & Toubro (CMP – Rs. 1478; Potential Upside 10.6%)

The Budget 2017 is likely to increase capital spending by 25-30% and that could be a good push for capital spending and revival of capital cycle in India. The recent IIP numbers for November 2016 also indicate that the IIP in terms of capital goods user industry is showing good traction. L&T is likely to maintain above 12% growth in its consolidated revenues and its order book position at 2.5 times annual sales is robust and promising. L&T still has 75% exposure to India, which makes it a true-blue domestic consumption play as against the likely vagaries of global markets in the next few years. The stock has been in a long term downtrend since 2012 and the revival in capital cycle and an infrastructure boost may be the triggers for the stock. With just 6% exposure to realty, the demonetization may not really be a major worry for L&T.

Lupin Ltd (CMP – Rs. 1458; Potential Upside 24.1%)

Indian pharma industry may have been under the scanner due to worries over Form 483 and the investigations of the US FDA. There are also worries over Trump’s promise to clamp down on generic pharma pricing. Notwithstanding all that, quality pharma is today available at historically low valuations. Lupin has maintained its CAGR growth at 20% over the last 5 years vis-à-vis the market average of 13%. In the world’s biggest pharma market, the US, Lupin already has a 5.3% share in prescriptions and has filed a total of 338 ANDAs of which 196 have already been approved. Lupin also has nearly 30 new product launches in the US in the year 2017. Lupin already has one of the largest Indian presences in Japan where drugs worth $16 billion are likely to go off-patent. The current price point surely provides an interesting entry level into the stock.

Dewan Housing (CMP – Rs. 322; Potential Upside 8.6%)

Dewan has been one of the fastest growing housing finance companies in India and has already emerged as the 3rd largest player in the private HFC space. Its AUM is expected to grow at a CAGR of 21% over the next 3 years while PAT is likely to grow at 23% over the same period. Dewan has a 72% exposure to individual home loan accounts which has resulted in its Gross NPAs being at a low of 1.17% and net NPAs at 0.87%. Since individual borrowers are very unlikely to default on home loan commitments, we do not see any likelihood of deterioration in asset quality. Its net interest margin (NIM) at 2.9% is among the best in class in the industry, which assures growth in profits and profitability. The stock quotes at single digit PE and is a good proxy to participate in the India consumption story.

Amara Raja Batteries (CMP – Rs. 854: Potential Upside 18.2%)

Although Amara Raja is the second largest battery manufacturer in India behind Exide, Amara Raja has been growing at a much faster clip compared to Exide. Amara Raja has been growing at 21% CAGR compared to Exide’s 7%. Amara Raja’s market share in batteries has improved from 25% in 2010 to 35% in 2016. Since Amara Raja caters to the original equipment manufacturer (OEM) and the replacement market, it gives them a wider marketplace to cater to. Amara Raja could be a good proxy to play the revival in automotive demand as a direct outcome of higher consumer spending.