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Keep your eyes and ears open.
Chances are, you might just spot some big winners on Dalal Street.
And take this, they may be even from the lot that has trailed benchmark indices so far!
Look at Morgan Stanley, which recently added three underperformers from different sectors to its portfolio.
The global brokerage has suddenly taken a fancy to India's biggest lender State Bank of India (SBI), which just about doubled investor money in the past 10 years even as the benchmark Sensex rallied over 180 per cent during the same period.
Leading super-specialty hospital Apollo Hospitals and real estate developer Prestige Estates are the two other favourites of Morgan Stanley after the latest correction.
For the short-list, the third-largest wealth management firm in the world in terms of total client assets focussed on stocks that have underperformed the market over the past 12 months whose business fundamentals have been weak with slow earnings growth and RoEs below the standard deviation from the average.
Prospects of these companies are now looking robust in terms of RoE and earnings growth, Morgan Stanley said.
“We choose stocks rated ‘overweight’ by Morgan Stanley and where our analysts expect a positive change in RoE (return on equity), along with EPS growth in excess of 10 per cent over the next two years,” Morgan Stanley said in a report.
SBI stock has rallied 6 per cent in the last 12 months till September 14 whereas the benchmark BSE Sensex has advanced 18 per cent.
Morgan Stanley believes that the government’s recapitalisation move enabled the state-owned banks (SOE) to recognise problematic corporate loans as non-performing loans (NPLs) and increase provisioning.
“We expect an improvement in overall provisioning and NPL slippages to drop sharply during the second half of FY19 (H2FY19).
However, loan loss charges are likely to remain high as banks take coverage towards 60 per cent with Ind-AS rolling in from April 1, 2019 (our base case).
Core pre-provision operating profit (PPOP) growth should start picking up from H2FY19 as NPL formation slows and higher rates help margins expand.
Given its strong liability franchise and technology, SBI is better positioned relative to other SOE banks to sustain growth and ROE,” Morgan Stanley added.
Japanese brokerage Nomura in August gave a ‘buy’ rating to SBI with a target price of Rs 360.
“Valuations at 0.9 times are not undemanding.
We maintain a buy rating as the corporate cycle and core PPOP improve,” said Nomura.
The state-owned lender suffered a major loss of Rs 4,876 crore for the first quarter to June, caused by higher provisioning on account of accumulated non-performing assets (NPAs), or bad loans.
In a stock exchange filing, SBI said it earned Rs 2,005.5 crore net profit for the same period of last financial year.
Shares of Prestige Estates and Apollo Hospital have climbed 9 per cent and 5 per cent, respectively, during the period.
Prestige Estates has a balanced portfolio of developmental and rental projects, both of which have good scale-up potential.
Presence in healthy South Indian cities (Bengaluru, Chennai and Hyderabad), will be complemented by diversification to NCR and MMR markets.
“Valuations appear reasonable at 51 per cent discount to our March 2019 NAV,” Morgan Stanley added.
The company is also looking to acquire malls across major cities to expand its rental income base.
In the case of Apollo Hospitals, Morgan Staley believes that valuations seem inexpensive at 15x F20 EV/Ebitda.
Operational improvement in the ensuing quarters would be driven by all the three revenue segments, including hospitals, steady growth in standalone pharmacies and narrowing of AHLL retail losses, for the target to break even in the first half of 2020.
Apollo Hospitals is also one of the top picks of IDFC Securities.
In a report in August, the brokerage firm maintained ‘Outperformer’ rating on Apollo with a target price of Rs 1,483.
The domestic brokerage firm further said a leadership position, national footprint and multi-pronged healthcare delivery model make Apollo one of the stronger EM healthcare models.
“Post a prolonged weak earnings phase emanating from an aggressive expansion plan, earnings recovery is visible from H2 FY18 onwards, driven by improvement in mature hospital profitability.
The new hospital cluster has begun to contribute positively, led by improvement in Navi Mumbai unit.
While the ASAP business will sustain growth momentum, reduction in operating losses at the retail health platform too should aid growth in consolidated profitability,” IDFC Securities said in a report.
Morgan Stanley has upped its target price for the Sensex to 42,000 for September 2019 from 36,000 in June.
Asian Paints, ICICI Bank, ITC, MM Financial and UltraTech Cement are other underperformers that made their way to the Morgan Stanley list.
Motilal Oswal Financial Services has ‘Buy’ rating on ICICI Bank with a target price of Rs 355 while it has ‘Neutral’ call on Asian Paints with a target of Rs 1,405.
Brokerage firm JM Financial is positive on MM Financial with a target price of Rs 650.
“We expect earnings CAGR of 53 per cent over FY18-20E with RoA and RoE expanding to 2.9 per cent and 19 per cent, respectively, by FY20E.
