Play safe, but play to win: From ITC to L&T, best blue-chips for 2023

While leading Indian indices ended the year trumping most markets on returns, global factors could make the near-term journey into 2023 bumpy. Besides geopolitical anxiety, worries of recession, sustained inflation, and Covid making a comeback are risks investors are up against. Keep your portfolio safe for 2023 with these 10 blue-chip bargains that balance the need for returns without sacrificing safety. Ram Prasad Sahu gives a bird's-eye view.

SBI Cards & Payment Services

 

• The second-largest credit card issuer in the country, SBI Card, has a long runway for growth, given huge underpenetration and doubling of credit card base every four to five years

• Nomura Research prefers SBI Card, given its reduced structural risks. This is largely on the negligible risk of a sharp cut in merchant discount rate cut, lower competition from ‘buy now pay later’ players, and challenger cards being clamped down by the Reserve Bank of India
• Notwithstanding the likely continued moderation in interchange fees, Emkay Research expects the return on equity (RoE) to stay resilient at 25-26 per cent, based on over 5 per cent return on assets and operating leverage
• Although the business has a high RoE, higher fee income proportion, and larger penetration opportunity, it trades at a discount to Bajaj Finance, point out analysts at Nomura Research

Maruti Suzuki India

 

• The carmaker is a dominant player in the passenger car market with about 44 per cent share
• The company seeks to post double-digit growth for the third consecutive year and outperform the sector
• Launches, especially in the sport utility vehicle segment - growing faster than average - to aid Maruti Suzuki India’s (MSIL’s) growth and margins
• In addition to the economic rebound, launches, and cutback in semiconductor shortage, what could drive incremental growth are exports. Demand recovery for entry-level cars ought to help MSIL hit the 2.3-million-plus target for 2023-24
• Motilal Oswal Securities expects the company to gain further market share, led by an expected shift towards petrol and hybrid vehicles, resulting in 14 per cent volume growth annually between 2021-22 and 2024-25
• While the stock has declined from its 52-week high of Rs 9,769 in October, commodity prices are also lower on-year

ICICI Bank

 

• The second-largest private bank in the country is the top pick in the banking space of most brokerages
• Analysts have raised their earnings estimates after the July-September quarter results and expect the lender to deliver about 19 per cent annual growth in profit between 2021-22 and 2024-25
• With rising impetus for its bank technology initiatives, strong execution, and favourable macro tailwinds, ICICI Bank is set to sustain its best-in-class profitability, with digitally-led, market-share gains in all segments, observes Nuvama Research
• JM Financial, too, is positive about the bank’s outlook, given its highly-efficient liability franchise, robust capital ratios, strong provision coverage ratio, and steady asset quality, coupled with a strong return profile and superior digital prowess
• The lender’s subsidiaries in asset management, insurance (life and general), and broking are also expected to grow at a healthy pace, creating value for shareholders

ITC

 

• The second-largest listed fast-moving consumer goods (FMCG) company is a diversified conglomerate with a presence across cigarettes, consumer goods, hotels, agribusiness, paper and packaging, and information technology
• A key reason for the Street’s confidence in the stock is due to a stable tax regime on cigarettes, helping ITC take calibrated price hikes, counter illegal trade, and improve market position
• If this sustains, it should boost earnings visibility over the near to medium term
• In addition to fortifying its core portfolio, various businesses continue to address adjacent growth opportunities by leveraging the 25-plus powerful mother brands established over the years, says SMC Research
• Expectations of a demand uptick and margin gain in cigarettes, robust sales growth in FMCG, recovery in the hospitality segment, and better capital allocation keep analysts upbeat on ITC, whose stock valuations remain the cheapest in the sector

State Bank of India

 

• India’s largest bank, through its subsidiaries and joint ventures, has a presence across categories and segments of the financial sector
• It is one of the few large-cap stocks available at a reasonable valuation with high growth visibility
• Motilal Oswal Securities expects its net profit to grow 32 per cent annually between 2021-22 and 2023-24, led by strong retail loans and a pick-up in corporate loans
• Revival in consumer demand and rise in private capital expenditure, followed by a rise in government spending, may be triggers for growth. State Bank of India, being an industry leader, could be the best play on this theme, observe analysts
• A high mix of floating loans, which will benefit from loan repricing, will continue to support net interest income and overall earnings
• The loan book quality seems healthier as a majority of the back book clean-up has been done and the pace of (loan) recoveries stepped up, says HDFC Securities

Titan Company

 

• The biggest listed jewellery retailer is looking at growing its jewellery business revenue by 250 per cent by 2026-27, implying an annual revenue growth of 20 per cent
• Given a low single-digit market share, the company has enough room to expand and grow its share in the Rs 4-trillion market, dominated largely by unorganised players
• Robust balance sheet and asset-light distribution model have enabled Titan Company to outpace peers in terms of store addition (to add 35-plus Tanishq stores in 2022-23), says ICICI Securities
• Focus on weddings is driving growth for the company, even as its market share is moving up appreciably
• Higher proportion of value-added (studded) jewellery should result in improved margins
• Other businesses, such as watches and wearables and eyewear, continue to grow. Motilal Oswal Securities, in a recent report, said wearables will be a critical driver of the targeted 20 per cent compound annual growth rate in the watches and wearables division

Infosys

 

• The second-largest listed information technology (IT) services firm is among the key gainers from IT spending by global companies, given its wherewithal in Cloud and digital transformation
• Continued participation in deal wins and net new deals up 47 per cent on-year in the first half of 2022-23 give the company an edge on growth outperformance, compared to its large-cap peer set, believes Nomura Research
• Supply-side issues, including attrition, are showing signs of peaking
• Utilisation levels are also edging up, which, along with lower contract costs, should help lift margins in 2023-24
• The company will continue to sustain its premium on the price-to-earnings growth metric vis-à-vis peers, given flight to safety in recession, says Jefferies Research
• With the stock down 20 per cent in Calendar 2022, a huge area of concern on growth may be priced in

Reliance Industries

 

• Most brokerages expect 2023-24 to be a strong year for the country’s largest company by market capitalisation, with 19 per cent growth in operating profit and over 20 per cent uptick in net profit
• JPMorgan expects earnings to improve as petrochemical, exploration and production, and retail businesses pick up further, even as refining remains stable and Reliance Jio benefits from tariff hikes
• Incremental value accretion from the digital ecosystem - that will be captured at the Jio Platforms level - and steady free-cash-flow generation in the retail segment will enable the company maintain debt at lower levels and improve its ability to invest in future inorganic opportunities, observes ICICI Securities
• The immediate trigger, according to analysts, could come from Jio Financial Services as the listing of its key consumer segments of retail and telecommunication may take some time
• Brokerages are also upbeat on Reliance Industries’ initiatives in green energy, which will add value in the medium run

Hindustan Unilever

 

• The country’s largest listed consumer company is a play on recovery of the rural market. Falling inflation, higher farm income, and crop realisations are key triggers
• Product launches, a wide distribution network, its presence across multiple categories, and good execution should enhance market share as demand across rural/urban markets bounce back
• Stronger demand momentum in discretionary categories is expected to boost revenue
• Ongoing premiumisation not only adds to revenue, given higher growth rates for this segment than the company average, but also enhances profitability due to a richer mix
• Gross margins are expected to improve, given raw material prices have come off their peaks
• Further, Hindustan Unilever has pricing power that could offset any near-term inflation worries
• Segments like nutrition will not only aid the company’s top line but profitability as well, given the high margins

Larsen & Toubro
 

 

• India’s largest engineering and construction company is expected to be a key beneficiary of the capital expenditure upcycle, led by a rise in investment from the private and public sectors, says HDFC Securities
• For the second quarter (Q2) of 2022-23 (FY23), Larsen & Toubro (L&T) registered strong order inflows of Rs 51,914 crore at the group level, up 23 per cent on-year. International orders for Q2FY23 were at Rs 17,341 crore, comprising 33 per cent of the total order inflow

L&T expects the bid-to-award ratio to further improve in the second half of FY23 to over 55 per cent, driving order inflows

The easing of commodity prices is likely to be beneficial due to fixed price exposure of its order book, says Nomura Research

The company is looking to divest its investments in non-core areas, which include road concessions and power, and minimise its stake in Hyderabad Metro

The information technology business ought to continue to add to its financials and valuations