BNP Paribas: Top BUYs and SELLs for 2011

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Top BUYs and SELLs for 2011: BNP Paribas
Our top BUYs are

• Axis Bank, 
• Infosys and 
• Ashok Leyland. 

We are fundamentally positive on the IT and autos sectors, and believe the earnings-upgrade cycle in these sectors has not ended yet. The valuations of Axis Bank, after the recent correction,
seem to be adequately factoring in the risk of higher NPLs. Moreover, a high-CASA
bank like Axis should outperform in a situation of tight liquidity.

Our top SELLs are

• ABB India, 
• Ambuja Cement and 
• Hindustan Unilever. 

All of them appear overvalued. We believe HUL could be a loser from soft commodity inflation as
well.

Sector and stock selection
Discussions in the previous sections indicate that the main focus on portfolio
construction should remain on domestic consumption and domestic investments (like
our previous portfolio on 29 October 2010). However, within that broad framework, we
see scope for tactical allocation into fundamentally sound stocks that have
underperformed over the past two-to-three months, and away from the ones that have
outperformed, but have some concerns about growth and valuation attached to them.
Second, in the medium term, it seems the market’s preference for companies with
relatively better managements is likely to persist. Many of the recent underperformers –
example in the real estate and construction sector – are perceived to suffer from the
“management drawback”.

From these two considerations, we make the following modifications to our portfolio:
Automobiles (OVERWEIGHT): Trim exposure. Exclude Tata Motors. As the share
price of Tata Motors (TTMT) has come close to our target price, we remove the stock
from our model portfolio and increase weights on Bajaj Auto and M&M. TTMT could
face some pressure on recent restrictions on car sales in Beijing, and even more so if
other large Chinese cities enact a similar legislation.

Engineering and Construction (OVERWEIGHT): Exclude Nagarjuna Construction;
Include Voltas. While we remain positive on the long-term prospects of the
construction sector, the market’s concern about cash flows and equity-raising
propensity of construction companies is likely to persist. After recent underperformance,
we believe Voltas (VOLT IN; BUY, CP: INR216; TP: INR300) is likely to benefit from the
potential orders from the Middle East in 2H11.

Banks (Upgrade to NEUTRAL, from Underweight): Increase weight on SBI. The
banking sector has underperformed the market sharply. Main concerns seem to be the
increase in NPLs (from MFIs, telecoms, airlines, etc), a sharp increase in pension
provisions and potential pressure on NIMs (due to the current tight liquidity forcing
banks to increase deposit rates). We believe the pressure from NPLs and pension
provisions as a proportion of balance sheet will be relatively low for the large banks like
SBI. Liquidity may remain tight in 1Q11, but we think SBI’s recent underperformance
has discounted NIM pressures significantly.

IT Services (OVERWEIGHT): Increase weight on Infosys. We think IT will continue to
outperform for a while longer. The large current-account deficit and temporary
disappearance of flows may exert downward pressure on the INR for some more time.
The long-term argument in favour of IT – viz, record cash flows generated by US
companies – stays intact, in our view.

Metals (UNDERWEIGHT): Include Hindalco, SAIL; Exclude JSW. After the Ispat
acquisition, JSW’s balance sheet could get over-leveraged again. We like Hindalco
(HNDL IN; BUY, CP: INR241; TP: INR246) as half of its revenue is less risky (i.e. pure
processing, not related to LME aluminium prices). Improvement in the US economic
outlook bodes well for Hindalco’s overseas business as well.

Property (NEUTRAL): Exclude IBREL; Include Sobha: This is the only exception we
make to our “stick to sound underperformers” rule. IBREL has been one of the biggest
underperformers recently. Still, we capitulate on IBREL as we think the market’s
preference for high-quality managements (which we believe Sobha [SOBHA IN; BUY,
CP: INR314; TP: INR409] offers) is likely to last over the medium term.