Morgan Stanley adds HPCL, Sterlite to Focus List

MUMBAI: Morgan Stanley has added large cap stocks like HPCL and Sterlite Industries in its Focus List as it maintains spotlight on large-cap cyclicals as a strategy.

Following are the rationale on picking the duo in the list:

HPCL:

Analysts at Morgan Stanley are of the view that HPCL is more skewed to the domestic marketing business compared to other oil marketing companies as 60 per cent of its value comes from its fuel marketing business. Hence, it is a levered play on the fuel price reforms theme.

They are of the view HPCL could see material earnings upside based purely on interest cost savings, which are likely to come as the working capital situation improves with a reducing subsidy.

“Historically, the stock has traded at an average of 1.4x during the periods when the momentum of fuel reforms was positive. We continue to see a valuation re-rating if the price reform continues. We think HPCL’s ROE will bottom out from a low of 5.4% in F2013e and move near its historical average of ~11% in F2015e, and it could move even higher to 15-16% if diesel prices become fully decontrolled in F2016e,” the report said.

Sterlite Industries:

According to the brokerage, the simplification of holding structure and inclusion of high-return oil and gas business, following the restructuring of the company, is expected to drive an improvement in earnings quality and investor sentiment.

It also sees growing possibility of value unlocking as chances of stake purchases in HZL and BALCO are rising.

“Sentiment toward aluminum and power divisions may improve with earnings having troughed as regulatory news flow seems to have bottomed and could improve if the government accelerates its policy push. Progress on the start of a new coal block can aid earnings of both the power and aluminum businesses. F2014e valuation of 0.6x P/B (implying more than 50% discount to historical average and to peer group) and 3.7x EV/EBITDA seems to be reflecting an overly pessimistic view and ignoring positives such as Sterlite's strong balance sheet and improving visibility on the catalysts,” the report added.

Morgan Stanley has also merged some of the stocks from its Mid-Cap List into Focus List. The stocks included in the list are Dabur, Mindtree and Sobha Developers.

At 02:00 pm, HPCL was at Rs 327.90, down 0.33 per cent, on the NSE. It touched a high of Rs 332.95 and a low of Rs 324.15 in trade today.

Sterlite Industries was at Rs 108.10, down 1.55 per cent, on the NSE. It touched a high of Rs 109.15 and a low of Rs 107.15 in trade today.