Jefferies Overhauls India Portfolio, Eyes High-Growth Picks with Value Appeal

Key additions include Adani Energy Solutions and Sagility, signaling a focus on companies with strong growth trajectories and attractive valuations.

In a meaningful portfolio rebalancing, global financial services firm Jefferies has introduced several new names and made strategic adjustments to its India stock recommendations. The firm’s updated strategy emphasizes a blend of “absolute value picks and relative value bets,” targeting companies with Enterprise Value to Earnings Before interest, Taxes, Depreciation, and Amortization (EV/EBITDA) multiples below 18x, while prioritizing essential strength and historical valuation ranges.

A standout addition is Adani Energy Solutions (AESL), which Jefferies believes presents compelling value despite recent group-wide headwinds. The brokerage points to AESL’s ample pipeline of transmission projects, valued at INR 616 billion, marking a 3.6x year-over-year increase. Notably, AESL is trading at a significant 79% discount to its January 2023 peak forward EV/EBITDA. Jefferies further highlights AESL’s superior growth prospects compared to Power Grid Corporation of India (PGCIL), projecting a 34% EBITDA Compound Annual Growth Rate (CAGR) for FY25-27E, in contrast to PGCIL’s 9%. The firm has set an enterprising price target of INR 1,150 for AESL, based on a 15x EV/EBITDA FY27E multiple, a premium to the implied 10x target for PGCIL.

Adani Ports, another group company, also features prominently in Jefferies’ updated outlook. The brokerage anticipates robust growth momentum for Adani Ports, driven by a projected 16% EBITDA CAGR for FY25-28E, fueled by a 14% CAGR in volumes as new port operations commence and stabilize. The stock is currently trading at 16.6x FY26E EV/EBITDA, a valuation broadly in line with its average since 2009 and representing a 38% discount to JSW Infra.

In the facts technology sector, Jefferies has strategically added midcap IT firm Sagility, while reducing its weighting in Infosys, maintaining an overall underweight stance on IT. The firm views Sagility as a fast-growing player with strong potential.

within the auto sector, Jefferies has swapped Eicher Motors for Belrise Industries. This move is driven by Belrise Industries’ positioning as an auto-component midcap with a recently initiated strong growth outlook.

The firm has also removed Nuvama from its recommended list following recent market events involving Jane Street.

The core of Jefferies’ strategy remains a disciplined approach, ensuring that even within a value-focused framework, the selected companies demonstrate underlying financial health and a history of stable valuations. This selective approach aims to identify both intrinsically undervalued stocks and those offering relative value compared to their peers.

How dose Jefferies reconcile its ‘Buy’ recommendations with its acknowledgement of current Indian market overvaluation?

Jefferies Identifies 11 Buy Stocks, Including Three Adani Holdings Plays Amidst indian Market Overvaluation

Despite concerns surrounding Indian market overvaluation, Jefferies has released a list of 11 stocks it recommends as ‘Buy’ opportunities. Notably, the list includes three companies from the Adani Group, signaling continued confidence in their growth potential even amidst broader market anxieties.This analysis comes as investors grapple with high valuations and global economic uncertainties.

Jefferies’ Stance on the indian Market

jefferies acknowledges the current premium valuations within the Indian equity market. However, their research suggests selective opportunities remain for investors willing to look beyond the headline numbers. The firm’s strategy focuses on identifying companies with strong fundamentals,growth prospects,and reasonable valuations – even within a potentially overheated market.Key themes driving their recommendations include infrastructure development, domestic consumption, and the ongoing digital transformation in India.

The 11 ‘Buy’ Rated Stocks

Here’s a breakdown of the 11 stocks identified by Jefferies,with a particular focus on the Adani Group picks:

1. Adani Enterprises: Jefferies maintains a positive outlook on Adani Enterprises,citing its diversified portfolio and leadership in emerging sectors like airports,roads,and data centers.
2. Adani Ports & SEZ: The firm highlights Adani ports’ dominant position in Indian port infrastructure and its consistent financial performance. Expansion projects and increasing cargo volumes underpin their ‘Buy’ rating.
3. Adani Power: Despite the challenges in the power sector, Jefferies sees value in Adani Power due to its improving operational efficiency and strategic positioning.
4. Apollo Hospitals enterprise: Benefiting from the growing healthcare sector in India, Apollo Hospitals is seen as a strong long-term investment.
5. Axis Bank: Jefferies believes Axis Bank is well-positioned to capitalize on the growth in Indian banking, with a focus on retail and corporate lending.
6. Bajaj Finance: A leading non-banking financial company (NBFC), Bajaj Finance continues to demonstrate strong growth and asset quality.
7. Bharat Electronics (BEL): Driven by increased defense spending and government contracts, BEL is expected to benefit from the ‘Make in India’ initiative.
8. Divi’s laboratories: A prominent pharmaceutical company, Divi’s Labs is recognized for its strong research and development capabilities and global clientele.
9. ICICI Bank: Jefferies highlights ICICI Bank’s improved asset quality and efficient operations as key strengths.
10. Larsen & Toubro (L&T): A major player in infrastructure and engineering, L&T is poised to benefit from government investments in infrastructure projects.
11. Tata Consumer Products: With a strong brand portfolio and expanding market reach,Tata Consumer Products is expected to deliver consistent growth.

Deep Dive: Adani Group – Navigating Risk and Reward

The inclusion of three Adani Group companies is especially noteworthy. Following the hindenburg Research report in early 2023, the group faced important scrutiny and a sharp decline in stock prices.Tho, the companies have as demonstrated resilience, focusing on debt reduction and operational improvements.

Debt Management: A key factor in regaining investor confidence has been the Adani Group’s proactive approach to reducing its debt levels.

Operational Performance: Improved operational efficiency and strong financial results across various adani businesses have contributed to the positive outlook.

Sectoral Growth: The infrastructure and energy sectors, where the adani Group has a significant presence, are expected to benefit from India’s economic growth.

Price-to-Earnings (P/E) Ratio: The Indian market’s P/E ratio is currently trading at a premium compared to its ancient average and other emerging markets.

Price-to-Book (P/B) Ratio: Similar to the P/E ratio, the P/B ratio also suggests that Indian stocks are relatively expensive.

Market Capitalization to GDP Ratio: This ratio indicates the total market value of listed companies relative to the country’s GDP. A high ratio suggests overvaluation.

Foreign Institutional Investor (FII) Flows: While FII inflows have been positive, a sudden reversal could trigger a market correction.

Focus on Quality: Prioritize companies with strong fundamentals, consistent earnings growth, and healthy balance sheets.

Value Investing: Identify undervalued stocks with long-term growth potential.

Diversification: Spread investments across different sectors and asset classes to mitigate risk.

Long-Term Viewpoint: Adopt a long-term investment horizon to ride out short-term market fluctuations.

Systematic Investment Plan (SIP): Invest regularly through SIPs to average out the cost of investment.

Jefferies’ Investment Banking Role

Jefferies, as highlighted on their website (https://www.jefferies.com/our-services/investment-banking/), plays a crucial role in advising companies on strategic decisions. Their insights and analysis