Sensex target slashed by Citigroup; Here are the top picks investors must not ignore

Sensex target: Sound of caution has just started ringing out loud and clear! Significantly, global brokerage Citigroup has reduced its Sensex target for the calendar year 2018, expecting just 5-7 per cent returns from the current levels over the next twelve months as it sees tepid earnings growth in FY18 and elevated earnings expectations for FY19. "With FY18E likely to be another year of tepid earnings growth (single digit expected), we would watch out for downgrade risks to FY19 estimates, given elevated expectations (20 per cent to 24 per cent YoY for Nifty based on Citi/consensus forecasts). Our sentiment indicator (CISI) now suggests ~5-7 per cent returns over 12 months," said Citigroup in a research note dated April 9, 2018. 

Citi expects 2018 to be a volatile year for Indian markets. "We lower our Sensex target to 35,700 (Dec-18), factoring in the downward earnings revisions," it added.

For March quarter of FY18, Citi estimated nearly 10 per cent YoY growth in Q4 earnings of Citi coverage Universe, largely driven by strength in commodities sectors (oil & gas and steel) and domestic autos (excluding JLR).

On sectoral basis, strong growth trends are expected in autos excluding JLR (ex-JLR at 48 per cent yoy vs overall autos at 1 per cent yoy), energy (+33 per cent yoy) and metals & mining sectors (+14 per cent yoy), while financials, pharma and telecom are likely to be the key drags.  

"With credit costs for financials likely to remain elevated in the near future and continuing pressure in sectors like healthcare/telecom, we see downside risks to earnings expectations," Citigroup elaborated.  

The brokerage pointed out that buy-side expectations have already been reset lower with most investors talking about mid-to-high-teen growth.

Model Portfolio:

Citigroup makes the following changes to the model portfolio:

1. Reallocate healthcare weight from Sun Pharma to Cadilla, Cipla and Aurobindo – overall active weight is largely unchanged.
2. Increase the weight on cement – replace ACC with Ambuja, in line with our analyst’s updated views.
3. Energy – we replace IGL with GSPL post the 30 per cent outperformance over the past year. GSPL is an integrated midstream & downstream company offering exposure to both parts of the gas value chain at reasonable
valuations.

It also made multiple tweaks within the sectoral allocations and our defensive/quality bias stays in what we expect to be a tough year.

Key overweights (OWs) – Financials (lower OW than earlier though), Autos
Key underweights (UWs) – IT, Consumer (lower UW than earlier though)

Top Picks:

Citigroup makes three changes to its Top Picks List:

1. Replaces ACC with Ambuja Cement in the large-caps
2. Replaces Gujarat Gas with GSPL following the former becoming a 54 per cent subsidiary of the latter, now making GSPL an integrated midstream & downstream company offering exposure to both these parts of the gas value chain at reasonable valuations, relatively lower risks, and under a robust capital structure.
3. Replaces IGL with Petronet LNG post IGL’s significant outperformance and lower valuations. 

Citigroup expects good growth in Petronet LNG in FY20E, which should start getting priced in some point over the next few months.