Stocks that Morgan Stanley thinks may cross $10 billion market cap in the next three years

On the back of double-digit and two-year forward earnings growth, there are 14 "mega stocks" dominated by private sector financials and consumer discretionary, which will outperform the markets in coming three years, a Morgan Stanley report said.

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BSE and NSE reached their all-time peaks earlier this month before cooling off. Analysts expect more foreign money to flow into Indian markets as Indian stocks gain weight in the MSCI Emerging Markets (EM) index.

Morgan Stanley, in a research report dated August 13, 2017, said, "Calling the performance of mega caps will likely become more important for institutional portfolios."

It said, ''As India's domestic institutions grow in size, they will no longer be able to rely on mid- and small-cap stocks to generate outperformance. Making the right mega- and large-cap call may become crucial to generating alpha."

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Based on this, Morgan Stanley has come up with its list of 7 companies that are likely to cross $10 billion in market capitalisation over the next three years.

Ridham Desai and Sheela Rathi of Morgan Stanley, in the report said, "The criteria for our shortlist is a combination of growth and valuations and include: double-digit, two-year forward earnings growth; positive change in return on capital; attractive valuations (implied long-term earnings growth and earnings yield relative to return on assets); and beta (<1.1)."

If you look at the above chart, the mega cap list includes mainly private sector banks and consumer stocks, considering these sectors are most attractive.

Desai and Rathi pointed out that the reason behind picking private banks is because of the high liquidity in banks which will help loan growth recovery in the coming months. At the same time, the duo mentioned that while margins are under pressure for corporate banks, retail banks, non-banks and property companies look fine on the margin front.

For selecting discretionary consumer stocks, Desai and Rathi believes that strong consumer loan growth, positive real incomes and a jobs recovery is driving our positive view.

"Over the longer term, the expanding household balance sheet augurs well for both sectors, as households leverage more than before to advance discretionary consumption and drive loan growth, especially for non-banks and retail banks," analysts said.

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