Moneycontrol
Aug 14, 2017 12:52 PM IST | Source: Moneycontrol.com

Top 7 stocks which are likely to enter $10 billion market cap in next 3 years: Morgan Stanley

Morgan Stanley’s calculations show that domestic mutual fund assets could catapult to USD 1 trillion in the coming decade from USD 100 billion currently, underpinning the scale problem.

ByKshitij Anand
Top 7 stocks which are likely to enter $10 billion market cap in next 3 years: Morgan Stanley

Kshitij Anand

Moneycontrol News

Are you looking for undervalued stocks or stocks which can lead the next leg of the rally on D-Street? Well, Morgan Stanley in its latest report highlighted 7 stocks which are likely to enter the USD 10 billion club in the next three years, authored by Ridham Desai and Sheela Rathi.

Seven stocks which are likely to enter in the USD 10 billion include names like Cummins India, JSW Steel, Lupin, M&M Financial, Petronet LNG, UPL, and ZEE Entertainment.

Top stocks which are in Morgan Stanley’s focus list and are already in the USD 10 billion club include stocks like Bajaj Auto, BPCL, HDFC Bank, IndusInd Bank, Infosys, M&M, and Maruti Suzuki India Ltd.

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Morgan Stanley highlights three reasons why mega caps will be an important space to watch out for. Firstly, as Indian stocks gain weight in the MSCI EM index, the market will attract tourist money and bigger flows, which will look for large liquid names to invest in.

As India index weight rises, it will probably attract more non-long-term money, or what we can loosely call 'tourist flows'. Such flows will mostly look for large cap, liquid names through which to participate in the India story.

Secondly, 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 the large-cap call may become crucial to generating alpha.

History suggests mutual funds have had close to 40-50 percent of their equity allocation towards mid- and small-cap stocks. This strategy has worked and has helped them earn excess returns over the benchmark, reflecting the underlying performance of mid- and small-cap stocks.

Since 2001, India's mid- and small-cap indices have risen at respective CAGRs of 18 percent and 16 percent, while the narrower market (Nifty) has appreciated at a 13 percent CAGR. Mid- and small caps will likely continue to outperform the market over the next 3-5 years.

Morgan Stanley’s calculations show that domestic mutual fund assets could catapult to USD 1 trillion in the coming decade from USD 100 billion currently, underpinning the scale problem.

And, lastly, the reason to evaluate mega caps is the likely growth in domestic exchange-traded funds (ETF). The global investment bank believes that domestic ETFs' assets are likely to grow 30x in the coming decade to USD 200 billion.

The other large source of domestic flows will likely be retirement funds. On a combined basis, the global investment bank expects equity saving via these retirement funds could reach USD 170 billion by FY26.

Within the retirement saving pool, provident funds will drive the ETF boom. The initial equity allocation in FY2016 was 5 percent of incremental flows, which was increased to 10 percent of incremental flows in FY2017.

This flow is directed into equities via domestic ETFs. Over the past two years, the Employees' Provident Fund Organisation (EPFO) has invested close to Rs235bn in equities via the ETF route.

“The labor ministry has increased the allocation to 15 percent for F2017-18. This could imply additional flows of Rs300bn into equities via ETFs,” said the report.
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