The recent measures announced by the Modi government to combat the coronavirus-induced downturn are being compared with the 1991 reforms, but analysts beg to differ.
The Year 2020 can be called the year of reforms that are likely to benefit the economy over the next two or three years or later but for the short term, investors were left longing for more.
The recent correction of about 40 percent from the highs, however, is an opportunity for a first-time investor to deploy cash at lower levels.
The reforms introduced in 1991 were aimed at opening India to foreign investment and making the economy market-and service-oriented.
This year, the government and the Reserve Bank of India have taken some steps to support growth and kick-start investment through a Rs 20-lakh-crore package, which amounts to 10 percent of GDP.
“While the fruitfulness of the reforms will be known in future, there were indeed some strong measures reflecting government intent on improving bottlenecks/driving growth across sectors be it defence, power, infrastructure, MSMEs, mining etc,” Pankaj Pandey, Head of Research, ICICI direct told Moneycontrol.
“Calling it historic like 1991 will be far-fetched, but 2020 will be marked as a year where reforms process (albeit pushed by the crisis) have been expedited by the government,” he said.
They prefer investors to position their portfolio for a long-term perspective through companies with excellent and reliable performance over the years, and “we like Nestle India, HDFC Bank, Asian Paints, Kotak Bank, and Tata Consumer Product”, Pandey said.
The economic package was a bit underwhelming, given the lack of a big-ticket spending programme. As most of the announcements came in the form of credit guarantees that was one of the reasons D-Street gave it a thumbs down.
But, there were few positives as well. “The government’s decision to announce key structural reforms in the area of agriculture and power were key positives, which will benefit the economy in the medium to long run,” said Jyoti Roy, DVP Equity Strategist, Angel Broking Ltd.
The government has said that it will amend the essential commodities act and also undertake long-standing demand for agriculture market reforms. Tariff policy reforms are also going to be implemented to ensure the sustainability of the power sector and promote the industry.
If the government can implement more tough reforms, especially in the area of land and labour, then 2020 would be called the Year of Great Reforms, Roy said. We have collated a list of stocks that experts think are likely to be wealth generators in the next two-three years:
Expert: Vinod Nair, Head of Research at Geojit Financial Services
HDFC Bank
The recent Q4 numbers witnessed an increase in deposits and the overall improvement in the Net Interest Margins (NIM) for the bank. Even though there has been a decline in new loans, robust network and strong asset quality will pave way for better growth in the long term.
The near-term concerns like exposure to unsecured loans given in the on-going economic trouble seem priced in. MSME exposure for HDFC stands at 13 percent and the current alteration in IBC code to have a sentimental negative impact in the banking sector. We value the stock at 2.7x FY22E BVPS.
Asian Paints
The company has largely domestic-oriented business and has displayed resilience by giving double-digit volume growth despite a challenging environment.
Tailwinds on raw material cost due to the sharp fall in crude prices will aid significant expansion in the gross margins.
Further, the company is likely to pass the benefit to customers to set the brush for a revival in the demand. We expect the impact of COVID-19 on demand but that can be mitigated through the benefit from the lower raw material prices.
A strong balance-sheet and debt-free status will support the premium valuation. Considering the long-term positive industrial outlook, we upgrade the stock to buy.
PI Industries
The company’s domestic operations should see good numbers on the back of a good monsoon forecast and successful product launches. The custom synthesis and contract manufacturing (CSM) segment will see an uptick in export orders due to the tightening of regulations and supply disruptions in China.
On the back of positive monsoon forecasts, new product launches, and a potential uptick in orders from the CSM segment, we value the company at 31x FY22E EPS, and recommend a buy.
MGL is Mumbai's sole distributor of gas, an essential commodity, the demand for which will be relatively less impacted by the COVID scenario. The demand for gas is set to pick up dramatically in the country, with the government encouraging the use of clean fuels and reduce pollution.The recent decline in natural gas prices will lower costs and expand margins going forward. We value the company at 13x FY22E EPS, and recommend a buy rating.Pidilite IndustriesThe company enjoys a monopoly in the adhesive sector (70 percent market share), along with its strong financials, which will help the company withstand the COVID-19 impact .Pidilite has a strong balance sheet with almost zero debt and has maintained an average ROE of 27 percent in the last five years, justifying its premium valuation.The recent reduction in oil prices will enable the company to lower costs and improve margins in the future. Hence, we value the company at 49x FY22E EPS and put a buy rating on the stock.Expert: Gaurav Garg, Head of Research at CapitalVia Global Research Limited- Investment Advisor Bharat Forge
Bharat Forge would be a key beneficiary of the increase in FDI limit in defence manufacturing under the automatic route to 74 percent from 49 percent.
The government is looking to protect India’s indigenous defence sector, with a negative list for items that will only be procured domestically.
Avanti Feeds
The government has allocated Rs 20,000 crore for aquaculture and infrastructure. This will benefit fishermen in getting financial support as well as increase production.
Rallis India
The measures for the agriculture sector could be beneficial to companies like fertiliser and crop protection.
Indiabulls Housing Finance Limited
The announcement of a Rs 30,000-crore special liquidity scheme and partial credit guarantee scheme of Rs 45,000 crore for non-banking finance companies (NBFCs), housing finance companies (HFCs) and microfinance institutions (MFIs) will benefit this firm for the long term.
Larsen & Toubro
The increase in the FDI limit in the defence sector to 74 percent is a big long-term positive for this firm.
Brokerage Firm: Reliance Securities
Finolex Industries
The company is the largest player in agriculture pipes and second-largest player in the Indian pipes sector with a market share of 9 percent.
Finolex has increased its PVC pipes capacity to 370,000 TPA currently from 250,000 TPA in FY15, while resin capacity remains at 272,000 TPA.
It has forayed into the CPVC segment with a tie-up with Lubrizol in February 2017. Reliance Securities initiated coverage on Finolex with a buy recommendation and a two-year target price of Rs492 (valuing it at 16x FY23E earnings).
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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