Indian economy might be going through its worst phase as Gross Domestic Product (GDP) hit over a six-year low in the September quarter, but experts feel that the pain is almost over and a recovery could be in sight by FY21.
The previous low was recorded at 4.3 percent in the January-March period of 2012-13. The GDP growth was at 7 percent in the corresponding quarter of 2018-19, PTI reported.
The gross value added (GVA), a measure of the value of goods and services produced in an area, industry or sector of an economy plunged to a near ten-year low.
Experts feel that a rebound in economic activity is possible either in the second half of the current financial year or possibly in FY21, and to take advantage of the rise in economic activity investors should allocate some percentage of their portfolio towards economy-linked stocks.
“With strong policy measures since September 19 acceleration in government spending, infra tendering, accommodative liquidity and interest-rate policies, we expect a marked rebound in H2,” AnandRathi said in a report.
“Recent trends in bank credit, an effective lending rate, exports and non-oil imports support our positive view of future growth,” it said.
The slowdown was visible across other sectors as well. Construction sector GVA grew 3.3 percent in July-September 2019 compared to 5.7 percent in the previous quarter and 6.8 percent in the second quarter of the previous fiscal year. The GDP growth in 1H-FY20 has averaged at 4.75 percent.
Experts are of the view that amid a slowdown in growth, the central bank could well cut rates by 25-50 bps in December meeting to support growth in Asia’s third-largest economy.
“The GDP growth in 1H-FY20 has averaged at 4.75 percent and we have cut our full-year FY20 GDP growth estimates to 4.7 percent. This means the growth rates in the second half could be similar to that seen in the first half,” Rusmik Oza, Sr. VP (Head of Fundamental Research) at Kotak Securities told Moneycontrol.
“Further measures from the government followed by another 50 bps rate cut by RBI in the remainder of FY20 could lead to some recovery in FY21. The low base effect of FY20 and likely stimulus in the forthcoming Union Budget could help improve numbers in FY21,” he said.
What should investors do?
Revival in corporate earnings led by a reduction in corporate tax rate and strong FPI flows have been driving markets as of now, suggest experts and the disconnect between the economy and markets will remain for some more time.
The Nifty50 is trading at one year FW PE of 18.6x (based on Bloomberg consensus estimates), which is very close to its previous peaks of 19x. The ideal strategy is to remain buyers on every dip with a focus on select large-cap and mid-caps.
“Investors and traders should continue with buy on dip strategy because the overall trend of the market is bullish. Investors can continue with large-cap stocks especially FII's favorite stocks where growth visibility is still there while some quality midcap stocks also should be added into the portfolio where valuations are attractive,” Santosh Meena, Senior Analyst, TradingBells told Moneycontrol.
“Investors should also focus on good stocks where the turnaround is visible. For example, in the last few days, Telecom, NBFCs, and PSU Banks' stocks witnessed handsome returns as there are signs of a turnaround,” he said.
We have collated a list of ten economy-linked stocks which are likely to benefit the most from a turnaround in economic fundamentals:
Expert: Rusmik Oza, Sr. VP (Head of Fundamental Research) at Kotak Securities
State Bank of India (SBI)
SBI is a preferred pick to play any recovery in the economy. Retail segment constitutes 30 percent of the loan book and has been witnessing strong growth rates driven by home loans (up 18 percent YoY) and Xpress credit (personal loans) (up 42 percent YoY).
We are optimistic that FY20 should see far better performance than FY19 and going forward the bank is well-poised to show a sharp improvement in return ratios by FY21-22 on the back of a recovery in loan growth, healthy operating profit growth and a sharp reduction in credit costs.
For corporate banks having heavy NPLs, the slippage ratio is steadily improving. Recovery from NPLs is seeing traction despite a slower-than-envisaged IBC-led resolution process and RoE recovery is on track.
The recent ruling on Essar Steel should be a welcome move for banks like ICICI Bank. We build a 15 percent CAGR in both loan growth and non-interest income over FY19-22E.
We expect earnings of ICICI Bank to potentially go up by 6-7x between FY19-22E. Going by the potential earnings trajectory RoE of ICICI Bank could converge with those of retail banks at ~16-17 percent over FY20-22E.
L&T is one of the best proxies for the Indian economy with exposure to most businesses through its standalone company and dozens of subsidiaries. The challenging environment on the domestic side would make FY20 a tough year for L&T.
Infrastructure remains the dominant segment for the company accounting for 71 percent of the Rs 3.03 trillion order backlog as at the end of 2QFY20. L&T’s order backlog has strengthened over 1HFY20, providing growth visibility.
The company offers a wide range of products and solutions ranging from SUVs to electric vehicles, pickups, commercial vehicles, tractors, two-wheelers, and construction equipment.
The tractor industry’s fortunes are linked to the rural economy which could pick up in the next calendar year on the back of above-normal rainfall this year. The fortunes of its passenger & commercial vehicle are linked to the recovery and spending power in the economy.
M&M has an advantage in the electric vehicle space and plans to launch a couple of products in this segment in the next two years. Due to a lack of visibility, we are expecting volume and earnings growth to remain subdued between FY19-22E.
As and when there is a recovery in the economy we can expect M&M to be one of the beneficiaries because of its diversified product portfolio and presence of subsidiaries in various businesses.
The company caters to a wide spectrum of transformer users in various industries like petrochemical, oil refining, cement, paper and pulp, pharmaceuticals, automobiles, steel, power plant, building, metro rail applications, mining & minerals, and many others.
The bulk of the company’s orders are from industrial customers and due to weak market sentiments pace of order finalization has been sluggish. Voltamp remains one of the best stocks to play future upturn in industrial demand.
Valuations are attractive compared to peers and more so considering that management remains prudent and has been able to preserve the quality of balance sheet even through years of industry distress.
Expert: Santosh Meena, Senior Analyst, TradingBells
Bandhan Bank is the fastest-growing private bank with a strong financial performance where it is maintaining ROE of around 19 percent without any issue in asset quality while its peers are going through a tough phase.
It is doing very well in the microfinance segment compare to its peers whereas new opportunities have opened in the housing finance segment after the merger of Gruh finance.
ICICI General InsuranceThere is a lot of growth opportunities in the Insurance sector of India as penetration is very low where we have seen a stellar rally in life insurance stocks while the leader of the general insurance sector, ICICI Lombard general insurance may do well in coming days. Any recovery in the auto sector will also help this stock for better performance.LupinAfter four years of a downtrend, some pharma counters are providing good opportunities where Lupin may do well as worst is behind us for this counter in terms of US FDA issues and we can see improvement in profit and margin in the coming quarters.
It is one of the stocks in the auto sector which performed well in bad times in the Industry. It is also doing well in its export market amid the global slowdown.
Any recovery in the sector may lead to significant improvement in the performance of this counter as the company has launched new products in the mid-segment to strengthen its position. It is maintaining ROE of more than 20 percent where we can expect improvement in margin in the coming quarters.
Brokerage Firm: Citigroup
ACC’s stock trades at close to replacement cost ($100/t). Cement prices have been largely resilient post-Diwali, and the global investment bank expects a demand-driven price improvement going into the New Year.
9M EBITDA/t at Rs885 is 19 percent higher on a YoY basis setting a high base for CY20. Further Emami Cement’s potential acquisition by an existing large player should help consolidate the East market (>25 percent of ACC’s volumes).
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