Generally, the auto sector and related segments benefit from interest rate cut due to lower EMIs.
The Reserve Bank of India's Monetary Policy Committee (MPC) on August 6 decided to keep the repo rate unchanged at 4 percent, consequently, the reverse repo rate under the LAF stays at 3.35 percent.
The MPC also decided to continue with an accommodative stance as long as it takes to revive growth and mitigate the impact of COVID-19 on the economy while ensuring that inflation remained within the target.
Equity markets heaved a sigh of relief as the central bank kept rates unchanged and didn't extend the moratorium period but allowed a one-time restructuring of all loans across sectors affected by the pandemic.
By restructuring, the regulator allows banks to relax terms of a loan that can be done either by extending the payment period, cutting the rate of interest or by offering a payment holiday.
“The committee has taken a soft stance in the right direction to aid India’s worst-hit MSME sector by making them eligible for a one-time restructuring of loans. Various decisions such as no further extension in the moratorium period on loans and an increase in the scope of restructuring of loans, demarcates the RBI’s intention to maintain the integrity of the Indian banking sector,” Jimeet Modi, Founder & CEO, Samco Group told Moneycontrol.
“In other countries, we have seen politics merging with monetary policy, but the RBI has clearly stood on merits without any political compulsion. Given the fluid situation across the world, they have indeed done what is best for Indian financial markets.”
Experts are of the view that the central bank could take a pause but slash rates in the December policy meeting.
"The RBI has clearly stated that there is further room for a rate cut, but the RBI will wait and watch for a 'durable reduction' in inflation for further rate action. This amounts to saying that only if there is sustained fall in inflation, especially food prices, RBI may consider further rate cuts. This does not rule out further rate cuts but makes it linked to inflation performance," Dr Joseph Thomas, Head of Research - Emkay Wealth Management said .
Rate-sensitive stocks are likely to benefit the most from a rate cut by the RBI. Generally, the auto sector benefits from interest rate cut due to lower EMIs for loans.
“Majority of the auto segments are loan financed from 40-90 percent for different segments of the industry volumes. This would benefit the entire auto sector and all the segments,” Arjun Yash Mahajan, Head- Institutional Business at Reliance Securities told Moneycontrol.
“However, we believe that the segments that are better performer like tractors, two-wheelers and passenger cars would get a boost, while CV (commercial vehicle) segment would will till the broader economy revives and business activities picks up,” he said.
Lockdown has taken a toll on the economy and there is a dire need for a stimulus though the rolling back of restrictions is going on. Experts say a further rate cut of 25-50 bps is possible.
The RBI will keep a close watch on headline consumer price inflation for the next few months as it crossed the MPC threshold of 6 percent.
“For a faster recovery, economic stimulus is required to boost both consumption and production. Therefore, we can expect rates to come down 50 bps to 3.5 percent in 2020 and may rise thereafter with recovery in the economy,” Gaurav Garg, Head of Research at CapitalVia Global Research Limited said.
We have collated a list of rate-sensitive stocks that experts think are likely to benefit from a future rate cut. The list also includes stocks on which experts have maintained a buy rating after Q1 results:
Expert: Arjun Yash Mahajan, Head- Institutional Business at Reliance Securities
Escorts is a purely rural play. It has healthy agri output and was least impacted from among the tractor segment in the auto industry.The company's margins and performance have been steadily improving. A lower interest rate will kick in dealers stocking of inventory due to ease of working capital and will attract more tractor buyers.
Almost 50 percent of Hero's volume come from rural India. It has a healthy agri output and was among the least effected in the rural market, driving 2W volumes.
Social distancing and crowded rural public transport will boost two-wheeler purchases in the rural sector over the next few months.
A lower interest rate will support working capital requirements and attract more buyers due to low EMI. Two-wheeler buyers are most price-sensitive customers and more sensitive to EMI changes.
M&M's entire tractor portfolio is rural centric, while within auto space, 50 percent of products are rural focused. Healthy agri output, minimal impact on rural market will drive tractor volumes as well as support auto volumes.
A lower interest rate will support dealers on working capital and attract more buyers due to low EMI. The company's margins and performance were far superior in its latest quarterly financial performance.
Expert: Jaikishan Parmar, Sr Equity Research Analyst, Angel Broking Ltd
We recommend HDFC Ltd and CanFin Homes from BFSI, as both housing finance companies will see benefits in terms of reduction in the cost of funds and lower interest rates will support loan book growth.
HDFC Ltd has sufficient liquidity at a low cost that would be the key criteria for NBFC or a bank to navigate the current situation, as asset side inflow is limited due to moratorium.
HDFC Ltd was able to raise funds at a competitive rate owing to strong operating metrics, experienced management, and industry’s best credit rating.
It is trading (Core Banking Business – 1.42x FY22ABV) at a significant discount to historical average valuations and offers favourable risk-reward from current levels
Geojit Financial Services
Bajaj Finance’s Q1FY21 AUM grew 7.1 percent on a YoY basis to Rs. 138,055cr. As of June 30, 15.7 percent of the consolidated AUM was under moratorium.
The Net Interest Income rose 12.4 percent on a YoY basis to Rs. 4,151cr in 1QFY21. The outlook remains positive for the stock with a continuous reduction in provision coupled with the company's focus on capital preservation, liquidity and opex management and calibrated business restart.
Hence, we reiterate our buy rating, with a revised target price of Rs. 3,630 based on 5x FY22E BVPS.
L&T Finance Holdings Limited offers financial products and services in the corporate, retail and infrastructure finance areas along with fund products and investment services.
Focused loan book grew 3.5 percent YoY in Q1FY21, supported by growing rural and housing finance verticals. Disbursements declined 75.9 percent YoY, owing to weak housing and rural finance after COVID-19 lockdown and slowdown in the economy.
With the improvement in collections and reduction in moratorium accounts, we value the stock at 0.77x on FY22E BVPS of Rs. 91, with a revised target price of Rs 70 and retain our 'accumulate' rating.
Brokerage Name: Angel Broking
Swaraj Engines is engaged in manufacturing diesel engines and hi-tech engine components. Diesel engines are specifically designed for tractors.
Going forward, we expect a recovery in the tractor industry (due to a robust rabi crop production, hike in MSP and the forecast of a normal monsoon) will benefit players like Swaraj Engines.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.