A rate cut generally augers well for the companies that are debt-laden, auto sector, banks and NBFCs.
The Reserve Bank of India’s monetary policy committee on October 4 slashed rates by 25 bps, and kept the stance accommodative to revive growth in Asia's third-largest economy.
The central bank slashed policy rates for the fifth time in a row in line with expectations. Consequently, the rate cut totals to 135 bps in 2019 and the repo rate stands at 5.15 percent now.
On the growth front, GDP projections for FY20 was significantly downgraded to 6.1 percent from the earlier estimate of 6.9 percent, which was expected.
Experts says the central bank still has some more room to cut interest rates further by 15-30 bps.
"We believe there is a possibility of another 15 to 30bps further cut. On the bond markets, while we do not rule out the possibility of yields rising somewhat, but eventually we see them headed lower. Although there is a concern regarding fiscal slippage, we sense that markets have largely baked in the fact that fiscal deficit will widen to 3.7-3.8% of GDP," said Amar Ambani, Head of Research – Institutional Equities, YES Securities.
"Having said that, we see interest rates falling significantly, looking at high real rates and scope for fall in credit spread as well as term premium. Moreover, policy transmission will eventually take place, which has not been yet materialised optimally. We see 10-year yields in the range of 6.3-6.7%," he said.
A rate cut generally augers well for companies that are debt-laden (as it reduces interest cost), the auto sector, and banks as well as NBFCs, as it brings down the cost of funds for them. For the real estate sector, a fall in interest rates could also mean lower EMIs.
A list of 17 rate-sensitive stocks that are likely to benefit the most from the rate cut:
Analyst: Ajit Mishra, Vice President Research, Religare Broking
The auto sector has underperformed the benchmark index significantly over the last few months on the back of a demand slowdown, which has sharply impacted the financial performance of the auto companies. Hence, a rate cut could provide some relief and improve the volume trajectory of the players in rural markets.
A rate cut will bring down the cost of funds, help in recovering credit growth and lastly, will help improve asset quality, leading to a decline in NPAs. In short, it will bring financial stability to the bank.
We believe that if the banks pass on the rate cut to borrowers, it helps in reviving growth on the ground. Lower interest rates will eventually spur spending and consumption that can benefit stocks such as Oberoi Realty and Voltas.
Analyst: Jitendra Upadhyay, Fundamental Analyst, Bonanza Portfolio Ltd
The rate cut will impact home loan interest rates, leading to reduced EMIs, which, in turn, will be positive for the growth of the real estate sector.
Oberoi Realty and Godrej Properties are the two stocks that have less debt in their books as compared to their peers and will get higher benefit of the rate cut. Banks are also likely benefit, as the cost of funding will get lower and there will be an improvement in the margin and in this space.
Analyst: Amit Gupta, Co-Founder and CEO TradingBells
Ujjivan is among the few NBFCs that posted better-than-expected results last quarter. There were major changes of key personnel at Ujjivan, which is a positive sign for the company.
Any significant step by the government to solve the NBFC problem will lead to a rally in quality NBFCs such as Ujjivan and Bajaj Finance. A rate cut certainly augers well for the business and the company.
Corporate banks were the theme of the recent bull run, as NPAs showed a decline on a quarterly basis. The outlook for growth is visible as a rate cut cycle has begun. This is where Axis Bank and SBI can lead the rally.
After a painful period, the auto sector may see some revival as liquidity crisis may be resolved soon and the capex cycle is likely to improve since a stable government is in power.
Ashok Leyland could do well as it is focusing on electric vehicle segment and the government has announced tax benefit for this segment in the recent budget, both for the manufacturers and buyers.
DK Aggarwal, chairman and managing director, SMC Investments and Advisors Ltd
The bank is focusing on growing the core operating profit in a risk-calibrated manner instead of loan growth. The bank aims to improve the share of profitable market opportunities by making delivery to customers more seamless and friction-less through digitisation and process improvements.
The bank's business performance such as domestic loan growth, overall corporate advances, retail loan growth and CASA ratio is continuously improving.
The company has made significant progress on its goals in the quarter, with strong operating performance including good net sales growth.
The operating profit has improved significantly. The management believes that higher annual budget allocation for infrastructure, affordable housing, upgradation of roads and the government's focus on improving connectivity will drive cement demand going forward.
The company delivered a decent performance in a challenging demand environment. As the management hopes for a recovery in the overall sentiment towards the second half of the year, it will continue to push for volume-driven growth and market share gains.
After being constrained in the last two years, margins should see an uptick this year despite higher investments required to support core franchises as well as fuel the new engines of growth.
The company aims to build healthy foods, premium hair nourishment and male grooming into growth engines of the future and expects to deliver value growth at 20 percent plus CAGR over the medium term in these portfolios.
The company is reducing its debt-equity ratio with a focus on improvement of efficiency. Moreover, improvement in transmission and distribution, focus on green-power projects and commissioning of renewable power plants will give good strength to the company.
Government’s policy push such as emphasis on clean coal technologies, replacing old plants with new supercritical plants, automatic transfer of coal linkage, stricter environmental norms and emphasis on digitisation will go a long way in reenergising the coal-based power generation sector.
The company continues to focus on profitable execution of the large Order Book, selective order picking, on-time deliveries & operational excellence through digitalisation.
The management is also emphasising on cost competitiveness, continuous optimisation of working capital, restructuring of its business portfolio and value creation with an aim to enhance its return on equity.
Emkay Alpha Portfolio:
The bank’s core retail growth is trending well at 28 percent on a year on year basis, in line with its renewed focus on retail to drive higher margins and RoAs.
The brokerage firm expects the bank’s RoA/RoE to improve from sub-1%/10% since FY16, which has been a key irritant for investors, to healthy levels of 1.1%/14.7% by FY21E on better margins, contained opex and lower credit costs.
Emkay believes that better execution of retail strategy and the potential acquisition of an MFI company at reasonable valuations should provide further upside to the bank’s return ratios and its otherwise cheap valuations.
The recovery in sales cycle should be sooner in PVs than in 2Ws and CVs as PVs are less impacted by the BSVI transition. MSIL should continue in the pole position in the Indian passenger vehicle market, driven by its focus on new launches and network expansion.
New products such as Spresso hatchback, gasoline Brezza/Scross, electric hatchback, new UV, etc are expected to support sales ahead.
The network has expanded to around 3,000 touchpoints, and the expansion continues toward the medium-term target of 3,500.Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.