UBS Wealth Management revised its outlook for Indian equities for this year and for 2018 due to goods and services tax (GST) related GDP growth softness. However, it still believes that Indian equities have already hit a bottom, in line with recovering leading indicators.
The economy is slowly recovering from the GST-related disruption and so will corporate earnings. “However, we continue to expect the market to move sideways for some months so that profits can catch up with a market that went quite far ahead of them,” UBS Wealth Management said in a report.
The drag from the introduction of the goods and services tax (GST) is likely to fade, both on the GDP as well as on the corporate earnings level. UBS Wealth Management revised its EPS growth expectations down for this fiscal year for reasons that are also non-GST related.
The global investment bank is of the view that India's long-awaited investment recovery will happen eventually, some of it even in this calendar year. But, it will be a slow one.
The prospects for the BJP-led National Democratic Alliance (NDA) coalition look solid for the 2019 national elections; however, a hint of rising populism has the potential to hamper the growth recovery.
This is especially true of the recent fashion to grant farm loan waivers in a (so far) limited number of states. While this pleases voters, for markets it might be less reason to cheer, and even the Reserve Bank of India (RBI) has voiced concerns about this trend
Here is a list of top 10 preferred bets from UBS Wealth Management:
Apollo Hospital is well positioned in the Indian healthcare market, but does not have a sufficient supply of hospital beds. The group added several new facilities in the last few years, which are operational now.
Owing to the breakeven turnaround time in the hospital business, the group's margins were low during the years it was investing in its facilities, but these investments should become margin accretive in coming quarters as the group begins to focus on improving its operational performance and cash flows.
UBS Wealth Management expects Apollo Hospitals' margins to improve as it turns EBITDA positive on investments made during earlier years. The stock looks attractive at current valuations, while the global investment bank sees earnings growth improving from here.
Asian Paints is the leader among organized paint manufacturers in India, and has a diversified and strong brand presence across first, second and third-tier cities.
The group enjoys solid pricing power and can comfortably pass on higher input costs without affecting volumes much. After the Goods and Service Tax (GST) takes effect we expect volume growth to improve gradually, supported by re-stocking by suppliers.
The implementation of the GST should be positive for established players like Asian Paints. As such, UBS expects the company to experience market share gains and earnings growth.
The group has strong pricing power and hence the global investment bank believes that it can sustain margins at current levels even when input costs are on the rise.
HDFC Bank has a balanced portfolio of retail and corporate loans and continues to record above-industry- average growth rates. UBS Wealth Management expects lower domestic interest rates to trigger healthy credit growth, especially in the corporate segment.
UBS Wealth Management also see an opportunity for the bank to pursue market share gains as ongoing asset quality issues have weakened the balance sheets of public sector banks and thereby their ability to lend competitively.
HDFC Bank remains a prudent lender and continues to pursue market share gains. It is also well positioned to benefit from both retail and corporate lending growth.
After accelerated recognition of non-performing loans (NPLs) over last few quarters, NPL formation (rate) has now declined for ICICI Bank, and hence UBS Wealth Management expects its balance sheet strength to improve from here.
On the other hand, ICICI Bank's growth remains robust. A majority of loan growth is still coming from retail, while corporate loan growth is only gradual and might pick up once economic growth prospects improve further.
The stock looks attractive because it offers a balance of strong earnings growth and improving asset quality, while we expect cash flows to improve from monetization of some of its subsidiaries.
UBS Wealth Management thinks investor concerns over ICICI Bank's asset quality are now behind us as the NPL formation for the group has now declined. The global investment bank thinks that the stock's valuations are undemanding, and offer a balance of strong earnings growth and improving asset quality.
ITC's share price corrected after the Goods and Services Tax (GST) council announced that cigarettes will carry the GST rate plus a higher cess. The group raised prices to pass on the higher tax rates to consumers and volumes suffered, but only in the short term.
ITC's share price plunged after the government categorized tobacco products as de-merit goods and levied higher cess. Given the company's strong pricing power, the price drop has created an attractive entry point, in our view, as the group continues to achieve solid earnings.
UBS Wealth Management likes Kotak Mahindra Bank (KMB) because it offers growth while its prudent lending policies help it in sustaining good asset quality. Given its balance sheet strength, the group might explore inorganic growth, which, in our view, could provide further upside to earnings.
L&T's strong presence in domestic markets has helped it sustain earnings momentum by bagging orders from government investments, while its international presence compliments earnings growth. The stock's current valuations are undemanding to UBS Wealth Management.
M&M's valuations look attractive at current levels, while we expect earnings growth to improve given revival in rural demand and also from new launches in the utility vehicle segment.
UBS Wealth Management expects the group to gain strategic advantage over peers once it scales up production of electric vehicles.
UBS Wealth Management is upbeat on PVR, India's largest multiplex cinema exhibition company, and see the group sustaining robust growth rates. The global bank expects PVR to continue posting robust earnings growth on the back of 1) expansion plans within India; and 2) margin expansion from an improved product mix (increasing share of revenues from F&B segment).
UltraTech's geographical spread and economies of scale shield it from demand and price fluctuations, in our view. Therefore, UBS Wealth Management believes that the stock offers better earnings visibility relative to its peers. Moreover, the stock looks attractively valued at current valuations.
Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are UBS Wealth Management's own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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