Amid high valuations and a volatile macro environment, Credit Suisse recommends investors to focus on long-term structural themes that have been shaping up in India.
Credit Suisse maintains a cautiously optimistic outlook on Indian equities, but a sustained or a sharp correction on D-Street is unlikely as domestic flows remain strong while a solid global growth outlook should be supportive for risky assets.
Amid high valuations and a volatile macro environment, Credit Suisse recommends investors to focus on long-term structural themes that have been shaping up in India.
Investors can build their portfolios around these themes, which we believe can potentially outperform the market in the medium term, it said in a report authored by Jitendra Gohil, Head of India Equity Research at Credit Suisse.
Here is a list of top 5 themes which investors can watch out in the year 2018:
Rural demand revival and financial inclusion:
Credit Suisse is positive on demand revival in rural and semi-urban areas. For the past couple of years, monsoon has been relatively good. Ahead of the general elections in summer of 2019, the government could take speedy measures to improve growth in rural and semi-urban areas, in our view.
Moreover, benefits of the 7th Pay Commission, farm loan waiver, record-high MANREGA allocation, etc. should provide a fillip to overall demand in 2018.
Credit Suisse likes Emami, Dabur India (HOLD), PI Industries (BUY) and Hero MotoCorp (HOLD), which are best positioned to benefit from rural demand revival.
Moreover, there is a huge scope for retail lending to improve, especially in rural and semi-urban areas, as penetration levels in India remain abysmally low.
Within retail lenders, Credit Suisse prefers rural and semi-urban lenders where there is maximum stress right now. Structurally, the global investment bank likes Shriram City Union Finance (BUY) and Cholamandalam Investment and Finance (BUY).
It reiterates BUY on Edelweiss, the largest ARC in the country, as Credit Suisse believes that the company will continue to demonstrate stellar growth in its credit as well as non-credit businesses (Net profit CAGR of over 50 percent in FY 2017– 2019E).
Progress on affordable housing is encouraging:
Credit Suisse expects the government to accelerate spending on affordable housing, which can create goodwill among voters and help create job opportunities as the construction sector is the second-largest employer after agriculture in India.
The global brokerage firm prefers housing finance companies, among which Indiabulls Housing Finance(BUY) and PNB Housing Finance (HOLD) are top picks. There are several industries such as paints, tiles, cement, faucets, white goods, cement, etc. that depend on the real estate sector.
Credit Suisse remains positive on Pidilite Industries (BUY), Kajaria Ceramics (HOLD), Shree Cements (BUY), Crompton Greaves Consumer (BUY) and Voltas (BUY).
Infrastructure and capital goods in a sweet spot:
As per IMF projections, India could spend on infrastructure on an average 8.1 percent of GDP per year from current fiscal year to 2022 compared to just over 5 percent a few years ago.
This accelerated spending along with policy support and international financing could potentially transform India’s infrastructure landscape. Apart from budgetary support, we expect the government to push public sector companies (PSU) to spend more or pay higher dividends.
Credit Suisse is positive on Larsen and Toubro (BUY), KEC International (BUY), Sadbhav Engineering (BUY), Dilip Buildcon (BUY) and VA Tech Wabag (BUY).
The energy sector continues to attract attention:
India is a net importer of oil and gas, and the sector has remained under-invested for years now. Credit Suisse expects the government to provide a favorable policy framework to attract more investments and improve energy infrastructure in India for curbing imports and moving toward energy independence.
In terms of gas sector reforms, Credit Suisse prefers ONGC (BUY), which will benefit from a better policy framework. Within oil marketing companies, we prefer Indian Oil Corporation (BUY), which will benefit from expansion and lower valuation.
NPA resolution will be keenly watched:
Stressed assets (NPA, restructured, etc.) in the Indian banking system are estimated at 14 percent of total loans. Starting June 2017, the Reserve Bank of India (RBI) issued a direction to banks to refer 40 cases to the National Company Law Tribunal (NCLT) for bankruptcy proceedings if they along with resolution professionals fail to finalize a resolution plan within the stipulated 270 days.
Progress on the resolution of most of these accounts has been better than expected so far, especially in case of the steel sector where banks have received multiple “Expression of Interests.”
Credit Suisse believes that State Bank of India (BUY) is best positioned to benefit from large accounts’ resolutions.
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