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India Strategy - Markets Meter: IDFC Top Picks; Healthy correction provides opportunity to buy

Indian markets: Nifty corrected 5.7% from a life-time high of 11130 (on 29th Jan 2018), led by global sell off and on profit booking by the market, post introduction of Long Term Capital Gains (LTCG) tax in Union Budget FY19. The budget focused on rural growth, infrastructure push, employment creation, MSME (Micro, Small and Medium Enterprises) support and social welfare, which was in line with expectations and is expected to support lower income groups in general (for more details please refer to Union Budget FY19.pdf ). These announcements come in backdrop of major reforms/stimuli like: a) GST implementation, b) recapitalisation of PSU banks, c) Bharatmala/Sagarmala/Smart cities projects, etc. All initiatives put together are expected to address key issues (looming NPAs, lagging private investment, weakness in SME segment and manufacturing etc.) plaguing the Indian economy in the last few years. Consequently, we expect an accelerated growth path for the Indian economy FY19 onwards. Our stance further finds support from better-than-expected ongoing Q3 earnings season (for more details please refer to Nifty Interim Review - Jan18.pdf ). The current dip seems a healthy correction and makes us re-emphasise buying on such dips; we reiterate our March 2018 Nifty target of 11300. Also, in light of positive policy developments and stimuli, FII’s have invested net of US$2bn in January 2018, while DII’s invested net US$63m (of which investments from mutual funds was US$1.2bn) during the same period.

Global overview: Post a new life-time high on 28 January 2018 , Dow Jones developed markets index and MSCI emerging markets index corrected by 6% and 5%, respectively. With the global economy exhibiting fundamental strength after a long downturn (as exhibited in employment data, GDP growth, inflation and bond yields in the US as well as the Eurozone), we expect fundamental growth to continue undeterred. Moreover, a part of the sell off could be the fear of drying liquidity (as Fed is expected to increase rates, US 10-year yields exhibited a sharp spike at 2.84%). We believe 2018 will continue to be marked by the global recovery theme, as manufacturing, investment and trade continue to strengthen after a prolonged downturn. Thus, we expect global economic recovery to continue with stronger business activity buoyed by robust demand, unless some unlikely event breaks out (like geopolitical stress worsening).

Key themes and IDFC view: We believe two themes would predominantly play out as the economy recovers: a) Asset-heavy and export-oriented industries would do well as the global economy recovers and consequently, the valuation gap between asset-heavy and asset-light industries would narrow further, b) Consumption being the strongest component of GDP (especially discretionary consumption) will continue to see growth impetus from retail credit, which we believe will continue in the near term. Moreover, recent reduction in tax rates for companies operating in the discretionary consumer sector will boost overall consumption. Consequently, we are:

Overweight: Engineering and Capital goods, Construction, Metals & Mining, Oil & Gas, Consumer Goods, Automobiles, Media and Pharmaceuticals;

Neutral: Banks, Cement, Chemicals, Power and IT;

Underweight: Real Estate and Telecom

Changes in top picks: a) Replacing SBI with ICICI Bank within our top picks: We see ICICI Bank as our top pick within the corporate banking space, as we believe the slippage going ahead will be less volatile compared to what we observed in previous years and given that its margins have bottomed out. On the other hand, SBI has received lower-than-expected allocation in the first tranche of recapitalisation plan (Rs88bn vs Rs265bn expected) and we expect disappointing Q3 earnings. 

1. b) Replacing ONGC with Maruti Suzuki: Maruti continues to gain market share on back of strong product launches and declining competitive intensity. Moreover, upcoming  joint venture with Suzuki, Toyota and Denso for battery production (FY20 onwards) will give company an edge in electric vehicle space. Consequently, Maruti’s recent price correction provides a good opportunity to bring it into top picks. Given the upper cap on number of our top picks we are dropping ONGC from IDFC top picks list.

IDFC Top Buys: Large caps: Maruti Suzuki, ICICI Bank, Motherson Sumi, HPCL, Hindalco Industries, Aurobindo Pharma, Bharat Electronics and Ashok Leyland; Small and mid caps: Kajaria Ceramics, SpiceJet , Ashoka Buildcon and Greenply Industries.

IDFC Top Sell: Bajaj Auto