FREE

India Strategy: Thinking Alpha - IDFC Top Picks

Against the backdrop of fairly weak economic growth, in addition to the aggressive measures taken by the Indian government towards resuscitating demand, resumption of US-China trade negotiation talks in Oct 2019 make for a constructive outlook.

As we have held in the past, withering of global trade momentum has had a significant impact on domestic growth through both direct and indirect channels. We attributed the sudden collapse in domestic auto sales volumes and durables to cash crunch from curtailed government spending, disruption in the MSME sector, and the NBFC sector mess.

We see some of these constraining factors ebbing, partly aided by recent measures taken by the government and the RBI. Secondly, there are signs of stabilisation of global trade from the initial shocks, even though still at sub-trend levels. Recent ebbing of trade polemic talks between the US and China comes as a positive development, notwithstanding the continued risk of a failure again.

Near-term data flows are unlikely to be enthusiastic, especially ahead of the upcoming Q2FY20 result season. High frequency data indicate that corporate performance may still remain muted amid feeble demand conditions in Q2FY20. Data across several industries, particularly automobiles, infra sector, capital goods, metals, and BFSI sector corroborate weak growth dynamics.

Based on the above mix of extant weakness in growth and expected improvement over the next 4-6 quarters, we pack up key themes and ideas across our IDFC Coverage universe in our introductory IDFC Securities ’Thinking Alpha’ product. The bottom up and macro views also feed into our India portfolio (Pages 23-24).

Consumption: Traction of growth recovery will be first seen within the consumption space, which has been most adversely impacted. Gains from corporate tax cuts will aid leaders. Cash flow improvement from higher government spending and bank lending is expected to feed into discretionary consumption as well. Gains in price realisation for the farm sector amid stable current output and strong rabi season should help boost rural demand.  Top picks: HUL, Titan, Asian Paints, Crompton Consumers, Amber Enterprises.

Automobiles: Volume declines, overstocking amid uncertainty over festival demand and BSVI concerns remain. However, we expect the intense negativity to ebb Q3FY20 onwards. Top buys: Maruti, Eicher Motors and we have underperformer rating on Ashok Leyland

Private capex still afar: Reduction in corporate tax rate to 25% is only an enabler for private capex. However, we believe the operating matrix for Indian companies have yet to touch the inflexion point for fixed investments. Top picks: L&T, KEC.

Banking and Financial services: Decline in bank credit growth and renewed asset quality concerns will weigh on the sector. We see margin pressure in the foreseeable future, as lending rates are being benchmarked to RBI’s repo rate. Hardening of Gsec curve (10-year rising to 6.75%) suggests that trading gains in Q1FY20 is wearing off. Top picks: ICICI Bank, Axis Bank, HDFC Bank.

Cement: We see muted demand from the housing space, support from affordable housing and benign costs as key themes in the sector. Top picks:  Ultratech, ACC.

Building material: Weakness in the housing sector continues to weigh on dependent companies. However, the affordable housing space is seeing strong traction. Top picks: Kajaria, Supreme Industries and Astral Poly.

IT & ES: IT Services as a defensive play, in which our fundamental stance is cautious; Top picks: HCL Tech, Infosys.