Global investors are decisively turning upbeat on Indian equities, betting a pick-up in industrial growth, slowing inflation pressures, rising exports and a government focused on removing bottlenecks would percolate to stronger corporate earnings in the years ahead.
Finance Minister Arun Jaitley said on Friday his decision to extend excise duty cuts for cars and other consumer goods until the end of this year and give tax breaks for individuals would help boost consumer demand and enable economic rebound.
“Put more money in the hands of average citizens so that his spending also increases and this larger economic activity will then lead to an enhancement of the growth rate itself,” he told parliament and added that the government would shun arbitrary tax changes, try and resolve disputes and help perk up sentiment.
The cabinet this week approved a proposal to raise the foreign holding in the insurance sector to 49 per cent from 26 per cent, and this is likely to be legislated before the current session of parliament ends in early August. It would herald quick decision-making in New Delhi, which has traditionally followed a snail’s pace in such matters.
Transport minister Nitin Gadkari, who spearheaded the flyovers that dot the financial hub of Mumbai during his earlier term in Maharashtra in the 1990s, is working on reviving 50 stalled highway projects worth Rs1.8 trillion by mid-August. To speed up the process the government has decided to allow starting work on linear projects such as highways on non-forest land without waiting for environment clearance.
These refreshing moves are a shot in the arm for business confidence, which had been in the dumps after the previous administration allowed things to drift endlessly. Economic growth that had halved to below 5 per cent in the past two financial years, is expected to climb to near 6 per cent in the current year.
“From being the weakest link in the Fragile Five, today, the consensus view among investors was that India was a winner staring in your face,” Citibank economists Rohini Malkani and Anurag Jha said in a report after meeting with more than 50 institutional investors across asset classes in London.
“The mood was undoubtedly bullish with India being a consensus over-weight versus other emerging markets,” they wrote.
Record highs
Indian stocks have been the biggest gainers in emerging Asia this year, and among the top performers in the world. The top-30 Sensex shot to another all-time high of 26,300.17 on Friday, before ending at 26,126.75, up 1.9 per cent on the week and stretching gains to 23.4 per cent for the year to date.
The broader 50-share Nifty also hit a record high of 7,840.95, and closed at 7,790.45, notching a rise of 1.65 per cent for the week.
“While valuations have risen, investors are now expecting earnings upgrades. The consensus overweight is due to the upturn in the economy/policy cycle, rising profitability — a result of cost cuts/excess capacity and potential trend reversal of financial savings — which bodes well for equities,” the Citibank analysts wrote.
Goldman Sachs said with green shoots already visible in the economy, a recovery in corporate earnings should follow. The stocks rally so far was largely driven by “recovery hope”, and further gains would need concrete proof on the ground.
“We remain strategically bullish on India and believe the next leg up will be less sharp, more earnings driven and contingent upon reform execution,” analysts at the US investment bank including Sunil Koul and Nitin Chanduka said in a note to their clients.
“We expect corporate earnings to grow 14 per cent and 18 per cent for this calendar year and next.”
Expecting the Nifty to reach 8,600 by next June, Goldman Sachs said it was overweight on banks, industrials and technology.
Stocks watch
Shares in Tata Consultancy Services, the country’s biggest software services exporter, leapt 6.7 per cent this week to Rs2,604.95, swelling the company’s market value to more than Rs5 trillion. On the top pick list of most brokerages, the stock has been propelled by robust earnings and a buoyant outlook for outsourcing in the company’s main markets of US and Europe.
“We like TCS for its strong client relations, stable management and its dominance in emerging services like IT infrastructure management services, business process management and digital that are likely to drive superior growth versus peers,” Merrill Lynch said. “We also like TCS for its tight execution that has resulted in industry leading profitability.”
Suzlon Energy Ltd, India’s biggest wind turbine maker that had been struggling under adverse government policy changes and a bond default in 2012, should see better days after Finance Minister Arun Jaitley said the government would reintroduce an accelerated depreciation tax benefit for wind-farm investors.
Improving enforcement of renewable purchase obligation by state regulators, and a push to increase wind energy in states such as Rajasthan, Gujarat, Madhya Pradesh, Maharashtra and Tamil Nadu should also help companies such as Suzlon.
“We see potential upside for the stock from a balance sheet turnaround and from strategic strength in the Indian market,” HSBC analysts Charanjit Singh and Jenny Cosgrove said in a report, setting a 12-month target price of Rs37 (Dh2.26). The stock closed at Rs23.55 on Friday.
Market conditions
Although Tata Motors shares fell more than 3 per cent on Friday after the company said it lowered prices of its Jaguar and Land Rover vehicles in China, the company is expected to get a boost from improving market conditions in India where it is set to launch two new car models this quarter. The Zest and Bolt sedans would be the first launches by the company since the Nano six years ago.
The new models could potentially add 20-40 per cent to the company’s car sales, which along with better demand for its trucks and buses should underpin earnings in the coming months
“We reiterate our overweight rating on Tata Motors as we believe that the outlook for the India business is improving, given the new product launches in the passenger car segment as well as their dominant position in the commercial vehicle segment in India,” JP Morgan said.
The writer is a journalist based in India
