Mumbai:

Improving outlook for economic expansion and stronger corporate earnings growth are expected to bolster asset allocation to Indian equities in 2018 and provide renewed thrust to the bull run that has lifted benchmark indices to record highs.

Both the top-30 Sensex and the 50-share Nifty soared to their all-time peaks this week after Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP) posted a hard-fought victory in provincial elections in Gujarat, making it a sixth consecutive win for the ruling party in the western state. The BJP also dislodged rival Congress party and swept the polls in Himachal Pradesh.

For the markets the results eased any concerns about political uncertainty, and reaffirmed continuance of reforms underway. Challenges posed in the elections are also seen as a wake-up call for the BJP to pull up its socks and focus on governance, particularly faster implementation of plans and policy corrections to revive private-sector investment.

“The spotlight will shift to the economy in quick time,” said equity strategist Manish Pandiya. “The next big event is the budget and it is a given the government will aim to pacify rural distress and boost jobs growth. It should be exciting times for equities.”

Around two-thirds of India’s 1.3 billion people, the world’s biggest population after China, depend on their livelihood from farm-related activities and governments in a democracy have to be overly sensitive to their plight. While the $2.3 trillion economy expanded 6.3 per cent in the September quarter, rebounding from a slowdown to 5.7 per cent in the preceding three months, the farm sector grew at a measly 1.7 per cent, dented by lower prices and output.

The annual budget, which would be the last full one before general elections due in 2019, is expected to be unveiled on February 1. It is likely to be populistic, without overshooting fiscal prudence that has been the hallmark of this government and received approval of rating agencies.

Themes matter

Companies have raised almost $30 billion through share sales this year, including record initial public offerings of $11.5 billion. A significant slice of the money was pocketed by angel investors, still the remaining cash is no small measure and would be ploughed into productive investments and higher earnings in the coming year.

Fund managers aver the biggest theme that will be the key driver for stocks in the coming years is discretionary spending, synonymous to latent demand in the emerging economy. As living standards improve and income levels rise, consumer spends on items such as cars, apartments, home appliances, electronic gadgets, branded garments, luxury goods and leisure and travel are set to soar.

Exposure to cable TV networks in the hinterlands, especially films both foreign and domestic as well as advertisements, has vastly widened the market. With more than half the population below the age of 35, the aspirational classes dominate the countryside. When economic growth picks up to more than seven per cent in the 2018-19 financial year, beginning April, expect discretionary spends to move up in tandem.

Already demand for cars is robust. Maruti Suzuki, the dominant player in passenger cars and the fifth most valuable company, is on track to report double-digit growth this year and would aim to maintain the pace in the coming year.

“The constraint next year will probably come not from the customer demand but will come from production capacity,” Chairman R.C. Bhargava told ET Now television channel. “My guess is when we do the budget, we will have to see how much we can stretch our facilities to try and get to the double digit figure.”

Maruti, which has a more than 50 per cent share of the domestic car market, sold 1.568 million vehicles between April and November, up 14.6 per cent in the first eight months of the financial year. Its shares soared to a record Rs. 10,000 on Wednesday after the Gujarat and Himachal election results, and closed on Friday at Rs. 9,700.25, with a gain of 82.2 per cent in 2017.

In comparison, the top-30 Sensex jumped to a record 33,964.28 on Friday, before closing at 33,940.30, up 27.5 per cent in the year-to-date. The 50-share Nifty rose to an all-time high of 10,501.10 and settled at 10,493. Both the indices gained 1.4 per cent and 1.6 per cent respectively over the week.

Morgan Stanley has a 2018 Sensex target of 35,700, with India likely to outperform emerging markets. It is positive on industrials, corporate banks, domestic materials and software stocks. It recommends investors should avoid health care, staples, utilities and energy.

Nomura believes that India is at the cusp of a business upcycle and will see a strong revival in earnings growth. It has a 2018 Nifty target of 11,880, and is overweight on financials, auto, oil and gas, health care and infra sectors. It is underweight on information technology, consumer staples, utilities and cement.

Stock picks

Religare Securities is upbeat on shares in Asian Granito, the No. 4 tile maker in India, which have climbed 1-1/2 times so far this year to Rs. 538.70. The brokerage sees robust growth potential for the tiles sector in anticipation of a pickup in the real estate sector, and has set a target price of Rs. 642 for the stock, an upside of nearly 20 per cent.

It expects the company’s profit after tax will expand 32 per cent on a compounded annual growth rate over three years. Analysts forecast the market for tiles to reach Rs. 1.5 trillion by 2021-22 from Rs. 240 billion currently. Edelweiss Securities, which also recommends the stock, believes the company has a “multi-storied” compelling growth story.

The stock trades at 19 times 2018-19 expected earnings, compared with Kajaria Ceramics at 27 times and Somany Ceramics at 24 times.

JP Morgan recommends Fortis Healthcare as it expects improving profitability and falling borrowing costs will fire up earnings. The company’s acquisition of real estate assets that houses its 14 existing hospitals and four upcoming projects from Religare Healthcare Trust, is accretive for its operating performance, according to the brokerage.

Analysts at 12 more brokerages have a “buy” rating on the stock, with a target price of Rs. 209. That implies a potential gain of 47 per cent. The share has been a laggard this year, having fallen 21 per cent.

—The writer is a journalist based in India