Mumbai: The record-breaking rally in Indian equities shows no sign of abating, fed by abundant liquidity and an expected acceleration in economic growth, but investors should be prudent to pick and choose stocks wisely because pitfalls also abound in the red-hot market.

Economic growth in India should pick up to 7.3 per cent in the coming financial year that begins on April 1, the World Bank said in its report ‘Global Economic Prospects’ released on Tuesday, regaining the nomenclature as the world fastest expanding major economy, “supported by strong private consumption and public spending on wage increases and infrastructure investments”.

India lost the top position in 2017-18 when it estimated growth in the subcontinent slowed to 6.7 per cent, knocked by temporary disruptions caused by the ill-prepared launch of a new national sales tax just as businesses were getting over demonetisation fallouts.

“Private investment is expected to revive as the private sector adjusts to the Goods and Services Tax and a global trade recovery lifts exports,” the World Bank said. It projected rival China’s economic expansion to slow to 6.4 per cent in 2018 from 6.8 per cent in 2007.

The flood of household savings flowing into equities in India, driving stock benchmarks to all-time highs, is the belief among economic pundits that the country can sustain high growth rates over a long period of time, much like China in the past two decades.

“In all likelihood, India is going to register higher growth rate than other major emerging market economies in the next decade,” Ayhan Kose, a senior World Bank official, told the Press Trust of India news agency. “I would look at the big picture for India and big picture is telling us that it has enormous potential.”

Official data late on Friday showed industrial output leapt to a 25-month high in November, expanding 8.4 per cent, well above expectations and after a downwardly revised two per cent rise in October.

Earnings on radar

Two factors that will have a big bearing on market outlook over the near term are quarterly earnings and the annual central budget that will be unveiled on February 1. Tata Consultancy Services, the country’s biggest software services exporter, reported a 3.6 per cent decline in October-December profit that was largely in line with expectations, and the company said big orders were coming in providing optimism to outlook.

Analysts at Deutsche Bank said the company reported strong revenue growth in a seasonally weak quarter and noted that large deal signings were healthy. They maintained a ‘buy’ on the stock with a price target of Rs3,000 (Dh173.27). The share closed down 0.6 per cent after the results at Rs. 2,772.90 on Friday.

However, Credit Suisse kept its ‘neutral’ stance on the stock with a price target of Rs2,350, implying a potential 15.3 per cent drop, saying that growth momentum continued to be soft in the US, the main market for software services.

After markets closed on Friday, rival Infosys Ltd, posted a better-than-expected 38.3 per cent jump in quarterly profit, bolstered by tax benefits from an agreement with the US tax authorities. The company maintained its expectation for full-year revenue growth of between 5.5 and 6.5 per cent.

IndusInd Bank, a mid-sized lender controlled by the billionaire non-resident Indian group, the Hindujas, reported a 25 per cent jump in quarterly profit. Analysts at Citigroup and Bank of America-Merrill Lynch raised their target price for the stock to Rs2,060, indicating a potential gain of 21 per cent to the share’s closing on Friday.

Earnings in the coming week include Federal Bank on Monday, Hindustan Unilever and Bharti Infratel on Wednesday, Bharti Airtel, UltraCement, Yes Bank on Thursday, HCL Tech, HDFC Bank, ITC, Jubilant FoodWorks, HDFC Standard Life Insurance, ICICI Prudential Life Insurance, IDFC Bank, Kotak Mahindra Bank and Wipro on Friday.

Wary eye on budget

The top-30 Sensex shot to an all-time high of 34,638.42 on Friday, before closing at 34,592.39. The benchmark index gained 1.3 per cent over the week, posting a sixth consecutive week of gains. The broader 50-share Nifty ended up 1.2 per cent at 10,681.25, after hitting a record 10,690.40.

Speculation on the budget is also driving the market even as government finances remain under severe pressure from shortfalls in indirect tax collections and ballooning spending. High global oil prices are also a worry for New Delhi, boxing in room for any easing in monetary policy. Retail inflation in December climbed to a 17-month high at 5.21 per cent, well above the central bank’s threshold.

“The government faces a tough challenge in order to create the right balance between fiscal discipline and spurring economic growth,” Rakesh Tarway, head of research at Reliance Securities, wrote on the coming budget.

Consensus opinion among economists and policy watchers is the budget would focus on raising incomes in the rural region, where the vast majority of the nation’s 1.3 billion people live. It is a sector that the ruling Bharatiya Janata Party is trying to woo ahead of general elections due in 2019.

Tarway believes that measures to help stimulate the rural economy would drive consumption and benefit makers of fast moving consumer goods (FMCG), building materials and white goods.

“We expect companies in the agro, FMCG, infrastructure development, building materials and railways sectors to be biggest beneficiaries of the forthcoming union budget,” he wrote.

Big bets

India strategists at Deutsche Bank are also betting on “a sharp jump in spending on agriculture and rural development in 2018”, given the significance of votes from this large sector in elections. New Delhi’s Rs2.11 trillion recapitalisation plan for state-run banks that are struggling with bad debts should also pave the way to increased credit growth, particularly for small and medium enterprises.

Taking note of this, the analysts have recommended their preferred shares that investors could use to build a portfolio. These include: Reliance Industries, Mahindra & Mahindra, Tata Motor, Larsen & Toubro, ICICI Bank, Bank of Baroda, Hindustan Unilever, Titan, Apollo Tyres, Jubilant FoodWorks, Petronet LNG, Aurobindo Pharma, Shriram Transport, UPL, Dalmia Bharat, Shree Cement, Coromandel, Gujarat State Petronet and NTPC.

The strategists cautioned investors on sectors such as health care, telecommunication, consumer staples and financials especially non-banking financial companies.

Credit Suisse initiated coverage of InterGlobe Aviation Ltd, the owner of IndiGo, the country’s leading airline, with an “outperform” and a target price of Rs1,650, a potential rise of 33.7 per cent to Friday’s close of Rs1,233.90, noting the company’s lowest cost structure and strongest balance sheet among its peers. Air travel in India is booming on the back of higher standards of living and the rapid growth rate is expected to continue over many years.

The writer is a journalist based in India.