Global brokerage Morgan Stanley expects the financials and consumption sectors to perform well in the next decade. It believes both the sectors will gain share in the market at the expense of global sectors.
"Together the financials and consumer sectors could account for 63 per cent of India's market by 2027, up from 47% currently, largely at the expense of global sectors such as software services, pharmaceuticals, materials and energy," said Morgan Stanley In a report titled 'India's digital leap - The multi-trillion-dollar opportunity'.
We have picked ten stocks among thirteen that Morgan Stanley recommended to ride on India's digitisation story:
Babaj Finance, which has gained over 100 per cent year-to-date, is the preferred pick of the global brokerage from its financials coverage. The stock is a pure play on consumer and SME financing growth given it has the highest exposure (over 90 per cent) to these segments as a share of the loan book.
"Bajaj Finance (BAF) offers a diverse range of products across both these segments. Continued focus on these segments has helped it deliver a strong 33 per cent EPS CAGR, with an average ROE of 21 per cent in FY2014-17," it said.
Risk: An underlying assumption is that BAF will be able to maintain asset quality and profitability. If this were not to happen and if BAF were to see meaningful compression in profitability with or without an increase in NPLs, valuation multiples could come under significant pressure from current premium levels.
Edelweiss Financial Services
As a diversified financial services competitor, with a good combination of credit and capital-light businesses, Edelweiss is positioned well to benefit from the strong growth the brokerage expects in financial services between FY17 and FY27.
"Its distinctive advantage is that its key businesses are in segments that are among the fastest-growing parts of the financial services industry, but which face relatively less competition from banks, implying good pricing power," the brokerage noted.
The stock has already turned a multibagger, gaining 169% so far in 2017.
Risk: The brokerage may go wrong if Edelweiss sees a sharp rise in non-performing loans (NPLs) with or without a major prolonged decline in equity markets and sentiment.
HDFC Bank is clearly one of the biggest beneficiaries of the consumer and MSME lending boom. It has a number of advantages over the rest of the banking system, for example, its balance sheet is cleaner relative to many other lenders, and its low funding cost allows it to price aggressively and still make strong returns. The stock has returned over 48 per cent year-to-date.
Although HDFC Bank's valuations as compared with its history are elevated, Morgan Stanley expects them to contract over the next ten years, adding given the likely
strength of compounding, the stock is likely to perform well.
Risks: a) greater than expected competition in retail on pricing; b) slower than expected CASA growth; c) higher than expected competition in processing and other fees.
ICICI Prudential Life Insurance
Although ICICI Pru valuations are not cheap, we nonetheless believe that the combination of the increasing protection mix and better operating leverage can drive sustainable RoEV of ~17-18% over next ten years. This implies strong returns, even as valuations move lower.
Risks: a) Significant margin compression in the protection business; b) an aggressive move to open architecture by ICICI Bank; and c) potential increase in tax rates.
LIC Housing Finance
The company will be a big beneficiary of strong growth in affordable housing as it is the lowest-cost producer of housing loans. The brokerage also believes RERA and GST to drive bigger foray into its self-employed and developer segments.
"We expect a strong housing loan CAGR (around 16%) over the next ten years, with potentially even a stronger non-housing loan CAGR, which could help improve / sustain NIM in the wake of NIM competition in the core housing loan business.
Risks: If LIC Housing Finance fails to accelerate growth in home loans and loses market share in housing loans, and if it does not increase the share of non-housing loans thereby seeing a decline in net interest margins.
The brokerage believes Asian Paints is a key beneficiary of increasing disposable incomes and strong growth in property demand. It has a standout business model and is set to benefit from an improvement in urban consumption growth. The stock is up 30 per cent year-to-date
Risk: Given the strong correlation of paint industry volume growth to real GDP growth, any slowdown in economic activity can impact industry growth trends. Operating margins for the business may be at risk in the event of a sharp increase in input costs.
Eicher Motors is a key beneficiary of higher discretionary spending. "With rising disposable incomes in India, we expect a strong upgrade cycle for two wheelers in India and we expect Royal Enfield’s (RE) cruiser bikes segment to be a key beneficiary of this trend," it said.
Risks: "Pull brand" turns into a "push brand", Stronger-than-expected competition and Any sustained slowdown in commercial vehicles
Morgan Stanley believes GST offers the opportunity of structural market share gains for ITC from illicit cigarettes; valuations and earnings expectations are relatively benign due to risks from continuing adverse policy action.
Risks: Any incremental adverse government policy action (tax, packaging, a loose cigarette ban) will put brokerage's cigarette volume growth estimates at risk. An increase in awareness and shift to reduced-risk products (RRP) in tobacco consumption as smokers increasingly look for alternatives to combustible cigarettes, may impact long-term valuations on the stock.
The brokerage expects Maruti’s growth will be strong not only on an absolute basis but also on a relative basis and hence it expects auto major's market share wins to be sustained given the strong moats (strong product proposition, distribution, which is more than double that of the
nearest competitor) Maruti has built around its business.
Risks: The Indian car recovery remains patchy, Competition setting up a Tesla-like Giga factory in India, rupee depreciates against pound.
Morgan Stanley believes Ultratech is in a sweet spot amid a strong demand outlook given India’s housing shortage and the government focus on infrastructure and affordable housing and slowing capacity additions.
Risk: Weaker than expected cement demand and higher than expected capacity additions.