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    Betting on economic recovery? Top stocks & sectors to watch out for

    Synopsis

    There is still some headroom for the stock market to make new highs as the economy starts catching up with market expectations, say experts.

    ET Online
    NEW DELHI: There is no doubt that the Indian markets have rallied on the hopes of higher economic growth on the back of a reform push by the Modi-led government, which has also fuelled a rally in cyclical stocks or economy-related stocks; but it’s not just mere speculation which has led to an over 30 per cent rally in the S&P BSE Sensex so far in the year 2014 as macros have improved. There is still some headroom to grow as the economy starts catching up with market expectations, say experts.

    "India’s macro economy has significantly improved. The current account is better. We hope the fiscal is within 4.1%, commodity deflationary cycle is a positive for India and the markets are obviously normally ahead of the real economy," says Uday Kotak, Exec VC & MD, Kotak Mahindra Bank.

    "The real economy is still catching up, but I do believe that acche din are coming for the economy and are probably already in the markets," he adds.

    The initial part of re-rating is done across economy-related stocks in anticipation of recovery, say experts, and the market seems to have run ahead of itself in terms of discounting the earning numbers of certain sectors.

    "In terms of underlying economic activity - whether it is credit off-take, auto sales or earnings numbers- it is clear that the economy has not really turned meaningfully," says Saurabh Mukherjea, CEO-Institutional Equities, Ambit Capital.

    "My reading is that the second quarter growth will come in well below the Q1 number of 5.7 per cent. We are looking at a number closer to 5%. So there is concern that the economy has not actually turned in a significant way," he adds.

    However, economists across brokerages feel that the economy has bottomed out, but will take time to pick up. With factors turning favourable, the growth is expected to gain momentum in FY16.

    While the Organisation for Economic Co-operation and Development (OECD) has lowered India’s growth forecast to 5.4 per cent from 5.7 per cent estimated earlier for the current year, it expects the Indian economy to expand 6.4 per cent next year compared with 5.9 per cent estimated less than two months back in its September '14 interim outlook.

    "From a political and economy point of view, India today stands in far better stead vis-à-vis other competitors and peers like Brazil, which is in recession. China is only pumping credit to create growth. Their credit-to-GDP ratio is at 200%, which is three times more than that of India," says Nilesh Shah, MD & CEO, Axis Capital.

    "Russia has its own political and governance issues. So, suddenly all these factors have come together to create a foundation, on which a real long-term bull market can be in play in India," he adds.

    Here is a list of stocks & sectors which are likely to benefit more as the economy improves:

    Investors should not be swayed by the improvement in macros and invest in relatively weaker businesses. Experts still advice investors to look at quality before going for quantity. They should properly investigate the business of the company as well as earnings record.

    Mukherjea is of the view that this is a slow recovery and it will take time to overcome the fundamental issues of the economy. The best way to deal with to make profit is buy good quality names, which will stand the test of time, because you will need to be patient to make money in India, he adds.

    Sandeep Tandon, MD & CEO, Quant Capital

    The whole economy is improving and money flow is extremely positive. I like to capitalise the broader market rather than having a skewed portfolio. Definitely, themes are confined to very limited five-six themes which we are looking at.

    Very clearly pharma, banking, agri, cement and capital goods are up to certain extent and may be FMCG, IT also will continue. So I am looking at much diversified portfolio.

    Harendra Kumar, Managing Director-Institutional Equities, Elara Capital

    There is clamour for an interest rate cut, which may lead to a revival in the economy. So, in terms of absolute valuations, both these banks have this delta vis-à-vis HDFC Bank.

    Their management profiles are similar and they are putting in efforts to strengthen their businesses more. ICICI will tend to outperform Axis and both of them would tend to outperform HDFC Bank.

    There are some very interesting names in the infrastructure pack. These include HCC, MBL Infra and J Kumar. These companies have lots of stock-specific stories. Their execution and margins have been held up. I am specifically talking about MBL Infra and J Kumar. HCC, of course, has its own stories in terms of recoveries and order book.

    Saurabh Mukherjea, CEO-Institutional Equities, Ambit Capital

    The theme that we are focussing on is the large home improvement theme, which spans stocks such as TTK Prestige, V Guard, HSIL, Berger Paints, etc. We are also focussing on the smaller BFSI names such as Repco Home Finance, Magma, etc.

    We are also focussing on the auto sector. There is a clutch of names such as Castrol and Mahindra CIE from that sector. Three themes that we believe will do well in a recovering economy include home improvement, small cap financials and auto.

    We are looking at three to four small and midcap companies with good track record in cash flow generation and value generation.

    Sudip Bandyopadhyay, President, Destimoney Securities Pvt Ltd

    There is still a lot of opportunity in both automobile as well as some of the good infra stocks. In automobile, we like Maruti, which at current levels also looks good. Yes, it has run up quite a bit, still it is an excellent stock to buy. We like Hero MotoCorp. Again, it is an excellent stock to buy. So these are the two names we like in the automobile space.

    On the infra side, we still can go for L&T at current levels. It is a good stock to buy if you have one year plus time horizon in mind and, of course, beyond the top 100-200 stocks if you can venture out into midcap universe, there are enough and more opportunities of buying.

    (Views and recommendations expressed in this section are the analysts’ own and do not represent those of EconomicTimes.com. Please consult your financial advisor before taking any position in the stocks mentioned.)






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    (What's moving Sensex and Nifty Track latest market news, stock tips, Budget 2024 and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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