Indian markets have turned positive for 2022 led by gains in the months of July and August so far. The benchmark indices jumped nearly 9 percent in July and have advanced 3 percent in August so far. Between January and June, the benchmarks had fallen around 9 percent before recovering in the last 2 months. Overall in 2022, the markets are up 2 percent.
Amid this backdrop, brokerage house Bank of America Securities (BofA Sec) has come out with six structural themes likely to play out within India.
"We see six structural themes likely to play out within India over time. These trends could provide the potential for India's corporate earnings to outpace its nominal GDP growth structurally. We, hence, remain constructive on India long term. That said; we remain cautious on markets in the near term led by weakening global macro," said the brokerage.
Let's look at the themes
Rapid infrastructure ramp-up: India is rapidly augmenting its infrastructure capacity across sectors. BofA believes India's capacity adds in transportation infrastructure such as Highways & Railways in just ten years (FY15-25) could exceed the cumulative capacity adds seen over 65 years (FY50-FY15).
India is also focusing on rapidly augmenting basic infrastructure. For example 1) sanitation access for 89 percent of the population now versus 43 percent in FY15, 2) cooking gas/ LPG coverage at 100 percent now vs 56 percent in FY15, 3) electricity access now for 96 percent of households versus 56 percent in 2000, 4) tap water coverage already at 52 percent from 13 percent in FY15 and aim for 100 percent coverage by 2024, 5) piped gas with 10 million connections (2.5 million in FY15), and finally, 6) affordable housing (rural) for 25 million households till now vs 1 million till FY15.
These developments on the macro level will be reflected in the markets as well and related stocks are likely to do well going ahead, as per BofA.
Stocks exposed to the ramp-up infra theme include L&T, ABB India, Siemens, Cummins India, Adani Ports, ConCorp, Cement stocks, Voltas, Havells, DLF, Godrej Properties, Welspun India, and Astral, among others.
De-carbonization: This is another major theme BofA believes will lead to gains in the future. With its net-zero target, India is now aligned to large economies on a carbon-neutral goal. BofA sees the 2015 Paris agreement as an inflection point in India's efforts toward de-carbonization. In fact, India is leading the de-carbonization efforts globally, it said.
"Our analysis suggests that India would incur a capex of over $385 billion over 2015-30 just to meet its 2030 de-carbonization goal, which would accelerate materially over time, as it transitions to net-zero by 2070," predicts the brokerage.
Stocks exposed to the decarbonisation theme include RIL, Adani Total Gas, ONGC, Coal India, JSW Steel, Tata Steel, Tata Power, NTPC, Maruti, Jind Zinc, and IOC, among others.
Curtailing imports, stepping up exports: As part of its Atmanirbhar initiative, India is curtailing imports/focus on indigenization and stepping up exports, noted the brokerage. To achieve this goal, India is holistically addressing issues around factors of production, simplifying processes and curtailing infra deficits, it added. BofA further said that India is targeting exports of $1 trillion by FY28 (15 percent CAGR vs 8 percent CAGR currently). If successful, its estimates suggest potential for India to shrink its current account deficit by 74 percent over 5-6 years, noted the brokerage. This will give a leg-up to export-based stocks, it highlighted.
Stocks exposed to this theme include HAL, Bharat Electronics, 3M India, Honeywell Automation, L&T, Siemens, Adani Green, among others.
Government monopolies: As per BofA, the Government aims to operate in only 4 strategic sectors. In line with this vision, the govt has stepped up capital recycling through planned $75 billion of brownfield asset sales by FY25 and opening up of large monopolies across coal mining, defense, city gas distribution, airports, and railways, etc, it said. BofA further noted that the govt has demonstrated progress through Air India divestment, LIC IPO, The Major Port Authorities Act, InVITs/ToT models & proposed privatization of a few PSU banks and its analysis suggests that opening of monopolies helps attract large private and foreign capital and results in a rapid increase in capacity adds. Going ahead, PSU, as well as private stocks operating in sectors like airports, railways, gas distribution, ports and other themes focussed on by the govt, are likely to see major moves.
Stocks exposed to the theme of opening up of monopolies include Adani Gas, Gujarat Gas, IGL, MGL, Adani Enterprises, HSL, Bharat Electronics, PowerGrid, IRCTC, Concor, etc.
Improving tax compliance: Another important theme to focus on for the future is Tax collections. It has spiked over recent years and BofA believes tax collections could continue to outpace nominal GDP growth in the medium term led by tax simplification, rationalization and digitization helping step up the tax base and curb tax leakages. Also, it expects India's economy to rapidly formalize. It sees a huge opportunity for consolidation across sectors, given the high share represented by unorganized firms currently. Higher tax collections could also help augment govt. capex and/or fiscal consolidation, driving lower interest rates, it added.
Stocks exposed to higher tax compliance theme includes Bharti Airtel, Adani Transmission, Tata Motors, M&M, Grasim, L&T, Siemens, ABB India, HUL, ITC, Nestle, DLF, Lodha, Titan, etc.
Improving Digitization & Financial inclusion: India is seeing rapid rise in internet penetration and falling data prices which is driving step changes in digitization across sectors, noted BofA, adding that has seen a 1000x rise in digital transactions over 5 years. Rapid digitization/tech penetration is also nurturing a robust venture capital ecosystem within India (4th largest in the world), it pointed out. Besides, led by a strong govt. push, financial inclusion in India is rapidly rising, it added. Given a moderate borrowing penetration (45 percent) and an even lower share of access to formal credit (11-13 percent), it sees a huge growth runway for financial firms.
Stocks exposed to dogitisation include Paytm, Nykaa, Zomato, PB Fintech, Indiamart, Delhivery, Makemy Trip, Just Dial, Info Edge, Infibeam Avenues, Easy Trip Planners, among others.
A confluence of these themes & continuing reforms momentum has the potential to kick start multi-year upcycles across capex, real estate, credit growth & start-ups and could create room for lower fiscal & current account deficits in the long term, said BofA.
It remains cautious on earnings for external facing sectors such as IT, Energy and Materials, given global macro headwinds. On the other hand, it expects India's economic/earnings growth to outperform vs large EMs.
Meanwhile, it is optimistic on domestic cyclical sectors such as Financials, Industrials, and select Autos.