Jefferies Optimistic On India Citing Wave Of A Multi-Year Capex Upswing

India became the fastest-growing large economy in the world over the last two years mainly due to a renewed capex cycle, a well-capitalised banking system, robust credit growth, an upturn in the housing sector, robust domestic consumption and growing services exports, according to Jefferies.

"GDP has grown at a strong 7.7% in 1HFY24, much ahead of consensus estimates," the research firm said in a Jan. 2 note.

The long dormant capex cycle, both in housing and corporate, has just started picking up and should be a significant growth driver over the remainder of the decade, it said.

The IMF estimates India will contribute 7-8% of the world's incremental GDP over 2024–2028, as the growth momentum sustains over the next several years.

Nifty earnings have risen 21% CAGR over FY20-24E, matching pace with the Nifty 50 index which rose 77% during the last four years. Earnings outlook is still robust for FY25/CY24 as rising corporate spending and strong bank balance sheets anchor earnings growth in mid-teen over the medium term.

"Compared with the other emerging markets or major economies, India has shown more robust and consistent earnings performance," the note said.

The visibility of India's cyclical upturn, full-blown capex cycle, robust demand and expected interest rate easing in 2HCY24 gives us enough confidence in Indian companies to deliver 15% plus earnings growth next year, the research firm said.

Multiple large drivers such as supply chain diversification and production-linked incentive schemes will lead to capex, driving optimism across industries. New project announcement data shows a surge in the chemicals industry, a key beneficiary of the supply chain split.

The order flow with the capital goods majors—Larsen & Toubro Ltd., Siemens Ltd., ABB India Ltd., and Thermax Ltd.—has risen by an average of 28% year-on-year for the last six quarters and up 63% YoY in 2QFY24. The spurt in housing construction bodes well for a long supply chain of building materials, including electrical, cement, tile, etc.

The approaching national elections will keep welfare spending imperatively high, and the same may be visible during the Feb. 1 interim budget.

After elections, there is a risk of higher taxation. Slower incremental government capex growth could be a near-term negative for L&T, rail and defence stocks. "We move some weight from L&T to Adani Ports—privatisation beneficiary—in our model portfolio," the research firm said.

The Indian markets have been well supported by domestic institutional flows as the rise of systematic investment plans continues to create a consistent liquidity pool, Jefferies said.

"We do not foresee a disruption to the domestic flow, particularly as fixed income has turned less attractive due to tax changes. Moreover, we believe that the FPI flows will likely improve in CY24," the note said.

Key Triggers For FPI Flows Would Be:

• Peaking U.S. dollar

• May 2024 elections

• The rising significance of India in global markets.

Banking sector has benefitted from the sector rotation (into large caps) seen in December 2023. But even beyond that near-term trade, the sector stands out as the only sector with below average multiples and possible earnings surprise if asset quality holds up, according to the research firm.

More foreign flows from global mandates suit the large banks and financial theme well.

It is national election year and past trends over the last three election cycles have shown that there will be a push for large rural and economical weaker section supportive schemes.

A major driver of rural economy is the jobs in construction sector, as after agriculture, they are the largest employer of unskilled or low-skilled labor. These laborers then boost the rural income transfer economy.

The China plus one has emerged as a theme in India and while the same is visible in several sectors, amongst the listed companies universe, it is most visible among chemicals, tiles, cables & wires, and electronics manufacturing.

India has a large domestic market in these categories and potential exports opportunity adds as an advantage, according to Jefferies.

Jefferies model portfolio is oriented towards domestic cyclicals and capex cycle plays, with the key 'overweight' being financials, power, industrials, autos, real estate and telecom.

The cyclical upturn in private corporate capex has started, even as the housing upturn is now in full swing.

"We fund the portfolio 'overweight' by being 'underweight' on staples, consumer discretionary (excluding autos), energy and IT services.

Within autos, Jefferies prefers two-wheelers and within healthcare, the preference is for the structural story of hospitals. "Metals and Tata Motors reflect our preferred plays on a potential China rebound," the note said.