Indian markets, rebounded strongly in the month of March, going up by more
than 10%. The positive movement was fueled by growth oriented budget for
FY2016-17. FIIs turned bullish on the Indian markets in a major fashion with net
inflows of Rs21,143cr in the month of March after being net sellers since
November 2015. Additionally, the markets gained in the latter half of the month
on expectation of a rate cut by the Reserve Bank of India (RBI) at its monetary
policy review.
Backed by a windfall gain on crude the government could deliver a pragmatic
budget with focus on productive expenditure, emphasis on infrastructure and rural
development rather than spending on subsidies. Favorable trade balance helped
narrowing down the current account deficit to 1.3% of GDP for 3QFY16
compared to 1.5% in 3QFY15. FDI inflows have also picked up substantially in
9MFY16 to $54bn compared to $45bn for entire FY15, indicating foreign
investors’ preference for India over other markets as an investment destination.
At 7.3% India has the highest GDP growth rate amongst the emerging markets
and is placed very attractively as an investment destination for foreign investors.
With the Indian government’s move to reduce rates on small savings instruments,
the overall interest rates in the economy are likely to come down, which will give a
fillip to corporate earnings. The earnings growth of Sensex has taken a hit in the
last two years as few companies with less than 30% weightage (mainly from the
metals and PSU space) in the index saw sharp declines in their profitability, while
the balance 70% of the companies continued to deliver decent results. Further,
during the current year the weightage of the underperforming companies has
gone down to 20% and their earnings also seem to have bottomed out. The
above reason makes us believe that with nominal GDP growth rate of ~12%,
corporate earnings should grow by 15-16%. Inflows into the domestic mutual
funds have also been at record high levels. Lower interest rates offered on bank
deposits and small saving scheme make equities more attractive and we see
inflows into the Indian equity markets to be strong going ahead.
In line with our expectations the RBI has reduced the repo rate by 25bp to 6.5% in
its first bi-monthly policy review of this fiscal and addressed the liquidity shortage
witnessed by the bank. We believe that RBI has further room for rate cuts in the
quarters to come. Lower interest rates will come as a relief for both consumers
and corporates. Interest rate sensitive sectors like auto, banks, housing finance
companies and select players in the infrastructures and real-estate space could
see improvement in volumes. Our top-picks in these sectors are LIC Housing
Finance, Dewan Housing Finance, Mahindra Lifespace, and IL&FS Transportation
Networks. Further we remain positive on consumption based stocks like Blue Star,
Radico Khaitan, Siyaram Silk Mills, etc.

Download Full Report View Full Report in Browser