India’s macroeconomic environment has shown gradual improvement over the
past two years and there are a whole host of indicators suggesting a favorable
outlook for the Indian economy. The interest rates have declined with the central
bank getting the leeway to do so on the back of slowing consumer inflation and
declining fiscal deficit. The current account deficit has narrowed, forex reserves
have been at their highest levels and FDI inflows have picked up. However,
despite these improvements over the past two years, Nifty and Sensex earnings
have been anemic.
The earnings of high growth companies in spaces like IT, FMCG, pharma etc,
which account for ~73% of the Sensex have grown by 26% over FY2014-16E.
However, this is not reflected in the overall Sensex earnings as they have been
overshadowed by the balance 27% of the index composed of commodity and
power stocks that have witnessed a de-growth in earnings by 39% yoy over the
same period.
In our view, there are pockets in the market where growth trends are picking up.
We believe there are stock picking opportunities in the space outside of
Sensex/Nifty and also in many of the newer listings in the upcoming sectors of the
Our top picks comprise of companies that will benefit from strong consumption
and from the government’s thrust on infrastructure. Our top consumption based
plays are Blue Star, Siyaram Silk Mills and Radico Khaitan. Our picks that will
benefit from interest rate cuts and higher government focus include LIC Housing
Finance, Dewan Housing Finance, Mahindra Lifespace, NBCC and IL&FS
Transportation Networks.

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