The aggregate picture, that was quite dismal in the run up to the GST in the previous quarter, has got better. Our analysis of over 4200 companies showed tepid growth in topline, but surprisingly there was a marked improvement in margins. Finally, unlike in the previous quarter when profitability declined, there was some revival in the September quarter with the trend line flattening.
In a surprise move, Moody’s Investors Service upgraded India’s sovereign rating by one notch from Baa3 to Baa2 last week, fuelling fresh air of bullishness in India’s equity, currency and debt markets.
This rating upgrade is critical because, at Baa3, India’s rating was just above speculative grade and was not reflecting the true picture of the reforms initiated by the Modi government in the past three years.
Yes, some of the measure initiated by the government such as demonetisation, and GST led to short-term volatility in some of the macro indicators but the results will be positive in the long term, assure experts.
Although the eyes are on the other two rating agencies i.e. Fitch and S&P – which are unlikely to follow suit and wait for fiscal deficit to moderate before changing their stance on India’s rating.
“Overall this rating is a gift to the whole economy in some or either way. This is a perfect reply to the people questioning the integrity of Modi Government. Banks and NBFC companies are the beneficiaries of the move. Oil & Gas will be another beneficiary,” Dyaneshwar Padwal – AVP – Technical Analysis, KIFS Trade Capital told Moneycontrol.
“Just after the update of Moody’s we saw upgrade for various companies few of them were NTPC, NHPC, GAIL, IOC, HPCL, BPCL, Petronet LNG from Baa2 to Baa1. This is just the beginning of Modinomics,” he said.
The rating upgrade came as a surprise but will do more good than harm to Indian economy and India Inc. in general. It is also a recognition of pro-growth policies initiated by the government to revive growth in Asia’s third-largest economy.
According to Moody’s bank recapitalisation is being seen as a major thrust for the Indian economy. Secondly, the government’s commitment to fiscal discipline has also been a major positive for the Indian economy and lastly, the government has shown boldness in reforms by implementing GST and demonetization despite a challenge from the opposition.
Ace investor, Rakesh Jhunjhunwala, Partner, Rare Enterprises in an interview with CNBC-TV18 on Friday said that it (upgrade) is a recognition of the fact that however disruptive in the short term the measures were, all the actions which the government took were correct, bold and required.
Jhunjhunwala said the mother of all bull markets has just begun and investors have nothing to worry about. Financials will be the biggest beneficiary including private, public sector banks from Moody’s upgrade.
The biggest advantage to India Inc. from the Moody’s upgrade, he said, is that it will allow India to borrow funds at a lower rate. A lot of funds which have a mandate to invest in countries with a specific rating can now invest in India.
Banks and NBFC are the borrowers of foreign funds and they deploy those funds in India. The rate reduction will have a direct impact on the cost of Funds which will have a direct impact, suggest experts.
According to Padwal of KIFS Trade Capital State Bank of India, Bajaj Finance and ICICI Bank will be the biggest beneficiaries’.
“There are many such companies like Tata Motors and Reliance Industries which borrow Funds from outside they will get benefited from the low cost of capital,” he said.
Here’s what brokerage have to said about the stocks:
State Bank of India: BUY| Target Rs400
CLSA maintains buy on SBI posy Q2 results and hikes its 12-month target price to Rs400 from Rs350 earlier. Lower slippages and higher provisions are a key positive for the national lender but weak topline growth is a concern.
Merger synergies are beginning to play out which should offset any concern from weakness in top line growth. The global investment bank slashed its earnings estimates by 6-13 percent to build higher credit costs and weaker topline.
SBI is a strong buy given stronger deposit franchise and better asset quality across PSUs.
ICICI Bank: BUY| Target Rs400
UBS maintains a buy rating on ICICI Bank post Q2 results and hikes its 12-month target price to Rs400 from Rs380 earlier.
The September quarter numbers remained inline on asset quality and operating metrics. The watch list continues to decline albeit at slower than expected pace.
The visibility of the resolution under bankruptcy law and Indian Accounting Standard are key catalysts in the near term, said the UBS report.
The global investment bank does not expect significant divergence and raised earnings per share estimates for the financial year ending 2019 and 2020 by 4 percent and 2 percent respectively.
Tata Motors: BUY| Target Rs 535
BofA-ML maintains a buy rating on Tata Motors post Q2 results but hikes its target price to Rs 535 from Rs 525 earlier. Jaguar Land Rover and India margins improved on higher volumes and cost controls.
The global brokerage firm expects faster India turnaround as cost-saving measures kick-in. It slashed volume growth estimates for the current and next financial years to 7 percent and 14 percent respectively due to volume weakness.BofA-ML raise India’s operating estimates by for the current and next financial years by 44 percent and 32 percent respectively.
The global investment bank expects improving share in medium and heavy commercial vehicles and higher car volumes trajectory to continue in the next financial year.
Bajaj Finance (BAF): BUY| Target Rs2300
Motilal Oswal maintains buy on Bajaj Finance post Q2 results with a target price of Rs2300. BAF, a dominant player in the consumer durables financing segment, continues to reap the benefits of healthy consumer demand, increasing its market share in consumer and also other businesses.
Within the consumer financing business, it has demonstrated its ability to cross-sell, as evident from strong growth in the personal loans portfolio over the past three years. Its focus on the SME and commercial lending segments may depress margins and RoE, but will keep growth strong.
At the same time, it is proactive in detecting early warning signals with regard to asset quality. The brokerage firm maintains their estimates for FY18/20 and reiterates Buy.
Reliance Industries: BUY| Target Rs1077
Motilal Oswal maintains a buy rating on RIL post Q2 results with a target price of Rs 1077. The global refining peers are trading at 7x FY19E EV/EBITDA and 10-11x FY19E P/E.
The brokerage firm values RIL at a higher multiple of 7.5x (7x earlier) average FY19-20E EV/EBITDA to factor in higher capacity utilization, better yield management, crude optimization, and sound risk management.
The global petchem companies are trading at 7x FY19E EV/EBITDA and 10x FY19E P/E. Motilal values RIL at 7.5x (7x earlier) average FY19-20E EV/EBITDA. The higher multiple takes into account RIL’s higher level of integration, flexibility in the feedstock, as well as strong growth in the domestic petchem market.
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