Mumbai: Jefferies is bullish on Indian equities in general, with battered banking stocks – usually the first choice for top overseas funds – likely to see fresh allocations in the New Year on a rebound in credit demand and likely shrinkage in provisions.
Broadly, the brokerage said, India has entered into a period of economic upcycle driven by a turnaround in housing demand.
The brokerage said valuation concerns and rate increases by the US Federal Reserve might result in periods of correction, but those should be used to add cyclical stocks.
Indian stock indices have more than doubled from March 2020 lows of the pandemic but corrected about 6% from the highs hit in October.
Jefferies is ‘overweight’ or bullish on financials, property and auto sectors.
“Subject to a favourable election outcome, the markets could hit a new high in 2022,” said Jefferies, which estimates a 7%-plus GDP growth and 15%-plus earnings growth for calendar year 2022 and financial year 2022-23. Some states in India are due to elect their local governments early next year. The brokerage said its analysis of economic cycle components shows that conditions are ripe for a 2003-10 style upturn.
Jefferies said the housing cycle appears to be in its first year of upturn in 2021 while the banking bad loan cycle has convincingly turned for the better.
“Interest rates will likely move up, but it’s unlikely to impact investment activities a-la 2003-10, and a rate up-move should not be a worry in the initial stage of the cycle. As capacity utilisation rises, and corporates take on incremental risks, we believe that a broader capex cycle will become evident as 2022 progresses,” said Jefferies.
It said that due to the recent sell-off, most marquee financial stocks are trading at attractive valuations. ICICI Bank is trading 2.2 times price to book (PB) while HDFC Bank is at 3 times. Axis Bank PB is at 1.6x, IndusInd Bank at 1.3x and State Bank of India at 1.2x. “We see favourable risk-reward for banks with ICICI Bank as top pick and HDFC Bank given growth rebound and fair valuation,” Jefferies said in a note.
Also, with bank credit growth improving steadily to 7% vs 5-6% earlier this year, the uptick is reflecting a rise in retail demand, better economic activity and inflationary push for working capital demand.
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