Shrugging off its image of being in a state of ‘policy paralysis’, Government of India unleashed a blitz of reforms late last week, including diesel price hike and opening up FDI in several key sectors. Though many will argue that these measures will have limited impact, we believe that 51% FDI in multi-brand retail and 49% in airlines are probably the biggest and toughest reform initiatives that the UPA Government has taken in its tenure of eight years. We believe that it will have significantly positive implications for the economy and the market.
FDI in retail (51%), aviation (49%) and broadcasting (74%)
FDI will bring much needed funding options for domestic players. We see Pantaloon, being the largest player, a key beneficiary of FDI in retail as it will strengthen its back end operations and inventory management, which in our view has been one of the most challenging areas for the company. We believe increased FDI is very positive for the broadcasting industry. With nearly 90m households and top five players having market share of 50%, the market is fragmented. FDI, coupled with digitalization, will lead to consolidation, benefiting larger players. We remain positive on both cable and DTH. Our top picks are Hathway and Dish. On the other hand, Spicejet is among the biggest beneficiaries of FDI in civil aviation due to significant market share (~18%) and relatively better balance sheet.
Rate cut hopes: Not unfounded
With falling GDP growth and dwindling capex cycle, need for sustained rate cuts is more than ever before. We believe that the Government has initiated small yet meaningful steps, such as diesel price hike and divestments of certain PSUs, to bring down cost of capital. We believe that banks, particularly PSU banks, will be key beneficiaries of rate cuts, as it will arrest formation of NPAs in the system. SBI is our top pick among banks. Lower rates, coupled with PM’s concerted efforts to revive infrastructure investments, will also boost growth outlook for large infra-plays. We like L&T and IRB Infrastructure in this space. We believe that stocks like Maruti (demand outlook may improve, lower import bill) and PFC (Wholesale funded NBFCs key gainers of rate cuts) will also see significant re- rating, following rate cuts.
Re unlikely to fall further; Can appreciate buoyed by inflows
FII investment in India has already crossed US$10b, YTD. Historically, strong reform initiatives by government have led to improved foreign capital inflow. We believe that appreciation of INR vs. US$ will significantly benefit a host of companies, exposed to imports. This will also help curtail oil import bill, thereby further helping fiscal situation. We like JSW energy, which operates 2.6GW of power plant, and meets its coal requirement through imports. JSW Energy will benefit from appreciating INR, apart from falling international coal prices.
Best Stocks After Reforms