Angel Top Picks – October 2016 Diwali Special

Consumption remains the key theme:

In our opinion, consumption continues to remain a dominant theme in India. Our domestic demand is expected to improve due to a strong revival in the rural economy. This year’s Kharif production is expected to be strong with food grain production reaching to a record 270 million tons, 7% higher than total food grain production of 252 million tons in FY16.

In the past two years, rural economy suffered significantly as the agriculture production took a hit due to drought and decline in Minimum Support Prices (MSP) of food items by the government. This led to a decline in earnings of the farmers impacting the rural economy. This year, however, the rural economy is on strong recovery path with a robust growth in crop production and rise in MSP.

Overall, the domestic consumption is expected to improve with the increase in demand and this is already reflected on sales of automobile and white goods. The traction in retail loans has also picked-up over strong recovery in consumer sentiment. The recent rate cut will further accelerate the consumer demand as loans will become further cheaper. In the last two years, RBI has cut the interest rates by 175bps, which has provided a strong cushion for consumption growth. Overall, we believe that the consumption is expected to remain a strong theme in the Indian markets. We also expect this to have positive impact on corporate earnings, which for most sectors look to be bottomed out.

Valuations remain near its long term average: The Sensex in CY2016YTD has appreciated by ~6%, but has outperformed the US markets by ~1%. During this period, Chinese markets have declined over growth concerns in their economy. We believe that the economic revival, improvement in the consumption and further possibility of interest rate cuts will increase corporate earnings going forward. Owing to this, we expect Sensex to clock ~14-15% CAGR in earnings in the next two years.

As the current level, Sensex is trading at 15.8x of FY2018E earnings. As the corporate earnings pick-up and economy gathers momentum, we expect Sensex to reach new heights.