Long-Term Stock Ideas of Companies with higher growth potential with reasonable valuations by AXIS Securities

As we conclude the last chapter of Samvat 2079, we usher in Samvat 2080 with boundless enthusiasm and extend our heartfelt wishes for a “Happy and Prosperous Diwali” to all our cherished readers. The Indian economy currently finds itself in a sweet spot of growth and is well-poised for continued resilience in the face of global challenges. We trust that this festival will illuminate your wealth and financial well-being. At this juncture, we take great pleasure in unveiling our Diwali Muhurat picks for this year, with the hope that they will further illuminate your investments.

Samvat 2079 proved to be an intriguing year for the Indian equity market, characterized by notable volatility in the first half. Several factors contributed to this turbulence, including a) A hawkish central bank view on the interest rates, b) Rising bond yields, c) Rising Covid-19 cases in China towards the end of 2022, d) Imposition of lockdowns in the Chinese economy, e) Union budget-related developments, and f) Other macroeconomic challenges. These occurrences collectively subdued market performance in the first half of Samvat. However, in the second half, the Indian market witnessed a remarkable recovery from its Mar’23 bottom. During this time, the broader market outperformed Largecap companies by notable margins. These developments were supported by a) Improving high-frequency indicators of the domestic economy after a growth-oriented budget, b) Superior growth outlook vis-a-vis other emerging market countries, c) Status-quo maintained by the RBI in Apr’23 MPC, d) Supportive valuation after the correction seen in first three months of 2023, and f) Returning FIIs in domestic market. With these developments since last Diwali, the Indian benchmark index Nifty 50 grew by 9%, whereas the Emerging Market Index grew by only 6% till 2 nd Nov’23. Even more impressively, Small and Midcap indices emerged as the true winners during this period, displaying substantial growth of 28% and 31%, respectively.

In the second half of Samvat, our benchmark index Nifty 50 reached a significant milestone, touching 20192 on 15th Sep’23. This remarkable achievement can be attributed to (a) Positive sentiment during the G-20 event, (b) Positive FII inflows, (c) Robust economic prospects relative to other EM countries, (d) Strong earnings outlook, (e) Robust demand across sectors, (f) Much improved health of the banking sector, and (f) Positive expectations for the private investment cycle. As a result of reaching this milestone, the market capitalization of India surged past $3.7 Tn, catapulting India to the position of the 5th largest market in the world and standing tall among other global economies. Only the US, China, Japan and the Hong Kong market are currently ahead of India in terms of market capitalization.

Furthermore, investors, both domestic and foreign, have demonstrated a proactive and unwavering belief in India’s long-term growth narrative. This faith has been bolstered even more during the last seven months of FY24, with Foreign Institutional Investors (FIIs) injecting an impressive $15 Bn into the Indian equity market. Additionally, the monthly Systematic Investment Plan (SIP) inflow in mutual funds has surged to over Rs 16,000 Cr in Sep’23. This substantial increase serves as a compelling indicator of investors’ steadfast confidence in India’s growth trajectory

Samvat 2080 will be a very interesting year to watch out for the global economy. We embark on this new Samvat with a narrative marked by ‘Higher for Longer’ interest rates, volatile bond yields, geopolitical conflicts in the Middle East, and fluctuating oil prices. However, on the domestic front, the prospects for the Indian economy appear notably brighter and more promising. In the midst of a volatile global landscape, India remains in a favourable position for growth. According to the estimates of the International Monetary Fund (IMF), the Indian economy is set to be the fastest-growing economy in FY24 and FY25 within the emerging market category. This is poised to be a significant driving force behind Indian equities in the foreseeable future.

The improvement in the balance sheet strength of corporate India and the much-improved health of the Indian banking system are other positive attributes. They will ensure that Indian equities will easily manage to deliver double digit returns in the next 2-3 years with the support of double-digit earnings growth. Keeping this in view, we expect Nifty EPS to grow by 15% CAGR over FY23-25 vs. 7% CAGR over FY09-FY23.

Well, the country’s macro set-up is positive and the fundamentals for Indian corporates have improved as well. Profitability across the board has also improved significantly. The cumulative and rolling net profit of the NSE 500 universe for the last 4 quarters (till Q1FY24) touched an all-time high of Rs 11.5 Lc Cr. Moreover, after a muted performance for several years, ROE for the broader market is improving as well. Asset quality of private as well as PSU banks has improved significantly as compared to the levels seen a couple of years back. Factoring in these attributes, we believe the relative outperformance of the Indian market will likely sustain in Smavat 2080 as well.

Nonetheless, it’s essential to note that we are entering a period marked by a few major state elections this month, with a general election scheduled for next year. This political landscape is expected to introduce increased volatility over the next 12 months compared to the current levels. Considering the positive attributes of the Indian economy and recent market developments, we present the following themes for Samvat 2080:

• Companies with higher growth potential with reasonable valuations

• Higher earnings visibility

• Companies with proven track record with improving return ratios

• Leadership position in the respective business

• Balanced Approach of Large, Mid, and Smallcaps

• Right mix of domestic focus and export-oriented themes

Based on these themes, our Diwali picks are: HDFC Bank; TVS Motors; Bharti Airtel; SBI Life; APL Apollo tubes; Astral limited; KPIT technology; Ahluwalia Contracts, and Jyothy Labs