India Equity Strategy: Gradual bottoming out phase, look beyond the obvious - HDFC Securities

Worst of domestic economic woes are behind. However economic healing is likely to be protracted and FY21e growth of 6% will still be lower vs. potential growth. Govt & RBI are likely to maintain accommodative stance but headroom for counter cyclical measures is smaller now. While overall market valuations are still above long term averages, we believe investors should position their portfolios in favor of GARP, turnaround and select value plays instead of hiding in very expensive quality names.

Worst seems behind, but economy in gradual auto healing phase

We believe that India's economy is in bottoming process with expected FY20GDP growth of 5% likely to mark the bottom. However recovery is likely to be weak and gradual as multiple segments of the economy are still in a difficult phase. While FY21 GDP growth is expected at 6%, it is still lower than potential. Improvement in strained segments such as Real Estate, SMEs, Autos, NBFCs is imperative for sustainable recovery.

Accommodative policies necessary, but not sufficient

While the government/ policymakers have demonstrated strong intent in past 6 months to support the economy, given limited fiscal space, we are unable to foresee a sharp govt/regulator-stimulus-induced recovery hence forth. Govt has already fully utilized the escape clause in FRBM and RBI has already cut repo by 135bps from Dec'18. Households, pvt sector and banking system will also need to do heavy lifting to drive higher growth trajectory, in our view.

Look beyond conventional 'quality at any price' plays

Last 2 years have seen investors chasing 'quality at any price' theme thereby making risk-reward unattractive. Given calibrated auto healing of the economy and prevailing global risk-off sentiment we see best risk-reward in quality GARP names (such as ICICI, Infosys, L&T, SBI Life) or select turnaround plays (like Axis Bank, SBI, Bharti, DLF) which are witnessing structural endogenous improvements. We also like select value plays (like ITC, Powergrid, Coal India) which have been de-rated, still have reasonable growth prospects and bereft of meaningful risk of business model disruption.

HSIE Model Portfolio - Key: O/W Financials, Cement, Chemicals, IT, Telecom; Key U/W Consumer staples, Autos, Energy, Metals

While overall Nifty and midcap valuations are above long term averages, we see enough bottom-up investing opportunities across market caps, especially given healthy correction in select large caps and midcaps over last 2 years. We introduce model portfolio with key overweight positions in Financials, Cement, Chemicals, IT and Telecom sector while we have underweight stance in Consumer staples, Autos, Energy and Metals.

Introducing a new rating system

Through this report we are also introducing a new rating system wherein we moving our covered stocks to a new 4 point rating scale of Buy, Add, Reduce, Sell vs. the older 3 point rating scale of Buy, Hold, Sell to better reflect relative stock picking and conviction across coverage universe.

Source : Equity Bulls

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