Key structural themes to aid corporate earnings, prefer financials, auto stocks over IT, energy

India’s economy and corporate earnings growth is expected to outpace other large emerging markets helped by six structural themes, said analysts at Bank of America Securities (BofA). Forecasting strong growth for the country, analysts are bullish on domestic cyclical sectors. “We … remain optimistic on domestic cyclical sectors such as Financials/Industrials/select Autos. We believe domestic plays would also benefit from a confluence of six structural themes (below) and reforms momentum,” they said in a note. BofA is cautious on external facing sectors such as IT, energy, and materials.

Six structural themes to pay out

BofA has listed six structural themes that they believe could play out in India over time, aiding the growth of the economy and hence corporate earnings. “These trends could provide potential for India’s corporate earnings to structurally outpace its nominal GDP growth. We hence remain constructive on India long term,” the note said. However, analysts are cautious in the near term led by weakening global macro. 

Rapid infrastructure ramp-up: The first of the six themes has been listed out as infrastructure ramp-up. “We believe, India’s capacity adds in transportation infrastructure such as Highways & Railways in just ten years (FY15-25) could exceed cumulative capacity adds seen over 65 years,” said BofA. Further augmentation of infrastructures such as sanitation access, cooking gas/ LPG coverage, electricity, and tap water among others would improve the infrastructure and in turn aid economic growth. 

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De-carbonization: India has stepped up on its carbon neutral goal, according to BofA. They said that India is leading the de-carbonization efforts globally by spearheading the International Solar Alliance, the transition from Euro IV to VI and much more.  “Our analysis suggests that India would incur a capex of >$385bn over 2015-30 just to meet its 2030 de-carbonization goal, which would accelerate materially over time, as it transitions to net-zero by 2070,” analysts said.

Focus on exports: India has stepped up its exports game. In the previous fiscal year, the merchandise exports by India crossed $400 billion in value. To further increase exports, the country is simplifying processes and curtailing infra deficits with better labour laws, PLI scheme, and much more. Cumulatively the steps taken in this direction may result in India shrinking its current account deficit by ~74% over 5-6 years.

No to monopolies: BofA noted that the government has taken steps towards opening up large monopolies across coal mining, defence, city gas distribution, airports, railways, etc. “Govt. has demonstrated progress through Air India divestment, LIC IPO, The Major Port Authorities Act, InVITs/ToT models & proposed privatization of few PSU banks. Our analysis also suggests that opening of monopolies helps attract large private & foreign capital and results in rapid increase in capacity adds,” they added.

Improving tax compliance: Improving tax collection with the help of formalising the economy is also seen as a structural theme that would benefit India. Higher tax collections could help augment government capex and/or fiscal consolidation, driving lower interest rates. 

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Digitisation and financial inclusion: Lastly, the wave of digitalisation with rapid internet penetration and falling data prices is aiding the growth. “Rapid digitization/tech penetration is also nurturing a robust venture capital ecosystem within India,” BofA said. “Besides, led by a strong govt. push, financial inclusion in India is rapidly rising: bank account penetration at 80% vs 35% in 2011. Given a moderate borrowing penetration currently and even lower share of access to formal credit (11-13%), we see a huge runway of growth for financial firms,” they added.

While analysts at the global brokerage firm remain optimistic about the long-term growth, BofA had last month said Nifty 50 may hit 15,600 by December this year. “We remain cautious on markets on the current volatile environment and looming global recession concerns as reflected by consensus downgrading NIFTY FY23/24 earnings (YTD -2.5%/-2.2%),” analysts had said. BofA continues to remain cautious on markets in the near term led by weakening global macros.

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