BofAML Is Positive On Indian Equity Market Over 6 To 9 Months

By Mani
Updated on

Thanks to weak earnings, Indian equity markets will give a flat to slightly negative return near term, but over the next 6 to 9 months, BofAML analysts remain positive.

Anand Kumar and team at Bank of America Merrill Lynch in their May 20, 2015 research report titled: “Year II: How to position” anticipate banks will be the key beneficiary of lending rate cuts.

Indian earnings to improve late 2015

According to the BofAML analysts, though the 1-year old Modi government has undertaken a few reforms, market expectations had been high. They point out that contrary to common market expectations, in the first year of the Modi government, defensive sectors like pharma did the best, while the high beta real estate sector and reform ideas like the oil sector underperformed.


The analysts anticipate earnings improving only in late 2015, and stock market returns being back-ended with a flat to slightly negative phase in Q2 and Q3 CY 2015.

Listing their anticipations over the next 6 to 9 months, Kumar and team anticipate lending rate cuts, 7th Pay Commission recommendations, Fed rate hikes and big-bang reforms like GST and land bill would be in the offing.

They also anticipate an up-turn in consumption over the next 6 months aided by lending rate cuts, MSP hikes in line with Swaminathan formula and implementation of 7th pay commission. Positioning for this theme can be found in consumer discretionary (Asian Paints), cement (Ultratech) and consumer staples (GCPL, Dabur).

The BofAML analysts have pegged GCPL’s PO of Rs 1290 based on SOTP, where they compared GCPL’s businesses with peers in respective geographies, i.e., India, Indonesia, Latin America and Africa. For Ultratech, they have a price objective of Rs 4,250 based on 13x FY17E-EV/EBITDA, in line with the upper end of the stock’s valuation range during the previous cyclical upturn in the industry.

Indian equity markets: Lending rate cuts to favorably impact banks

Anand Kumar et al. anticipate a pick-up in economic activity in 2HFY16 aided by lending rate cuts. They note banks would be the early play on lending / deposit rate cuts and a fall in bond yields. They anticipate banks would benefit over the next 6-9 months, thanks to a pick in loan growth and improvement in asset quality. The analysts prefer rate sensitive cyclicals such as ICICI Bank, Axis, SBI and Yes Bank. However, the analysts anticipate L&T (under industries) and Ultratech (under cement) would be other beneficiaries of this recovery, though with a lag.

Highlighting two key events that would create volatility in the Indian equity markets over the next six months, the BofAML report notes a Fed hike could lead to a temporary sell-off in the market, while GST could re-rate the markets to a higher level. They anticipate that Fed rate hikes will not have a negative impact on Indian macro, though there could be volatility in currency and equity markets in the short term during that period. They point out that the markets currently have de-rated from peak by ~10% due to the lack of major reforms. They agree GST is a key reform for creating a unified tax regime for the whole country, as it is expected to eliminate dual taxation and lower logistics costs. The analysts believe GST is likely to benefit Consumers, Pharma, Steel and Autos.

Focusing on weakness in INR, the analysts prefer pharma (Aurobindo) for its superior earnings profile, as against IT as a hedge against INR weakness as well as any correction in the equity markets. They point out that 5% depreciation in INR would help Aurobindo’s FY16 EPS by 4.3%.

The following table sets forth upcoming themes and beneficiaries:

Upcoming themes Indian Equity Market

The following table captures key beneficiaries in Indian equity market:

Key beneficiaries Indian Equity Market

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