Investors See Ingredients for India Stocks Revival After Diwali

(Bloomberg) -- Once a year, for the Hindu festival of Diwali, India’s stock exchanges hold a special one-hour session where brokers make ceremonial purchases of shares to win the favor of the goddess of wealth.

The centuries-old tradition of seeking the blessings of Lakshmi has taken on an added purpose this year as investors pray the recent government steps revives growth and solidifies the recovery in equities that’s taken the $2 trillion market close to its June peak.

“We expect the index to scale into uncharted territory and give a lot of opportunities for wealth creation in the coming quarters,” said Rajiv Singh, chief executive officer at Karvy Stock Broking Ltd. Singh said cyclical stocks will do well as the economy is expected to revive.

While India’s key equity indexes have risen at least 10% since last Diwali, led by a handful of heavyweights, the broader market has trailed the gains sparked by a surprise tax cut for corporates and the return of global funds to local shares. That’s as investors continue to seek the safety of the biggest stocks in times of tepid earnings growth and a lingering credit-market crisis.

Still, analysts remain optimistic that the stimulus measures and the five back-to-back rate cuts so far in 2019 will help narrow this divergence in the new Hindu financial year -- Samvat 2076 -- that gets underway Sunday. The session will begin at 6:15 p.m. in Mumbai. Markets will be closed Monday.

“The backdrop for the economy and earnings is improving as we step into the new Samvat,” said Siddhartha Khemka, head of retail research at Motilal Oswal Financial Services Ltd. The $600 million of foreign funds that came into shares this month, on top of September’s $955 million, will grow as the economy gets better, he said.

The iconic Jeejeebhoy Towers, home to the BSE, will be decorated and lit up for the occasion, as brokers flock to its premises in traditional attire along with their families to take part in a ritual that goes back at least five decades. The S&P BSE Sensex has ended higher in eight of the past 12 Diwali-day sessions.

Here’s are some top picks by brokerages based on their potential 12-month return:

ICICI Securities

• United Breweries: target price 1,620 rupees
  • The leader in India’s beer market and is expected to maintain its share of 51%-52% of sales; expect volumes to grow at 8.5% CAGR in FY19-21.
• Axis Bank: target price 865 rupees
  • Valuations attractive for third largest private sector lender; recognition of large number of bad debts to help keep a lid on the ratio of loans turning sour.

HDFC Securities

• Sudarshan Chemical: target price 460 rupees
  • World’s fourth largest pigment maker aspires to be number three in next five years; has 35% share of the local market.
• Amber Enterprises: target price 1,140 rupees
  • Component maker to eight of 10 air conditioner brands in India; low air-conditioner penetration in India -- only 4% versus global average of 30% -- offers huge opportunity.

Reliance Securities

• Sonata Software: target price 395 rupees
  • Has partnership with Microsoft
• Crompton Greaves: target price 297 rupees
  • Strong, established portfolio of products with a wide distribution network.

Anand Rathi Securities

• ICICI Prudential Life Insurance: target price 575 rupees
  • Well positioned for recovery and growth, given its cost-cutting efforts, distribution network, range of products and value of new business.
• Indraprastha Gas: target price 450 rupees
  • Pace of sales remains strong for the compressed natural gas distributor; government’s plan to provide 10 million connections by 2020 provides big opportunity.

Prabhudas Lilladher

• UPL: target price 752 rupees
  • Agro-chemical maker’s diversified presence across crops and geographies has enabled it to outperform industry, minimize impact of volatility due to trade wars.
• Cholamandalam Investment: target price 356 rupees
  • Maintains strong asset book amid auto industry slowdown and tight liquidity; focus on high-yielding loans for used commercial vehicles, construction equipment and two-wheelers will improve net interest margin.

--With assistance from Ravil Shirodkar and Ameya Karve.

To contact the reporters on this story: Nupur Acharya in Mumbai at nacharya7@bloomberg.net;Ronojoy Mazumdar in Mumbai at rmazumdar7@bloomberg.net

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, ;Lianting Tu at ltu4@bloomberg.net, Ravil Shirodkar, Margo Towie

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