A man uses a mobile device while sitting on a motorbike in the Electronics City area of Bengaluru. (Photographer: Dhiraj Singh/Bloomberg)

Elara Capital Names Stocks That Will Drive Markets Next Year

The next financial year is going to be one where fundamentals—especially a 20 percent earnings growth—will drive the stock market upwards. That’s according to Ravi Sundar Muthukrishnan, head of Institutional Equity Research at Elara Capital.

Indian markets will remain volatile in the near-term because of its inter-connection with the U.S. markets, he said in an interview with BloombergQuint. The medium term—between January and May—will be governed by the “political scenario” as investors guess which party will take power in the upcoming general elections. Post May, fundamentals will kick in, Muthukrishnan said.

When I say fundamentals will take over, our yearly target for FY20 is roughly about 20 percent earnings growth. And the four planks which will do really well are banking, consumer discretionary, healthcare and telecom.
Ravi Sundar Muthukrishnan, Head Of Institutional Equity Research, Elara Capital

If the Narendra Modi-led Bharatiya Janata Party comes back into power, "it'll be a real tailwind for fundamentals and stocks will do really well after that,” he said. If the Rahul Gandhi-led Congress comes into power, the markets will ponder on it for two-three months, but eventually take its own course, he added.

2018 has been a volatile year for Indian equities, packed with trade tensions between U.S. and China, political tensions between U.S. and North Korea, start of a global monetary tightening regime led by the U.S. Federal Reserve and a liquidity crunch in the domestic market stemming from the IL&FS crisis. The benchmark S&P BSE Sensex Index has gained 6.09 percent in 2018 so far, compared to a 27.91 percent rise in calendar year 2017.

Here are the stocks Ravi Sundar Muthukrishnan suggested for the next financial year:

Banking

While banks may not see an earnings recovery as soon as the fourth quarter, they will see substantial growth in FY20 as credit cost will drop 70-80 basis points, he said. “That is the biggest driver for earnings.”

Most of the decently big banks—ICICI Bank, Axis Bank—they have a CASA of about 50 percent so the cost of funding for them is going to be substantially low. And when it comes to lending, retail is expected to do really well in auto and housing. 
Ravi Sundar Muthukrishnan, Head Of Institutional Equity Research, Elara Capital

Lending to corporate as well as micro, small and medium enterprises is expected to do well, he said, while suggesting private banks along with Karur Vysya Bank Ltd. and City Union Bank Ltd.

Telecom

The average revenue per user is increasing in the telecom sector as the intensity of the tariff war waged by Reliance Jio’s entry cools down, he said.

As a consequence, my sense is that Bharti will start doing well going forward. 
Ravi Sundar Muthukrishnan, Head Of Institutional Equity Research, Elara Capital

The economy packs and the bundling of data packs Bharti Airtel Ltd. is speaking about, will drive earnings in a big way for the company. “In terms of leverage being high, the market has already discounted that in the price. So, incremental whatever will be a surprise for the market,” he said.

Consumer Discretionary

Growth in rural income, along with aspirations, will drive growth for certain auto stocks, auto ancillaries and tyre stocks, Muthukrishnan said.

“Today the youth does not want to work in rural areas. What they want is a motorcycle, drive around 20 kilometers away to the nearby towns and earn a living,” he said. The income from jobs in towns is much higher than what they earn from MNREGA or working on a farm. This incremental rise in earnings presents a big opportunity for auto stocks such as Hero MotoCorp Ltd. which has a good rural penetration and is coming out with new scooters.

Other stocks he suggested include Maruti Suzuki Ltd., Exide Industries Ltd. and MRF Ltd.

Healthcare

Healthcare stocks are set to perform well in FY20 as most of them have sorted out facility issues with the U.S. Food and Drug Administration, he said. Approvals from the drug regulator have also increased, he added.

Muthukrishnan suggested Aurobindo Pharma Ltd. to investors, as a company with international focus. While companies with a domestic focus will also do well, there remains some uncertainty as a new price control policy for drugs is expected to kick in next year, he said.

Other mid-sized stock suggestions:

Watch the interview here