Morgan Stanley’s Outlook On Key Sectors And The Market In 2021

From mid caps and auto stocks to offline retail, Morgan Stanley updated its clients about its view on what the research firm sees as key debates for the Indian market for 2021.

Here’s what the Morgan Stanley expects:

Will mid caps turn the corner in 2021?

• Morgan Stanley sees growth likely improving in 2021, favouring smaller firms which have higher operating and financial leverage.
• Small and mid-cap valuations appear attractive and could outperform large caps in next year.
• Meaning, the concentration of market cap and profits, a mean-reverting variable, may have peaked for this cycle.

Will auto demand rebound in 2021?

India's auto industry is at the start of the next upcycle, and given operating leverage gains, cost cutting and lower discounts, earnings growth will be ahead of volume growth, Morgan Stanley said.

According to the brokerage, these factors will impact the auto market:

• Replacement demand alone can drive 2021 growth.
• Supportive financing environment.
• $10 billion incentive under the production-linked incentive scheme.
• New model launches across companies to support 2021 demand.
• Mahindra & Mahindra Ltd., Bajaj Auto Ltd., Eicher Motors Ltd. and Maruti Suzuki India Ltd. companies on which Morgan Stanley is overweight. Motherson Sumi Systems Ltd. preferred pick among suppliers.

Are all the positives now priced in for steel?

• Morgan Stanley sees more legs to the rally and prefers Tata Steel Ltd. and Jindal Steel and Power Ltd.
• Favourable conditions like tight supply-demand across markets and higher raw material prices should provide continued support to steel prices.
• Valuations are still lower than the last upcycle average (2016-18), leaving room for upside.

Will the consumer return to the store?

• The near-term impact on offline grocery retailers is already reversing, according to Morgan Stanley.
• A large chunk of the Indian population remains value-conscious, prefers the physical experience, and will revert to the offline mode of shopping.

Can DLF finally increase its sales velocity in 2021?

• The developer, according to Morgan Stanley, seems poised for growth supported by:
• Its strong new launch pipeline of 35 million square feet (Rs 3,600-4,000 crore sales potential) and a 3.9 MSF under-construction in the rental asset subsidiary.
• Unsold finished inventory of Rs 6,600 crore.
• Potential recovery in Gurgaon's physical market—under-construction inventory is the lowest amongst all Indian metros, and real prices have corrected 25-30%.