2024: Gains from soft rates and commodities

2 Jan 2024 , 12:33 PM

Analysts of IIFL Capital Services expect 1) Indian GDP growth sustaining at 6%+, 2) globally declining inflation and yields but 3) weakening global growth thanks to monetary tightening over last 2 years causing commodities price softness. Lending financials have derated in the last 2 years significantly, as regulation has tightened, but analysts of IIFL Capital Services think for the better. Axis Bank and BAF feature as top BUYs, which also include Trent, BPCL, Ultratech, SBI Life and Mankind in large caps. Recommend O/W on Cement, RE, and U/W on IT, FMCG, Auto. Nifty ex-fin and O&G is rich at 24.5x and while sentiment will be buoyant, index upsides of >15% are unlikely. Analysts of IIFL Capital Services also think the relative U/P of largecaps vs Mid and Small caps is over. Their top large/mid/smallcap buys/top sells for 2023 generated OP of 20.1/6.5/40.3/16.1 ppt. 

Monetary easing + soft commodities to benefit India

While monetary easing normally suggests commodities buoyancy, this time it is unlikely thanks to weak global demand (lag effect of monetary tightening) and improving supplies (especially crude), and this will help earnings. Estimated Indian Nifty equal weighted EPS growth of a robust 20% (ex BPCL that will take MTM losses on crude inventory) for FY25/24 and expectation of NDA govt. continuing mean rich multiples sustaining. 

Strong case for lending financials re-rating

The building blocks for sustainable growth are in place – low corp/bank leverage, potential breakout from a long period of under investment, significantly improved RoEs, govt. providing a capex thrust thanks to improving fiscal position. Through it all, lenders have de-rated, partly based on tightening regulation being perceived as unfriendly for growth. Analysts of IIFL Capital Services look at this as protective regulation and a reason for growth to sustain without blowups, once it picks up. Expect lenders to re-rate.

Cement/Building Materials/RE to do well

Analysts of IIFL Capital Services include Ultratech/JK Lakshmi cement in view of likely demand kicker from strong RE launches of last 2 yrs. (up 50% from covid lows), and continuing RE strength. Analysts of IIFL Capital Services expect a modest consumption pickup in H2FY2024. U/W IT (especially largecaps) call is based on a) their expecting further deterioration in US growth nos. from monetary tightening lag effect b) invasion of turf by GCCs and c) productivity gains from AI.