Experts feel select companies in banking, automobiles, financial services & real estate will gain from lower interest rates
Dalal Street cheered the Reserve Bank’s surprise 50 basis points repo rate cut to 6.75 per cent, double the consensus expectation of a 25 bps reduction. The S&P BSE Sensex more than recovered the 330 points (or 1.1 per cent) fall in the pre-policy session on Tuesday, ending the day with a gain of 162 points (0.6 per cent) to 25,778.66.
Going ahead, the market direction will be dictated more by global events like the US Federal Reserve’s plan to raise its policy rate, developments in China and commodity prices. They will also react to domestic events such as corporate results and the outcome of assembly elections in Bihar in the short term. In this backdrop, there are questions over the sustainability of the rally.
Experts, however, appear bullish. Dinesh Thakkar, chairman and managing director, Angel Broking, says, “The rate cut was much-needed for India and will aid in clearing the way for double-digit earnings growth by India Inc. We remain bullish on the market and expect 15-16 per cent returns to about 29,000 levels for the Sensex by December 2016.”
The sectors he is positive on include private banks, automobiles and capital goods.
Gautam Chhaochharia, head of India Midcap Research at UBS, agrees. “We remain positive medium-term, given our long-held aggressive view on interest rates, policy reforms and India's sustained relative attractiveness. Our new Nifty target of 8,200 for end-December 2015 implies a reasonable upside after the recent market correction,” he says.
Rate-sensitive indices, namely, the Bankex, realty, automobiles and capital goods fuelled the Sensex rally on Tuesday. While cheaper auto and home loans could boost demand for these sectors and aid revenue growth, lower interest rates will improve availability of working capital loans. It will also reduce overall interest costs for highly leveraged companies in the capital goods and infrastructure sectors.
Banks, too, should benefit, in the form of higher credit offtake and better asset quality on account of lower interest rates. This will aid earnings growth for these companies. Experts believe investors can consider rate-sensitive stocks.
Ajay Bodke, a chief portfolio manager at Prabhudas Lilladher, says: “The inflation forecast has been brought down by RBI, both for the current calendar year (CY) and for CY16. This essentially indicates that the disinflationary chill of a fall in global commodity prices is here to stay, amid a slack in the economic growth. We like the banking and automobile sectors.”
Interestingly, even within rate-sensitives and in individual sectors, the impact of lower interest rates will vary between companies. For instance, in the automobile sector, passenger vehicle (PV) sales will get an immediate boost from cheaper loans as compared with the two-wheeler and commercial vehicle (CV) segments. This is because PV sales are relatively strongly correlated to affordable auto loans. While, two wheeler sales are typically not dependent on loans and a pick-up in economic activity is a pre-requisite to boost CV sales.
Some specifics
Thus, companies such as Maruti Suzuki and Mahindra & Mahindra are preferred picks in the PV segment. In the CV space, Tata Motors, Ashok Leyland and Eicher Motors stand to gain in the form of a rise in demand.
Similarly, though public sector banks' transmission rates are faster than their private sector peers, most of them suffer from acute capital constraints and huge pile of bad loans. Private banks are much better placed than PSBs on both parameters and, hence, are the preferred bets of most analysts.
State Bank of India (SBI) is the only outlier among PSBs, with superior ability to raise money from capital markets; it stands to gain from lower interest rates. The lender announced a 40 bps cut in its base rate (BR) to 9.3 per cent on Tuesday, with effect from next Monday. Though there could be a 10-11 bps hit on its net interest margin in the interim, the longer-term gains should be larger.
While banks have been slow in transmitting rate cuts to the end-user, likely adoption of a new BR calculation methodology from April 2016 will address this issue. Effective transmission will aid demand, as well as reduce interest costs for India Inc. Among the lenders, most analysts prefer HDFC Bank, ICICI Bank and Axis Bank in the private segment and SBI in the PSB segment.
Real estate companies might gain in the form of interest cost savings, though meaningful demand recovery will happen only after the affordability factor improves. In this sector, analysts are positive on DLF, Sobha Developers and Prestige Estates. Home finance entities such as HDFC, LIC Housing, DHFL, Gruh Finance and Indiabulls Housing will stand to gain, from an increase in demand. Likewise, non-bank finance companies such as Bajaj Finance and M&M Financial Services.
