Indian equities had outperformed major global indices, barring China during calendar year 2014, driven primarily by the big political changes which helped global investor confidence.
The sharp drop in crude oil prices and a slightly stronger rupee had improved fiscal health and led to a turnaround in India’s macroeconomic climate. Globally, steady recovery of the US economy had led to the US Federal Reserve to signal a tapering of bond purchases or quantitative easing (QE) and readiness for increasing interest rates, confirming the gradual return to health of the worlds’ largest economy.
Outlook for 2015
Economic growth could reach 6.5 -7% during 2015 driven by an uptick in the domestic investment cycle. In 2015, Indian economic growth could be driven by the reforms momentum. The government is enthusiastically pushing through initiatives like introduction of goods and services tax (GST) which many say is akin to India signing a free trade agreement with itself, land acquisition amendments, insurance sector reforms and coal blocks auction bills. Under the ‘Make in India’ campaign, the government is keen to abet the process of mass manufacturing in India.
Interest rate cuts too will help credit growth. Expectations over RBI cutting interest rates by over 50 basis points were reflected in 10-year government bond yields. The reduction in interest rates coupled with improving business climate could trigger a pick-up in the credit cycle.
Subdued inflation amid softening global commodity prices has helped the government immeasurably in tackling the emotive issue of price rise. Crude oil prices have fallen nearly 40% in 2014 and are expected to remain soft in 2015 due to a supply glut and lack of consensus among OPEC countries to cut production. Expectations of lower consumption in China and the European Union, and lower import demand from the US could keep global crude oil price under check.
The upward trajectory of interest rates in the US reflects confidence about the sustainability of its growth. The US Fed is expected to increase interest rates by up to 75 bps during 2015, for the first time since 2006. Last quarter’s GDP growth in the US has been an impressive 3.5%. This turnaround could result in outflow of capital from emerging markets to the US.
Improved macros would bring stability to the Indian currency markets. If the government successfully contains fiscal deficit at 4% and the current account deficit below 2%, given lower import bills for crude oil and gold, the rupee will stay strong.
Corporate earnings in India is expected to grow over 15-18% in 2015, which is likely to be revised further based on improvement in execution at the ground level, softening commodity prices and sustainability of the global growth momentum.
In 2015, we expect the Sensex to trade in the band of 27720 to 35640. There could be short-term volatility as markets have priced in growth post the elections.
Our analysts take a look at some of the blue chip stocks that will provide healthy returns in 2015.
In Pole Position
Asian Paints is expected to register strong growth and strengthen its leadership in the domestic decorative paints segment which contributes 81% of its revenue, amid higher double-digit volumes growth, due to incremental demand from tier-2 and 3 cities. Its innovative products, superior brand image, strong marketing and distribution network will drive volumes growth.
Volumes in industrial and automotive segments will improve as private consumption gathers steam.
Asian Paints is expanding its Rohtak plant, and has proposed to set-up greenfield plants in Andhra Pradesh as well as in Indonesia. Its acquisition of a 51% stake in the Ethiopian firm Kadisco Chemicals will aid international revenues that account for around 13% of its turnover.
Asian Paints generally undertakes small price hikes at regular intervals. Its margins will be better as raw material costs go down substantially. Asian Paints could offer 18% growth in 2015 for investors.
Blue Chip Beneficiary of Credit Off-take
HDFC Bank is expected to outpace credit growth in the system by 3-4 percentage points and see a CAGR of 20% in the next few years. Its loan book growth is driven by a healthy mix of retail and corporate loans.
The bank is planning to raise close to Rs 100 billion in the next few months which will aid growth plans over the next few years.
Net interest margins (NIM) is expected to be around 4-4.5% led by the bank’s strong credit account-savings account (CASA). Further, current deposits are likely to grow strongly due to recovery in capital markets where the bank has higher market share.
HDFC Bank is relatively immune from asset quality strain in the banking industry, primarily due to superior risk management practices along with lower exposure to stressed sectors. We expect further moderation in fresh slippages.
HDFC Bank was able to command premium valuation in the market for its consistent growth of over 20% in net profits, healthy balance sheet growth, higher NIMs, lower NPAs, superior return ratios coupled with good corporate governance. Its proposed capital raising plan will lead to rerating of the stock in the coming months. The bank could offer 21% upside from its current levels in this calendar year.
A Premium Player
JSW Steel is well positioned to benefit from the expected cyclical uptrend in the domestic steel industry that is likely to witness volumes growth of 4-5% amid robust economic growth in India over the next two to three years. Its collaboration with JFE Steel to manufacture high-grade steel for automobiles and white goods is well-suited for the ‘Make in India’ campaign. JSW Steel’s focus on increasing its share of value-added products in the cold-rolled segment like automobile grade steel and coated products to over 33% of its volumes resulted in higher realisations while minimising the impact of pricing pressure in the hot-rolled products segment.
JSW Steel’s brownfield expansion at Dolvi to increase capacity from the current 3.3 MTPA to 5 MTPA will be completed by September 2015. The company’s recent acquisition of Welspun Maxsteel would bring in synergies. Its expansion programmes at Vijaynagar plant will enhance capacity by over 2 MTPA.
JSW Steel, with its in-house facilities for iron-ore beneficiation, pellets, coke oven and value-add cold-rolled steel, is well-positioned to convert low-cost raw material into high-value steel, thus extracting better value compared to its competitors.
The stock could be a star performer in 2015 with a potential upside in excess of 40%.
Mr India Inc.
L&T’s outstanding order book at the end of September 2014 was at Rs 2144 billion from diverse sectors, while the order inflow for the year was expected to be around Rs 1400-1500 billion. This robust order book build up reflects its proven leadership in the infrastructure and engineering segments and gives revenue visibility with order book coverage of over 2.5x.
L&T has an excellent track record of executing the most complex projects in diverse sectors like infrastructure, oil and gas, defence, power and others, making it the preferred partner, resulting in repeat orders from clients. The infrastructure segment which constitutes 68% of the order book and 46% of its new order inflow during FY15, continues to drive growth with strong traction in order inflows and revenue growth along with sustained EBITDA margins of 11-12%.
Any divestment or induction of a strategic partner on the lines of Canada Pension Plan Investment Board’s Rs 2000 crore investment in L&T Infrastructure Development Projects, or listing of its subsidiaries, would unlock value. L&T’s shares could rise by over 30% in 2015.
Tata Motors is expected to witness strong traction with the launch of the Jaguar XE range performance car with in Ingenium engine developed in-house by JLR UK, at an indicative price of £27,000 that competes with BMW 3 series, Audi A4 and Merc-C Class. The new XE is expected to help improve market share in the small luxury saloon segment in 2015, which would drive overall volumes for JLR.
Price cuts in the Chinese market would bring healthy volumes for JLR, while tax benefit from its local assembly plant in China would be more than enough to compensate the impact of price cuts in FY16. JLR’s profitable business growth justifies its capex.
Tata Motors has begun witnessing volumes improvement in its CV category with M&HCV segment reporting a YoY growth in August 2014 for the first time in the last two-and-a-half years. The last CV cycle had seen the industry decline 20% during the down-cycle and bounce back with 35% growth. In the current cycle, M&HCVs declined at a CAGR of 25% over FY12-14, which is steeper than the previous cycle, indicating much stronger bounce back in the new up-cycle.
There is good news from the passenger vehicles segment as well for Tata Motors. Its newly launched Zest has received good initial response while other models like Nano Twist, Vista VXTech, Tata Aria and Tata Bolt contribute towards the car sales recovery. Tata Motors’ shares could rise by nearly 32% in 2015.