India Portfolio: Bernstein gives 13 Bottom-up ideas for the rest of the year

After lagging from the end of 2021 till March this year, the Indian equity markets rebounded strongly. Markets have hit multiple new peaks this year starting in June till the latest in mid-September with brief periods of consolidation in between. Just in 2023 YTD, the benchmark Nifty has gained over 9 percent. Meanwhile, in the last 1 year, the index has advanced 16.6 percent.

However, if investors look at the continuous ups and downs from September 2021 still make the Nifty returns fairly flat for the last two years, a recent report by Bernstein pointed out.

"While the entire attention is on the market recovery from April, what if we tell you that India's equity markets underperformed fixed deposits over the past two years? Nifty CAGR over two years is 2.9 percent while the Next 50 is flat. SMID did better, up around 10 percent- chiefly led by the recent rally post-March. The modest returns for equities reflect the concerns about the global environment, rising rates, limited support from a broad-based economy, and high starting valuations," noted the brokerage.

Still, the outlook remains positive on the back of strong economic parameters, strengthening domestic institutions, and growing retail participation, said Bernstein.

In 2022, when markets around the world dropped in double digits, India showed resilience with a relatively subdued 4 percent decline compared to other markets. This lays the foundation of several years of sustained high growth, where Indian markets are expected to give one of the highest returns among key markets throughout the world for the next several years, it stated.

Furthermore, the GDP growth recovery has also been strong off the lows, with 1Q GDP at 7.8 percent. While the brokerage expects a modest reduction in GDP growth rates over the next few quarters as election activity commences, broad high-frequency indicators still exhibit strength for various reasons. India has been accelerating Govt capex spending ahead of elections while manufacturing activity has been scaling up. PMI and IIPs are strong at this stage. However, the brokerage sees some risks to Agri growth in 2H and believes that while broad consumption volumes will stay sluggish, it has largely bottomed as inflationary impacts have moderated.

In its model portfolio, the brokerage has introduced two new ideas and removed four stocks from the portfolio. Its sector weights have also been marginally tweaked to pave the way for the new additions.

Sector portfolio: Bernstein remains overweight (OW) on Financials but allocates a small part of the weight to utilities. It is now neutral on utilities.

It also maintains an overweight on consumer tech with an overall IT sector with a modest OW position and remains OW on building materials.

Meanwhile, it is underweight (UW) on staples, equal-weight (EW) on Autos, and overall discretionary, and UW on Metals.

"Our current view on broad markets is to buy the corrections that will happen given the quick run-up from April. We see limited large downside risk due to supportive macro, resilient earnings growth, and lower risk in the broader corporate ecosystem," it forecasts.

Stocks portfolio: The brokerage has added NTPC and Paytm while removing Reliance and SBI from its portfolio. It has also retained HDFC Bank and Axis Bank in Financials, Infosys in IT, Delhivery, and Zomato in consumer tech. Biocon is retained in Healthcare, L&T in Industrials, and UltraTech in Cement.

Additions:

NTPC: The brokerage has a simple 4-point thesis on NTPC: 1) Thermal: Evening power shortages are on the rise in India. The solution to this is to add more thermal power - and NTPC is only the large player leading new investment in this space. 2) Renewable capital intensity: Renewables (RE) require 2-3x the capex of a thermal plant, and an operating renewable plant does not throw enough cash to fund a new one (first 12 years of debt servicing). Hence, cash flow from the coal plants of NTPC (10x of Renew + Adani Green in FY25) will be 'super-critical' to meet India's 50GW/yr renewable capacity addition plans. 3) Renewable - cost of capital and receivable advantage: NTPC has a borrowing cost of 6-7 percent compared to 9-10% for most private players. In a business where the cost of debt is the biggest differentiator as execution is relatively easy, it sees them make superior returns than peers. 4) Green Hydrogen: It is not easy to get funding for a green hydrogen project. The renewable plant is 60-70 percent of the capex of a green hydrogen plant, hence most private players are also reaching out to NTPC to set up a renewable plant to supply power to their electrolyzers.

Further, the brokerage sees limited regulatory risk in NTPC in the FY24-29 cycle, given the criticality of thermal plants and the 10-year govt. security rates remaining nearly the same as last time.

Paytm: While it's too early to declare winners in the digital lending space, especially with the expected entry of Jio Financial Services, PayTM does appear to be on the right side of disruption with its dominant payments platform and a head start in digital credit products, said the brokerage. PayTM has leveraged its large Monthly Transacting User (MTU) base, thanks to its dominant position in payments, to gain a head start in the digital lending segment. It expects PayTM to continue its strong growth in the lending business (50 percent CAGR between FY23-30E). Simultaneously, a rise in payment volume (even as the payment margins decline marginally) will ensure that the business turns profitable in FY25E and achieves an EPS of ₹130 by FY30E, it added.

Apart from Equities, the brokerage has also retained a small allocation to Ethereum. Also, Gold is retained as a short idea and a 20 percent allocation to SMID, which it finds adequate at this stage of the cycle.

Small caps are still trading at a discount to Large caps, while Mid caps are at a premium now, although SMIDs are more levered to end markets, which are positively impacted by a recovering cycle and new emerging areas that benefit from China plus one and Govt initiatives, noted Bernstein.

The brokerage further said that it has managed its portfolio largely through bottom-up stock selection in preferred stocks and shifting to aggressive positions (shift from cash exposure to no shorts, etc.) in specific periods.

Here is Bernstein's updated India portfolio for the rest of the year.