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Business News/ Markets / Stock Markets/  Morgan Stanley sees significant opportunity for bottom-up stock picking in India; lists its preferred sectors
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Morgan Stanley sees significant opportunity for bottom-up stock picking in India; lists its preferred sectors

Morgan Stanley sees a significant opportunity for bottom-up stock picking, by owning businesses with strong balance sheets, robust growth and improving profitability. MS also discussed the broad areas where it sees investment opportunities.

Morgan Stanley sees a significant opportunity for bottom-up stock picking, by owning businesses with strong balance sheets, robust growth and improving profitability. MS also discussed the broad areas where it sees investment opportunities. (Pixabay)Premium
Morgan Stanley sees a significant opportunity for bottom-up stock picking, by owning businesses with strong balance sheets, robust growth and improving profitability. MS also discussed the broad areas where it sees investment opportunities. (Pixabay)

India is home to a disproportionate number of high-quality companies yet remains underrepresented by equity indices. So, global brokerage Morgan Stanley sees a significant opportunity for bottom-up stock picking, by owning businesses with strong balance sheets, robust growth and improving profitability.

The brokerage noted that Indian markets have delivered strong returns over the last two decades and many investors, even in the emerging markets, have missed out. MS believes the backdrop of economic growth acceleration and more prosperous households, will likely provide well-run businesses the opportunity to gain share and improve efficiencies. This will provide numerous attractive Indian businesses to invest in, it added.

"We believe India’s growing population and young demographic, and its efforts to build digital, regulatory, financial and physical infrastructure over the last decade, will pave the way for growth acceleration over the next decade. This will have significant implications for India’s share of the global economy and equity markets," said the brokerage.

READ HERE: Why Chris Wood sees 7% real GDP growth and 12-15% earnings growth going forward

India offers a broad opportunity set for long-term investors yet it is underrepresented by equity indices. 

The brokerage pointed out that as an economy, India is likely to grow much faster than global growth, and despite quadrupling over the last two decades, India’s weight in the global equity index is just 1.7 percent, trailing its current 3.4 percent share of global GDP.

India is also home to a disproportionate number of high-quality companies (over 15 percent 3-year revenue growth CAGR and over 15 percent ROIC). MS believes India’s growing population and young demographic, and its efforts to build digital, regulatory, financial and physical infrastructure over the last decade, will pave the way for growth acceleration over the next decade.

This should drive India’s nominal GDP growth, in US Dollar (USD) terms at high single digits, taking its GDP from $3.5 trillion in 2022 to $8.1 trillion in 10 years according to Morgan Stanley Research.

"We have made multiple investments in India since the inception of our first strategy in 2006, across financials, consumer and industrials. As a team, we look for leading businesses with large addressable markets, opportunities to gain share and strong management teams we can co-invest with for the long term. We believe India offers an attractive hunting ground to find ideas that meet our criteria for long-term value creation. We expect the evolution of the Indian economy over the next decade will support our bottom-up ideas rather than act as headwinds, as we have seen in other emerging markets," said the brokerage.

READ HERE: What should be your investment strategy in this record-high environment?

However, performance will be volatile, cautioned MS but it believes that well-run, high-quality businesses in India, purchased at a discount to intrinsic value, can outperform over the long run.

In this note, the brokerage also discussed the broad areas where it sees investment opportunities.

BANKS: For more than 20 years a structural theme for Indian banks has been the transition of market share away from state-owned banks to private lenders. Given the importance of technology in terms of offering new services, MS believes it will be difficult for state banks to stem the continued market share loss to private banks. This should help better-run banks grow revenues in the mid to high teens for multiple years, it stated. As banks gain scale, operating leverage will be meaningful. The combination of a large market, significant market share opportunity, operating leverage, attractive valuations and governance is tough to find globally, it argued.

LUXURY: There are growing signs of Indian consumers spending on luxury products. This is permeating other segments, where consumers are premiumizing their purchases. A key beneficiary of this trend is likely to be the jewelry sector, given the importance of gold for Indian households, with India being the second-largest importer of gold. The sector is dominated by unorganized players, but market share has been shifting to organized players, a trend accelerated by the government’s digitization and taxation moves. As Indians get richer, they’re likely to consume diamond jewelry, which would expand margins for retailers, said the brokerage.

READ HERE: Nifty 50, midcap, smallcap indices, most sectors overvalued, says HDFC Sec

TRAVEL: The brokerage pointed out that more Indians are travelling within and outside the country. The investment in infrastructure, from 70 cities with airports a decade back to likely more than 200 by 2025, makes it easier for people to travel within the country. This will give rise to multiple businesses, from online travel agencies to hotels. For instance, current hotel infrastructure is limited in India. In 2022, India had 160,000 branded rooms, compared to 4.7 million in China, implying significant room for growth. The large hotel chains are focused on profitability, adopting asset-light strategies, driving up profitability and becoming less exposed to cyclical downturns, rationaled MS.

FOOD DELIVERY: According to the brokerage, food consumption accounted for a quarter of India’s GDP in 2019, dominated by home-cooked food, at 90 percent of consumption. Restaurant and food delivery is underpenetrated, with only a 10 percent market share of the total food market. MS expects the industry to grow steadily, driven by socioeconomic factors including rising urbanization, nuclearization, more working women and higher disposable incomes, and digitalization will further accelerate the adoption.

HEALTH CARE: India’s health care industry has grown at 12-14 percent CAGR over the past five years, but it is still underdeveloped compared to the global market. Aside from traditional hospital and pharmacy services, digital health can be an interesting area given the high smartphone penetration rate, 75 percent of the population living outside urban centers and digital health care adoption being boosted by the pandemic, it stated.

READ HERE: Is market correction on the horizon amid high valuations?

OUTLOOK

According to the brokerage, growth should accelerate compared to the last 10 years, resulting in a broader set of investment opportunities. Morgan Stanley research expects GDP per capita to increase from $2,400 in 2022 to above $3,600 in 10 years.

Another factor that enhances Indian equities attractiveness over the long term is increased savings from households in equities, expects MS. Historically, the Indian macroeconomy and its markets were both dependent on global liquidity, with the largest incremental investors in the markets being foreign investors. However, domestic mutual funds have become larger and provide a more stable and sustainable investor base, it noted.

Domestic equity assets under management (AUM) in India is around USD 350 billion, up 10x since 2014—their average ownership in the top 75 companies in India has increased from 3.5 percent in 2014 to over 10 percent now, as per Morgan Stanley Research. There may also be stickiness in this domestic flow into equities, with Systematic Investment Plans (SIP)—plans for individual investors to save a small amount in equity funds every month — now annualizing at close to $25 billion a year, it informed.

READ HERE: Want to become a crorepati before your retirement? Ideal SIP to amass 5 crore

It also pointed out that a large proportion of Indian companies are managed with a focus on long-term shareholder returns. This is helped by the fact that founders, called ‘promoters’ in India, own fairly large stakes in listed companies. Promoter ownership in the top 70 Indian companies was 45 percent in September 2023, as per Morgan Stanley Research.

A large number of businesses are focused on efficient use of capital, given the high cost of capital in the country, and this, coupled with the strong economic backdrop, has driven good market returns, added MS.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decision.

 

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Published: 23 Feb 2024, 02:41 PM IST
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