India - Strategy 2024 Lok Sabha

Elections
04 June 2024

NDA govt. skating on thin majority ice
Despite a weak BJP finish, an NDA govt. will likely eventuate
though after a likely tense period of thrust-and-parry. A non BJP
led majority formation looks almost impossible. NDA’s thin(ish)
majority will also be at risk with many new significant faces in the
BJP. BJP’s own struggle to 240 seats will likely interrupt fiscally
and politically challenging reform efforts, cause more populism
and potentially impact medium term growth (currently a
satisfactory 6.3% for GVA in 4Q). This will surely cause multiple
compression (Nifty is 14% richer than 5y pre covid avg, but
sectoral dispersion is substantial; and SMID indices are 55-60%
richer), initially concentrated on unreasonably pricey sectors like
PSUs and Cap goods, but becoming more broadbased over time
(expect upto 10% compression) as growth estimates adjust. But
rather than be totally defensive, we recommend stocks with
decent growth, less linkage to govt. action and valuation support,
especially in large caps – select auto, consumer, banks, NBFCs.
Cap goods, defense & power will underperform in the near term.
Cement, pharma, healthcare should also do well. We introduce
Sun Pharma, Apollo Hospital in large caps (removing SBILI and
BPCL), and pare down our SMID list, and keep our top SELLs
unchanged.
Thin majority: BJP’s vote share stayed at 37%, but seat losses were
significant in strongholds including UP. Despite a ~110 seat gain for the
INDIA alliance mainly dominated by Congress and SP, the alliance (as it
stands right now) wouldn’t be able to reach the 272 majority mark. A BJP
led majority govt is almost certain, though it will have to accommodate
demands from the testy 12 seat JDU and other partners. State elections
will become more challenging.
Avoid Defense, but don’t go totally defensive: We expect somewhat
higher interest rates than we did earlier, and weaker INR. DDButMMMdo YYYY
keep
sight of strong current growth momentum (4Q GVA growth of 6.3%),
monetary easing imminent globally and inevitably in India, some
structural reforms (like GST) beginning to make their impact, improved
balance sheets and finally visibility on a stable coalition at the center. We
introduce Sun Pharma (margin improvement and earnings visibility),
Apollo Hospital (sector has hit a temporary air pocket) and avoid very
high priced sectors and supposed defensives like FMCG (pricey) & IT
(multiple headwinds such as slowing US economy and AI).
Figure 1: Reforms requiring political consensus will likely be pushed back
Reform continuity Tough reforms - Likely push back
DBT reforms Political reforms: Uniform Civil Code/ One Nation One Election
FTA negotiations Power reforms - New Electricity Act / Discom privatisation
Deepening debt markets Agri reforms, land acquisition laws
Simplifying tax laws Implementing labour laws
Correcting inverted duty Expanding GST coverage
Source: IIFL Research
Figure 2: NDA numbers comfortable to form the next government
2024 Lok Sabha numbers
INDIA & Others, BJP, 240
251

Tough reforms now almost impossible: PM Modi had been targeting

several key economic reforms – among them would have been a new
Electricity Act, labour laws, farm laws, PSU reforms and others. Many of Shiv Sena, 7
these now look out of reach, but simplifying duty structure/GST/direct LJP, 5
taxes, widening DBT, FTAs are still possible. TDP, 16
JD(U), 12

Source: ECI, IIFL Research

G V Giri Akshit Gangwal Vishal Mehta

gvgiri@iiflcap.com Akshit.gangwal@iiflcap.com vishal.mehta@iiflcap.com
91 22 4646 4676 91 22 4646 4661 91 22 4646 4649
 India - Strategy

Top Picks
Figure 3: Top Picks Valuation Matrix
Company Name Sector CMP Mkt Cap 3M Avg Vol EPS CAGR (%) P/E (x) P/B (x) D/Y (%) RoE (%) EV/Ebitda (x) Upside
(Rs) (USD m) (US$m) FY24-FY26ii FY25ii FY25ii FY25ii FY25ii FY25ii (%)
Top Largecaps
Axis Bank Private Banks 1,131 41,837 85 14.0 12.6 2.0 0.1 16.8 NA 14%
Sun Pharma Pharma 1,430 41,070 34 14.5 31.0 4.6 0.8 16.5 22.8 17%
Apollo Hospitals Health Care 5,858 10,084 21 51.9 58.0 9.8 0.1 18.3 26.2 21%
UltraTech Cement Cement 9,918 34,280 26 23.0 32.2 4.2 0.7 13.9 18.3 17%
CIFC NBFC 1,241 12,481 13 32.7 23.2 4.4 0.2 20.6 NA 21%

Top SMID
Samvardhana Motherson Auto Ancillaries 142 11,532 22 26.7 26.2 3.3 1.4 13.3 10.1 9%
Info Edge (India) Internet 5,661 8,768 13 14.4 77.9 6.1 0.5 8.0 63.5 25%
KIMS Health Care 1,847 1,770 1 21.3 40.6 5.9 - 15.9 20.8 27%
MRS BECTORS FOOD FMCG 1,265 891 1 9.5 51.7 9.4 0.3 19.8 27.9 14%
JK Lakshmi Cement Cement 764 1,076 1 29.3 14.8 2.4 0.5 17.5 7.6 44%

Top Sells*
TVS Motor Automobiles 2,211 12,578 13 20.1 43.8 11.0 0.6 27.8 25.4 -21%
Tech Mahindra Technology 1,248 14,601 19 36.1 27.3 4.2 3.6 15.5 15.5 -24%
Divis Laboratories Pharma 4,324 13,743 15 20.1 59.5 7.8 0.6 13.6 40.4 -17%
Wipro Technology 438 27,427 16 NM 18.0 2.9 3.3 16.6 11.5 -4%
Eicher Motors Automobiles 4,549 14,922 21 7.8 28.7 5.9 1.2 22.3 28.1 -18%
Delhivery Logistics 360 3,182 8 NM NM 2.9 - NM 51.1 3%
Source: IIFL Research.

Changes to Top picks:

We remove SBI Life, BPCL from our top large-cap picks and add Apollo Hospitals & Sun Pharma. In SMIDs, we remove Vedant Fashions & APL Apollo.
No change in top sells.

*In addition, we expect cap goods, defense & power to underperform in the near term and recommend shorting basket of these stocks.

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 India - Strategy

An Unexpected weak mandate for the BJP: Figure 5: NDA numbers comfortable to form the next government

BJP registered an ‘unexpected’ decline of 63 seats (provisional) vs its

2024 Lok Sabha numbers
2019 tally, despite being able to retain its overall vote share at 37%
(same as 2019). The losses were led by states of Uttar Pradesh,
Maharashtra, Rajasthan, Karnataka and West Bengal; while it gained
some in Odisha, Telangana and Andhra Pradesh. The verdict was against
the trends shown as per opinion polls and exit polls, which gave a bigger INDIA & Others, BJP, 240
majority to BJP and NDA vs 2019 tally. While the NDA has a clear majority 251
with 292/543 seats (provisional) will be able to form the government, BJP
is likely to fall short of a majority by ~30 seats which means we will see
a return of coalition politics after 10 years. The INDIA alliance has seen a
Shiv Sena, 7
gain of ~110 seats vs 2019, with Congress (+47), SP (+32) gaining the LJP, 5
maximum’ however the alliance (as it stands right now) is unlikely in a TDP, 16
position to form the government on its own. JD(U), 12

Figure 4: State wise tally for the BJP Source: ECI, IIFL Research
2019 - BJP 2024 AMI Exit IIFL Change with
States Total seats
tally tally# poll* estimates exit polls
Uttar Pradesh 80 62 33 66 72 Miss Figure 6: Uttar Pradesh has led the decline in seats for BJP followed by Rajasthan and
Madhya Pradesh 29 28 29 29 28 In-line Maharashtra
Gujarat 26 26 25 26 26 In-line
(Seats) States with highest seat losses for the BJP vs 2019
Maharashtra 48 23 10 21 25 Miss 0
Karnataka 28 25 17 21 21 Miss
West Bengal 42 18 12 29 23 Miss (5)
Rajasthan 25 24 14 18 20 Miss -6 -5
(10) -8
Bihar 40 17 12 14 17 Miss -10
Odisha 21 8 19 19 13 In-line (15) -13
Jharkhand 14 11 8 9 11 In-line (20)
Assam 14 9 9 10 9 In-line
Haryana 10 10 5 7 6 Miss (25)
Chhattisgarh 11 9 10 11 9 In-line (30)
NCT of Delhi 7 7 7 7 7 In-line -29
Telangana 17 4 8 12 7 Miss (35)
Uttar Rajasthan Maharashtra Karnataka West Bengal Haryana
Andhra Pradesh 17 0 3 5 3 Miss
Punjab 13 2 0 3 2 Miss Pradesh
Tamil Nadu 39 0 0 2 2 Miss Source: ECI, IIFL Research
Kerala 20 0 1 3 0 Miss
Others 42 20 18 22 19
BJP total 543 303 240 331 320
Source: ECI, Axis My India, IIFL Research *Mid-point of range assumed

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Figure 7: Odisha, Telangana and Andhra Pradesh led gain for the BJP Figure 9: State wise vote share losses- Hindi heartland states form a big share
(Seats) States with highest seat gains for the BJP vs 2019 (%) States wise vote share losses for the BJP vs 2019
0
14
12 (5)
12 (10)
10 (15)
8 (20)
(25)
6

Arunachal

Rajasthan
Manipur

H.P

Karnataka

Uttarakhand

Bihar

NCT of Delhi

West Bengal
J&K

Jharkhand
Haryana

Chandigarh
Uttar Pradesh

Maharashtra
4
4 3
2
0
Odisha Telangana Andhra Pradesh

Source: ECI, IIFL Research Source: ECI, IIFL Research

Figure 8: State wise vote share gains- Telangana, A.P, Tamil Nadu and Kerala were the Figure 10:Current Rajya Sabha tally for the NDA will ensure smooth passage of bills
significant states where BJP saw vote share gains Current NDA parties RS Seats
(%) BJP 97
States wise vote share gains for the BJP vs 2019
25 JD(U) 4
20 JD(S) 1
15 SHS 1
10 RLD 1
5 PMK 1
0 AGP 1
Punjab

Kerala
Tamil Nadu

Odisha
Tripura

Telangana

Andaman &
Andhra Pradesh

TMC(M) 1
Nicobar

NPP 1
RPI(A) 1
UPPL 1
IND 2
Source: ECI, IIFL Research Others 7
NDA Total 119
Total Rajya Sabha 245
% of total 49%
Source: Media reports

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 India - Strategy

Sector-wise & Stock-wise PE re-rating & EPS growth

Figure 11:Defense, Real Estate, EMS, Utilities & Cap goods have seen significant re-rating compared to pre-Covid levels
No. of Mcap PER (x) 12m Fwd PE Rerating (x) EPS CAGR FY25 EPS Chg (%)
Sector Companies (US$ bn) Jun-24 Current vs 5Yr Avg on Dec 19 FY17-20 FY22-24 FY24-26 YTD
Technology 19 369 23.7 1.78 13.3 26.9 20.8 (5.8)
Private Banks 11 337 12.7 0.66 1.9 59.0 16.9 (3.8)
FMCG 14 263 48.1 1.36 15.4 16.8 25.5 (4.8)
Conglomerate 1 226 22.7 1.93 11.2 8.9 17.0 (3.7)
Automobiles 8 167 27.2 1.44 (0.2) 54.9 19.3 4.9
Metals & Mining 9 150 15.7 1.99 2.2 (12.7) 31.8 11.1
Pharma 18 150 29.6 1.41 12.8 23.1 20.0 (0.1)
NBFC 13 132 12.9 0.94 19.4 28.2 15.7 2.2
PSU Banks 4 122 8.3 0.91 (25.6) 45.3 18.9 10.5
Cap Goods 18 123 52.0 1.92 10.9 21.9 25.0 1.0
Retail 7 101 67.1 1.43 22.5 77.4 35.7 (9.9)
Utilities 6 108 21.4 2.30 24.2 14.6 16.9 2.2
Telecommunications 1 10 12.6 0.73 19.4 (2.8) 11.1 11.2
Cement 10 96 32.4 1.39 18.0 (6.2) 27.0 (5.2)
Real Estate 7 37 43.9 2.45 4.5 62.5 68.4 (2.0)
Chemicals 9 55 39.8 1.97 40.9 (5.3) 39.9 (14.5)
Construction 7 69 23.1 1.46 15.1 25.6 28.3 (2.4)
Financial Services 7 51 33.0 1.46 3.7 18.8 40.3 12.0
Insurance 5 52 55.8 1.29 (2.1) (0.4) 22.4 (3.5)
Upstream O&G 3 48 8.6 1.10 (5.4) 9.3 9.6 7.4
OMCs 2 23 7.8 1.25 (26.2) 48.9 (21.6) 18.7
Defense 2 29 49.7 3.92 8.8 19.7 25.5 7.8
Logistics 4 43 29.8 1.37 (5.2) 24.7 21.0 7.3
Auto Ancilliaries 10 46 29.3 1.53 0.7 33.3 23.1 (0.1)
Paints 3 42 40.6 1.00 9.7 46.0 (1.4) (11.4)
Health Care 6 23 45.3 1.04 (1.2) (5.1) 41.4 (8.1)
Gas Utilities 3 21 18.2 1.41 49.6 (0.5) 5.4 (6.3)
Consumer Electricals 2 15 54.8 1.42 9.2 (6.6) 44.1 (2.9)
Travel & Leisure 1 2 39.4 0.91 67.2 NA 32.7 (6.9)
Building Materials 6 22 43.0 1.64 4.7 2.0 25.3 (10.2)
Tyres 4 17 21.1 1.56 (1.3) 80.9 13.8 (0.5)
Consumer Goods 3 11 51.4 2.07 27.2 13.7 65.2 (1.5)
Internet Companies 1 9 72.1 1.01 (5.0) (39.4) 19.0 4.8
Agriculture 3 8 19.5 1.65 14.3 5.2 17.9 (9.6)
Textiles 3 6 17.9 1.84 6.8 (9.4) 27.8 (4.1)
EMS 1 6 73.4 2.33 30.9 38.4 56.7 13.7
Media 2 5 14.7 0.69 (3.2) (24.3) 67.3 (16.3)
Consumer Discretionary 1 1 43.0 1.04 41.2 167.6 20.0 (6.6)
Business Services 1 1 18.6 0.58 6.8 8.7 37.7 (5.6)
NSE500 Aggregate 235 2,998 32.3 1.46 10.8 23.5 25.9 (1.4)
NSE500 Ex-Financials 195 2,303 34.5 1.55 12.1 21.7 26.8 (2.2)
NSE500 Ex-Fin & Commodities 181 2,082 36.2 1.54 13.3 23.3 27.4 (3.3)

Source: Bloomberg, IIFL Research. Note: Based on 235 NSE500 cos. for which more than 5 analysts’ estimates and historical data for FY17-20 EPS are available.

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Figure 12:Highest re-rated stocks within NSE500 (Current vs pre-covid 5yr average)
Company Sector 12m Fwd PE PE Rerating EPS CAGR (%) FY25 EPS Chg (%)
Current (x) FY17-20 FY22-24 FY24-26 YTD
Grasim Industries Ltd. Cement 96.7 8.5 (18.1) (44.8) 45.7 (24.8)
Bharat Dynamics Ltd. Defense 59.1 6.5 6.0 10.5 35.6 4.9
Irb Infrastructure Developers Ltd. Construction 36.4 4.2 0.3 8.2 46.5 5.4
Hindustan Zinc Ltd. Metals & Mining 24.6 3.6 (2.7) (10.2) 24.7 10.1
Kei Industries Ltd. Cap Goods 48.2 3.5 38.1 24.6 24.7 1.0
Brigade Enterprises Ltd. Real Estate 47.5 3.4 (11.7) 146.0 29.5 10.0
Sobha Ltd. Real Estate 43.8 3.3 21.4 (42.1) 241.4 (17.2)
Vedanta Ltd. Metals & Mining 11.2 3.2 (3.2) (54.5) 98.9 22.9
Tata Consumer Products Ltd. FMCG 60.1 2.9 (5.5) 19.9 18.4 (4.0)
Firstsource Solutions Ltd. Technology 19.4 2.8 5.8 (3.2) 21.8 (3.2)
Persistent Systems Ltd. Technology 36.9 2.7 5.2 24.6 23.7 (4.9)
Escorts Kubota Ltd. Automobiles 33.6 2.7 12.4 14.1 22.6 (6.4)
Laurus Labs Ltd. Health Care 47.5 2.6 4.8 (55.9) 106.9 (43.6)
Thermax Ltd. Cap Goods 78.1 2.6 (7.7) 52.0 18.1 0.2
Bharat Electronics Ltd. Defense 40.3 2.5 11.5 28.9 15.4 10.7
Tata Power Co. Ltd. Utilities 27.3 2.4 7.9 35.1 11.6 11.7
Divi's Laboratories Ltd. Pharma 53.5 2.4 8.0 (26.4) 26.3 (8.5)
Navin Fluorine International Ltd. Chemicals 40.6 2.4 159.2 1.7 34.5 (34.5)
Dixon Technologies (India) Ltd. EMS 73.4 2.3 30.9 38.4 56.7 13.7
Torrent Power Ltd. Utilities 27.7 2.3 65.8 18.1 22.5 (14.1)
Sunteck Realty Ltd. Real Estate 24.9 2.2 (14.7) 61.7 118.0 (7.8)
Apl Apollo Tubes Ltd. Metals & Mining 34.9 2.2 14.4 3.2 43.0 (18.0)
Power Grid Corporation Of India Ltd. Utilities 16.1 2.2 14.1 (3.7) 7.2 5.8
Solar Industries India Ltd. Chemicals 62.6 2.1 14.9 42.3 31.7 2.9
Cummins India Ltd. Cap Goods 49.5 2.1 (2.3) 35.4 10.6 16.8
Tech Mahindra Ltd. Technology 24.1 2.1 12.0 (31.1) 50.2 (20.5)
Voltas Ltd. Consumer Goods 54.5 2.1 0.9 (24.6) 101.3 5.1
Blue Star Ltd. Consumer Goods 55.6 2.1 9.2 53.5 30.8 9.7
Source: Bloomberg, IIFL Research

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 India - Strategy

Figure 13:Lowest re-rated stocks within NSE500 (Current vs pre-covid 5yr average)
Company Sector 12m Fwd PE PE Rerating EPS CAGR (%) FY25 EPS Chg (%)
Current (x) FY17-20 FY22-24 FY24-26 YTD
Bandhan Bank Ltd. Private Banks 7.8 0.3 22.8 321.4 36.7 (22.4)
Natco Pharma Ltd. Pharma 10.5 0.5 (4.1) 217.7 13.0 27.9
Au Small Finance Bank Ltd. Private Banks 20.4 0.5 (14.9) 18.2 28.4 (8.3)
Fortis Healthcare Ltd. Health Care 39.0 0.6 (69.2) 3.6 32.6 2.9
Quess Corp Ltd. Business Services 18.6 0.6 6.8 8.7 37.7 (5.6)
Indus Towers Ltd. Telecommunications 12.6 0.7 19.4 (2.8) 11.1 11.2
Jk Lakshmi Cement Ltd. Cement 15.2 0.7 74.1 2.7 19.7 (1.4)
Hdfc Bank Ltd. Private Banks 15.7 0.7 18.8 13.4 11.0 (8.0)
Axis Bank Ltd. Private Banks 12.5 0.8 (27.0) 37.8 12.2 (0.9)
Acc Ltd. Cement 18.6 0.8 16.7 12.2 5.1 10.0
Dalmia Bharat Ltd. Cement 28.2 0.8 (27.5) (17.2) 33.4 (20.4)
Pnc Infratech Ltd. Construction 15.1 0.8 29.8 37.8 (1.5) 5.9
Dr. Reddy's Laboratories Ltd. Pharma 17.0 0.8 37.0 37.7 4.4 5.6
Petronet Lng Ltd. Upstream O&G 11.3 0.9 19.2 3.3 5.6 5.3
Chalet Hotels Ltd. Travel & Leisure 39.4 0.9 67.2 NA 32.7 (6.9)
Knr Constructions Ltd. Construction 18.8 0.9 12.8 16.1 0.2 (9.8)
Ashok Leyland Ltd. Automobiles 19.1 0.9 (39.0) 132.8 12.7 1.9
Shree Cement Ltd. Cement 33.2 0.9 3.4 (0.1) 17.2 3.6
Emami Ltd. FMCG 31.6 1.0 (7.6) (4.3) 15.0 (4.8)
Oil & Natural Gas Corporation Ltd. Upstream O&G 5.8 1.0 (43.0) 5.7 2.1 1.0
Biocon Ltd. Pharma 34.0 1.1 8.5 30.9 19.5 (26.7)
Nestle India Ltd. FMCG 64.2 1.1 16.6 15.2 12.4 (3.8)
Maruti Suzuki India Ltd. Automobiles 24.4 1.1 (17.3) 96.1 23.4 8.7
Source: Bloomberg, IIFL Research

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Sector write-ups & top picks

Sector Outlook Top Buys Top Sells
The agriculture sector has witnessed several initiatives taken by the government in the last 10 years. Some of the key policies that were
implemented include, PM Kisan Samman Nidhi Yojana, PM Fasal Bima Yojana and Per Drop More Crop. ~118mn farmers have benefited from
the PM Kisan Samman Nidhi Yojana by receiving Rs6,000 annually (in three equal instalments), while more than 40mn farmers received claims
under PM Fasal Bima Yojana. The allocation for PM Kisan Sanman stood at Rs600bn in FY24. One bold step to highlight is the government’s
efforts to ensure affordable fertilisers despite a huge increase in the global prices, resulting in the ballooning of fertiliser subsidy to Rs2,252bn
Coromandel
Agriculture in FY23. However, a few crucial reforms had to be repealed due to farmers’ protest.
International
While there were expectations that the new government would revisit the farm reforms and reintroduce them in a modified form, achieving
consensus may prove challenging given the updated mandate. Other anticipated reforms, such as MRP rationalisation, the inclusion of Urea in
the Nutrient Based Subsidy (NBS) policy, and the introduction of an efficient Direct Benefit Transfer (DBT) system for fertilisers, are also eagerly
awaited. However, these reforms may now take longer to materialize. If executed effectively, they could benefit fertiliser companies. Among
our coverage universe, Coromandel International stands to gain.
AMCs and Exchanges are beta plays on the market. With a likely slowdown in government capex, corporate earnings would moderate vs. the
earlier expectations. This would also impact the premium market valuations and thus lead to further market correction. Our strategy team
calculates Nifty could fall upto 10% from current levels. This would have a direct impact on AUM of the AMCs and the MF-RTAs thereby impacting
their earnings. As far as Exchanges are concerned – market activity could slowdown as many of the new retail investors (demat accounts are up
AMCs and
3x in last 4 years) may be seeing the downcycle for the first time. Having said that, as Options are the key earnings driver for the Exchanges now MCX
Exchanges
– market can adapt new strategies for the downcycle – and thus limit the overall impact on the volumes. Either which ways we await better
entry points for Capital Market plays. MCX we believe is relatively insulated as it is still at nascent stage and there is potential to increase market
participation (traders may look at commodities if opportunities in equities moderate); also underlying commodity price volatility is likely to
drive volumes.
Govt. reforms in the Auto sector has revolved around three areas – 1) Stricter emission and safety norms, 2) Push for manufacturing via PLI
Schemes, 3) Push for EVs. The government mandated an accelerated transition from BS-IV (2017) to BS-VI (2020), skipping BS-V altogether.
Over the years, the Govt. brought in safety norms such as ABS, air-bags, etc. These were positive from an environment/safety perspective, but Balkrishna
resulted in higher costs for vehicle buyers, hurting affordability. The positive push for the sector came in the form of PLI incentives for auto/ li- Industries,
Auto ion battery manufacturing, and incentives for EVs by way of low GST rate (5% vs 28-50% for ICE) and FAME subsidies. We expect the government Samvardhana Eicher Motors
to continue incentives for EVs, and possibly introduce sops for hybrid cars (although much lower than what Street is anticipating). Scrappage Motherson
norms have been talked about for few years, but nothing concrete has come through so far. This may change going forward. Lastly, if overall International
GDP growth were to remain strong and become more broad-based, lower segments of cars ad 2Ws (which have under-performed post Covid)
would receive a fillip.

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 India - Strategy

Sector Outlook Top Buys Top Sells

Stock price performance of Private banks has lagged both Public bank peers and also the broader market in last 1Y/3Y/5Y (Pvt banks index -
62%/-147%/-76% vs. PSU banks index and -11%/-12%/-48% vs. Sensex. This was mainly led by the convergence in growth and profitability of
PSU banks vis-a-vis Private banks. Some of the cyclical tailwinds enjoyed by the PSU banks (ala low loan-to-deposit ratio driving faster loan
Banks HDFC, Axis
growth, better NIM outcome and low credit cost) should start abating in the next 2-3 quarters. While the ROEs have converged (thanks to higher
leverage), PSU banks’ ROAs are still 40-50% below the Private peers. Following significant underperformance in the past few years, improving
system liquidity and deposit mobilisation prospects, we see significant value in select large Private banks.
Business services sector encompasses staffing, facility management, security and cash management subsectors. Staffing, facility management
and security services are a direct proxy on infrastructure capex, China +1, PLI scheme and higher manufacturing. If some of these trends take a
Business backseat due to a weak government, the addressable market for these subsectors may grow at a slower-than-expected pace. The BJP had CMS Info
Services included the implementation of Labour Code in its 100-day agenda if it were to form the government; this would have benefited larger, Systems
compliance-adherent players. Labour reforms may end up taking a back seat in the event of a coalition government. In such a scenario, our top
pick in the business services space is CMS Info Systems - largely immune to the above expectations not materialising.
Capital Goods stocks witnessed unprecedented re-rating in recent weeks driven by strong earnings performance and expectations of sharp
growth from strong investment sentiments and breakthrough reforms in the power (distribution) sector. While broad investment thrust on
Capital infra and Manufacturing can continue, large outlays driven by major reforms in the power distribution sector may not materialise, resulting in
KKC, BHE MTARTECH
Goods likely valuation correction for T&D related stocks. But power shortages are real and will continue to attract focus from stakeholders. We do not
expect a major cut in our earnings (22% Cagr over FY24-27ii) due to solid order book, increasing pull from global supply chains, strong local cost
competitiveness and operating leverage.
In last 3 years, cement sector volumes grew at high single digits driven by strong infrastructure and housing demand. Incrementally, higher
populism from the government at the cost of infrastructure capex could impact 28% of cement demand. Fiscal deficit could increase, and
interest rates stay higher than previously expected, leading to demand softness in housing at the margin. Having said this, the lower inventories
UltraTech
Cement in housing and record projects launches are likely to support cement demand, and populism will likely include continuation of affordable housing
Cement
scheme. Housing accounts for 60% of total cement consumption. Further, likely additional allocation to rural schemes (MNREGA/MSP) and a
normal monsoon should result in higher rural demand. In a scenario where utilisation levels can falter, pricing discipline will need to improve.
Given the current uncertainty we prefer large players with strong balance sheet – Ultratech Cement is our preferred pick in the sector.
Given the election outcome (a reduced majority for the incumbent), it is likely that there is a tilt towards populism in the near term. While the
impact on consumption would depend on a multiple factors (nature of the populism, targeting in terms of income groups, geographies, etc), it Bikaji Foods,
Consumer is sentimentally a positive for consumption, a sector that has been out of flavour in the past few months. While valuations continue to be rich Jyothy Labs,
in this space, (especially after today’s move), we would closely monitor the new governments’ announcements and look for their implications GCPL, Honasa
on EPS upgrades.

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 India - Strategy

Sector Outlook Top Buys Top Sells

While fiscal challenges will increase for the govt, there may not be material change in government policies towards strengthening domestic
EMS electronics eco-system and risk to PLI schemes or projects under National Semiconductor Mission. Expect business continuity with bottom-up KAYNES SYRMA
growth drivers.
A more socialistic perspective from the new government may help revive consumption sentiments and help growth bounce-back for consumer
CROMPTON,
FMEG electrical stocks. Valuation are at bottom of the cycle and earnings downgrade cycle is broadly behind, making the space attractive from risk
HAVL
rewards perspective, further complemented by strong seasonal offtake for products like fans, air coolers and RAC.
The India healthcare delivery market is also expected to sustain its 13-14% Cagr over the next few years driven by increasing prevalence of
chronic diseases, rising affordability levels and insurance penetration, and medical tourism. With the Hospital industry set to add 35-40%
incremental bed capacities over FY25-27, we believe inpatient volume growth will start improving even for the larger hospital players from
2HFY25. We remain positive on the Hospital sector given improving occupancies in existing hospitals, capacity expansions, and consistent ARPOB Apollo, KIMS,
growth of 5-7% should drive 18-19% Ebitda Cagr for the Hospital industry over FY24-27ii. Apollo, KIMS and Max are our preferred picks in the Max,
Healthcare
Hospital sector. With the Covid-related disruptions in the base business now behind, the core organic revenue growth for Diagnostic companies Metropolis,
has started improving to 12-14% YoY aided by both volume growth and realisation increase led by price hikes and better test mix. Given Ebitda Vijaya
margins are also expected to remain stable as the dilutive impact of network expansion is already in the base and will also be aided by a benign
competitive intensity environment, we expect aggregate Revenue/Ebitda/PAT growth for our Diagnostic coverage to be 14/15/21% Cagr over
FY24-27ii.
A not so decisive mandate presents incremental risks to sustainability of infra capex but in the near term bigger risks emanates from possible
review of priorities and consequently delayed decision making. With weak starting order books, road contractors are at a higher risk vs general PNC,
more diversified contractors. This should drive de-rating post the sharp run up seen over past few weeks. Change in state governments in AP
Infra – EPC Ashoka
and unexpected outcome in Maharashtra would also impact pace of awards as well as execution amid changing dynamics. Based on
fundamentals and existing valuations, PNC and Ashoka Buildcon are the preferred picks with both trading at single digit FY25ii PER (adjusted for Buildcon
value of HAM portfolio).
The Indian Life Insurance private sector was able to grow at high single digits in FY24 despite the impact of taxation of high ticket non-linked
products from Apr-1, as the same was offset by strong growth in ULIPs. We forecast our covered LI companies to deliver 16% APE Cagr in FY24-
FY26ii. The Indian General Insurance industry has delivered strong GDPI growth in FY24 at 19% YoY for private players, on a healthy base of last
year. While we believe FY25 could see a tad lower, but still healthy GDPI growth for the sector, market share dynamics may change as the GI
Insurance companies prioritise EOM compliance, offering share gain opportunity to the compliant firms, such as ILOM, STAR and BAGIC. On the regulatory SBI Life
front, given the subdued majority for the ruling government in the 2024 general elections, we expect major regulatory changes (e.g. Composite
license) to be potentially deferred, while focus may be more on changes benefitting policyholders (e.g. Increase in surrender value).SBI Life
(SBILI) remains our top pick in the Insurance sector given its best in class commission and expense ratio, diversified geographical distribution
and high agent productivity.

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 India - Strategy

Sector Outlook Top Buys Top Sells

Uncertainty on domestic capex will hurt the strong steel demand growth trend seen domestically which has provided a cushion amid weak
global markets and elevated Chinese exports. This has supported re-rating of steel stocks and this is incrementally at risk. Plays negatively more
for JSPL and SAIL (Also PSU narrative) than for TATA and JSTL. Non ferrous names are better placed relatively even as they too would see impact Hindalco, Jindal SAIL,
Metals
from possible slower capex trends. That said, Hindalco with majority value still being contributed by Novelis is better placed. APL Apollo would Stainless NMDC
see impact of any slowdown in capex spends as well. Hindalco is the top pick followed by Jindal Stainless given more of a converter nature of
business.
Stock price performance in the last 1/3/5 years of large cap Pvt. NBFCs (a large NBFC, CIFC, SHFL) have significantly trailed that of their PSU
counterparts (PFC, REC, IREDA, IRFC, HUDCO) on back of strong growth prospects (capex linked), improved governance and expectations of
structural reforms for the latter. Large Pvt NBFCs delivered returns of -7%-65%/10-117%/87-311% compared to 195-426%/420-675%/500-
625% for PSU NBFCs over the last 1/3/5Y respectively. With the election outcome likely indicating a return of the incumbent government, CIFC, SHFL,
NBFCs
albeit in a weaker avatar, some of those expectations are likely to reverse. Further, we expect focus may incrementally shift towards more MMFS
populist measures (cash transfers, MREGA, MSP increases, etc.). These measures can improve rural cash flows but also result in higher
interest rates on looser fiscal policy. Consequently, our preference would be for large NBFCs benefitting from improving agri cash flows and
strong parentage or diversified funding profile (CIFC, SHFL, MMFS).
The operating environment for Indian O&G companies is expected to remain benign over the next 12-18 months, underpinned by 1) relatively
less volatile oil prices (US$80-90/bbl), given well-supplied oil markets and adequate OPEC+ spare capacity to meet unanticipated demand spikes;
2) benefits of opportunistic oil sourcing by the OMCs boosting GRMs; 3) favourable product cracks; and 4) robust local demand for POL products.
Oil and Gas BPCL, HPCL
A weak outlook on LNG prices also bodes well for gas utilities like CGDs, GAIL, PLNG, etc. Meanwhile, ONGC and OIL also are confident in growing
O&G production in FY25ii by at least 5-8% YoY. Inclusion of auto fuels, ATF, and natural gas under the ambit of GST could further improve the
macro landscape, but may now end up taking a back seat in the event of a coalition government.
Pharma (& Healthcare, covered earlier above), being a defensive sector, has limited implications as far as election results are concerned,
particularly given the fact that most of the private healthcare companies do not actively participate in the central government’s healthcare
schemes such as Ayushman Bharat. But with overall macro uncertainty now, we believe the Pharma & Healthcare sector fits well with the Sun Pharma,
Defensive theme and will help to provide relatively stability to investment portfolios. Aurobindo, Divi’s, Biocon,
Pharma The outlook for the overall Pharma sector remains fairly upbeat for the next 12-18 month period, given lower intensity of price erosion in the Lupin, JB
Ipca
US generics market led by product shortages and supply chain disruptions, and a consistent secular 9-10% growth for the domestic India Pharma Pharma, Alkem,
Market. With continued moderation in API/RM costs (Pen-G related cost benefits should accrue in FY25/26), pricing stability in the US generics Torrent
market, and robust low-double-digit growth in the India/Branded RoW markets, our estimates factor-in our Pharma coverage’s aggregate
Revenue/Ebitda/PAT growth to be robust at 11/15/18% Cagr over FY24-26ii.
Power demand has witnessed strong growth post CoVID led by recovery in the economy and improving industrial activity. However, the supply
side has not ramped-up materially due to under-investments in the sector, leading to peak power shortages in pockets across the country. As a
result, the power sector has entered a capex cycle across the G/T/D space to ensure an adequate supply of power to support the growing
Torrent Power,
Power economy for which visibility on earnings growth >FY26 has improved materially. On this backdrop, we maintain our positive stance on the sector NHPC, PGCIL
CESC
and prefer companies that can sustain the 5 year+ investment phase and come out stronger; prefer CESC and Torrent Power. Seemingly rich
valuations relative to fundamentals amidst consensus O/W stance place PGCIL and NHPC de-rating candidates. We maintain SELL on NHPC
and downgrade PGCIL to REDUCE. Private utilities may also UPF in such uncertain times, but we relatively prefer them over PSUs.

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 India - Strategy

Sector Outlook Top Buys Top Sells

Real Estate sector has been in an upswing since 2021, and the top developers have witnessed a pre-sales cagr of ~45% over FY21-24; they are
guiding for ~25% YoY growth in pre-sales for FY25. Beyond the cyclicality impact especially in luxury housing, factors like Industry consolidation,
declining leverage levels of developers and healthy pricing growth have helped sector growth over next few years. With elections results which
point to a weaker mandate for PM Narendra Modi, while we expect the broad residential cycle to continue, we see some softness likely for
luxury and ultra-luxury segment (with high share of investors). Given that Real Estate stocks have witnessed a strong 23%/92% return over Nexus Select
Real Estate
YTD/1 year (outperformed NIFTY by 22%/74%), we would prefer to stay with Annuity based themes over cyclical and high beta names. REITs, Trust
both Commercial and Retail, are expected to benefit from strong demand across their underlying sectors. The commercial real estate sector is
coming out of a deep down-cycle with strong demand from Global captives. The Retail sector benefits from strong outlook on urban
discretionary consumption over the medium to long term. Within the REITs, we prefer Nexus Select trust to benefit from a combination of
strong consumption outlook and accretive acquisitions.
Telecom stocks rallied in the past six months on expectations of multiple rounds of tariff increase in the next three years and hopes of a relief
on AGR liability. IPO consideration of JIO Platforms raised the urgency around tariff hikes. Moreover, with the government keen on averting a
duopoly, the chances of a regulatory frown on tariff hikes looked remote. Subdued market sentiment (forcing JIO Platforms to postpone IPO
Telecom Bharti Airtel
considerations) and the risk of populist stance adopted by a weak government could push out tariff hikes. In such an environment, Bharti may
continue witnessing RMS gains. We note that even in years with no tariff hikes, Bharti has delivered double digit Ebitda growth. This, coupled
with lower capex, should drive steady deleveraging. If Vi’s financial pressure persists, Indus’ FCF may remain subdued.
Source: IIFL Research

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 India - Strategy

Published in 2024, © IIFL Securities Limited (Formerly ‘India Infoline Limited’) 2024

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 India - Strategy

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Key to our recommendation structure

BUY - Stock expected to give a return 10%+ more than average return on a debt instrument over a 1-year horizon.
SELL - Stock expected to give a return 10%+ below the average return on a debt instrument over a 1-year horizon.
Add - Stock expected to give a return 0-10% over the average return on a debt instrument over a 1-year horizon.

Reduce - Stock expected to give a return 0-10% below the average return on a debt instrument over a 1-year horizon.

Distribution of Ratings: Out of 276 stocks rated in the IIFL coverage universe, 124 have BUY ratings, 8 have SELL ratings, 93 have ADD ratings, 7 have NR ratings and 43 have REDUCE ratings

Price Target: Unless otherwise stated in the text of this report, target prices in this report are based on either a discounted cash flow valuation or comparison of valuation ratios with companies seen by the analyst as
comparable or a combination of the two methods. The result of this fundamental valuation is adjusted to reflect the analyst’s views on the likely course of investor sentiment. Whichever valuation method is used there
is a significant risk that the target price will not be achieved within the expected timeframe. Risk factors include unforeseen changes in competitive pressures or in the level of demand for the company’s products. Such
demand variations may result from changes in technology, in the overall level of economic activity or, in some cases, in fashion. Valuations may also be affected by changes in taxation, in exchange rates and, in certain
industries, in regulations. Investment in overseas markets and instruments such as ADRs can result in increased risk from factors such as exchange rates, exchange controls, taxation, and political and social conditions.
This discussion of valuation methods and risk factors is not comprehensive – further information is available upon request.
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