Much like the surge in our domestic markets, Indian benchmarks too have been enjoying a strong Bull Run this year. Indian benchmarks S&P BSE SENSEX and CNX NIFTY have solid gains of roughly 31.1% and 32.2% so far this year. Both of them has also surged 31.5% and 32.7% over the last one year period.
The gains have come amid an election year, which was held in May. A resounding win by BJP-led coalition boosted markets. The gains continued and positive economic indicators too have kept the uptrend alive.
In a previous article in September we had reported that economists predicted that India could move ahead of China in 2016. A senior economist in Singapore with CLSA had then estimated India to register 7.2% growth rate in 2016, while China is expected to grow at 7.1% during this period. (Read: India Promises Steep Growth).
Now, we have more confirmation on that as Kotak Life Insurance recently predicted a similar trend. The head of equity from this Indian leading life insurance firm says that India’s GDP will recover in FY16 above 6% and in FY17 the same will outperform China’s GDP. Kotak is not alone in the optimistic outlook. Nomura, Moody’s and Citigroup all have a bullish outlook.
India’s finance ministry said their economy is projected to grow 5.5% in the in the fiscal year to March 2015.
Banking on the past performance of the Indian markets, Indian ADRs have already added decent gains and are expected to continue the momentum. Thus, adding certain top Zacks ranked stocks would be a prudent investment decision. Before doing so, let’s look at the optimistic predictions and India’s recent growth story.
Moody’s, Nomura, Citigroup: Bullish on India
Moody's Investors Service, a unit of Moody's Corporation (MCO), believes strong domestic demand and diversified export market will propel India’s economy in 2015 to grow between 5 to 6%. India’s diversified export market also shields the country from economic concerns in China, Eurozone and Japan.
Moody’s said: “Employment and consumption are likely to rise in India, and the fall in global commodity prices will help to lower high inflation in the country.”
Meanwhile, Nomura now expects India to expand at 5.5% in this fiscal year.
A Nomura’s economist said: “We are positive about India's growth. Our medium term view is that macro policies — both the policies that RBI is likely to follow and reforms that the Government is likely to announce — will lead to lesser volatility going forward and more macro stability.”
This is almost an echo of what Nomura had said in July this year. Nomura had acknowledged “landslide election victory by Prime Minister Narendra Modi, combined with Governor Raghuram Rajan at the helm of RBI” to be a “potential game changer for India.” This led to Numra’s prediction that India will emerge as the single biggest emerging market turnaround story in the coming five years.
Citigroup also joined Moody’s and Nomura in their optimistic outlook. A Citigroup report noted that India “really surprised” in 2014 and is expected to do so next year. Citigroup is projecting a 7% expansion in fiscal 2016-2017.
Citigroup stated: “We believe India could make material strides in reforming the ‘factors of production’ in 2015 — land, labor, capital and enterprise. Faster than anticipated progress on these fronts could result in upsides to our FY16 GDP estimate of 6.5%.”
Separately, while the Reserve Bank of India pegs India's GDP growth to be 5.5% in FY15, the World Bank is expecting a 5.6% expansion.
India’s Growth Story: Modi Factor
In September, ratings agency Standard and Poor’s had raised India’s credit outlook to "stable" from "negative." The agency said that the impressive mandate received by Prime Minister Narendra Modi has created an atmosphere which is favorable to economic reforms and fiscal prudence.
Many have attributed the ‘Modi Factor’ for the surge in Indian benchmarks. The new government had sparked off hopes of an economic recovery. Indian markets had soared banking on expectations that the Modi-led government would come to power and the surge continued following Modi’s win.
According to S&P, the new government "will remedy, to varying degrees, the growth impediments-policy paralysis, energy supply bottlenecks, and administrative obstacles. The government's actions will likely add momentum to the incipient cyclical upswing evident in the economy."
In a recent development and according to Reuters, Modi has himself taken over the project monitoring body. This is done to fast-track $300 billion worth of investments and will help the manufacturing sector. The move will help coal, power, steel and infrastructure projects get clearances faster and easily.
Recent economic data have been discouraging though. Industrial output contracted in October at the worst rate in three years and the Indian Wholesale Price Index dropped to zero in November, causing deflation fears.
However, India seems to be tiding over its inflationary woes. Retail inflation dropped to 5.52% in October from 6.46% in September. This is a crucial data as the Reserve Bank of India (RBI) tracks this to set key policy rates.
Talking of inflation, Nomura is looking at 2015 as the ‘Goldilocks year’ for India as it is poised to be a high growth & low inflation year. Nomura notes that “While we are still in the positive direction on growth, we think inflation will continue to moderate.”
Separately, a rebound in the capital goods sector helped industrial output surge 2.5% in September from same period last year. This was the fastest gain in three months.
3 Best Performing Indian Stocks in 2014
Indian stocks have surged throughout this year. Among the Indian ADRs, we will pick the 3 top performers. Apart from high year-to-date returns, these stocks also have favorable Zacks Rank, impressive forward price to earnings ratio and have positive EPS growth projections.
ICICI Bank Ltd. (IBN) is the largest private sector bank in India with total assets of about INR6,111.43 billion ($98.97 billion) as of Sep 30, 2014. The bank had a network of 3,815 branches and 11,739 ATMs as of the same date.
The company holds a Zacks Rank #3 (Hold) and has returned 55.5% year to date. The PE ratio currently stands at 18.06. ICICI Bank has current year growth estimate of 14.7% as against industry growth projection of 4.5%.
HDFC Bank Ltd. (HDB) is one of the largest banks in India, with a retail network of 3,600 branches and 11,515 ATMs in 2,272 cities as of Sep 30, 2014. The bank enjoys favorable brand equity among Indian consumers and depositors, enabling it to keep its borrowing costs low.
The company holds a Zacks Rank #3 and has returned 47.2% year to date. The PE ratio currently stands at 23.97. HDFC Bank has current year growth estimate of 21.6% as against industry growth projection of 4.5%.
Infosys Ltd. (INFY) is the second largest IT services company in terms of revenues in India. Infosys markets its services to large enterprises in North America, Europe and the Asia Pacific region. The company has a strong market presence in North America and is working towards expanding its presence in Europe.
The company holds a Zacks Rank #3 and has returned 13.5% year to date. The PE ratio currently stands at 18.39. Infosys has current year growth estimate of 14.2% as against industry growth projection of 8.3%.
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