Rural-Focused Companies Are Top Picks Amid Recovery, Says Ridham Desai

Morgan Stanley India will continue to pursue rural-focused companies, according to Managing Director Ridham Desai, as recovery in India's hinterland gathers momentum, backed by a strong winter crop.

"Rural India will bounce back pretty nicely this year," Desai told BQ Prime. Even without government support, rural India's cycle is naturally turning, he said.

Desai's comments underline the fact that the Finance Ministry refrained from including rural-focused allocations in the Union Budget 2023.

It would have been advantageous if the government had put some money to work there, Desai said. However, given the good agricultural trends, where the winter crop looks very strong and the government has offset the loss of paddy production that occurred last summer, Desai remains optimistic about the sector. 

Desai expects that by the fourth quarter of 2023, the market will stop focusing on fundamentals and instead try to predict the outcome of the general election in 2024.

"If the market begins to believe that a majority government will form, then there will be a fierce rally into the end of the year," Desai said.

Right now, Desai said, the fundamentals look pretty solid. The key risk at the outset is global growth, and India has mitigated some of that risk using the budget, he said.

On an absolute basis, Desai remains optimistic about the market even though India's relative performance will take time to return.

"India has returned to a situation where things are looking a little less exuberant on a relative basis," he said. However, the absolute play is intact.

Earnings growth would be better than consensus this year, with the top-down estimate being 10% higher than the consensus view, Desai said.

Last year, the brokerage was below consensus on earnings growth.

This year, revenue growth is slowing, dragged down by a slowdown in global growth, but profit margins are set to improve, Desai said.

"On a top down basis it is because capex will be strong, and on a bottom-up basis because raw material prices will be less punitive compared to last year," he said.

Financials

• The case for financials remains intact this year.

• Banks may witness some NIM compression, but it will be opposite for the non-banking lending businesses.

• Non-banking lending businesses are likely to do well this year riding on stabilising in NIM , strong credit growth, and lower credit costs, Desai said.

• Performance of banks will be okay as well as credit growth, Desai believes, remains strong.

Technology

• Desai continues to be overweight on technology stocks as recession in the U.S. may not be as punitive as in previous cycles.

Industrials, Consumer And Automobile:

• Stocks in these segements are also likely to do well.

• "We should see pretty strong auto trends for the course of the next 12 or 24 months."