Top 10 stocks from Jefferies that could be a play on revival of Economic Cycle

Indian market recovered swiftly after touching a multi-year low back in March 2020 to touch fresh record highs, and the economy is now showing signs of recovery.  

Analysis of 6 key components of the economic cycle by global investment bank Jefferies, suggests that the conditions are ripe for a repeat of a 2003-10 style upturn.

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Housing, sharp drop in the non-performing loans (NPL), and corporate profitability cycle have convincingly turned positive, it said in a report released earlier in October.

Additionally, corporate leverage is at a cyclical low, the broader CAPEX cycle has not turned yet, but it usually follows housing cycle with a lag. Interest rates will likely move up but the same was the case over 2003-10, and a rate upmove should not be a worry in the initial stage of the cycle.

Stocks that could benefit the most from the economic recovery include names like -- 

1) ICICI Bank,
2) IndusInd Bank,
3) State Bank of India in the banking space.

In the housing plays stocks like

4) Godrej Properties,
5) Macrotech Developers,
6) DLF,
7) HDFC Ltd,
8) ACC,
9) Kajaria and
10) Supreme Industries

These stocks are likely to benefit the most, said the report. The report further added that L&T also benefits from the housing cycle and the eventual corporate investments upturn.

6 Key components of Economic Cycle:

Housing Cycle Improvement:

Historical analysis since 1996/97 suggests that Indian housing up-cycle and down-cycles typically last for 6-8 years.

2012/13 - 2020 was a prolonged downcycle and 2021 is the first year of upcycle with visible uptick in volumes and pricing, highlighted the report from Jefferies.

Best-in-2-decade affordability (last seen in 2003/04), huge pent-up demand and now visible price action imply that all the ingredients are in place.

Housing construction is a large job creator and has multiple economic linkages capable of driving an economic upturn

Sharp drop in NPLs:

While banks are still risk-averse, Jefferies believes that the stage is now set for an increase in risk appetite. Strong capability and 7-year high RoE's further support lending growth.

Corporate Profitability:

Corporate profit growth was lacklustre over the FY11-FY20 period growing by a paltry 0.4 per cent CAGR. “The tide has now turned with FY20-FY22 earnings growth of 51% CAGR and we expect FY22-FY24 profit growth to be elevated at 15%,” said the note.

Corporate Deleveraging:

Over the last 6 years, the D/E ratio for over 600 non-financial corp has come off from 1.0x to 0.7x. "The low debt on balance sheets will create space for the next economic upcycle. The previous cycle low D/E was 0.6x during FY06," it said.

Interest rate cycle bottomed:

Interest rates have probably bottomed out globally as well as in India. This is unlikely to be a big economic headwind, highlighted Jefferies.

Corporate CAPEX should follow:

Govt's infra Capex is picking up but that's a small component. Corporate investments are still sluggish as capacity utilisation and risk appetite is low. "Overall, broader Capex upturn should follow Over the next 4-6 quarters," added the note.

(The above article is compiled from Jefferies report on India Equity Strategy)

(Disclaimer: The views/suggestions/advice expressed here in this article are solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)