Jefferies on Nifty, $10 trillion stock market, FPI flows, PM Modi, BJP, Congress & more

Feb 22, 2024

Jefferies in its fresh note said the fifth largest economy India would be the third largest by 2027. In the process, it expects the domestic stock market to command a market capitalisation of $10 trillion by 2030. Continued reforms should maintain India’s ‘Fastest growing large economy’ status, it said adding that strong trend in domestic flows have reduced market volatility and decadal low foreign ownership offers valuation cushion.

“RoE-focused corporate sector with 167 companies over $5 billion market cap leave ample choices to investors,” it said.

India m-cap

Jefferies said India’s market cap is currently the 5th largest globally at  $4.5 trillion but India’s weight in global indices is still low at 1.6 per cent. US ($44.7 trillion), China ($9.8 trillion), Japan ($6 trillion) and Hong Kong ($4.8 trillion) are at present ahead of India in the m-cap race.

Jefferies said India’s weight would change as market free float rises and some weight anomalies get sorted out. Assuming market returns in line with the last 15-20 year history and new listings, India will become nearly a $10 trillion  market by 2030 – impossible for large global investors to ignore.

“With a renewed capex cycle and robust earnings profile, we believe that Indian equity markets will continue to deliver 8-10 per cent dollar returns over the next 5-7 years. Structural domestic flows arising from shift of savings to equities and potential listing of large unicorn in India can drive the market cap past $10trn by 2030,” it said.

Jefferies said India is now in the early stages of another private sector capex cycle, with the gross debt-to-equity ratio of the corporate sector having declined from close to 1 time in FY15 to an estimated 0.5 time in FY24 ending March 31.

“But there is another aspect of the India story which now makes the country the best equity story in the world. In a report 21 years ago, this writer wrote that the bottom-up appeal of India has always been severely diluted by the lack of a compelling top-down story. In a sense the country has been the inverse of China, the ultimate macro story but without the compelling micro options,” Jefferies said on Christopher Wood.

This is what has now changed. For India now has a macro story as good as any, Jefferies said.

PM Narendra Modi

During the two five-year terms of Prime Minister Narendra Modi’s NDA government, India has seen fundamental structural reform which has created the framework for the country to realise its full potential in terms of taking advantage of its intellectual and physical capital as well as its positive demographics.

“First, massive government funded investment in infrastructure which has been game changing in terms of improving the overall logistical efficiencies of the economy. Second, the passage of the Insolvency and Bankruptcy Act of 2016 which means that Indian “promoters” now know they risk losing their assets if they default on loans. Third, long overdue reform of the residential property market as a result of the Real Estate (Regulation and Development) Act of 2016 which means the property market, three years into an upturn after a seven-year downturn, is now delivering its full potential in terms of the resulting multiplier effects for the economy at large,” Jefferies said.

The backdrop is why it is quite realistic to project 7 per cent real GDP growth and 12-15 per cent earnings growth going forward, Jefferies said.

FPI buying missing

“Indeed the remarkable point now is how little foreign investors are invested in Indian equities. This report details how dedicated global emerging market investors are only moderately overweight India despite all the current issues affecting China. While global equity funds are barely invested in India at all despite the fact that it is now consensus, as highlighted by headlines coming out of the Davos gathering this year, that India is the world’s next big growth story. This lack of exposure to India by global investors is, frankly, absurd,” Jefferies.

Jefferies said the increased profile of India on the global stage also reflects the marketing skills of Prime Minister Narendra Modi, as reflected in the widely acknowledged success of the G20 Summit held in Delhi last September.

In a world of rising geo-political tensions, India has deftly managed to maintain a foot in both camps, remaining on good terms with the Washington-dominated G7 while also being a fully signed up member of BRICS, Jefferies said.

BJP, Congress

“Meanwhile with a general election pending in April-May this year, Modi’s goal will be to win a record number of seats for his BJP party. In the last general election in 2019 the BJP won 303 seats in the Lok Sabha, up from 282 in 2014. Modi has set a target of 370 seats for the BJP and 400+ for the BJP-led alliance (NDA) in the upcoming national elections. Such an electoral outcome is no longer far-fetched. As for the Congress Party, the dominant political party in India since independence in 1947, it faces an existential crisis,” it said.

Corporate earnings, Nifty valuation

Corporate profitability is enjoying a surge post Covid, with earnings for the benchmark Nifty growing at an 21 per cent compounded annually over FY20-24E. The earnings are also undergoing a large cyclical uptrend, with the overall corporate profitability to GDP ratio of 5.8 per cent, still below the previous peak, Jefferies,

In terms of relative valuations, Nifty’s 1-year forward PE premium over MSCI EM ex China is close to historical average and still 20 percentage points  below the peak levels that India has seen on several prior occasions.

“With India offering a longer duration capex upturn, alongside growing domestic flows, the premium multiples are likely to sustain over the long run. When we compare the Indian markets on PE and PB basis, as compared to own history, the markets are trading closer to the +1sd levels of past 10-yrs, and approximately in the middle over the post COVID average. Given the robust earnings visibility of India companies, we believe the Nifty PE is likely to be sustained,” it said.

As double-digit earnings growth unfolds, amid a resilient domestic economy and consistent local flows, we believe Indian markets should provide a compelling investment opportunity  for the global investors.

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