India Gets New Stock Leaders as Banks Top Tobacco on Modi

Indian stock investors agree with the nation’s voters on at least one thing: it’s time for new leadership.

As Narendra Modi’s opposition bloc secured the largest electoral victory in 30 years on May 16, the biggest gainers in India’s equity market were the companies likely to benefit most from a strengthening economy. That’s a turnaround from the last three years, when investors favored so-called defensive shares, such as drugmakers and consumer-staples producers.

The shift underlines the growing conviction that Modi, 63, can replicate the economic success he enjoyed in Gujarat state when he takes over as prime minister of the most-populous democracy. The victory spurred Macquarie Capital Securities India Pvt.’s Rakesh Arora, the most accurate forecaster of the S&P BSE Sensex in 2013, to advise switching into State Bank of India from cigarette-maker ITC Ltd. CLSA Asia-Pacific Markets made Jaiprakash Associates Ltd., a builder of power plants and highways, one of its top regional picks.

“We will be in a bull run for next three to five years,” Shishir Bajpai, a director at IIFL Wealth Management Ltd., which has $8 billion under management and advisory, said in a phone interview from Mumbai. “We will look closely at shares of banks, utilities and industrials as they are likely to perform better.”

Stocks Rally

The value of Indian equities has climbed by $371 billion, or 37 percent, since the Bharatiya Janata Party named Modi as its candidate for prime minister on Sept. 13. Foreigners bought $14.4 billion of shares during the period amid speculation Modi will do more than the outgoing Congress Party-led alliance to revive economic growth from near the weakest pace in a decade.

The sector rotation continued for a second day as banks, power companies and metal producers advanced, while software exporters and health-care providers tumbled. State Bank rallied to a three-year high and Jaiprakash surged the most in five years. The Sensex climbed 1 percent to a record 24,363.05 at the close and the rupee touched an 11-month high.

ITC fell the most since September and the S&P BSE India Healthcare Index slid the most in five years. Tata Consultancy Services Ltd., the best performer on the Sensex in 2013, dropped to a five-month low.

Industry Picks

Shares of companies most tied to the economy are trading at about 10 percent below their long-term averages compared with defensives, Macquarie’s Arora wrote in a note on May 16.

Arora raised his overweight rating on financial-services companies and industrials, while paring technology and drugmakers to underweight. He raised his Sensex target for the fiscal year ending March 2015 by 15 percent to 28,000.

Deutsche Equities India increased its year-end target by 17 percent to the same level as Arora’s while advising investors to focus on banks and energy companies.

Modi, the son of a tea seller, is favored by business leaders because of his record in Gujarat. The state he’s led since 2001 has attracted investments by companies such as Reliance Industries Ltd. and Ford Motor Co., while its per capita income nearly quadrupled during his tenure to 61,220 rupees ($1,040), faster than the national average.

Faster Growth

Gujarat drew 1.3 trillion rupees of planned foreign and domestic investment, about 22 percent of India’s total, in the year ending March 31, 2012. Investment proposals nationwide fell to about $95 billion in fiscal 2012 from a peak of $289 billion two years earlier, according to the latest data from the commerce ministry.

India’s economic growth slowed to 4.5 percent in the year ended March 2013, the weakest pace in 10 years, and the government estimates a 4.9 percent rate in the year that ended March 31.

With the BJP-led alliance winning 336 of 543 seats up for grabs, more than the 272 required for a majority, Modi has a “much greater chance” of making changes needed to boost investment, Christopher Wood, the chief equity strategist at CLSA Asia-Pacific Markets in Hong Kong, wrote in a note May 16.

Aberdeen Asset Management Plc favors Indian producers of raw materials, including cement, Adrian Lim, one of the firm’s Singapore-based money managers, said in an e-mail on May 16.

“They are starting to pick up on the back of a cyclical recovery and are likely to be notable beneficiaries of an investment revival,” said Lim, who helps Aberdeen oversee $322 billion worldwide. He didn’t name any companies.

State Partners

Jaiprakash Associates, which got 47 percent of its revenue from cement products in the year ended March 2013, slumped 44 percent in 2013. That was the fourth-worst performance on the S&P BSE 100 Index, data compiled by Bloomberg show.

While the BJP won the biggest victory for a single party since 1984, Modi will still need to work with state governments on land-use, water and electricity policies, said Frederic Neumann, the co-head of Asian research at HSBC Holdings Plc in Hong Kong.

Only nine states adopted the Congress party’s 2012 blueprint to allow 51 percent foreign ownership of multi-brand retailers. South Korea’s Posco has been waiting for land and environmental clearances to build a $12 billion steel plant for nine years.

“If the next government fails to lift confidence, its task of turning the economy around will get heavier,” Takahira Ogawa, an analyst at Standard & Poor’s, said in a statement.

Ratings Upgrade

The BJP’s landslide win has raised the chances of “more decisive policy action,” Masha Gordon, the London-based head of emerging-market equities at Pacific Investment Management Co., said in a phone interview on May 16. Shares of lenders “are not a bad place to be,” she said.

India’s credit rating may be considered for an upgrade if the new government cuts the budget deficit, simplifies rules on investment and builds infrastructure, said Atsi Sheth, a sovereign analyst at Moody’s Investors Service in New York. Moody’s has a Baa3 rating on the nation, the lowest investment grade.

“Sector rotation towards domestic cyclicals should be a strategy investors should continue to pursue,” Gautam Chhaochharia, the head of research at UBS Securities India Pvt. in Mumbai, said in a report dated May 16. UBS raised its 2014 target for the CNX Nifty Index to 8,000, 10 percent higher than today’s close. “It may be early to book profits.”

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