Here are 7 India stocks Morgan Stanley likes — and one's up nearly 300% from a year ago

Published Tue, May 25 20213:35 AM EDT

Indian shares look set to overtake their emerging market counterparts in 2021, Morgan Stanley said. Performance of Indian equities are likely to be driven by earnings growth, current underperformance, strong policy traction and reasonable relative valuation, said the investment bank's strategists in a report published on May 17. Despite a devastating second wave of Covid-19 , India's benchmark S & P BSE Sensex index has remained relatively stable and is up about 5.8% year-to-date based on Monday's close. Here are seven stocks on Morgan Stanley's focus list for India, which contains companies in the country that the investment bank likes. The investment bank likes both domestic and global cyclical stocks — or those tied to the fluctuations of the economy that tend to perform better during economic growth periods. They also like stocks that are sensitive to interest rates, as well as defensives exporters. Defensive stocks tend to provide consistent dividends and stable earnings regardless of overall market conditions. There were 20 stocks on Morgan Stanley's India focus list and most had an overweight rating. They include: Maruti Suzuki : Overweight rating. The automaker is up nearly 31% over the last 12 months based on Monday's close. Reliance Industries : Overweight rating. The stock is up almost 40% in the last year. HDFC Bank : Overweight rating. The private lender posted gains of 77% for the same period. Britannia : Equal weight rating. The food and beverage maker is up 6.8% in the last 12 months. Tata Steel : Overweight rating. The stock is up 289% over the last 12 months. State Bank of India : Overweight rating. India's largest state lender is up 172% since a year ago. Larsen & Toubro : Overweight rating. The engineering and construction company is up about 78%. Market performance The market's ongoing consolidation is improving its return prospects going into the second half of 2021, the strategists said. Morgan Stanley's target for the Sensex, which tracks 30 of the largest companies listed on the Bombay Stock Exchange across sectors, remains unchanged at 55,000 — an 8.5% upside from Monday's close. For the Sensex to reach that target, Morgan Stanley assumes stability in India's coronavirus outbreak — deceleration in case counts and improvement in vaccine supply. It also expects economic recovery to come with that. Overall, the bank said Covid-19 trends remain a key near-term input that will drive market performance, but policy and earnings will likely become more dominant in the coming months. It expects Sensex earnings to rise 32% in the fiscal year 2022, which ends on March 31, 2022. The ongoing quarter will see some slowdown in earnings growth due to the Covid-19 second wave, but the market is likely going to look beyond such disruptions, which are viewed as temporary, Morgan Stanley said. "The government is not required to launch a fresh fiscal program thanks to the ongoing recovery in the economy, but continues to pursue both administrative and legislative reforms," the strategists wrote. Sectors Sector-wise, the bank is overweight on consumer discretionary, financials, industrials and utilities. Consumer discretionary stocks are considered non-essential goods and services, and may include luxury goods, entertainment activities and automobiles — their consumption typically increases with growing disposable income. For consumer discretionary, the bank said that "valuations look attractive and with real rates likely to be in negative territory through 2021, we expect strong growth in the coming months." "Long-term fundamentals are robust underpinned by rising incomes," the report added. The investment bank is neutral on consumer staples and materials, and is underweight on energy, healthcare, technology and communication services. The technology sector is "least exposed to a recovery in India growth and valuations are relatively rich," Morgan Stanley said. "It is not a call that worked well for us in 2020 given the sector's outperformance," the report added.

India traders at the Motilal Oswal Financial Services Ltd. office in Mumbai, India.

Vivek Prakash | Bloomberg | Getty Images

Indian shares look set to overtake their emerging market counterparts in 2021, Morgan Stanley said.

Performance of Indian equities are likely to be driven by earnings growth, current underperformance, strong policy traction and reasonable relative valuation, said the investment bank's strategists in a report published on May 17.

Despite a devastating second wave of Covid-19, India's benchmark S&P BSE Sensex index has remained relatively stable and is up about 5.8% year-to-date based on Monday's close.

Here are seven stocks on Morgan Stanley's focus list for India, which contains companies in the country that the investment bank likes.