From clean energy to health, Morgan Stanley picks India stocks set to see strong growth

Published Sun, Oct 17 202110:22 PM EDT

After outpacing other emerging markets, India's stocks are poised to see strong earnings growth in years to come, Morgan Stanley said. India outperformed other emerging market peers by 30 percentage points in less than six months, partly due to a favorable global landscape, analysts at the U.S. investment bank said in a Oct. 6 note. "India seems well placed to enter a new profit cycle which may result in earnings compounding at over 20% per annum for the next 3-4 years," the Morgan Stanley analysts said. They cited factors such as nascent signs of capital expenditure, "supportive government policy for higher corporate profit share in GDP and a robust global growth outlook." Between late March and early May this year, India suffered a devastating second wave of Covid infection that overwhelmed the country's health-care system . It led several institutions, including the Reserve Bank of India, to revise down their projected growth rate for India for the fiscal year ending on March 31, 2022. Morgan Stanley expects India's consumption to pick up in 2022. The bank also predicted that the Reserve Bank of India would move toward a path of policy normalization, implying that interest rates will likely rise again as the central bank shifts away from its ultra-supportive policy measures aimed at propping up the Covid-hit economy. The Wall Street bank also expects the manufacturing sector to comprise a larger share of the country's gross domestic product. Here are Morgan Stanley's stock ideas for 2022: Clean energy and defense Renewable energy is cheap and the sector will likely benefit from favorable policies and technologies that could lead to substantial growth in the coming decade, according to Morgan Stanley. In the defense sector, the Indian government is aiming to increase local production of defense equipment via several policies including an import ban of certain equipment, as well as setting aside budget for local procurement. The bank recommends engineering and construction firm Larsen & Toubro , Tata Power , state-owned power company NTPC and electronics goods maker Havells . Pharma and property A ramp up in production as well as product launches are expected to drive value in the pharmaceutical sector and Morgan Stanley recommends Sun Pharma and Dr. Reddy's . In the property sector, residential demand is set to be driven by more affordable homes, low mortgage rates and pent-up demand, the report said. Commercial leasing is expected to remain weak, according to the bank. It recommends real estate property development firm Prestige Estates . Banks and financial firms India's non-bank financial companies, or NBFCs, are expected to have stronger balance sheets post Covid-19, the report said. Non-bank lenders typically lend to consumers, farmers as well as small- and medium-sized companies. Banks are set for "strong cyclical recovery" driven by lower credit costs and the beginning of new loan cycles, Morgan Stanley said. Cyclical stocks are those that grow when the broader economy strengthens, and decline when the economy weakens. Stocks that Morgan Stanley recommends include SBI Card, ICICI Bank , HDFC Bank and Axis Bank . Autos and aviation India's automotive sector is set to benefit from a sharp recovery in auto demand as well as the acceleration of electric vehicle adoption. Meanwhile, in the aviation space, Morgan Stanley expects a recovery in domestic travel and a rebound in international travel that is set to drive margins higher. The bank recommends automakers Maruti , Ashok Leyland and Motherson Sumi .

A man counts Indian rupee banknotes for a photograph near the Bombay Stock Exchange (BSE) building in Mumbai, India.

Dhiraj Singh | Bloomberg | Getty Images

After outpacing other emerging markets, India's stocks are poised to see strong earnings growth in years to come, Morgan Stanley said.