Most analysts and investors have stumbled upon to thinking that after the election of 2019 India would take a decisive right path allowing for an instant capitalistic reform. Worse still, they have incorporated these high expectations into their valuations that are not supported by reality. Even if the government has wherewithal to roll out even the most grinding reforms that would benefit the country, we believe that it may not necessarily translate into stock returns just yet.
It is the already implemented reforms in previous government that would generate better returns for investors. The ripple effects of previous government (2014-19) reforms have not yet shown up in financial numbers of the beneficiary companies. Five years is too less a time for making an impact in a country as huge as India that resides around 125 Crore people. We believe that large scale and wider execution of existing reforms in Modi 2.0 regime will lead to positive surprise in profits of many of these companies. Rather than speculating future reforms, there is lot of money to be made in already known stocks as quite a few of them trade at below their fair values.
We think that there is a good ground to be optimistic on already rolled out reforms, and let's review some of these:
1. Rural Reforms:
1. Rural Reforms:
NDA government 2014-19 laid out various reforms on rural front which would lower rural distress, put more money in hands of rural population and improve their lifestyle. Direct Benefit transfer, affordable housing, public toilets, minimum income guarantee, etc are key reforms which will increase GDP per capita of rural economy. We believe this will lead to animal spirits in rural economy wherein they feel empowered to invest in better equipment to improve farm yield and consume more by making higher small ticket purchases due to certainty about income.
NDA manifesto prior to the election said, "The physical infrastructure of the country has undergone an unprecedented upgrade in the last five years. We have connected 91% of villages with rural roads, electrified 100% of villages, operationalized 36 new airports and introduced metro networks in several cities. Looking ahead, we plan to build 60,000 km of National Highways, connect 100% of villages with rural roads, operationalize 100 new airports, modernize 400 railway stations, and cover 50 cities with metro networks." The above reforms are going to create demand for power, transport and lead to increase in utilization of several infrastructure & equipment companies.
"While providing annual health cover of Rs. 5 lakh to 10.74 crore poor families under the Pradhan Mantri Jan Arogya Yojana under Ayushman Bharat, we also initiated a programme to set up 1,50,000 Health and Wellness Centres (HWCs) by 2022." The hospital struggle with high cost of operations due to high rent, professional fees and lower utilization due to lower footfalls or unaffordability of patients for taking treatments. The Ayushman Bharat would enable patients undergo diagnosis and treatment due to government funded healthcare.
"We are committed to focus on 'Make in India in Defence' to enable indigenous production of defence equipment. This will also generate employment and encourage investment in the defence sector." The government's focus on defence has been unprecedented, this was inevitable after 10 years of poor defence expenditure as a % of GDP prior to 2014. We are yet to see large orders given out to India based defence companies. Although the pricing may not be very attractive the quantum of growth can't be discarded.
We discourage you to invest in a thematic manner by picking a basket all the relevant companies. One has to be selective based on quality of a company and valuation it trades at. To address the same, we are coming up with comprehensive report "Portfolio 2.0 Explosive Returns - Stocks you must own under Modi 2.0 ".