Global brokerage Morgan Stanley has added Maruti Suzuki India Ltd and Larsen & Toubro Ltd to its Asia-Pacific ex-Japan (APxJ) focus list while removing Titan Co Ltd. The brokerage said L&T and Maruti were also included in the global emerging markets (GEM) focus list.
The brokerage said it is bullish on India's financial sector and is increasing its 'overweight' position on industrials while reducing its 'overweight' stance on IT.
The brokerage says Maruti Suzuki is poised to benefit from rising per-capita income in India, alongside market share growth and an improved product mix. The company's strong track record of successful new models and expanded price ranges, especially focusing on SUVs, is expected to drive further market share expansion. It foresees margin expansion to approximately 9 percent by F2025, driven by leverage gains, a new SUV-focused model cycle, and the gradual pass-through of commodity headwinds.
Maruti's alliance with Suzuki-Toyota positions it favourably for the future of the automotive industry (Autos 2.0). Despite fair valuations, there is potential for the company's multiple to expand, considering the anticipated improvement in auto volumes, margins, and market share.
Also Read: India at the start of 'long wave boom', China's may be ending soon: Morgan Stanley
India's per capita GDP stands at only $2500, significantly lower than China's $12,700. However, despite the lower income level, India exhibits positive demographic trends, which positions the country to potentially embark on a prolonged wave of economic growth. This comes at a time when China may be experiencing a slowdown, Morgan said in its note.
A notable contrast between the two countries is the level of household debt relative to GDP. In India, household debt/GDP is only 19 percent, while in China, it is much higher at 48 percent. Moreover, life insurance penetration in India is comparatively low, with only 2 percent of Indian households having life insurance coverage.
Morgan expects Larsen & Toubro to be a leading beneficiary of the Indian and broader EM capex cycle. The brokerage says L&T enjoys domestic macro tailwinds and strong infrastructure prospects in the Middle East, particularly Saudi Arabia.
L&T stands out with its economies of scale, impressive order inflow growth, diversified order book, improved execution, and lower margin volatility. Despite its core valuations trading near the long-term average, it remains an attractive choice compared to its EPC peers, which are trading at a 20 percent premium to long-term averages.
Morgan Stanley foresees a profit cycle that is halfway through its course, as profit share in GDP has increased from 2 percent in 2020 to approximately 4 percent and is expected to reach 8 percent in the next four to five years. This indicates a 10 percent nominal GDP and about 20 percent compound growth in headline earnings.
The forecast is supported by the initiation of a new private capex cycle, which complements the ongoing government capex cycle. These factors underscore the promising outlook for economic growth and earnings expansion in the foreseeable future.
Morgan Stanley remains optimistic about India due to its favourable fundamentals and reduced valuation premiums compared to other Emerging Markets (EM). The country is now designated as the core 'overweight' market within the Asia Pacific ex-Japan and EM category. The market is willing to pay a premium for India's growth opportunities, with the 12-month P/E and trailing P/B ratios standing above historical averages.
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