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Saturday, January 17, 2015
RBI rate cut likely to benefit cyclicals & midcap stocks; retain Sensex target at 30k: HSBC
NEW DELHI, 16 Jan, 2015: The Reserve Bank of India (RBI) in a surprise move on Thursday slashed the repo rate by 25 bps, which is likely to benefit cyclicals and midcap stocks more compared to large cap stocks, HSBC Global Research said in a note.
Although the market was building a rate cut scenario by the central bank in 2015, the RBI surprised the street on timing by cutting the repo rate by 25 basis points to 7.75% from 8%, a few weeks ahead of its 3 February policy meeting.
Softness in global commodities and a more than 60 percent fall in global oil prices since June last year have led to a sharp decline in the Wholesale Price Index. The impact has been felt on G-Sec yields with the GOI 10-year easing by 150bps over the past 12 months.
HSBC Asia-Pacific Rates team expects credit costs to fall further to 6.0-6.5% within the next 2-3 years. Our India economist expects the RBI to cut rates by another 25bps after the end-February budget announcement, added the the HSBC report.
The global investment bank remains constructive on India with a Sensex target of 30,000 for the calendar year 2015 - implying 7% potential upside by the year-end. For mid-caps, they see better potential upside of 22 percent, with a BSE Mid-Cap target of 12,950 for the end of 2015.
Falling cost of borrowing positive for mid-cap companies:
The cost of borrowing for the BSE-Sensex for FY14 stands at 6.2%. This magnifies to 7.6% for the BSE 100 (top 100 stock index) with the Nifty in between at 7.3% (top 50 stock index).
Interestingly, the average cost of interest for BSE 100 stocks excluding the BSE-Sensex (top 30 names) rises to 8.1%, reflecting the fact that large companies can usually obtain better terms for borrowing.
The situation is similar for gearing levels. Large companies have lower levels of gearing (Sensex at 0.3x compared with BSE 100 ex Sensex at 0.6x) suggesting the impact of any decrease in borrowing costs would be more evident on the mid-cap universe.
Lower interest rates positive for cyclicals
The lower interest rates will benefit cyclicals more than defensives as the leverage ratios of domestic cyclical companies are much higher than those in the defensive sectors. The net debt-to-equity ratio of domestic cyclical sectors has increased sharply over the past few years.
Defensive companies (mostly IT, healthcare and consumer staples) continue to hold high levels of cash and cash equivalents, resulting in net cash positions. Within HSBC covered universe, they are overweight on companies that could benefit from the loosening of monetary policy, which include name like IDFC, Tata Motors, Maruti Suzuki and Larsen & Toubro in large caps and Voltas in mid-caps.
Apart from the above list, other midcap stocks which are likely to benefit from an uptick in utilisation, strong earnings momentum and business in transformation include names like Fortis Healthcare, Jubilant FoodWorks, Kaveri Seeds, Hathway Cable & Datacom Ltd.