Global brokerage Morgan Stanley is bullish on India. It sees a multi-trillion-dollar opportunity in the country, riding on the government's digitisation
In a report titled 'India's digital leap - The multi-trillion-dollar opportunity' released on Wednesday, the brokerage forecasts India's gross domestic product (GDP) to touch $6 trillion -- the third largest in the world -- in the next ten years, and expects Sensex to hit the 100,000
mark with an equity market capitalisation of $6.1 trillion during the same period.
The brokerage noted that apart from some short-term teething problems including implementation of GST, there is scope for visible shifts in economic activity starting in 2018 which would eventually lead India to be the top five equity markets
in the world.
Below are seven key takeaways from the report:
1) JAM Trinity and GST
Morgan Stanley noted India’s “Holy Trinity” of Jan Dhan, Aadhaar
and Mobile Sets (JAM) and the implementation of Goods and Services Tax (GST) are two major reforms, which have "digitised" India and brought the country to an inflexion point in terms of growth, with a concomitant impact on stock returns, financial sector dynamics, consumption growth and e-commerce activity.
The brokerage believes the implementation of GST
will likely increase tax compliance on both indirect and direct taxes even while the tax rates are in and of themselves revenue-neutral.
2) India likely to be world's fastest-growing large economy in next ten years
Morgan Stanley estimates that digitisation
will provide a boost of 50-75 bps to GDP growth. It also forecast that India will grow to a $6 trillion economy and achieve upper-middle income status by fiscal year 2027.
“India's economy already had strong growth prospects for the next ten years. The trend line in India's annual GDP growth has been accelerating from 5.8% in the 1990s to 6.9% in the 2000s. We think this trend will likely continue for the next decade given the structural factors like favorable demographics, globalization, and reforms … and digitisation
reinforces our views. We lift our annual long-term growth forecast by 50 bps,” it said.
3) Stronger GDP growth = Stronger equity market performance
The global brokerage noted that the strong nominal GDP growth plus a rising ratio of credit-to-GDP should be good for corporate earnings, and a low starting point of corporate profits/GDP, which sits well below trend, augurs well for corporate profit growth in the coming years.
“We think India's stock market could be among the world's best performers in the next ten years, leading to India's market cap rising from nearly $2 trillion to $6 trillion.
The brokerage also noted that it sees the BSE Sensex crossing the 100,000
mark, albeit the bulk of the returns are likely to be front-ended in the coming five years.
4) Financials and consumption sectors to gain share in market
Morgan Stanley forecasts market capitalization of the financials
and consumption sectors to grow 4 times each from current levels, to $1.8 trillion and $2 trillion, respectively in the next ten years.
“Together the financials
and consumer sectors could account for 63% of India's market by 2027, up from 47% currently, largely at the expense of global sectors such as software services, pharmaceuticals, materials and energy,” it said.
5) The stock winners
Morgan Stanley also outlined the potential stock winners from the digitisation
story of India, which may not be an exhaustive list but is a good starting point for an investor who wishes to participate.
“The macro exposure to consumption and the financial sector is an overriding feature for our selection. We have left out smaller stocks from this list,” it said.
Stocks from financial sector: Bajaj Finance, Edeelwiss Securities, HDFC Bank, ICICI Prudential Life Insurance, Kotak Mahindra Bank, LIC Housing Finance, Mahindra & Mahindra Financial Services
Stocks from consumption sector: Asian Paints, Eicher Motors, ITC, MakeMyTrip, Maruti Suzuki, Ultratech Cement
6) Consumer loans will drive growth
Morgan Stanley is of the view that corporate loan growth will remain muted even when the economy picks up on account of RBI's regulations on exposures to large corporates.
The brokerage, however, added that consumer loans will remain big drivers of growth.
“As data availability becomes better and quicker, banks will be able to roll out new products (for instance HDFC Bank's "loan in 10 seconds"); in our view this, along with fairly strong economic growth, will help drive consumer loan growth at a 17% CAGR over the next decade,” the brokerage said.
It further noted that MSME sector could be another big driver, which may grow at a CAGR of nearly 17% compared with low double-digits in the past decade.
Overall, Morgan Stanley expects banks' loan growth to increase by 12% annually – implying an average credit multiplier (nominal credit growth as a percentage of nominal GDP growth) of ~1x.
7) Key risks
After setting up a bullish case for Indian markets
and economy, Morgan Stanley prudently takes into consideration the things that can go wrong with its thesis. Politics and policy, cyber security, privacy debate around Aadhaar, transition to GST, India’s often discussed macro risks, and deep global recession are a few issues that may play spoilsport.
“Failure of the digitisation
effort will likely cause our estimates for the economy, markets
and financial services to end up somewhere between our base and bear case. This means that: GDP will likely settle at $ 5.5 trillion, India's market capitalisation could grow more modestly at 9% to $5 trillion by 2027, loan growth by banks will likely be closer to 10% CAGR for the coming decade, and accordingly the financial and consumer sector
returns may also be tempered and the respective market capitalisations will likely settle at lower levels somewhere between our bear and base case,” it noted.