Growth at reasonable price: Morgan Stanley bets on Bajaj Auto, ITC, RIL

Bajaj Auto, Mahindra & Mahindra (M&M), ITC, Reliance Industries (RIL), Mahindra & Mahindra Financial Services (MMFS) and JSW Steel are the six stocks that Morgan Stanley is betting on in India to play its 'growth at reasonable price' (GARP) investment strategy.

“Trends of the past 15 months suggest that growth stocks are making a comeback – indeed the market is detecting a new growth cycle and seems willing to back a nascent recovery in the performance of growth styles as a more sustainable outcome. We think this outperformance of growth over value (and quality) will continue in 2018,” writes Ridham Desai, head of India research and India equity strategist at Morgan Stanley in a co-authored report with Sheela Rathi.

The brokerage cautions that investors need to distinguish between growth and quality before taking an investment call. Even though there are stocks that straddle these categories, the former (growth) is change in return on capital; the latter (quality) is about the level of return on capital, Morgan Stanley says.

Over the long-run, the global research and brokerage house says, growth stocks have outperformed other types of stocks, as India remains a growth market. It also suggests how investors should play the GARP strategy.

According to Morgan Stanley, there are four ways to participate in growth – companies with strong trailing capex, robust trailing book growth, strong trailing positive earnings revisions or the best forward revenue or EPS (earnings per share) growth. 

“We are careful about the price that such growth commands. So our strategy, as it has been over the past several months, is to back growth at a reasonable price (GARP). The risk to this view is that if the growth cycle falters, it could lead to a bounce back from quality and value stocks,” Desai and Rathi write.

The conviction to chase growth comes at a time when investor confidence in India’s growth story is low. In another recent report, Morgan Stanley alerted that lower returns from the Indian stock markets is due to persistent growth disappointment of the past few years, signalling low investor confidence in the nation’s growth story.

“Within the aggregate investor base, this erosion in confidence is concentrated with foreign portfolio investors (FPIs) who have reduced their India position in the average emerging market (EM) portfolio in to a seven-year low,” the report says.

Adding: “If one is bearish on the Indian market (or even EM), the portfolio strategy is to buy low beta stocks with high relative volatility. Stocks with low beta tend to exhibit lower sensitivity to the market but when accompanied with high relative volatility also show high idiosyncratic strategies.”