Indian equities shrugging off geopolitical uncertainties, says PL Capital; rejigs top picks

Domestic brokerage firm PL Capital has noted a strong recovery in Indian markets, which had previously been under pressure due to foreign institutional investor (FII) selling. The Nifty index has delivered a 10% return over the past six weeks. Notably, the Q4FY25 results have exceeded expectations, with Ebitda and PBT surpassing estimates by 5.1% and 9.2%, respectively.

PL Capital's latest India Strategy Report highlights their updated conviction picks. The firm has decided to remove Bharat Electronics, Cipla, Maruti Suzuki, Aster DM Healthcare, and Kaynes Technology India from its list. In their place, Sun Pharmaceutical Industries, Rainbow Children’s Medicare, and Hindustan Aeronautics have been added, reflecting the brokerage's confidence in their future performance.

The stage is set for a revival of domestic demand, supported by the lowest food inflation since November 2021 at 1.78% and a consumer price index (CPI) of 3.16%, the lowest since August 2019. This positive economic environment, buoyed by strong Kharif and Rabi crop outputs and a promising monsoon forecast, is expected to benefit sectors such as automobiles, hotels, airlines, consumer durables, and more. Additionally, the impact of tax cuts is anticipated to further strengthen this outlook, making the environment ripe for growth in various industries.

High discretionary spending is anticipated among individuals earning Rs 1 million annually or more, particularly benefiting sectors like travel, quick service restaurants (QSR), apparel, and building materials. While daily-use staples may see moderate growth, the larger upside is expected in sectors such as consumer durables and personal accessories, including jewellery.

Urban consumption has faced challenges over recent quarters due to factors such as elections, extreme heat, and prolonged monsoons. However, PL Capital indicates early signs of recovery, with a gradual improvement in demand anticipated, particularly as budget tax cuts begin to take effect. This recovery is expected to be sustained over the coming quarters, providing a much-needed boost to the economy.

The FY26 budget's reduction in personal income tax rates is beginning to reach consumers, with an expected demand boost of around Rs 2,500 billion. This is aided by low inflation, falling interest rates, and a normal monsoon, all of which are expected to further support recovery in consumption. The estimated multiplier effect of the tax cut is projected to significantly enhance domestic spending, thereby stimulating economic growth.

Operation Sindoor has reinforced the strategic importance of the 'Make in India' initiative, highlighting advancements in air warfare, missile systems, and drone technology. This operation underscores the need for India to invest significantly in military hardware, space technology, and air defence systems to address geopolitical challenges. The integration of these advanced technologies is expected to bolster India's defence capabilities, positioning it as a formidable global power.

The suspension of the Indus Water Treaty presents opportunities for growth in hydroelectric and pumped storage projects (PSPs) in India. With more than 20GW potential in hydroelectric projects in Jammu & Kashmir, the region remains largely untapped, opening up prospects for engineering, procurement, and construction (EPC) and equipment sectors. These projects are anticipated to drive significant economic activity and development in the region.

In response to rising geopolitical complexities, PL Capital suggests India should focus on technological advancement and economic growth. The involvement of global powers in Southeast Asia is expected to heighten tensions, reshaping alliances and potentially leading to economic volatility. As these dynamics evolve, India is urged to accelerate its innovation and infrastructure development to maintain economic stability and security.

In terms of defence investment, drones, missiles, and UAVs are identified as critical components of modern warfare. PL Capital anticipates significantly higher investments in these areas, especially following the pivotal role they played during recent regional conflicts. These investments are expected to enhance India's strategic defence capabilities, ensuring readiness for future challenges.

Furthermore, the report emphasises the importance of air defence systems, with expected increases in allocation for radars and indigenous air warning systems. Defence spending is projected to focus on missile technology, fighter aircraft, and aircraft carriers to bolster India's strategic capabilities. This focus is intended to ensure that India remains equipped to manage and mitigate potential threats effectively.

Finally, the report anticipates increased emphasis on smart grids and higher investments in power transmission infrastructure. Smart power infrastructure is crucial during wartime for managing grids electronically and enforcing blackouts, highlighting the need for advancements in this sector. These developments are expected to enhance the resilience and efficiency of India's power infrastructure, supporting both civilian and military operations.