Modi Government – Positives vs. Challenges

The most awaited general election 2019 results have been declared and Modi government is back with with thumping majority. The Modi led NDA have won 353 seats in general election 2019 vs.336 in 2014. The second term of the NDA will now work towards the implementation of reforms that have been initiated in the first five years to generate economic growth.  However, the government will have to address a few key challenges too. We will discuss some positives of continuation of the powerful NDA party coupled with the challenges that need attention.

Key Positives

• The continuity of pro-reform government will provide economic stability leading to continuation of policies and initiatives like Make in India, Insolvency and Bankruptcy code, focus on digitalization, RERA act, Housing for All, etc.
• Political stability in the country will attract more investments leading to strong economic progress in India, which will result in improving the financial prospects of the country.
• Government’s focus on reducing fiscal deficit, improving liquidity along with proper macroeconomic policies will be crucial in taming inflation, and thus interest rates going ahead are likely to remain benign
• The midcap stocks have remained down in 2019, and with Modi led NDA government coming back for the second term, we expect mid and smallcap stocks to see revival.

Key Challenges

• Modi Government will face key challenges like presenting a balanced budget, addressing NBFC liquidity issues, unemployment and strong measures to arrest consumption slowdown. Given that it still does not have majority in the upper house, passing of growth-oriented structural reforms will difficult.
• Slowing GDP growth on the back of tepid domestic consumption and muted exports remains a key challenge for the government.
• Consumption focused companies are experiencing slowdown on the volume growth front owing to lower purchasing power and tighter credit environment. Given that consumption makes up around 60% of India’s GDP, government will have to address the income and liquidity bottlenecks.

5 Stocks to Buy Post-Election Results

The market welcomed the general election results and both the benchmark indices Nifty 50 and Sensex touched new highs of 12,041 and 31,705 respectively. Given the clear mandate to Modi Government we are positive on sectors like infrastructure, private banking, capital goods and selective NBFCs. Hence, 5paisa remains positive on following stocks.

Axis Bank

Axis Bank is the third-largest private bank in India with a ~5% market share in loans as of FY19. The bank has a wide distribution reach comprising 4,050 branches and 11,801 ATMs as of March 2019. It has ~45% CASA ratio and diversified loan book of Rs4.95 lakh crore as on March 2019 spread across retail, SME, and mid and large corporates. We have optimistic outlook on the stock given strengthening fee income, stable asset quality and adequate provisions. Cost control measures will also lead to some moderation in cost ratios. NIMs would benefit from warrant conversion and increasing yields given the better risk appetite. As efforts to gather SA intensify, NIM pressures should ease.