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Healthcare, education key areas to capitalise: HSBC
Posted Date: 04 Sep 2007 Resource Type: Articles/Knowledge Sharing Category: General
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Posted By: Niyaz Member Level: Gold
Rating:  Points: 6
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Global investment bank HSBC is of the view that one of the best ways to capitalise on the growth in India is through the somewhat under-recognised consumption story. It is bullish on sectors like (healthcare, education, finance, telecoms and real estate, and says that the outlook for these sectors over the next few years is remarkable.
HSBC is of the view that jitters about the economic outlook and volatility in global markets are likely to continue for a while.
“Investors have tended to focus on infrastructure plays in India, particularly over the past year. In a way, that is not surprising since investment has been growing at around 15% a year, compared to 6-7% for consumption But the strong capex cycle may be coming to an end, whereas consumption growth should be more reliable,” the HSBC note to clients says.
The investment bank has an overweight rating on stocks like Pantaloon, Hero Honda, Maruti, Bharti Airtel, Reliance Communication, TV 18 and HT Media. China’s consumption story seems much better known than India’s, HSBC says.
But what strengthens India’s case is that valuations for the overall Chinese market have just overtaken those for India for the first time in this bull market. In India, the above mentioned sectors are not generally cheap, but strong growth prospects justify premium valuations, HSBC says. “Debate continues on how resilient India would be in the event of a severe US slowdown. Our feeling is that, with exports only 22% of GDP, India would be relatively unaffected compared to other Asian economies, even China,” the HSBC note says.
According to a McKinsey report in May this year, average household income growth in India will accelerate from 3.6% a year over the past 20 years to 5.3% over the period 2005-2025. As a result, the ‘middle class’ (which McKinsey defines as those with annual household income between Rs 1-10 lakh) will grow from 13 million households (50 million people) to 128 million households (583 million people — 41% of the population) by 2025. The rich will grow from 1.2 million households to 9.5 million. As a result of these shifts, aggregate consumption by the middle and upper classes will, McKinsey argues, grow 13 times between 2005 and 2025.
“Projections of this sort should be taken with a pinch of salt. But a combination of demographics and economic catch-up means that, even if the exact quantum is wrong, the overall story — in the absence of a major change in India’s and the world’s economic fortune — is hard to dispute,” the HSBC note says.
But the note also cautions about the possible snags with the Indian consumer story, both short and long term. “Savings rates could continue to rise, as mentioned above, meaning that little of the increase in household income finds its way into additional discretionary spending,” the note says.
“In the near term, the rise in interest costs could dampen consumption. That has been seen in the automobile market where sales growth, which had been more than 20% this time last year, has turned negative,” the note adds.
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