India's Surging Growth Plays - Analyst Blog

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Key market indexes surged at the end of the world's largest democratic exercise. As polling ended in India, the Sensex gained 2.42% to end above 23,000. The Nifty posted an even more impressive performance, posting its largest two day gains in nearly three years. Ultimately, the index ended above the 7,000 mark, propelled by expectations that the NDA alliance will form the next government.

ADRs Surge

The buildup of strong momentum helped around 189 stocks to notch up gains. Banks and manufacturing stocks were among the major gainers, several of which were near one-year highs. This includes names like Axis Bank, Coal India, JSW Steel and Maruti Suzuki.

Among the ADRs to move upwards were HDFC Bank Ltd. ( HDB ) and Tata Motors Ltd. ( TTM ). This is in keeping with gains made by both these companies in recent times. For instance, last Thursday HDFC Bank had gained 1% to close at $41.29 and Tata Motors also gained around 1% to close at $38.12.

The strength in India ADRs was borne out by the massive increase in the Bank of New York Mellon India ADR Index at 10:35 am local time. The index gained 3.2%, coming within striking distance of its highest level in around three years.

Possible Economic Spoilers

Despite optimism arising out of a new dispensation at the center, economic indicators remain worrying. Retail inflation has increased to 8.59%, its highest level in three months. This will possibly make it difficult for the Reserve Bank of India to reduce interest rates when it reviews monetary policy in June.

On the other hand, the index of industrial production or IIP has reduced by 0.5% in March. This is primarily due to a reduction in manufacturing output, with capital goods production declining significantly. Taken together, these are significant downsides for market watchers.

Impact of Exit Polls

Despite these numbers, exit polls which predict a resounding victory for the NDA alliance will continue to drive markets upwards. Several market analysts believe that the Nifty and the Sensex will continue to rally this week riding on exit poll results. Since nearly all exit polls predict a clear majority for the NDA alliance, this momentum is expected to continue going forward.

However, given the complex nature of the elections there is a slim chance that a small number of votes could change the nature of results. This is because it could translate into a large difference which in turn could impact the nature of the new government. If these factors come into play, markets could soon experience a high degree of volatility.

Below we present three Indian stocks which have a track record of consistent performance. Each of them also has a good Zacks rank. These make them ideal choices, since they could capitalize on market momentum. However, in case the market experiences a few jitters they remain solid choices.

Tata Motors Limited

Tata Motors is the largest automobile company in India. It is also the fifth largest truck manufacturer and the fourth largest bus manufacturer in the world. It also provides automotive solutions. Commercial and passenger vehicles are also sold in Europe, Africa, the Middle East, South East Asia, South Asia, Russia and South America.

Tata Motors Limited holds a Zacks Rank #3 (Hold) and has expected earnings growth of 8.6% for the next financial year. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 8.95.

HDFC Bank Ltd.

HDFC Bank is one of the largest banks in India, with a retail network of 3,336 branches and 11,473 ATMs in 2,022 cities as of Dec 31, 2013. The bank enjoys favorable brand equity among Indian consumers and depositors, which enables it to keep its borrowing costs low. It provides a wide range of banking services covering commercial and investment banking on the wholesale side and transactional/branch banking on the retail side.

Currently the company holds a Zacks Rank #3 (Hold) and has expected earnings growth of 24.8% for the next financial year. It has a P/E (F1) of 19.55.

Dr. Reddy's Laboratories Ltd.

Dr. Reddy's ( RDY ) is an integrated global pharmaceutical company engaged in providing affordable and innovative medicines since 1984. The company markets its products in countries like the U.S., U.K., Germany, India, Russia, Venezuela, Romania and South Africa.

Dr. Reddy's third quarter fiscal 2014 results were impressive with the company beating on both earnings and revenues. Moreover, the company recorded strong year-over-year growth.

Apart from a Zacks Rank #3 (Hold), Dr. Reddy's has expected earnings growth of 8.5% for the next financial year. It has a P/E (F1) of 19.22.

Given recent political developments, the Indian economy may soon experience a turnaround. This seems to be the most likely scenario despite current weaknesses. This is why these stocks would make good additions to your portfolio.

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HDFC BANK LTD (HDB): Free Stock Analysis Report

DOCTOR REDDYS (RDY): Free Stock Analysis Report

TATA MOTORS-ADR (TTM): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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