Infosys, Zomato, IndusInd Bank shares to benefit from falling interest rates, says Emkay

Emkay Global in its latest strategy note said the US Federal Reserve's newly minted dovishness has added another leg of rally to the bullish market and that while the impact of earnings due to lower rates will be muted, the fresh development is likely to play out with higher foreign portfolio investor (FPI) flows driving the re-rating in stocks.

Provisional data available with NSE showed that FPIs were net buyers of domestic shares to the tune of Rs 3,570.07 crore on Thursday. December has seen inflows of Rs 39,260 crore so far, the best for any month since July, data compiled from depository NSDL suggests. 

Going ahead, Emkay Global said, domestic stocks will also be aided by a post-election policy stability and continued strength in the capex and manufacturing cycle going ahead. It expects a continued strength in equities, and felt technical corrections should be used to add exposure.

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"The best beneficiaries of falling rates are mid-size lenders (IndusInd Bank) and IT (Infosys), while our other top picks are Hero MotoCorp, Piramal Enterprises, and Zomato (new addition)," the domestic brokerage said.

Emkay said the US Fed’s dovish comments portend three rate cuts in CY24 and have turned market sentiment decisively. It expects the RBI to follow suit with concurrent rate cuts. The impact would be more pronounced at the short end, given that long bonds have not tracked policy rates on the way up, the domestic brokerage said.

Emkay said FPI flows have been strong in the second half of 2023. "We see the momentum intensifying as risk on trades comes back into play. India will remain one of the most attractive emerging markets given its size and growth profile, especially considering the challenges of investing in China," it said.

Emkay Global said the initial leg of rate-cut cycles has had mixed results for equities over the last 15 years. The strike rate for a positive reaction is 3/4, mostly captured in the run-up to the cut. The additional wrinkle in this cycle is that we are entering the rate-cut cycle on the back of strong growth. The sectoral performance around the rate cycle’s peaks is also mixed, it said.

"Re-rating is an obvious trigger, but it is hard to find candidates if we apply additional filters like earnings visibility, growth sustainability, and relative valuations to history. We filter down to mid-size financials, IT, and real estate as the best plays. Beyond the immediate impact of the rate cycle, we like SMIDs and manufacturing and are cautious on consumption, except autos. IndusInd, Piramal Enterprises, and Hero MotoCorp stay as our top picks. We add a) Infosys, as we see little near-term earnings risk and valuations are reasonable with respect to history and Zomato, as we see continued business momentum and a relatively strong play on consumption," it said.

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