SBI, REC, Coal India: Jefferies cuts PSU weightages, says this on midcaps, UP results, Modi 3.0

Jefferies in its latest GREED & fear note said it will shave the weighting in public sector companies in the long-only India portfolio. The weightings in State Bank of India, REC Ltd and Coal India Ltd, and private lender ICICI Bank Ltd, will be reduced by one percentage point each, it said while introducing investment in PB Fintech Ltd with a 4 per cent  weight in its model portfolio. 

"As for the Asia ex-Japan long-only portfolio, the investment in JSW Energy will be increased by one percentage point by shaving the investment in State Bank of India," the foreign brokerage said.

Modi 3.0

Jefferies said the focus of the Indian media is now on what cabinet seats these TDP and JDU will demand to join the NDA coalition, and what policies they will lobby for. On this point, TDP is the more reliable partner, it said.

"Such a portfolio adjustment in favour of consumption plays, particularly rural plays, probably makes sense tactically and Jefferies’ head of India research Mahesh Nandurkar reduced the weightings to property and public sector banks in his portfolio this week. Still GREED & fear’s long-only India portfolio is structural in nature and the base case here remains that
India is in a property and capital spending up cycle which will continue," Jefferies said.

Nandurkar noted noted that the 2004 shock defeat of the BJP provides an interesting precedent. The Nifty declined 19 per cent in three days following the result, but the then nascent capex cycle gathered strength and the Indian market rose 43 per cent in the following 12 months. The then incoming Congress-led government benefited from the structural reforms inherited from the BJP Government of Atal Bihari Vajpayee, it noted.

"If the repeat of that pattern is the base case, the election result has probably reduced the prospects of SOE reform and public sector divestment, both of which GREED & fear would have expected Modi to focus on in a third term of BJP government free from coalition constraints," he said. 

Stock market
Jefferies while is surprised by why the stock market did not fall more, most particularly given that the market has been driven by surging retail investor inflows in recent months. It said if there is definitely a risk of renewed share price declines, there is one major positive to be aware of from a flow of funds perspective. 

"That is that foreign investors will view any significant correction as an opportunity to add since a combination of India’s outperformance in recent quarters and high valuations, most particularly in the mid-cap space, has meant that most dedicated emerging market investors are no longer overweight the market. Indeed, it is the case that foreign investors have been net sellers of Indian stocks year to date," it said. 

UP results
Jefferies said the biggest negative for the BJP was the losses suffered in India’s biggest state, Uttar Pradesh. The BJP won only 33 of the 80 seats in Uttar Pradesh, down from 62 seats in 2019. 

"One mistake here seems to be that Modi went against the advice of the local BJP cadres by running with candidates from outside the state and in some cases who had only recently joined the party. Another issue was the allure of freebies offered by Congress and its partners in the opposition Indian National Developmental Inclusive (INDI) Alliance which comprises at least 28 political parties," it said.