Morgan Stanley’s List of Ten Disruptions for Indian Equity Investors 

Morgan Stanley says that ten highly relevant disruption themes are awaiting Indian equity investors in the coming decade. These themes are positive for those who are ready to embrace change. According to Morgan Stanley, all relevant disruptions that will impact equity market in India revolve around policy actions and regulatory changes by the government.

Lower nominal rupee returns from equity, disruptions in financial sector, better transparency in real estate segment, more dependency on digital payments, positive consumption surprises including that from auto segment and better spending potential of middle class are some of the causes that can impact Indian equity market, according to Morgan Stanley. 

With the Flexible Inflation Targeting Regime, Morgan Stanley has stated a lower nominal return of 11% in future vs 14% between 20014 and 2017. They anticipate the inflation targeting to reduce the volatility in the inflation forcing inflation to settle at a lower level affecting nominal return.  With the asking rate of equity returns falling, P/E multiples will remain higher. 

The paper says that DREAM factors, demographics, regulation changes, investor education, growing risk appetite and improved macro environment for stocks, will change India’s equity saving landscape. Morgan Stanley expects small- and mid-cap stocks to outperform the narrow indices over the medium term and the domestic ETFs to become 20x bigger than today. 

Financial inclusion and direct benefits transfer has propelled banking culture in India and 300 million Indians have a bank account and receiving benefits via the Aadhaar platform. Reduction in income equality and higher decision making by the new segment will benefit consumer companies. Consumer companies focusing middle income consumer segment like those in two-wheelers, entertainment/media, education, travel, leisure, retail, and select staples will be benefitted.

Unified payments interface (UPI), will account 50% of digital transactions by FY 2023, compared to 3% in March 2017 and 20% in March 2018, meaning a CAGR growth of 90% for UPI transactions in next five years. This will be around USD 450 billion equivalent to 10 % of GDP. Banks will be able to deliver and recover loans at a low cost leading to an improvement of 400-500 bps in cost income ratio for banks. Those bank who leverage on UPI will gain market share. The existing banks with the existing technology are more likely to be most affected because of their inability to cope up with fast changes.. 

GST – Goods and Services Tax platform will enable Indian banks for the first time to get reliable data on MSME cash flows. This will shift focus of credit decisions from collateral basis to cash flow based. By leveraging the enhanced reliance on digital platforms for payments and the data there of, a banker can take informed decisions on the creditworthiness of small borrowers. Reliable data will enable MSME lenders to reduce spread.

The lending to large corporates will be shared between banks and bond markets. By FY2020, a  company with a debt of greater than US$1.5bn will be defined as a large corporate and it will have to meet 50% of incremental funding through the bond markets. This will force the banks to look for new avenues of growth.

The notional soil health card and direct benefits transfer will alter the way farm land will be nourished. Lower food inflation volatility will contribute to stabilize interest rate volatility which in turn, may reduce volatility in growth rates. Lower inflation means, lower volatility in share prices, directing the saving pool into equities and the P/E multiple. 

E-commerce enables even small suppliers to reach domestic and foreign consumers. if e-commerce delivers its promise, a disruption is in the anvil for the branded goods companies. The overall market may expand, but these companies can lose share to smaller firms. 

India has 14 of 15 most polluted cities in the world and autos cause almost 40% of this pollution. Morgan Stanley’s base case, the Indian Autos 2.0 market has revenue potential of US$265bn annually by 2030. Infrastructure investment, auto companies and credit providers may benefit from the developments in auto segment.

Bankruptcy law envisages resolution of borrower defaults though fast and collective decision making by the creditors. It is both process and time oriented, failure of which will cause liquidation of borrower. This will give upper hand to banks in corporate lending. After effect of all these is a disciplined capex cycle, resulting in better ROEs. 

Real Estate Regulation Act (RERA), with more regulator oversight and better customer protection, has the potential to alter the ways of doing business in real estate sector, making the players do business in a more complied manner. Quarterly updates on construction progress, bookings/sales, completion targets will bring in more transparency and will make developers more responsible. 70% of collections will have to be maintained in escrow account thereby ensuring financial discipline .and timely completion of project.

The above article is based on the report of Morgan Stanly’s ‘India’s Disruption Decade’, dated 18 October. Celebratebanking.com readers shall make own researches or seek advice of experts before taking any investment decisions based on the above article. .