These five stocks stand to benefit from the Fed rate cut

The US Federal Reserve’s recent 0.5% rate cut marks the start of what could be a prolonged easing cycle, with projections pointing to another 0.5% cut in 2024 and an additional 1% in 2025.

The Fed’s aim is to get ahead of potential labour market challenges and stabilise the US economy amid looming uncertainties. While the cuts are focused on the US, their impact is already resonating across global markets and India is well-positioned to capitalise on them.

The Fed’s decision could unlock new opportunities for Indian investors. Companies stand to benefit from lower US rates, too, by leveraging cross-currency swaps to reduce borrowing costs, enhancing profitability and providing more room for growth.

The Fed's move will also pave the way for the RBI to cut interest rates. There is speculation that India’s central bank could cut rates as early as Q4FY25, and that there could be two cuts by March 2025.

If the RBI does cut rates, it would create an even more favourable environment for Indian businesses. Lower domestic borrowing costs would provide corporations with additional liquidity and cheaper access to credit, fuelling their expansion and boosting profitability across key sectors.

Companies that would benefit from a weaker dollar, lower borrowing costs and a stronger rupee could see enhanced earnings potential in the coming months.

As monetary conditions evolve, the focus will shift to sectors and businesses that can leverage these changes most effectively. Here are some stocks that could benefit.

#1 Persistent Systems

A global software and tech innovation firm, Persistent Systems continues to make strides in digital engineering and enterprise modernisation. The company has built a solid reputation for its full-cycle software product development services.

It stands out among mid-sized Indian IT firms, and consistently holds its own against larger rivals such as TCS and Infosys in software services, while competing with niche players in the digital products space both in India and abroad.

Persistent’s real strength lies in cutting-edge cloud-native development, AI, analytics and cloud engineering, which have earned the company recognition and awards.

The recent launch of its AI-powered SASVA platform marks a new revenue stream, showing Persistent’s focus on forward-thinking growth avenues outside its legacy business.

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The recent Fed rate cut could bring tailwinds. With the majority of its business tied to the US market, the company could see benefits in terms of lower borrowing costs and increased spending on digital transformation projects.

The company derives 80% of sales from North America, while its remaining comes from India (10%), Europe (9%), and the rest of the world (1%).

The company also looks to expand its capabilities through acquisitions. It recently announced plans to acquire Starfish Associates for $20.7 million. Starfish, known for its enterprise communications automation platform, serves major Fortune 500 companies and is expected to boost Persistent's reach in enterprise solutions.

The business has performed admirably. Sales grew at a compounded annual growth rate (CAGR) of 23.6% From FY20 to FY24,, while the net profit grew at 25%. Return on capital employed (RoCE) and return on equity (RoE) averaged 26.8% and 21.5% over this five-year period.

#2 L&T Technology Services

LTTS is a mid-sized, niche IT firm that primarily focuses on exclusive outsourced engineering and R&D services.

Unlike its larger peers, LTTS undertakes complex design and engineering projects that require deep domain expertise. It operates higher up on the value chain, which gives it higher margins.

LTTS offers industrial products (19% of revenue), transportation (38%), telecom & hi-tech (19%), and process industries (24%). It has a well-balanced presence across industries, and a strong reputation due to its heavy engineering-focused parent Larsen & Toubro Ltd.

LTTS stands to benefit from the Fed rate cut due to rising demand for its engineering services. As 63% of its revenue comes from North America, lower borrowing costs could encourage clients to invest in more projects. The company generates 16% of its revenue from Europe, 13% from India, and 8% from other regions.

The rising demand for digitisation in the post-pandemic era has driven revenue growth over the past few years. Revenue increased at a CAGR of 13.2% from FY20 to FY24 while net profit grew at 12%. RoCE and RoE averaged 37.2% and 27%, respectively, over the five years.

#3 HDFC Bank

HDFC Bank Limited is India’s largest private sector bank by assets and the 10th-largest bank in the world by market capitalisation.

It has 21,683 banking outlets—comprising 6,342 branches and 15,431 business correspondents—alongside 18,130 ATMs and cash deposit/withdrawal machines across India.

It also has branches in Bahrain, Hong Kong, the UAE and Kenya, where it offers offshore deposits, bonds, equity and mutual funds to non-resident Indians.

The merger with HDFC Ltd made the combined the world’s seventh-most valuable bank, with 120 million customers and 177,000 workers.

Improved liquidity could aid its deposit mobilisation and branch expansion efforts, potentially boosting margins over time.

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Similarly, a possible RBI rate cut would offer even more direct advantages. Lower domestic interest rates would reduce the bank's funding costs within India, making loans more affordable and driving more demand, especially in areas like home loans and personal credit.

Lower rates could also ease pressure on deposit pricing, helping HDFC Bank maintain healthy margins and expand its balance sheet more effectively.

While the bank has performed admirably, it's important to note that the numbers aren't directly comparable, as HDFC Bank merged with HDFC Ltd in July 2023.

#4 Cyient

Cyient, an IT company, provides a comprehensive range of software services across industries such as aerospace, defence, healthcare and energy. It offers full-scale electronic and mechanical aerospace manufacturing engineering solutions, covering everything from conceptualisation to design and maintenance.

Cyient has been integrating Artificial Intelligence (AI) into its business operations to enhance its software offerings. By leveraging AI, the company aims to provide more intelligent and efficient solutions across its key sectors.

It is also incorporating AI into its semiconductor offerings, driven by miniaturisation, next-gen chips, advanced packaging systems and the growing use of AI in chip design and manufacturing.

Cyient is also developing cloud-enabled AI-driven analytical tools to predict and detect anomalies within networks, further optimising operational efficiency.

In FY24, the company generated more than 47% of its revenue from the US, making it a key driver of the company's growth. The Fed rate cut could stimulate economic activity, particularly in the tech and industrial sectors. This could translate into higher demand for the company's AI-powered solutions.

Improved investor sentiment and better market conditions could also give Cyient an added boost in its largest market, enhancing its overall growth outlook.

The company has done well in the past five years, with sales and net profits increasing at a CAGR of 8.7% and 8.2%, respectively. RoCE and RoE were 19.7% and 15.3% on average, respectively.

The business is a cash cow with a well-capitalised balance sheet, enabling inorganic expansion through acquisitions funded by a mix of debt and internal accruals.

The company expects growth from both acquisitions and existing operations. Additionally, its large OEM clients are increasing their tech investments, strengthening the company’s confidence in near-term growth.

#5 Gland Pharma

Gland Pharma has undergone a remarkable transformation from a contract manufacturer into one of the largest and fastest-growing companies in the generic injectables market.

About 50% of its revenue comes from the US, where the company supplies 14 of 22 drugs in critical shortage, including 10 essential hospital products.

The Fed rate cut could benefit Gland Pharma by creating a more favorable economic environment. Lower rates may stimulate consumer spending, driving up demand for its injectable products, especially in shortage-prone areas.

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Reduced interest rates could also enhance market sentiment, supporting Gland Pharma's growth strategy and operational flexibility.

The company specialises in sterile injectables, focusing on the ophthalmology and oncology segments. These segments are currently facing significant shortages in the US, which positions Gland Pharma as a key beneficiary.

The company’s revenue increased at a CAGR of 20.4% from FY20 to FY24. RoCE and RoE averaged 21.6% and 16.1%, respectively.

Conclusion

While the Fed rate cut could make certain stocks more attractive, it's essential for investors to conduct thorough research before diving in. Even with favourable economic conditions, market dynamics can shift and not every stock will react the same way.

Diversifying across sectors and understanding each company's fundamentals can help mitigate risks and position your portfolio for long-term gains, especially in an evolving interest-rate environment.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com