Global brokerage house Morgan Stanley anticipates a robust 15.3 percent compound annual growth rate (CAGR) in India's infrastructure investments, projecting total expenditures of $1.45 trillion over the next five years. To capitalise on this growth trajectory, the firm has identified four key stocks: Larsen & Toubro (L&T), NTPC, Titagarh Rail Systems, and UltraTech Cement.
"India's infrastructure has materially improved in recent years – and there is significant scope for further improvements through recent government initiatives like PM Gati Shakti (PMGS). Efficient infrastructure can lower logistical costs and improve India's manufacturing competitiveness," said the brokerage.
The brokerage expects India's infrastructure investment to steadily increase from 5.3 percent of GDP in F24 to 6.5 percent of GDP by F29. In its view, this will help to lift the investment rate, leading to a sustained period of high productive growth.
It further noted that investors are optimistic about India's economic resilience, driven by supply-side reforms and enhanced macroeconomic stability, reinforcing the belief in a burgeoning profit cycle. With the economy expected to grow at a nominal 10 percent annually, if the profit share in GDP reaches a new peak of 8 percent within the next four to five years, this could result in an earnings CAGR of over 20 percent for the broader market, forecasted the brokerage.
Morgan Stanley anticipates that increased government spending on infrastructure projects will significantly benefit L&T. The brokerage also noted that a reduction in steel and other material prices could enhance L&T's cost structure. Additionally, an overall economic improvement and higher-than-expected private capital expenditures would further support L&T's growth.
However, potential risks include a slowdown in government infrastructure spending, which could impact L&T's prospects. Delays in project execution and geopolitical risks could hinder project completion and profitability, while a sharp rise in material costs could pressure margins, it added.
Morgan Stanley sees potential upside for NTPC through accelerated capacity expansion driven by increased power demand and improved health of State Electricity Boards (SEBs), as well as value-accretive acquisitions and unlocking value in its subsidiaries.
However, risks include delays in project commissioning, under-recovery of fixed costs due to coal or equipment availability issues, investments in non-core businesses, and acquisitions that might reduce value.
NTPC's thermal business is valued at 2 times the projected H1FY27 price-to-book ratio, while its renewable business is valued at 12 times the forecasted FY29 EV/EBITDA, discounted back to H1FY27. The pumped storage business is valued at 2 times, consistent with regulated business multiples. "We assume a commissioning of 3GW by FY31, with valuations discounted back to H1FY27," Morgan Stanley noted.
Morgan Stanley's base case for Titagarh Rail Systems is based on a target price-to-earnings (P/E) ratio of 35 times September 2026 earnings. This valuation is deemed fair due to the company's strong earnings visibility from a substantial order backlog and superior return ratios compared to its peers.
Key positive drivers for Titagarh include improved freight margins and a faster-than-anticipated ramp-up in passenger coach production. Additionally, according to analysts, exceeding expectations in passenger segment margins would further boost the company's financial performance.
However, supply chain disruptions could impact the freight business and hinder execution. Delays or slowdowns in wagon tendering and passenger coach orders could reduce operating margins. Furthermore, postponed fulfillment of contractual obligations could result in liquidated damages, adversely affecting the company's financial health.
Morgan Stanley maintains that despite short-term uncertainties, UltraTech Cement has strong medium-term demand visibility. Key drivers for the stock include sustained demand and a significant decrease in input prices.
However, potential risks include weaker-than-expected demand if the macroeconomic environment deteriorates and rising input prices, which could increase costs without corresponding price increases, thereby impacting profitability.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
