Labour reforms, PSB mergers: Brokerages prepare a wish list for new govt

Illustration by Binay Sinha
Brokerages are pinning hopes that the re-elected Narendra Modi government will be able to push through challenging reform measures such as privatisation, easing of land acquisition and labour laws. Most say the rare second consecutive decisive mandate for the Bharatiya Janata Party (BJP) means investors can expect a stable pro-reform government for the next five years. 

Most brokerages, except a few including Morgan Stanley, have maintained their Sensex and Nifty targets as they believe there is little room for further re-rating in the backdrop of weak earnings. A look at what top brokerages are expecting in terms of policy action from the new Modi government:

Goldman Sachs: Nifty target—12,500 (May 2020)

The brokerage is already ‘overweight’ on India as it expects the domestic markets to do better than their regional peers. The brokerage says the current valuations are already “fair levels” -- and above historical averages. It says the political developments warrant for ‘valuation overshoot’ in the near-term. In the medium term, Goldman Sachs expects that market returns will be driven by mid-teen earnings growth. The US-based brokerage says the potential structural reforms should focus on the following four areas:

Land: Transparent auctions, and digitisation of records
Labour: Creating an enabling regulatory environment
Privatisation: In areas such as agriculture and banking 
Export promotion

Morgan Stanley: Sensex target — 45,000; Nifty target — 13,500 (June 2020) 

The brokerage says continuity in administration will be a source of comfort and accompanying policy predictability will be comforting for the markets. The brokerage has revised upwards its Sensex target from 42,000 to 45,000. The US-based brokerage expects the following policy framework:
  • Low food prices and positive real rates
  • Fiscal consolidation and infrastructure spending
  • FDI focus and strong external affairs policies
  • Increasing cash transfers to the poor
  • More emphasis on portfolio flows and actions to improve India's weight in the MSCI Index
  • Focus on India's external trade 
  • A revamp of corporate tax rate and lowering headline rate to 25% for large corporates 
  • Greater focus on recapping PSU banks
  • Encouraging BJP-led states to further reform land/labour laws 
  • Social/constitutional reforms (like removal of Article 370) 
UBS: Nifty target — 12,000 (December 2019) 

 
The brokerage says it remains to be seen if the government will focus on reviving growth in the short term or would go for structural reform to achieve sustainable higher growth over the medium term. The brokerage says corporate earnings will be impacted by the government’s policy choices to revive near-term growth vis-à-vis ensuring macro stability. 

Some of the reforms moves that will excite the market, according to UBS, are: 
  • Major structural reforms on land, labour and privatisation
  • Announcement of privatisation of Air India privatisation
  • Building a narrative on land/labour reforms 
  • Privatisation of state-owned banks
Credit Suisse: No index target

The brokerage says by 2020, the BJP and its allies should also have a majority in the Upper House, making
legislative changes easier. It says the government “may not intervene with a stimulus as the economic slowdown is not sharp enough, and neither does it have the fiscal space (or intent) to boost consumption.” Credit Suisse says sectors that may require government attention are NBFCs, real-estate, energy and agriculture.

Following are the key areas where the brokerage has expectations from the government:
  • Prioritisation of judicial reforms (address high pendency and latency) 
  • Direct tax reform;
  • PSU bank mergers (from 27 in FY17 to 19 now, and possibly 6 by FY23);
  • Continued infrastructure spending (affordable housing in urban areas) 
  • Labour law simplification 
Elara Capital: Nifty target — 12,000 (for December 2019)

The brokerage says the election outcome has reduced political risks and addressed market expectations of the government’s continuity. Elara says the strong mandate has renewed hopes of more reform-oriented policies such as goods & service tax (GST) simplification, labour reforms, ease of doing business and land acquisition. 

The brokerage says the action areas for the Modi government to steer the market would be:
  • Addressing the disquieting rural distress
  • Stemming the drag on discretionary and staple consumption
  • Resolving bank balance sheet issues and recapitalising PSU banks to spur private capital expenditure
  • Initiating measures to infuse liquidity in the NBFC sector, which has a cascading effect on consumption and growth 
  • Sustaining public infrastructure spending and plugging the fiscal deficit sans crowding out private borrowing
Edelweiss: Nifty target — 12,000 (June 2020)

The domestic brokerage says the election verdict would ensure continuity of the government with few political limitations. It also provides an opportunity to build on the last term’s reforms and to reflate the languid economy. The brokerage says the BJP’s manifesto was modest on economic detail. “We believe an early aggressive attempt at re-firing the business cycle is what, this time, will generate the greatest political, economic and market returns,” it says. 

Following are some of the key areas highlighted by the brokerage: 
  • Fiscal and monetary stimuli for a jump-start 
  • Income-support measures and greater consumption bias 
  • Unclogging of the financial system