Demand Recovery in Sight, These Sectors Could Reward Investors

Demand trajectory has been on a turbulent ride in past quarters, especially in urban and more affluent regions. While rural demand did show improvement, urban demand continued to struggle. However, analysts are estimating an improving trend for the quarters ahead.

With better-than-anticipated monsoon season and green shoots in urban demand recovery already visible in hindsight, D-street players are seeing a slow but steady recovery in the upcoming quarters.

On top of this, declining food inflation levels might add to the overall economic rebound. The CPI inflation figure stood at 3.16%, the lowest level recorded since August 2019. Food inflation was even lower and stood at just 1.78%.

"We have a favorable base for the next 2 quarters as demand was impacted last year due to elections, intense heat waves and dry marriage season (H1FY25). We believe that the combined effect of low inflation, declining interest rates and normal monsoons starts to boost demand," brokerage firm Anand Rathi said in its recent report.

Meanwhile, the announcement of tax cuts during this year's budget is also set to push the demand road into the recovery zone. The recent rebound in the Indian stock market's trajectory, following a sharp correction, signalled this optimism in investor mood.

As per analysts, here are the sectors that might gain from improving demand levels-

1. Consumer

"Given the multiplier of 2.5x to tax cuts, the expected surge in demand is likely to be around Rs 2,500 billion ($30 Billion)...We remain overweight on consumers as monsoons and tepid inflation will support demand in coming quarters," the brokerage firm said.

While all areas of consumption are likely to see some benefit, the positive impact might be stronger among people earning Rs 1 million or more per year. This cohort tends to spend more on discretionary items.

2. Capital goods

Amidst all the sectors that fall in the capital goods category, the defense sector has gained the most attention. In the last 6 months, the Nifty India Defence Index experienced a double-digit surge of over 35%.

"We expect strong growth for defense PSUs like BEL and HAL given that India needs to be battle ready for a 3-front war in future," analysts at Anand Rathi brokerage firm stated.

3. Financials

While the recent interest rate cuts by the central bank might hamper the overall earnings of lenders in the coming quarters, analysts expect an improvement in the longer-term outlook. So far this year, the Nifty Bank index has surged over 8.5%, nearly double the gains of the broader Nifty 50 index.

"We remain overweight in Banks although the sector has seen some traction over the past month or so. The sector is relatively immune to global uncertainties on their operations," the brokerage firm said.