Tracking economic growth! ICICI Bank, Reliance Industries top buy ideas for FY25: Siddhartha Khemka

Lower deflator has helped real growth in FY24, which is expected to reverse in FY25.

After recent revisions, India’s real GDP grew by over 8% YoY for the third consecutive quarter in 3QFY24, pushing the full-year FY24 growth to 7.6%.

If so, the CSO estimates a growth of just 5.9% YoY in 4Q. We, however, believe that real GDP growth could be as high as ~7% YoY in 4QFY24, partly led by higher net indirect taxes, leading to another positive surprise. We, thus, expect real GVA/GDP growth at 7.0%/7.9% in FY24, better than the CSO’s estimate of 6.9%/7.6%.

After surging to >7% YoY in Jul-Aug’23, the headline CPI inflation has subsided to a more tolerant level of 5-5.5% YoY in the past six months (Sep’23-Feb’24).

Headline inflation has been stable at 5.1% in the last two months and other details are also encouraging: 1) Core inflation easing to a record low of 3.3% YoY in Feb’24 since the new series began in 2012, a sharp drop from 6.2% a year ago.

Services inflation (weight of 23%) decelerated to 3.1% YoY in Feb’24, the lowest on record since 2015. However, ‘food’ inflation – led by cereals, pulses, and vegetables – remained high at 8.6% YoY last month, which has been very volatile in recent months.

Overall, we expect the headline inflation to average around 4.5% YoY in FY25, the lowest in six years and compared to 5.5% in FY24. Although it is extremely difficult to predict food inflation, a normal monsoon could help ease it to 5% YoY next year from 7.5% this year.

Core inflation is likely to average 4.2% YoY in FY25 from 4.4% in FY24.

The combination of strong growth and easing inflation is likely to push rate cuts by the RBI into 2025 unless the US economy slows down materially.

Lastly, we continue to believe that total receipts of the GoI would exceed the BEs/REs by about INR800b/INR400b in FY24, which may help the GoI meet its fiscal deficit target.

It is again likely that gross taxes may exceed the BEs by INR1.1t in FY25, helping the GoI achieve its fiscal deficit target of 5.1% of GDP.

Reliance Industries: Buy| Target Rs 3210

Ministry of New and Renewable Energy announced its plans to set up two hydrogen hubs in India by FY26, and provide incentives up to Rs 44b for electrolyzer manufacturing.

These initiatives align with ’s plans to establish a Giga-scale electrolyzer facility. It has also outlined a vision to be able to produce green hydrogen at less than $1/kg.

Additionally, O2C earnings in 4QFY24 are expected to remain robust, given the sharp recovery in SG GRM to $7.4/bbl (3QFY24 $5.5/bbl). We expect a 9% CAGR in standalone EBITDA over FY24-26E, driven by higher vol.

ICICI Bank: Buy| Target Rs 1230

ICICI Bank continues to witness strong growth in Retail deposits and has succeeded in building a robust liability franchise over the past few years.

Asset quality trends remain steady reflecting the healthy GNPA/NNPA ratios. We expect the bank to sustain a ~15% CAGR in PAT over FY24-26E with RoA/RoE of 2.3%/18.3%.

(The author is Head – Retail Research, Motilal Oswal Financial Services Limited)