L&T, Infosys must-haves in your portfolio to play India story, says Morgan Stanley

NEW DELHI: We are bullish on India's macro, and Larsen & Toubro (L&T) could be the best stock to play this, global investment bank Morgan Stanley said in a note. Well, in case the global bank is wrong, Infosys could be the best hedge.

Larsen & Toubro and Infosys are among our top picks in India. The drivers for these stocks sit at the opposite ends, providing a portfolio with protection, but not necessarily sacrificing too much return potential - the perfect barbell, added the note.

As per Morgan Stanley, this is because the macro drivers for these stocks are against each other, but the idiosyncratic stock price drivers are supportive for both. While L&T is likely to benefit from rising government spends and falling short rates, the stock is at the high end of its valuation multiples.

In contrast, Infosys is a beneficiary of a fall in the real effective exchange rate and, in turn, from falling short rates. However, the stock is largely a play on demand from the western economies - especially the US - and is a good hedge against the India's growth outlook turning down and appears inexpensive in terms of valuations.


Industrials do the best when rates are falling and growth is rising. Morgan Stanley expects that to be the macro backdrop in the coming months. The best proxy for industrials, in our view, is the behemoth Larsen & Toubro.

Infosys, in contrast, fares poorly when the rupee is strong and when US growth is weak or the Fed is cutting rates. Quantitative easing in the US has distorted the relationship, but the next Fed rate hike could lead to outperformance by the Tech sector in India, says the global investment bank.