Top 5 Stocks That Stand to Benefit From the Fed Rate Cut

The US Federal Reserve's recent 0.5% rate cut signals the start of what could be a prolonged easing cycle, with projections pointing to another 0.5% cut in 2024 and an additional 1% in 2025.

This bold move reflects the Fed's strategy to get ahead of potential labour market challenges and stabilize the US economy amid looming uncertainties.

While these shifts focus on the US their impact is already resonating across global markets and India is well-positioned to capitalise.

For Indian investors, the Fed's decision could unlock new opportunities. Moreover, Indian corporates stand to benefit from lower US rates by leveraging cross-currency swaps to reduce borrowing costs, enhancing profitability, and providing room for growth.

Additionally, the Fed's move will pave the way for the RBI's rate cuts. There is speculation that the RBI could cut rates as early as Q4 FY25, with two cuts potentially on the horizon by March next year.

If the RBI follows suit, this could create an even more favourable environment for Indian businesses.

Lower domestic borrowing costs would provide corporates with additional liquidity and cheaper access to credit, fuelling expansions and boosting profitability across key sectors.

For investors, this combination of global easing and potential RBI rate cuts opens the door to several key opportunities.

Companies well-positioned to benefit from a weaker dollar, lower borrowing costs, and a stronger rupee, could see enhanced earnings potential in the coming months.

As monetary conditions evolve, the focus will shift to which sectors and businesses can leverage these changes most effectively.

#1 Persistent Systems

First on the list is Persistent Systems.

Persistent System, a global software and tech innovation firm, continues to make strides in digital engineering and enterprise modernisation. The company has built a solid reputation for its full-cycle software product services.

It stands out among mid-sized Indian IT firms, consistently holding its own against larger rivals like TCS and Infosys in software services, while competing with niche players both domestically and abroad in the digital products space.

Persistent's real strength lies in cutting-edge cloud-native development, AI, analytics and cloud engineering, which have earned the company recognition and awards.

The recent launch of its AI-powered SASVA platform marks a new revenue stream, showing Persistent's focus on forward-thinking growth avenues outside its legacy business.

Interestingly, the recent cut in the Fed rate could offer a tailwind for Persistent. With the majority of its business tied to the US market, the company could see benefits in terms of lower borrowing costs and increased spending on digital transformation projects.

While the company derives 80% of sales from North America, its remaining revenue comes from Europe (9%), India (10%), and 1% from the rest of the world.

The company's proactive pursuit of deals and acquisitions, such as the recent announcement to acquire Starfish Associates for US$ 20.7 million, reflects its intent to expand its capabilities.

Starfish, known for its enterprise communications automation platform, serves major Fortune 500 companies, enhancing Persistent's reach in enterprise solutions.

Persistent Systems Financial Snapshot (2020-24)

	2019-2020	2020-2021	2021-2022	2022-2023	2023-2024
Revenue Growth (%)	6.85%	16.16%	36.54%	43.81%	18.84%
Operating Profit Margin (%)	17.52%	18.88%	19.30%	19.04%	18.36%
Net Profit Margin (%)	9.54%	10.76%	12.09%	11.03%	11.13%
Return on Capital Employed(%)	19.36%	23.70%	28.36%	31.43%	31.26%
Return on Equity (%)	14.50%	17.66%	23.00%	26.36%	25.86%

Source: Equitymaster

The business has performed admirably. Between 2020-24, the company's sales have grown at a compounded annual growth rate (CAGR) of 23.6%, while the net profit has grown at 25%.

The Return on Capital Employed (RoCE) and Return on Equity (RoE) have averaged at 26.8% and 21.5% over a 5-year period.

To know more about the company, check out its financial factsheet and latest financial results.

#2 L&T Technology Services

Next on our list, is L&T Technology Services (LTTS).

LTTS is a mid-sized niche Indian IT firm with a primary focus towards exclusive outsourced engineering and R&D Services.

Unlike its larger peers, LTTS undertakes complex design and engineering projects that require deep domain expertise. It operates higher up the value chain, which allows the company to attain higher margins on the services it offers.

LTTS caters to industrial products (19% of revenues), transportation (38%), telecom & hi-tech (19%), and process industries (24%). It enjoys a well-balanced and diversified presence across industries in tandem with a strong reputation due to its heavy engineering-focused parent Larsen & Toubro Ltd.

LTTS stands to benefit from a potential interest rate cut due to rising demand for its engineering services. As 63% of its revenue comes from North America, lower borrowing costs may encourage clients to invest in more projects.

Beyond North America, LTTS generates 16% of its revenue from Europe, 13% from India, and 8% from other regions.

L&T Technology Services Financial Snapshot (2020-24)

	2019-2020	2020-2021	2021-2022	2022-2023	2023-2024
Revenue Growth (%)	9.98%	-3.20%	19.68%	33.73%	9.22%
Operating Profit Margin (%)	23.48%	21.31%	23.86%	22.28%	22.04%
Net Profit Margin (%)	14.64%	12.23%	14.62%	13.80%	13.54%
Return on Capital Employed(%)	42.51%	30.06%	35.44%	40.25%	38.00%
Return on Equity (%)	31.77%	21.58%	25.32%	28.67%	27.29%

Source: Equitymaster

The rising demand for digitisation, in the post-pandemic era, has driven LTTS' revenue growth in the past few years. Between 2020-24, the revenue of the company has grown at a 5-year CAGR of 13.2%, the net profit has grown at 12%.

The 5-year average RoCE and RoE stand at 37.2% and 27%, respectively.

To know more about the company, check out it's financial factsheet and the latest quarterly results.

#3 HDFC Bank

Third on our list is the HDFC Bank.

HDFC Bank Limited is India's largest private sector bank by assets and ranks as the tenth-largest bank globally by market capitalisation.

Its extensive network includes 21,683 banking outlets-comprising 6,342 branches and 15,431 business correspondents-alongside 18,130 ATMs and cash deposit/withdrawal machines across India.

The bank also operates internationally, with branches in Bahrain, Hong Kong, UAE and Kenya, where it serves NRI clients with offerings like offshore deposits, bonds, equity, and mutual funds.

Following the completion of its merger with HDFC Ltd, the combined entity has become the world's seventh-most valuable bank, with a customer base of 120 m and a workforce of 177,000.

Improved liquidity could aid its deposit mobilisation and branch expansion efforts, potentially boosting margins over time.

Similarly, a possible RBI rate cut would offer even more direct advantages.

Lower domestic interest rates would reduce the bank's funding costs within India, making loans more affordable and driving further demand, especially in areas like home loans and personal credit.

Additionally, lower rates could ease pressure on deposit pricing, helping HDFC Bank maintain healthy margins and expand its balance sheet more effectively.

HDFC Bank Financial Snapshot (2020-24)

	2019-2020	2020-2021	2021-2022	2022-2023	2023-2024
Net Profit Growth (%)	21.61%	16.71%	19.76%	20.96%	41.82%
Advances Growth (%)	20.07%	13.57%	19.88%	16.96%	54.39%
Deposits Growth (%)	24.25%	16.36%	16.82%	20.84%	26.25%
Return on Equity(%)	16.54%	16.50%	16.70%	17.24%	17.64%

Source: Equitymaster

While the bank has performed admirably, it's important to note that the numbers aren't directly comparable, as HDFC Bank merged with HDFC Ltd in July 2023.

To know more about the bank, check out its financial factsheet and latest financial results.

#4 Cyient

Fourth on our list is Cyient.

Cyient, an IT company, provides a comprehensive range of software services across industries such as aerospace, defence, healthcare and energy.

The company offers full-scale electronic and mechanical aerospace manufacturing engineering solutions, covering everything from conceptualisation to design and maintenance.

Recently, Cyient has been actively integrating Artificial Intelligence (AI) into its business operations to enhance its software offerings. By leveraging AI, the company aims to provide more intelligent and efficient solutions across its key sectors.

It is also incorporating AI into its semiconductor offerings, driven by miniaturisation, next-gen chips, advanced packaging systems and the growing use of AI in chip design and manufacturing.

Additionally, Cyient is developing cloud-enabled AI-driven analytical tools to predict and detect anomalies within networks, further optimising operational efficiency.

In FY24, Cyient generated over 47% of its revenue from the US market, making it a key driver of the company's growth.

A potential Fed rate cut could stimulate economic activity, particularly in the tech and industrial sectors. This could translate into higher demand for the company's AI-powered solutions.

Additionally, improved investor sentiment and better market conditions could give Cyient an added boost in its largest market, enhancing its overall growth outlook.

Cyient Financial Snapshot (2020-24)

	2019-2020	2020-2021	2021-2022	2022-2023	2023-2024
Revenue Growth (%)	-3.87%	-6.25%	8.09%	31.22%	18.53%
Operating Profit Margin (%)	15.97%	17.30%	20.51%	18.03%	19.15%
Net Profit Margin (%)	7.71%	8.80%	11.52%	8.55%	9.83%
Return on Capital Employed(%)	17.49%	16.65%	21.96%	19.92%	22.71%
Return on Equity (%)	13.36%	13.25%	17.31%	15.80%	18.45%

Source: Equitymaster

The company has done well in the past five years, with sales and net profits growing at a CAGR of 8.7% and 8.2%, respectively. The RoCE and RoE have registered a 5-year average of 19.7% and 15.3%, respectively.

The business is a cash cow with a well-capitalised balance sheet, enabling inorganic expansion through acquisitions funded by a mix of debt and internal accruals.

The company expects growth from both its acquisitions and existing operations. Additionally, its large OEM clients are increasing tech investments, strengthening the company's confidence in near-term growth.

To know more about the company, check out its financial factsheet and latest financial results.

#5 Gland Pharma

Last on our list is Gland Pharma.

Gland Pharma has undergone a remarkable transformation from a contract manufacturer to one of the largest and fastest-growing players in the generic injectables market.

Currently, approximately 50% of its revenue comes from the US where the company supplies 14 out of 22 drugs in critical shortage, including 10 essential hospital products.

A cut in the Fed rates could benefit Gland Pharma by creating a more favorable economic environment. Lower rates may stimulate consumer spending, driving up demand for its injectable products, especially in shortage-prone areas.

Additionally, reduced interest rates could enhance market sentiment, supporting Gland Pharma's growth strategy and operational flexibility.

Gland Pharma specialises in sterile injectables, focussing heavily on the ophthalmology and oncology segments. These segments are currently facing significant shortages in the US positioning Gland Pharma as a key beneficiary.

Gland Pharma Financial Snapshot (2020-24)

	2019-2020	2020-2021	2021-2022	2022-2023	2023-2024
Revenue Growth (%)	NA	29.77%	28.55%	-16.42%	50.97%
Operating Profit Margin (%)	41.57%	41.50%	39.40%	34.91%	26.54%
Net Profit Margin (%)	29.35%	28.79%	27.53%	21.55%	13.64%
Return on Capital Employed(%)	27.39%	28.00%	24.85%	14.04%	13.63%
Return on Equity (%)	21.29%	20.97%	18.61%	10.34%	9.26%

Source: Equitymaster

Between 2021 and 2024, the company reported a 5-year CAGR of 20.4% in. The 5-year average RoCE and RoE stand at 21.6% and 16.1%, respectively.

To know more about the company, check out its factsheet and latest quarterly results.

Conclusion

While the potential benefits of a Fed rate cut can make certain stocks more attractive, it's essential for investors to conduct thorough research before diving in. Even with favorable economic conditions, market dynamics can shift and not every stock will react the same way.

Diversifying across sectors and understanding each company's fundamentals can help mitigate risks and position your portfolio for long-term gains, especially in an evolving interest rate environment.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...