Which Stocks Will Benefit When Interest Rates Start Falling?

A big event in financial markets recently was the interest rate cut by the US Federal Reserve.

It finally happened and the Fed cut its benchmark funds rate by half a percent. This was higher than the quarter percent rate cut that most analysts, investors, and economists expected.

So now that the fed has made its move, the market talk has moved on to the beneficiaries of this move.

In the Indian stock market, investors are keen to know which stocks could possibly go up.

This is not an easy question to answer as stock prices move around due to many reasons. Also, the US Fed's rate cut doesn't impact any Indian company directly.

In this article, we will present the top stocks that could be the top indirect beneficiaries.

Read on...

#1 HDFC Bank

The banking sector is always the main beneficiary of rate cuts.

Now that the interest rate reduction cycle in the US has begun, many countries will follow. India will likely be one of them.

Now the RBI may not cut rates immediately. However, there is speculation that the next move by the RBI on interest rates will be to reduce them. It's the timing that the market is unsure about.

Whenever it happens, banks will profit from it. This is because banks will be in a position to either reduce deposit rates to boost margins or reduce lending rates to increase loan growth...or a combination of both.

In this case, HDFC Bank, as India's largest private sector bank, is likely to be a top beneficiary.

HDFC Bank has been one of the most consistent performers of Dalal street growing at a 20% compounded annual growth rate for over two decades and will continue doing so due to India's strong GDP growth.

The bank's 5-year CAGR in net profit stands at 23% which has propelled its Return on Equity (RoE) to 22.1% in FY24.

The bank also has one of the lowest NPAs in the Indian banking system. For FY24, the bank's net NPA's stood at 0.33% of total advances. Its gross non-performing assets (NPA) ratio also improved to 1.24% against 1.26% in FY23.

For more details, see the HDFC Bank company fact sheet and quarterly results.

# SBI

Once the market gets even a hint of the RBI moving in the direction of a rate cut, State Bank of India (SBI) is likely to be one of the most prominent gainers on the Nifty.

After all, SBI is India's most trusted bank with a strong customer base of more than 500 m customers.

The company's management has guided to achieve 13-15% loan growth with consistent improvement in asset quality.

For the same reasons as discussed above for HDFC Bank, SBI too will be a top stock to watch out for going ahead.

For more details, see the SBI company fact sheet and quarterly results.

#3 Tata Motors

One group of stocks that could do very well in a falling interest rate environment, are fundamentally strong companies that have significant amount of debt.

The high debt levels are the only thing which would amount as a negative in an otherwise excellent growth story.

Tata Motors fits into this category perfectly. It's debt to equity ratio at the end of FY24 was 0.7. This is not very high. But it's also not low.

Thus, the company will do fine when interest rates are high, as long as its sales growth remains strong.

As the same time, its bottomline will improve when interest rates begin to fall.

The company's net profit margin was just 5.1% in the June quarter. The market wasn't too impressed by the latest quarterly financials of the company.

It just goes to show how much falling interest rates can be a positive for the company's profitability.

For more details, see the Tata Motors company fact sheet and quarterly results.

#4 Power Grid Corporation of India

As the backbone of the country's power grid, Power Grid plays a crucial role in ensuring the reliable and efficient delivery of electricity.

The company is responsible for integrating energy storage systems with the national grid.

This involves developing the necessary infrastructure, such as transmission lines and substations, to connect energy storage facilities to the grid.

The company is working on large-scale grid-scale energy storage projects to enhance grid stability and integrate renewable energy sources more effectively.

The nature of the business is capital intensive but the company's finances are rock solid. The only issue is the relatively high debt to equity of 1.2.

The high debt is a drag on the company's profitability. However, once interest rates fall, the company's cash flows will increase. This will give Power Grid the breathing room to take on more projects or improve the bottomline or both.

In any case, falling interest rates will be a big positive for the company.

For more details, see the Power Grid company fact sheet and quarterly results.

Conclusion

As long as you have bought high quality stocks at a good margin of safety, you will do well in the market over the long term. Interest rates should not bother you.

We believe, serious, long-term investors should hold on to their high-quality stocks and clean their portfolios of junk stocks.

Stick to the sound principles of fundamental analysis when picking the best stocks for the long term and keep speculation to a minimum.

To improve your skills as a long term investor, read this editorial on your long term investing checklist.

Also, check out our stock screener for best long term stocks in India.

Happy investing.

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...