These 5 stocks could benefit from the Fed’s rate cut

The Fed’s goal is to get ahead of potential labor market challenges and stabilize the U.S. economy in the face of looming uncertainty. While the cuts are focused on the U.S., their impact is already rippling through global markets, and India is well-positioned to benefit.

The Fed’s move could open up new opportunities for Indian investors. Companies will also benefit from lower US rates by using currency swaps to lower borrowing costs, boost profitability and provide more room for growth.

The Fed’s move will also pave the way for the RBI to cut interest rates. There are speculations that the Indian central bank may cut rates as early as Q4FY25, and there could be two cuts by March 2025.

If the RBI cuts interest rates, it would create an even more conducive environment for Indian businesses. Lower domestic borrowing costs would provide additional liquidity and cheaper access to credit to corporates, fueling their expansion and boosting profitability in key sectors.

Companies that benefit from a weaker dollar, lower borrowing costs and a stronger rupee could see greater profit potential in the coming months.

As monetary conditions evolve, attention will shift to sectors and companies that can best leverage these changes. Here are some stocks that could benefit.

#1 Persistent Systems

Global software and technology innovator Persistent Systems continues to advance digital engineering and enterprise modernization. The company has built a solid reputation for its comprehensive software product development services.

It stands out among India’s mid-market IT companies and has consistently kept pace with larger rivals like TCS and Infosys in the software services market, while competing with niche players in the digital products market both in India and abroad.

Persistent’s true strength lies in its cutting-edge cloud solutions, artificial intelligence, analytics, and cloud engineering, which have earned the company recognition and awards.

The recent launch of the AI-powered SASVA platform represents a new revenue stream and demonstrates Persistent’s focus on future growth opportunities beyond its existing business.

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The Fed’s recent rate cut could be a wind in its sails. With most of its business tied to the U.S. market, the company could see benefits in the form of lower borrowing costs and increased spending on digital transformation projects.

80% of the company’s sales come from North America, with the remainder coming from India (10%), Europe (9%) and the rest of the world (1%).

The company also intends to expand its capabilities through acquisitions. It recently announced plans to acquire Starfish Associates for $20.7 million. Starfish, known for its enterprise communications automation platform, serves large Fortune 500 companies and is expected to expand Persistent’s reach into enterprise solutions.

Sustainable Systems: Financial Snapshot (2020-24)

The company has been doing exceptionally well. Sales grew at a CAGR of 23.6% from FY20 to FY24, while net profit grew by 25%. Return on Capital Employed (RoCE) and Return on Equity (RoE) averaged 26.8% and 21.5% during the five-year period.

#2 L&T Technology Services

LTTS is a mid-sized, specialist IT company with a primary focus on exclusive outsourced engineering and R&D services.

Unlike its larger competitors, LTTS takes on complex design and engineering projects that require deep expertise. It operates higher up the value chain, which gives it higher margins.

LTTS offers industrial products (19% of revenues), transportation (38%), telecommunications and hi-tech (19%), and process industries (24%). It has a well-balanced presence across industries and a strong reputation through its heavy engineering-focused parent company, Larsen & Toubro Ltd.

LTTS is set to benefit from the Fed’s rate cut as demand for engineering services grows. With 63% of revenue coming from North America, lower borrowing costs could encourage clients to invest in more projects. The company generates 16% of revenue from Europe, 13% from India and 8% from other regions.

The rising demand for digitalization in the post-pandemic era has fueled revenue growth over the past few years. Revenue grew at a CAGR of 13.2% from FY20 to FY24, while net profit grew by 12%. RoCE and RoE averaged 37.2% and 27%, respectively, over the five-year period.

#3 HDFC Bank

HDFC Bank Limited is India’s largest private sector bank by assets and the world’s tenth-largest bank by market capitalisation.

The bank has 21,683 banking branches (including 6,342 branches and 15,431 business correspondents) and 18,130 ATMs and cash deposit/withdrawal machines across India.

It also has branches in Bahrain, Hong Kong, UAE and Kenya, where it offers offshore deposits, bonds, shares and mutual funds to non-Indian residents.

The merger with HDFC Ltd made the combined bank the world’s seventh largest bank by value, with 120 million customers and 177,000 employees.

Improving liquidity could support deposit mobilisation and branch expansion, which could potentially increase margins over time.

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Similarly, a possible RBI rate cut would offer even more direct benefits. Lower domestic interest rates would lower bank funding costs in India, making loans more affordable and driving higher demand, especially in areas like mortgages and personal loans.

Lower interest rates could also reduce pressure on deposit prices, helping HDFC Bank maintain strong margins and grow its balance sheet more effectively.

While the bank has delivered admirable results, it must be noted that these numbers are not directly comparable as HDFC Bank merged with HDFC Ltd in July 2023.

#4 Cyent

Cyient, an IT company, offers a comprehensive range of software services in industries such as aerospace, defense, healthcare and energy. It offers comprehensive aerospace electronic and mechanical manufacturing engineering solutions, covering everything from concept to design and maintenance.

Cyient is integrating artificial intelligence (AI) into its business operations to enhance its software offerings. Using AI, the company aims to deliver more intelligent and efficient solutions across its key sectors.

The company is also introducing AI into its semiconductor offerings, enabled by miniaturization, next-generation integrated circuits, advanced packaging systems, and the growing use of AI in integrated circuit design and manufacturing.

Cyient also develops AI-powered, cloud-based analytics tools that can predict and detect anomalies in networks to further optimize operational performance.

In fiscal 2024, the company generated more than 47% of its revenue from the United States, making it a key growth driver for the company. The Fed’s interest rate cut could boost economic activity, particularly in the technology and industrial sectors. That could translate into higher demand for the company’s AI-based solutions.

Improved investor sentiment and improved market conditions could also help Cyient strengthen its position in its largest market, boosting its overall growth prospects.

The company has performed well over the past five years, with sales and net profit growing at a CAGR of 8.7% and 8.2%, respectively. RoCE and RoE averaged 19.7% and 15.3%, respectively.

The company is a cash cow with a well-capitalized balance sheet, allowing for inorganic expansion through acquisitions financed through a combination of debt and internal accruals.

The company expects growth from both acquisitions and existing operations. In addition, its large OEM customers are increasing their technology investments, strengthening the company’s confidence in near-term growth.

#5 Pharma Gland

Gland Pharma has undergone a remarkable transformation from a contract manufacturer to one of the largest and fastest growing companies in the injectable generic pharmaceutical market.

About 50% of the company’s revenue comes from the United States, where the company supplies 14 of 22 drugs that are in short supply in hospitals, including 10 essential medical products.

The Fed’s rate cut could benefit Gland Pharma by creating a more favorable economic environment. Lower interest rates could stimulate consumer spending, boosting demand for injectable products, especially in areas prone to shortages.

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Lower interest rates could also improve market sentiment, supporting Gland Pharma’s growth strategy and operational flexibility.

The company specializes in sterile injections, with a focus on the ophthalmology and oncology segments. These segments are currently facing significant shortages in the U.S., making Gland Pharma a key beneficiary.

The company’s revenues grew by an average annual rate of 20.4% in fiscal years 2020-2024. RoCE and RoE averaged 21.6% and 16.1%, respectively.

Application

While the Fed’s rate cut could make some stocks more attractive, investors need to do their research before investing. Even in favorable economic conditions, market dynamics can change and not every stock will react the same way.

Diversifying across sectors and understanding the fundamentals of each company can help you reduce risk and position your portfolio for long-term gains, especially in the face of changing interest rates.

Disclaimer: This article is for informational purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com