5 stocks to benefit from 7th pay commission recommendation

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The cabinet on June 29th, 2016, approved the 7th pay commission. The changes in the pay commission will be implemented effectively from January 2016. The implementation of 7th pay commission will increase the income of ~50 lacs central employees and ~58 lacs pensioners in the country. Below mentioned are some of the highlights of 7th pay commission.

  • The 7th pay commission will result in 23.5% hike in the annual package of the government employees and pensioners.
  • The Government is yet to decide whether it will payarrears on 7th pay commission in the lump sum or instalment effective from 1st January 2016.
  • The implementation of 7th pay commission is estimated to put an additional burden of Rs 1.02 lakh crore, or nearly 0.7 percent of the GDP, on the government.
  • The money required to fund additional cost of Rs.1.02 lakhs crore towards 7th pay commission will be funded through two routes i.e. Rs. 73,650 crore from Government budget and Rs.28,450 crore from the railways budget.
  • The minimum and maximum salary will beRs.18,000 per month and Rs. 2.25 lakh per month respectively for the Government employee under the 7th pay commission.

Check out our video on how 7th pay commission can impact you as an investor:

The implementation of 7th pay commission will bring about Rs. 1 lakh crore additional money in the economy. This will increase the spending power of ~1 crore consumers in the country. The additional cash can create demand for buying a residential property, electronic gadgets and cars or two wheelers etc. The increase in demand for such products will boost the performance of the stocks in real estate, automobiles, and consumer durable sectors.Below mentioned are some of the stocks which are likely to perform well due to the implementation of 7th pay commission.

1. BajajElectricals Limited:

Bajaj Electrical Limited is in consumer durables, lighting, and EPC business. Out of the total net sales of Rs.4612 crore for FY 16, 43.4% of the revenue was contributed by consumer durable segment, 33.6% from EPC business and 23% from lighting business. The implementation of 7th pay commission will improve the demand for consumer durables. This will help the company to further improve its revenue contribution from consumer durable business. The company is 4 largest player in consumer durable business in the country.

2. Bluestar Limited:

It is one of the well-known air-conditioning brands in India. The revenue share of the cooling product segment (contemporary and split AC) has increased from 23.4% in FY 2009 to 43.2% in FY 16 in the total revenue of the company. The approval of 7th pay commission will create demand for air conditioners in the country. The expected increase in demand for AC’s will generate more revenue to the company and thus will improve its financials in the coming years. In addition, the penetration of air conditioner is merely 3% in India as compared to 25% in China. Bluestar stock is available at a PE of 42 (FY 16) as compared to its peer Symphony available at a PE of 59.86 (FY 16).

3. Hero MotoCorp Limited:

The implementation of 7th pay commission is expected to boost the demand for two-wheelers in the country. Currently, Heromoto Corp Limited has a market share of 38.9% in two-wheeler category in the domestic market. According to the government’s Auto Mission Plan II, released in September 2015, India’s two-wheeler market is expected to reach 55 million units by 2026 .The expansion in the number of units will generate more sales and revenue for the company in the coming years. The company has attractive ROE of 37.9% for the past 3 years.

4. Maruti Suzuki India Limited:

Maruti Suzuki India Limited is a subsidiary of Suzuki Motor Corporation of Japan. It is India’s largest passenger car company having a market share of 52%. The 7th pay commission will improve the purchasing power of the consumers ultimately leading to increase in demand for four wheelers especially cars in the country. The company will be the major beneficiary because of increase in demand for four wheelers. The stock is available at a PE of 26.9 (FY 16) which is low as compared to its competitor Mahindra and Mahindra Limited available at a PE of 29.6 (FY16)

5. Godrej Properties Limited:

It is one of the leading real estate developers in the country. The implementation of 7th pay commission will improve the EMI paying power of the consumer’s on the loan taken to purchase the residential properties. In addition, it will help to clear the stockpiles of the residential properties available with the real estate players in the market. This will help to improve the state of the real estate sector in the country.

Check out our video on how to create wealth from pay hike with 7th pay commission:

Conclusion

The final approval given to the 7th pay commission will boost the earnings of the Government employees and will provide better earnings to the pensioners to fund their expenses after retirement. The additional flow of Rs. 1 lakh crore in the economy will help to boost the performance of the stocks in the sectors such as automobile, real estate, and consumer durables. This is because it will increase the demand for consumer durables, two-wheelers, and four-wheelers in the country. Similarly, it will help to create demand for real estate properties in the country.

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