Morgan Stanley adds these two Indian stocks to its Asia-Pacific ex-Japan focus list

Morgan Stanley believes that Maruti Suzuki is set to benefit from a higher per-capita income in India along with expansion in market share and improving product mix. The brokerage sees leverage gains, a new SUV-focused model cycle and a gradual pass-through of commodity headwinds to drive margin expansion to nearly 9 percent by financial year 2025.

For the June quarter, Maruti's margins declined on a sequential basis, though they expanded by 200 basis points compared to the same period last year.

The brokerage said that Maruti's valuations remain fair and that they would expand given the potential improvement in volumes, margins and market share.

On the other hand, Morgan Stanley expects Larsen & Toubro to be a beneficiary of the Indian and broader Emerging Markets capex cycle. Analysts at Morgan Stanley have termed L&T as the best in-class impementation of the brokerage's upgrade of the industrials sector.

"Besides the macro tailwinds, infrastructure prospects from the Middle East, particularly Saudi Arabia remain strong," the note said. The firm cited five factors on which L&T fares better compared to its peers. Order inflow growth, a diversified order book, improving execution and revenue growth, lower margin volatility and well-managed working capital are those five reasons.

L&T's core valuations are trading close to their long-term averages, compared to its EPC peers, which are already trading at a premium of close to 20 percent to their long-term average.

Shares of Maruti Suzuki are currently trading little changed at Rs 9,650, as are those of Larsen & Toubro, which are trading at Rs 2,623.