'Avoid real estate, capital goods and infrastructure'

Amar Ambani, Head of Research, IIFL

What is your Sensex target by December 31, 2012? Why?

Multiple headwinds viz fast decelerating GDP/corporate earnings growth, policy paralysis, private investment inertia, fiscal/current account deficit and rupee depreciation will continue to weigh on the market in early 2012. However, reversal of inflation and rate cycle could drive material recovery in the second half. Our year-end Sensex target is 17,000-18,000. 

How much downside you see for Sensex and Nifty from present levels? By when do you think market will bottom out?

If the above-mentioned variables continue to witness rapid deterioration then the market may further correct by 5-10% in the near term. With potential negatives being priced-in instantly, we expect the market to bottom-out in the coming months. 

What is your Sensex EPS estimate for FY12 and FY13? What are the possibilities of this estimates getting revised?

Sensex EPS estimates for FY12 and FY13 are Rs1, 110 and Rs1, 225 respectively. Our estimates calculations are conservative. Only if the situation worsens further, our FY13 numbers could be at a ~5% risk. 

Which are the three large-cap stocks you will recommend investors to buy at current prices for 2-3 years time horizon? Please give a brief rationale for your recommendations.

Axis Bank: 

1) System outperforming loan growth would continue

2) NIM will stay strong aided by robust CASA franchise

3) Asset quality performance would be resilient

4) Valuation attractive both in absolute (FY13E P/adj.BV of 1.4x) and relative terms (50% discount to HDFC Bank)

 M&M :

1) Tractor volumes to remain strong on better credit availability and increased MSP for crops

2) M&M leadership in UVs to continue

3) Ssanyong volume and financial performance to see meaningful recovery

HCL Tech

1) Volume growth to be in the top quartile of industry lead by large deal wins

2) Margin would sustain in a narrow band

3) Top beneficiary of the sharp rupee depreciation

 Which are the stocks/sectors you will avoid in 2012? Why?

The sectors to avoid would be Real Estate, Capital Goods and Infrastructure/Construction. In real estate, volume growth has decelerated significantly and a material price correction in highly likely. Substantial reduction in government and private investment and policy/environmental issues have been impacting order wins and diminishing revenue growth visibility for infrastructure and capital goods companies. 

Which are the key events/triggers (both negative and positive) to look for from the stock market perspective in 2012?

Negative triggers would be worsening of sovereign crisis in Europe, increase in global risk aversion, further deterioration in India’s fiscal/trade position driving additional currency fall and continuation of policy paralysis and deadlock in investment cycle. Key positive triggers would be pick up in policy action, downtrend in inflation, reversal of rate cycle and fall in crude and commodity prices.

Rupee has fallen 20% against the US dollar this year, affecting stock returns of foreign investors. How will this impact the market outlook for 2012?

With further weakness expected in INR, foreign investors would be cautious about investing in India despite attractive valuation of many large cap stocks. Once the dollar tops out and Indian trade/fiscal situation starts stabilizing, market may witness resumption in FII inflows. Investing at lower rupee levels implies potential additional returns from local currency appreciation in the longer term.