'Markets will bottom out by Q4 of FY12'

Rikesh Parikh, VP-Equities, Motilal Oswal Financial Services

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

Sensex target of 19,285. We have estimated FY 13 EPS at Rs 1,331 at 14.4 PE ( Historical 10-year Average)

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

Downside range for Sensex in scenario of pessimism could be 13,500 - 14,500 (10 -11x FY 13 EPS), we expect market to bottom in the 4th Quarter of FY12. 

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

Our Estimates for FY 12 are Rs 1,131 and FY 13 Rs 1,331. We expect some downward revision possibilities if interest rates, rupee depreciation, policy decision etc does not show signs of revival. 

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.

State Bank of India: SBIN enjoys a competitive edge over its peers with strong liability franchise of 18,500+ branches at the group level, leading to a robust growth in CASA, fee income and core PPP growth. Led by repricing of assets and control over cost of funds, NIMs have improved sharply to 3.8% (up 70bp+ in 1HFY12, one of the best in the industry), and we expect it to remain superior at 3.5%+, a key driver for profitability. Higher focus on asset quality vs growth,  proactive recognition of stressed assets will lead to lower slippages and higher recoveries going forward. We expect earning CAGR of 25%+ over FY11-13E and standalone RoA is likely to improve from 0.7% in FY11 and ~0.9% in FY12-13. RoE is expected to improve to 17%+ for FY13 (without assuming capital raising) as against ~13% in FY11. Maintain Buy with a target price of Rs 2,700. 

Maruti Suzuki: We expect bottoming out of operating performance for the company in next 6 months, with gradual recovery post that. While competitive intensity is expected to remain high, volumes are expected to recover as macro-headwinds recede. This coupled with improving product mix, higher localization would drive margins in long run. Valuations are below average on trough earnings. Buy with target price of Rs 1,220. 

Infosys: Infosys has positioned itself as a high value player in the IT Services industry. We expect the company to consolidate its positioning across Europe and Emerging Markets. The company’s strategy of moving up the value chain while aggressively targeting new markets will help hold margins in a narrow band. The company is also better placed to drive productivity post the restructuring undertaken earlier this year. Infosys also has a prudent hedging policy, better than peers in our view, a key positive in the current environment. We expect earnings to grow by 15% in FY13. Buy with a target price of Rs 3,300. 

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

Infrastructure, Utilities, Metals:  Infrastructure high debt level and no new order flow; Utilities: shortage of coal & debt level of SEB; Metals: Slowdown in global economy, leading to fall in consumption hence fall in metal prices.

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

 

Positive triggers: Rate cuts expected in RBI Policy, Growth oriented budget with Fiscal discipline, Double digit IIP & GDP growth due to low base effect, US economy on growth path, Resolution to the euro debt issue. 

Negative triggers:  Rupee further depreciation, outstanding FCCB repayments liability of corporate, Reduction in weight age of FII allocation post worst performing market in FY 11, continuation of setback in policy reforms (FDI in retail, Insurance, Aviation etc), any negative news flow from 2G scam. 

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?

Rupee depreciation has increased the import bill increasing fiscal deficit, increase in interest burden for corporate affecting profitability, FII investments will be lower if rupee moves more from current levels.