Market Voice: Amisha Vora, Prabhudas Lilladher Group

'Markets concerned over likely slippage in fiscal deficit in FY12'

Even as concerns over inflation should start abating in a few months, Indian markets will be dominated by how aggressively and fast the central bank cuts rates, Amisha Vora, joint managing director, Prabhudas Lilladher Group, tells Puneet Wadhwa in an interview. Edited excerpts:

How do you see the Indian equity markets panning out in 2012?
The calendar year 2011 has seen tremendous wealth destruction and volatility, both in India and globally. In 2012, while the first quarter will continue to be extremely challenging, it will prepare a base for creating long-term wealth, particularly from an Indian perspective.

Do you think the worst is over as far as the negative news flow from the euro zone and US economies is concerned?
The European economies continue to be perched on the edge of a precipice. Though the EU members did reach a deal to reach an agreement by March 2012, the market is waiting till the final contours are sealed.

Even as the European Central Bank’s aggressive provision of three-year funds at very cheap rates to banks has infused a sense of calmness and helped lower rates in bond yields of peripheral countries, it needs to continue with such swift aggressive intervention whenever warranted. The EU, at best, can look at a little less volatility in 2012. But, a long period of slow growth will prevail.

The US seems to be showing signs of mild recovery and is expected to grow at 2.5-2.9 per cent in CY12. Political bickering about spending cuts will continue to dominate discourse over the next several months.

What about concerns on the domestic front, with issues such as inflation and policy logjam ? What more can investors/markets expect?
Inflation concerns are expected to start abating over the next few months, thanks to bountiful harvests, the strong base effect of the last year and a slowdown in growth, eventually feeding into core manufacturing inflation.

From the single objective of stamping out high inflation, the Reserve Bank of India (RBI) is now looking at growth worries and ways to address these concerns by initially pausing and eventually easing interest rates (all the while keeping a close eye on fears of a flare-up in inflation). Indian markets will be dominated by how aggressively and fast the RBI cuts rates, and whether inflation, expected to decline in Q1CY12, remains subdued once the base effect wears off. Or, having become structural in nature, comes back to unacceptable levels, warranting RBI action.

What events will likely shape Indian markets’ performance in 2012?
Indian markets will look for cues from New Delhi for kick-starting reforms that seem to have been completely grounded after the foreign direct investment in retail fiasco. The list of must-dos is getting longer and the delay in response is adding to the nervousness, both in local and foreign investor sentiment.

Are the markets still concerned about the widening fiscal deficit and lower GDP growth or have they already discounted these?
I believe fiscal consolidation will continue to dominate the discourse, with the widening current account, fiscal deficit and the government’s roadmap for medium-term fiscal consolidation being closely watched.

This would have a direct bearing on the currency outlook, which has seen a savage mauling over the last few months. Falling exports, inelastic imports, tepidly growing tax revenues and rapidly-growing expenses, with a propensity to push through populist rather than reformist measures, is leading to this crisis of confidence among local and foreign investors, manifesting itself in a weakening currency.

Large slippages in meeting the disinvestment target are also weighing on the markets. While the slowdown has led to tepid growth in tax revenue mobilisation, an increase in welfare spending has dealt a double whammy, thanks to the budgeted expenditure being overshot. The markets are concerned over the large slippage in fiscal deficit expected in FY12 and limited means to correct it in FY13.

How do you see earnings panning out for India Inc, given all these macro-economic headwinds?
We estimate an anaemic 2.4 per cent year-on-year growth in Nifty earnings for FY12. The estimated FY13 Nifty earnings growth of 15.1 per cent runs the full risk of downgrades. We are now trading at 13.6x FY12 and 11.6x FY13 estimated earnings.

At 11.6x FY13, we are now trading at a 19 per cent discount to the last 10 years’ average forward valuations and at a 31 per cent discount to the last five years’ average forward valuations. Our premium to Asian emerging market valuations has also compressed.

What are your top picks in the prevailing scenario?
Among frontline stocks, we like Maruti Suzuki, Infosys, Mahindra and Mahindra. In the banking space, we like ICICI Bank and State Bank of India. Jindal Steel and Power, NHPC, Coal India, HCL Technologies, Titan Industries, Petronet LNG and Cummins India are some other picks in the large- and mid-cap space.