Dipen Shah, Head- Fundamental Research, Kotak Securities
What is your Sensex target by December 31, 2012? Why?
We believe that, markets can give about 20% returns in the next calendar. In terms of valuations, markets are trading at about 12x FY13 consensus estimates, which is at the lower end of the long-term trading band.
We assume that, there will be no defaults / bankruptcies in Europe and USA may continue its slow growth. This may lead to some moderation in the global commodity prices, including crude. Locally, interest rates are expected to come down in the next fiscal. We opine that tough reforms measures will be initiated by the Government in the next calendar. All these factors provide the ideal setting for markets to move up next year.
How much downside you see for Sensex and Nifty from present levels? By when do you think market will bottom out?
In the immediate term, we may have more bad news on global events, industrial production, corporate results, etc. to which the markets may react. The extent of fall will depend on how serious the reasons are. In the recent past, benchmark indices have not traded below 10x 1-year fw earnings estimates.
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.
TCS: Management commentary reflects greater optimism, likely on the back of strong pipeline and better deal flow. Clients are adjusting to the changing macro and are navigating spends accordingly. It is optimistic on client spending with positive vibes coming in from clients over IT spends. Moreover, TCS has not seen any delays in spending by clients.
ITC: ITC has a long track record of high market share in the cigarette business. Coupled with pricing power, this creates an improving profit profile, and high visibility in revenue and earnings growth for the segment. Tobacco constitutes only 15% of India’s consumption pie; which explains ITC’s entry in the other FMCG businesses. ITC’s products show encouraging trends in market share, creating portents for profitability towards the end of FY-13.
HDFC Bank: The bank has shown consistency in its earnings growth (grown around 30% YoY in past 38 quarters). It has consistently delivered one of the highest CASA mix (47.3%: Q2FY12) and NIM (4.1%: Q2FY12) in the Industry. Superior return profile (FY13E: RoA: 1.8%; RoE: 20.3%) justifies its premium valuation.
Which are the stocks/sectors you will avoid in 2012? Why?
We are cautious on the Cement and Auto sectors. However, few stocks in these sectors may do well.
Which are the key events/triggers (both negative and positive) to look for from the stock market perspective in 2012?
Positive events/ triggers to look out for: Interest rate moderation, Fiscal policies and reforms, Moderation in crude prices
Negative events/triggers to look out for: Defaults / bankruptcies in Europe / US, slowdown in China
Rupee has fallen 20% against the US dollar this year, affecting stock returns of foreign investors. How will this impact the market outlook?
If the rupee remains at the current levels or depreciates further, it will be concerning from the inflation perspective (costlier imports). Also, the foreign fund flows may be impacted if the expectations are of sustained weakness. On the positive side, export oriented sectors will benefit. On an overall basis, the impact will be negative for India is the rupee remains weak because India is a net importer.
Disclaimer: Kotak Securities Limited (KSL) may have proprietary long/short position in the above mentioned scrips and therefore should be considered as interested. Analyst holding: Nil. The views provided herein are general in nature and does not consider risk appetite or investment objective of particular investor; readers are requested to take independent professional advice before investing. This should not be construed as invitation or solicitation to do business with KSL.
