Rahul Singh, head (research), Standard Chartered Securities (India) tells Puneet Wadhwa that India’s participation in a global rally could be more calibrated and cautious this time around. Edited excerpts:
How far do you think the emerging markets could trudge on in 2012 purely on liquidity, given the slowdown in China and the problems in the euro zone and the US? What are your year-end targets for the Sensex/Nifty?
A bit of a global slowdown might actually be good for emerging markets, particularly India. That will cool-off crude prices, provide the much-needed relief to inflation and open up the possibility of higher rate cuts in FY13.
The year-end Sensex target would be based on FY14 EPS, which, as of now, stands at Rs 1,380. Despite the liquidity support, it is difficult to see a significant re-rating of the market vis-à-vis the 10-year average price-to earnings (P/E) multiple of 14.5 times.
Given that the risk of interest rates remaining high for a longer time has risen, we believe a P/E multiple of 13 times is more appropriate, which gives us a year-end Sensex target of about 18,000.
Don’t you think it is time the markets took notice of the high fiscal deficit, crude oil prices, inflation and the compulsions of coalition politics that have paralysed the reform process in the Indian context?
Some of these issues are not new and were there in FY12 as well. At the margin, crude is a material new development. We believe that crude, at $130-135, is really the breakpoint in lot of ways — fiscal deficit, trade balance, current account deficit, inflation expectations, etc, and could result in FII outflows and pressure on the rupee in a vicious cycle.
Do you believe a fiscal deficit of 5.1 per cent is achievable or will this come in much higher on the back of slippages? Will the Reserve Bank of India (RBI) slash key rates in April?
We expect the fiscal deficit to come in at 5.3 per cent in FY13, with a risk of overshooting to 5.5 per cent. Though the revenue numbers are realistic and may even surprise on the upside, it may not be enough to offset the almost certain rise in subsidy numbers (unless there are dramatic reforms).
Given the rising risks to inflation, we are now forecasting only a 75 basis point (bps) reduction in rates in FY13, as against an earlier expectation of 150 bps. We are forecasting a 50-bps cut in the first quarter of FY13 and 25 bps in the second.
What are your earnings estimates for India Inc for FY12 and FY13?
Our Sensex earnings estimates are around Rs 1,250 and Rs 1,380, respectively. We see limited downside to these estimates as the FY12-14E compounded annual growth rate of 10 per cent is now lower than the nominal GDP growth rate. In fact, the earnings’ decline has virtually stopped in the last two months on a consolidated basis.
Which sectors, according to you, can surprise on the positive and negative sides? Can you suggest some good investment themes?
Given the uncertainty on the local macro outlook, consumer staples, cement and information technology (IT) services are looking good at the moment. In the event of a massive Beta rally on the back of global flows, the obvious gainers would be financials and industrials. However, the flip side of global liquidity flows would be the high commodity prices and, hence, the heightened inflation expectations. This means India’s participation in a global rally could be more calibrated and cautious this time around.
Why are you bullish on cement, given that the Budget has raised the excise duty and companies may be impacted due to the rise in freight rates?
Cement has been a contrarian call for us for the last 12 months and has outperformed the market. Our basic thesis has been that capacity utilisation has bottomed and the pricing discipline in the industry will sustain, given the strain (both on P&L and balance sheet) of smaller/mid-sized companies. This is the reason why the sector has passed through the cost pressures.
How are you positioning yourself in the IT space after the Tech Mahindra–Satyam merger?
We see the announcement as a logical and formal next step to a guided outcome, so it hasn’t come as much of a surprise. The swap ratio also tracks the current market valuation. It is to be noted that the two entities have been undergoing a virtual integration over the last two years. So, an improvement on the demand outlook, especially the telecom vertical, is more critical. And, while the combined entity does get the scale, we believe its impact on the competitive dynamics in the industry would come in only over long-term, as its large deal participation improves.
As far as the sector is concerned, we retain our theme of playing volume momentum from market share gains in renewal deals. While HCL Technologies is our top pick, we also like Infosys.
How do you see the rupee, crude oil prices and bond yields panning out, going forward?
Our crude oil forecast is $121 for 2012 and $123 for 2013. While we expect a 75-bps repo rate cut, the transmission to G-sec yields will be limited, given the likely large government borrowing programme.
We expect the 10-year yields to decline only by 50 bps in first half of FY13 before inching up again in second half to end at 8.5 per cent by FY13-end.
