Markets are stuck in a tight range after the up move. How do you see them panning out in the near-term?
Markets have been consolidating after sharp gain since September. There was some correction after the recent Reserve Bank of India’s (RBI’s) policy review, but there was no follow-up selling. Economic data, both globally and locally, has been supportive of an improving economic scenario. Further, the government seems determined to move forward on the reform agenda along with a roadmap to reduce fiscal deficit.
Some of the reforms have given renewed confidence to the foreign institutional investors (FII), which has resulted in record FII inflows in the range of $18-19 billion YTD. This has seen the Sensex rise 21% in 2012.
What are your calendar year ending (2012) targets for the Sensex and Nifty?
We expect markets to remain choppy for now given the line of events globally with US elections and the European finance ministers' meeting. Any positive trigger from US can further extend this risk on rally. Our year end targets for Sensex and Nifty stand at 19,000 and 5,800, respectively. This implies PE multiple of 13.3x FY14E, which would still be lower than five-year average.
What is your assessment of the macro-economic trend in the country?
It is known fact that our GDP and index of industrial production (IIP) are at multi-quarter low and with rising fiscal deficit, the rupee has depreciated against all major currencies. However, with Government announcing major reforms over past one month, there is hope for revival.
The only way out of this slowdown is to revive the domestic growth as global economic situation may not improve substantially for quite some time to come. Some green shoots are visible with improving auto sales at the back of festive demand and a rebound in the core sector growth.
Earnings downgrades have slowed down considerably this quarter. Earnings cycle also may be close to a bottom provided we do not see a sharp rebound in commodity prices. However, these are just early signs; sustainability of the same will depend on implementation of reforms and global scenario.
What should be the investment strategy that one should follow given the current market conditions?
With the RBI Governor hinting upon a reversal in rate cycle in the last quarter, prudent investment strategy should be to invest in the interest rate sensitive stocks like banking, auto, real estate which are likely to benefit most from the reduction in interest rates.
Further, some portfolio hedge should be maintained by investing in select FMCG and pharma stocks which are witnessing strong growth. One of the key caveats for continued performance of Pharma would be the currency movement. Any major appreciation in rupee from current levels can hurt these companies.
Can you elaborate your stance regaring FMCG and Pharma counters?
We believe that these counters are fairly valued at current levels and upside may be limited. The BSE FMCG index currently trades at a valuation of 36.66x trailing twelve months (TTM) EPS and BSE HC index is at a record high of 56.98x TTM EPS. However, they remain a good portfolio hedge and can be bought on declines.
Rural income growth is expected to be strong after a late but good monsoon and recently raised MSP for major crops. Pharma companies have also seen a revival in growth with faster approvals from USFDA and currency gains.
What is your view on the PSU banking space as this sector is facing asset quality issues?
Concerns raised about the asset quality issues of PSU banks are not unfounded. With 25% of restructured assets likely to be converted into NPA's, the risk looms large on smaller banks with lower capital base. While, these banks have seen sharp rally from lows, they are still trading at much lower valuations as compared to private banks which have better asset book.
Infrastructure and power are two areas of grave concerns and revival of activity in these two sectors and turn around things for these banks. Slowing credit and deposit growth along with slower recoveries increases the pressure on these banks we would continue to maintain neutral stance.
