Invest When The Market Dips

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The Indian markets have been resilient, compared to most of their peers, mainly on account of India’s low dependence on exports. Moreover, a high savings rate (of around 33 per cent of GDP), coupled with favourable demographics can sustain high GDP with little dependence on external funds.

Thus, India provides a high growth and high return on equity (ROE) destination for investors, which has aided India to enjoy a premium over its peers. The first quarter results for FY2011 are about to begin and we have estimated the topline of the Sensex companies to increase by around 19.7 per cent YoY while the bottomline is expected to remain flat.

This is primarily because of the pressure on the operating front on account of higher input costs resulting in operating profit registering a growth of 8.8 per cent during the period. Sectors such as metals, financials and information technology are expected to deliver robust numbers for Q1FY2011.

The metal pack is expected to significantly contribute to the overall earnings' growth of the Sensex. Oil & gas, telecom, power and engineering, on the other hand, are expected to be the key underperformers during Q1FY2011, which will keep a check on the Sensex earnings’ growth. Going forward we believe that with the monsoons expected to be normal this year, the immediate concern of its impact on the GDP growth and inflationary pressures have been mitigated to a large extent. Thus, the markets would focus their attention towards India Inc’s earnings growth, which would provide a base for the next upward movement in the markets.

On the global front, after the rumblings in the euro zone, the global equity markets have been in a correction mode. Anticipating the EU bailout package should prove effective, we believe that the EU crisis is behind us and economic recovery, which has bottomed out, should gather pace in CY2010. Consequently, the valuation of a majority of global equity markets has become attractive on the basis of such parameters as P/E, P/BV and market cap/GDP. Thus, we believe that the downsides are limited from here on and the equity markets, which have witnessed a down-trend owing to increased risk aversion, should rebound.

Sectoral themes that we currently like include banking, infrastructure and metals. Infrastructure is well on the path of high growth driven by the government’s thrust on the sector.[PAGE BREAK]

Operating margins in metals are expected to remain healthy due to favourable demand-supply dynamics, resulting from high domestic demand growth of over 10 per cent and slower expansion by the larger debt-strapped players. We believe that India, which is a domestically-driven economy, should be able to sustain an 8-9 per cent growth in banking and infrastructure.

Against this backdrop, the corporate earnings of the Sensex companies are expected to post an 18 per cent CAGR during FY2010-12E. Thus we believe that at 14x FY2012E earnings (Sensex), the risk-reward is favourable for long-term investors and hence they should hold on to their investments and any dip in the market should be used to invest.