Bet On The Big Ones

We believe Indian markets are reasonably valued at current levels. Sensex is trading at 17 times its expected FY11 EPS of Rs. 1050 and 14 times expected FY12E EPS of Rs. 1275 which is at a premium to other emerging markets like China,  Brazil, Mexico and Taiwan. However, we think that this premium valuation that our markets command is justified. Indian economy is growing at a faster pace compared to other emerging economies. Moreover quality of our growth is also much better compared to other emerging markets. The growth in India is led by service sector whereas in economies like China, Brazil and Russia are very much dependent on commodity cycles. First quarter results for FY11 are more or less in line with expectations except a few disappointments like Maruti, Hero Honda and Infosys. Capital goods sector has also performed well with likes of L&T and BHEL coming out with very good numbers. In IT sector TCS and Wipro performed exceedingly well while the numbers from metals and oil & gas sectors were also in line with expectations. We continue to remain bullish on banking, capital goods, infrastructure and domestic consumption stories.

There is a strong growth in domestic demand and this growth in demand can get further boost as festival season is not far away. Apart from liquidity the other key triggers driving the markets in near-term would be progress of Monsoon, government policies, interest rates scenario and of course happenings in the global markets. As earnings season is near completion, monsoon will play an important role going forward as food articles prices are rising every month and only a good monsoon can bring a sigh of relief for the government. Government policy reforms have so far been conducive for the markets and measures like Oil sector deregulation, 3G auctions etc have helped the markets remain buoyant. Key Global markets like the US, Europe and China are still not out of woods and any adverse news related to these will have an impact on the Indian markets as well. With good monsoon we expect the recent trend in inflation to moderate and in turn ease pressure on Government.

All this said and done, we believe inflation will remain a problem because of the supply side constraints and any economy that grows consistently over 8% this is a natural problem. We feel, if inflation continues to be at unreasonably high levels– in double digits— for a protracted period, interest rate sensitive sectors like banking, financials and real estate could suffer. Global markets have started recovering from the European crisis and economic outlook in the developed markets have started improving. At this point of time we are bullish on sectors like automobiles, large cap IT companies, Banking and Financial services companies, Capital Goods, Auto ancillary, Power Ancillary.  Retail investors should invest only for medium-to-long term and put their money into stocks which have good dividend yield and strong margin of safety. Retails investors should avoid investing in companies with volatile businesses. In bull markets, it is important for retail investors to stick to the basics and not to be carried away by the euphoria. They should look for large cap stocks and avoid investing in small cap or penny stocks where prices are open to manipulation.