Patience Has Its Rewards

We expect the Indian markets to correct 15 per cent after witnessing the strong run of 90 per cent plus from the March lows. India’s P/BV stand at 2.5x is above Asia’s 1.7x while our ROE of 17.5 per cent is well ahead of Asia’s ROE of 10.8 per cent but the PE was stretched at 17x FY10. India should get a premium looking at the differential growth rate and domestic consumption story. We feel that the Indian markets, due to the intrinsic strength of the economy, should outperform its peers, but in the near term the euphoria has been overdone and needs to correct, which would be healthy. The short-term market movement is always a reflection of ‘delivery vs expectations’.

We gave a euphoric ‘thumbs up’ for the government as we were pleasantly surprised by the mandate they got. With such a mandate we expected Dr Manmohan Singh’s finance minister to give us all the goodies in the budget but when it apparently failed to cheer the market men, we saw the markets tumbling. Similarly, the results’ season pleasantly surprised us and we saw the markets clawing back to post election highs as we conveniently ignored the monsoon warnings.

The Indian economy is thankfully much stronger and stable than its peers. We will see a quarter on quarter growth going ahead but deficit monsoons could delay this by about two quarters. I do believe that we could see 8.5 per cent GDP growth by FY12, assuming the continued foreign fund flows and increased investment by the Indian corporates. In the near term, investor sentiment may remain subdued due to monsoon fears, high fiscal deficit, rising risk of inflation exerting pressure on interest rates, the government’s occasional inability to meet expectations, and the slower pace of global recovery.

The government has followed the policy of ‘pain in the short term for a bigger gain in the long term’. It is also targeting a 6.8 per cent fiscal deficit which we believe is understandable given the scenario. The budget also ensures putting more money in the hands of the rural public which would have a ‘trickle up’ effect on the Indian economy and would ensure that we pick up faster than the rest.[PAGE BREAK]

For Q1FY10, the revenues of Sensex companies showed flat growth but margins improved. This was primarily due to overhead and cost cutting along with lower input costs. We expect Q2FY10 to show growth in the topline with a marginal dip in the margins. The improvement in the outlook and recovery in earnings growth may well be the positive triggers for the market going forward. Expectations will also become more realistic.

India is an infrastructure-starved country and to maintain a GDP growth rate over the next few years’ investments will have to be made in power, roads, highways, ports etc. Therefore we believe that sectors such as capital goods, power, infrastructure, banking, and automobiles will outperform. The ancillaries to these sectors such as capital goods, steel and cement would be the direct beneficiaries. And overall growth would ensure demand for automobiles, consumer durables, FMCG, etc.

We suggest that investors should wait for the next two weeks before parking their funds. The market, going ahead, would be quite volatile as we see the market cycles getting compressed. This would give an investor a number of entry/exit opportunities.