Kotak Sec: India Strategy: When in doubt, stay invested.

When in doubt, stay invested. We think investors are better off staying invested
looking at possible outcomes for the market despite the market’s full valuations.
However, we would advocate cutting positions selectively. We have re-jigged our
portfolio to cut exposure to the cement sector and certain stocks that have re-rated
beyond our FY2012E-based fair valuations. Our fair valuation of the BSE-30 Index based
on FY2012E estimates remains 21,000.


Stay invested for better or for worse but reduce exposure progressively if valuations expand
We think investors are better off remaining invested given three possible outcomes for the
market—(1) market moves up further driven by liquidity, (2) market remains range-bound for
some time, having discounted FY2012E earnings also and (3) market corrects mildly (up to 10%).
We rule out a sharp correction noting modest global recovery and strong domestic economic
outlook. However, it would be prudent to take off money from areas of expensive valuations
(consumers), earnings uncertainty (global commodities particularly those with weak
fundamentals—refining, steel) and excessive expectations (cement, telecom).
Reducing exposure to banking (private) and cement sectors; upping a few defensive stocks
In our view, private banks’ valuations are quite rich and cement stocks have jumped around 30%
in the past month without any fundamental change in the supply-demand balance. We had overweighted
the cement sector on August 16, 2010 expecting a recovery in cement prices in 6-9
months but the steep run-up in the stock prices has compelled us to reduce the weight on the
sector rather quickly.
Global and domestic macro-environment likely supportive; CAD is an issue though
We are not taking a very cautious view of the Indian market despite its full valuations as (1) we
expect a moderate global economic recovery, (2) we have a positive view of India’s economic
outlook and (3) valuations are not outrageously expensive. We are concerned about India’s large
Current Account Deficit (CAD) but sanguine about its fiscal deficit.
Next trigger will be how the market absorbs new issuances; test of liquidity
We note that large liquidity inflows have been the primary driver of the market over the past
month (+8.7% while the market had gone up only 5.4% CYTD prior to that). Large FII inflows
could continue, leading to overstretched valuations. However, we expect large issuances from the
government and private companies in October 2010 and beyond, which may counter FII inflows.
Domestic institutional investors have been net sellers for the past four months, though they may
have allocated part of secondary market sales to primary issuances.