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India Equity Strategy
2011 Road Ahead: + 15% – Steady, Not Swinging
2011 should be a smoother 2010 — We expect about 15% returns in 2011 (Dec
11 Sensex Target at 22,000) – similar to the around 10% returns generated in
2010 YTD. However, the market pace should be more measured and predictable,
volatility and uncertainties fewer, and sectoral divergences more moderate. We
also expect it to be a more bottom up than a top-down year, with less of the
mid/small cap bias of 2010. We expect market performance to be earnings growth
driven (19% FY12E EPS growth), with India’s market multiple holding at it 16-
16.5X 1Yr Fwd levels, but its premium to the Emerging Markets moderating.
Macro – Slow Structural gains only — India’s macroeconomic environment should
hit steady state, move in a positive direction, but with only moderate cyclical
influences. Growth to remain strong but inch up moderately to 8.6%, inflation will
continue to fall – but steady out at the 6% levels, rates and liquidity will remain
firm – but not move meaningfully, and the fiscal deficit should improve but
moderately. In effect, macro should be steady, and business/stability supportive,
but not a swing factor.
Micro – Maintaining, not Changing, Momentum — India’s corporate sector and
economic momentum is strong and broad-based – sales momentum/demand is
high, earnings growth momentum high and profitability steady. We see this
sustaining. ROEs will rise but only moderately, Capex appears steady – not
necessarily accelerating, FCFs rising but not unduly, and the corporate sector
remains optimistic but cautious. While this is the good mix of 2010 but unlikely to
meaningfully re/de-rate the market.
Less sectoral, More stock — Sectors will matter; but less than in 2010. We
overweight Banks, Autos, Pharma, Telecom, and Energy; and underweight IT,
Capital Goods, Metals & Mining, Utilities and Real estate; Neutral on Consumer.
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