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2011- ICICIdirect.com Research desk view
Outlook
In 2011, we expect strong earnings growth to take precedence over
multiple expansions. With Indian markets already trading at rich valuations,
multiple augmentations may be minimal while robust earnings growth is
more likely to lead equity performances. Accordingly, we are banking on
sectors that have clear visibility and are likely to exhibit vivid earnings
growth, superior to the broader markets.
Though valuations appear to be rich and may remain so in 2011, sectors
with 20–25% expected earning growth provide enough cushions for
outperformance in any untoward incident inducing a dip in sentiments.
These sectors would still continue to generate higher returns than the
broader market. Thus, we prefer large caps to mid caps, given their
enhanced ability to endure negative undercurrents if any.
We are positive on sectors like banking (strong economic growth
culminating into higher business growth that makes for rich valuations),
information technology (discretionary spending on uptrend emanating
clear visibility in earnings growth), capital goods (led by strong order inflow
for Tier I companies, capex to expand), pharma (to continue
outperformance exhibited in 2010, led by strong domestic outlook, huge
opportunity arising out of drugs worth ~US$25-30 billion losing patents in
2011 and greater access to US$80 billion Japanese pharma market) and
sugar (front ended growth with prices at 30-year high due to global supply
constraints).
We are neutral on sectors like auto (positive structural shift in demand
expected but validation awaited and risk of subdued margins due to firming
up commodity prices), infrastructure (robust order book but execution
missing coupled with tightening of interest rates poses a threat), oil & gas
(high crude prices, to mute margins), aviation (capacity rationalisation led
higher peak load to continue albeit sensitivity to crude remains high) and
metals (hazy revival in global demand and high raw material prices).
We recommend rotation/shift to our neutral sectors like auto, infra and oil &
gas, which seem to depict positive outlook but validation is awaited
towards the latter half of CY11.
We expect certain sectors to underperform the broader markets led by
deteriorating fundamentals, a structural change in demand or regulatory
concerns. We remain negative on sectors like telecom (though the worst
may be behind us, overcapacity led competition and regulatory concerns
will remain an overhang), real estate (unabated property prices resulting in
increasing un-affordability and moderated demand and limiting bank credit
following recent scams), cement (supply overhang to remain longer as
demand is still elusive and large caps lack valuation comfort) and shipping
(ongoing slowdown to continue in light of new vessel addition, slow
demand pick up and low freight rates).
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