Preferred picks for 2011: Kotak Securities

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Kotak Preferred picks for 2011
Sector	Stocks
Automobiles	TVS Motors
Banking	Axis Bank, ICICI Bank, J&K Bank, SBI, Allahabad Bank
Construction	BGR Energy, Pratibha Industries, IRB Infra, Sunil Hi Tech
Engineering	Cummins India, Diamond Power Infrastructure, Voltas,
	Greaves Cotton, L&T, Tractors India, Havells India
Information Technology	KPIT, Infosys, NIIT Tech
Media	HT Media
Metals & Mining	SAIL, Sesa Goa
NBFCs	HDFC, IDFC, PFC
Other Midcaps	Time Techno
Source: Kotak Securities - Private Client Research

2011 India MARKET STRATEGY: Kotak Securities

Indian markets started on a negative note in the beginning of December
with negative news related to 2G scam, bribery allegations and corporate
governance issues. Markets however moved up by nearly 9% from the lows
seen in December on positive news of inflation moderation, better than
expected IIP growth and RBI announcements to ease liquidity.
Data from US showed an improvement in jobless claims as well as retail
sales and housing data remained mixed. Along with this, Fed Reserve also
kept the interest rates unchanged and US government also extended the
Bush era tax cuts. All these factors coupled with increased momentum seen
in recovery supported the indices. In China, bank's reserve requirements
were increased for third time in a month and central bank also hiked the
interest rates for the second time in just over two months to manage
inflation. While in Europe, markets managed to shrug off bad news related
to rating downgrades and continued to move in past one month.
In India, moderation in inflation to 7.48% and better than expected IIP
numbers at 10.8% for the month of October boosted the indices. Though
RBI in its mid quarter policy meeting, kept the key interest rates unchanged
but with higher crude prices, hike in petrol prices and expected increase in
diesel prices coupled with jumping food inflation, inflation will continue to
remain a worry for policy makers.
On global markets front, downgrade in debt rating of Spain or further hike
in interest rates from China or lack of further signs of improvement in US
may impact domestic markets also. While on domestic front, inflation,
diesel price hikes, disinvestment and quarterly performance of companies
during Q3FY11 are likely to be key drivers going forward. While we believe
that markets may be fairly valued on FY11 numbers but there is an upside
based on FY12 numbers. Investors entering at current levels must be
prepared for a longer time horizon for making gains. In near term, though
there may be some downsides from the current levels due to unforeseen
events, but correction should be used to buy fundamentally sound large and
mid cap stocks. We remain bullish on sectors such as Banking, Capital
goods, Construction, IT, Media, Metals etc Risk to our moderately bullish
call comes from any disruptive event in global economy or lower than
expected quarterly performance.


Global markets
US markets have recovered gradually in past one month due to improving economic
indicators coupled with efforts of Fed Reserve to stimulate the economy. Initial jobless claims have registered a decline for three weeks in a row in December, new
home sales data for November also indicated improvement, though prices continued
to decline and improvement was also witnessed in retail sales which were better
than expected. Thus markets were supported by increasing signs that recovery is
gaining momentum. Along with this, Fed Reserve also kept the interest rates near
0% and President Obama also extended Bush era tax cuts.
European markets moved up despite worries coming in from euro zone debt crisis.
Earlier this month, Moody had cut Ireland's rating by five notches while S&P said it
may cut Belgium's debt rating next year. Fitch ratings downgraded Portugal on burgeoning debt levels and a tough financing environment. But markets managed to
shrug off these bad news related to rating downgrades and continued to move up in
past one month.
Chinese markets have remained mixed during the month with greater prominence
being given to manage inflation. China raised bank's required reserves for the third
time in a month and in all six times in year 2010 and targeted banks that had been
heavy lenders. China's central bank also raised interest rates for the second time in
just over two months to keep inflation in check. One year lending rates moved up to
5.81% while one year deposit rate moved to 2.75%. We expect further rate hikes in
China with inflation being the top priority for government in 2011.

Indian markets
Domestic markets started on a negative note on news of bribery and 2G scam that
broke out during last week of November. But markets recovered from the lows seen
in beginning of December on positive news of better than expected IIP figures, moderation in inflation and RBI's stance on maintaining the key rates.
Government has successfully completed fund raising through MOIL and has raised
more than half of the targeted amount from SJVNL, EIL, Coal India and MOIL out of
the planned Rs 400 bn fund raising from disinvestment in public sector companies in
current financial year till date. It has also lined up issues of ONGC, SAIL and
Hindustan Copper. It plans to raise nearly Rs 110 bn by selling 5% stake in ONGC
while follow on public offer of IOC may get impacted by lower subsidy burden sharing by the government. Due to delays seen in freeing up diesel, cooking gas and
kerosene prices, oil companies continue to make losses.
During December, metal and IT index recovered by 7.9% and 11.7% respectively
while capital goods segment continued to underperform due to lack of significant
order inflows. Oil and Gas index was up by 6.2% while small-cap and mid-cap indices continued to underperform due to issues related to corporate governance in few
companies.
Going forward, markets are likely to be governed by quarterly numbers, interest rate
movements, inflation, thrust on infrastructure spending as well as global factors
emerging from Europe, US and China.

IIP for Oct, 2010 surged to 10.8% - ahead of street expectations
IIP figures for the month of October surged to 10.8%, ahead of street expectations.
This was led by festive demand implying an inventory build up in anticipation of a
strong demand. Growth was witnessed across all three segments - Mining (6.5%),
manufacturing (11.3%) and electricity (8.8%). But for September, 2010 IIP figures
have been revised downward to 4.4%. Cumulatively during Apr-Oct 10, IIP growth
stood at 10.3% against 6.9% in the same period last year.
We expect IIP growth to moderate to mid-single digits going forward. However, we
continue to expect IIP to grow by nearly 9% in FY11, supporting 8.5% GDP growth
expectation.


Inflation moderates marginally
WPI inflation has come down to 11 month low of 7.48% for November, 2010 as
against 8.58% in October, 2010. This was due to deceleration seen in food inflation
as well as high base effect. On a month on month basis, primary article inflation
stood at 13% (vs 16.7% in Oct), manufacturing products inflation stood at 4.56%
(vs 4.75% in Oct) and fuel group inflation stood at 10.32% (vs 11.02% in Oct).
India's food price index rose 14.4% for week ended Dec 18 as against 12.13 % the
previous week while the fuel price index climbed 11.63% for week ended Dec, 18
as against 10.74% for the week ended Dec, 11. This was led by sharp increase seen
in onions, garlic, turmeric and fruits and vegetables.
Though WPI inflation has been witnessing moderation but it would continue to remain a worry for policy makers due to higher crude prices in 2011, hike in petrol
prices post de-regulation, expected increase in diesel prices going forward and high
food inflation. Oil prices have moved up to nearly $91 per barrel due to ultra cold
weather stoking up demand and depleting US inventories. This would have a cascading effect on manufactured and non-food product prices.


Mid Quarter Monetary policy Review - key rates unchanged
In its mid-quarter monetary policy review, RBI left CRR, repo and reverse repo rates
unchanged while reduced SLR by 1% to 24%. It also announced to conduct open
market operation (OMO) auctions for purchase of government securities for an aggregate amount of Rs.480 bn in the next one month (Rs.120 bn every week). These
measures are expected to ease liquidity into the system which remained beyond the
comfort level of RBI due to advance tax payments of Rs 550 bn, significantly abovetrend currency expansion and relatively sluggish growth in bank deposits.
We believe that RBI is walking the tightrope in managing liquidity position and containing inflationary expectations. Inflationary concerns continue to remain due to increase in global commodity prices, higher crude prices and correspondingly higher
petrol and diesel prices. Though in the current policy stance, RBI has left key rates
unchanged but it has clearly indicated that its liquidity easing measures should not
be construed as a change in the monetary policy stance since inflation continues to
remain a major concern.
We thus believe that RBI's forecast of average inflation of 6% by end of FY11 may
be at risk due to higher commodity prices and sticky food inflation. Going forward,
we expect RBI to continue with its monetary tightening stance which would be dependent upon inflation, liquidity and growth dynamics going forward.


FII fund flows
Foreign funds turned net sellers in the month of Dec (till 27th Dec 2010) with net
outflows in the cash market stood at Rs.25 bn while mutual funds have turned net
buyers and net inflows stood at Rs.17.7 bn. Foreign fund flows in December have
also been impacted by Christmas and New year holidays. The recent corporate governance issues in some companies have also marred India's reputation among foreign investors.
We believe that in the event of consistent selling from FII's, significant domestic inflows might be needed to support the markets near current levels.


Recommendation
Markets had been fairly volatile in past one month mainly led by negative news
such as corporate governance, corruption and FII selling as well as positive news
coming in from inflation moderation, better than expected IIP growth and RBI announcements to ease liquidity. Indices have already moved up by nearly 9% from
the lows made in beginning of Dec, 2010. In our previous note, we had mentioned
that valuations had come down to reasonable levels and had recommended investors to buy/accumulate fundamentally sound stocks.
On global markets front, downgrade in debt rating of Spain or further hike in interest
rates from China or lack of further signs of improvement in US may impact domestic
markets also. While on domestic front, inflation, diesel price hikes, disinvestment
and quarterly performance of companies during Q3FY11 are likely to be key drivers
going forward.
While we believe that markets may be fairly valued on FY11 numbers but there is
an upside based on FY12 numbers. Investors entering at current levels must be prepared for a longer time horizon for making gains. In near term, though there may be
some downsides from the current levels due to unforeseen events, but correction
should be used to buy fundamentally sound large and mid cap stocks. We remain
bullish on sectors such as Banking, Capital goods, Construction, IT, Media, Metals
etc Risk to our moderately bullish call comes from any disruptive event in global
economy or lower than expected quarterly performance.

Kotak Preferred picks for 2011
Sector	Stocks
Automobiles	TVS Motors
Banking	Axis Bank, ICICI Bank, J&K Bank, SBI, Allahabad Bank
Construction	BGR Energy, Pratibha Industries, IRB Infra, Sunil Hi Tech
Engineering	Cummins India, Diamond Power Infrastructure, Voltas,
	Greaves Cotton, L&T, Tractors India, Havells India
Information Technology	KPIT, Infosys, NIIT Tech
Media	HT Media
Metals & Mining	SAIL, Sesa Goa
NBFCs	HDFC, IDFC, PFC
Other Midcaps	Time Techno
Source: Kotak Securities - Private Client Research