Royal Bank of Scotland (RBS): Asset allocation and model portfolio : 2011

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Royal Bank of Scotland (RBS): Asset allocation and model portfolio : 2011
We are bullish on materials, telecoms and utilities, but have pruned our overweights in
technology and staples. Financials continues to be a key underweight. We still prefer large
caps over small/mid caps.


From a portfolio perspective, our key overweights are CAIRN, HNDL, HZ, HCLT, BHARTI and
PWGR and below we give our views on why we prefer these stocks.

1. Cairn India (CAIRN IN)/Energy: Cairn is levered to rising crude oil prices, and we also expect
production growth/new discoveries post the deal decision resolution in February.
2. Hindalco (HNDL IN)/Materials: Hindalco is leveraged to an increase in aluminium prices.
Aluminium is RBS’ preferred base metal exposure (refer “Global Economic Forecasts”, dated
20 December 2010). Also, the company’s capex plans should lead to significant volume
growth.
3. Hindustan Zinc (HZ IN)/Materials: RBS analyst Rahul Jain’s earnings estimates are 40%
above Bloomberg consensus for fiscal 2012, primarily linked to increasing silver production at
this zinc producer.
4. HCL Technologies (HCLT IN)/Technology: Has underperformed larger cap peers Infosys and
TCS, and is now trading at a 30% forward P/E discount to them which suggests margin
concerns are priced in.
5. Bharti Airtel (BHARTI IN)/Telecom: We think the company’s Africa business could surprise
positively on costs as it transfers best practices from its Indian business, and the worst in
domestic competition is behind it.
6. Power Grid (PWGR IN)/Utilities: A relatively inexpensive way to play the electricity
transmission and distribution story in India; underperformed market by more than 25% in
2010.

From a portfolio perspective, our key underweights are BPCL, COAL, ACEM, JSTL, HDFC &
ICICIBC.
1. Bharat Petroleum (BPCL IN)/Energy: Widening under recoveries at oil marketing companies
with the rise in crude oil prices, and the postponement of diesel price hikes.
2. Coal India (COAL IN)/Energy: The world’s largest coal producer trades at a significant

premium to peers, and RBS expects volume growth to miss consensus expectations.
3. Ambuja Cements (ACEM IN)/Materials: Expensively valued cement producer, in our view,
with earnings pressure as overcapacity leads to price declines.
4. JSW Steel (JSTL IN)/Materials: RBS’s earnings estimates are more than 30% below
Bloomberg consensus for this steel producer because of lower realisations and cost
pressures.
5. Housing Development Finance Corp. (HDFC IN)/Financials: Rich valuations for the core
mortgage business drive our underweight. Also, the rising cost of wholesale funds should
pressure margins.
6. ICICI Bank (ICICIBC IN)/Financials: We are cautious on the banks sector where we see rich
valuations and tight liquidity conditions. ICICI is the largest private sector bank, and we
believe profitability improvements are factored into the current price.