India Strategy- Headwinds to give more opportunity :: Emkay

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India Strategy

Headwinds to give more opportunity

n     Markets have corrected by 16% since their peak in Nov’10 with 16 and 197 companies from Nifty and BSE 500 respectively hitting 52 week lows in Feb’11. Companies below 200 DMA also increased sharply in Feb’11 to 37 and 392 for the same indices. 

n     Major reasons for the current fall are: a) high inflation (esp. food inflation), b) rise in interest rates, c) sell-off by FIIs and d) a series of scams 

n     On examining past financial scams, we believe that their impact on markets while significant, are temporary in nature

n     We expect inflation to come down to around 6.5% in FY12 on the back of fall in food prices and easing of crude oil prices.

n     Rise in interest rates will be contained with improvement in liquidity. Expect interest rates to inch up slightly or stabilise

n     FIIs have sold US$1.67bn of equities since beginning of Jan’ 11. However, we expect this to slowdown as this sell-off is a portfolio reshuffling from EM to developed markets and not a portfolio exit as witnessed in FY09. 

n     All concerns are already factored in the valuations but any improvement in the above factors could lead to a smart recovery in the market.

n     Valuations look reasonable (13.6XFY12 Consensus Sensex earnings)  

n     Long term India story intact; headwinds to give more opportunity

n     Return expectations moderate for this year with investors preferring quality

n     Prefer -  Agri-input, auto, pharma, IT, banking; Remain stock specific

Outperformers
Large Caps	Mid Caps	Small Caps
Bajaj Auto	Allahabad Bank	Kajaria Ceramics
BPCL	Aurobindo Pharma	Piramal Glass
Cadila Healthcare	Coromandel International
Infosys	Greaves Cotton
Larsen & Toubro	IRB Infrastructure
LIC Housing Finance	Rallis India
NTPC	Sterlite Tech
State Bank of India
Tata Motors
Underperformers
Large Caps	Mid Caps	Small Caps
Asian Paints	India Cements	Dishman Pharma
Bharti Airtel
Hero Honda
Idea Cellular
JSW Energy