Strategy - Can Spring Be Far Behind? : Edelweiss PDF link

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·       Global backdrop: Liquidity prunes financial risks in the system

·       Liquidity infusions by central banks, better than expected recovery in the US have boosted global risk appetite. India has benefitted in the form of improved capital flows

·       China’s growth concerns could potentially exert pressure on commodities. This could be positive for India

·       India: Poised for some cyclical upturn

·       Economy emerging from very weak phase as seen in sequential uptick in IIP, exports, PMI, etc. Going into FY13, monetary easing (~75bps), mild fiscal consolidation and relatively contained inflation will form ground for some cyclical uptick. However, reversal is unlikely to be sharp.

·       On the political front, key state elections are over, government is less distracted and TMC influence is likely to recede due to possible support from like-minded BSP/SP. All this will facilitate some policy reforms

·       Risks to the outlook: spike in crude oil prices, disruptive slowdown in China and re-emergence of risk in Europe

·       Markets: Earnings trajectory improving, valuations still attractive

·       Earnings downgrade cycle is bottoming out  with balance turning in favor of upgrades

·       On absolute valuations, markets are below historical average. Expect earnings upgrade in H2, leading to Sensex EPS of 1280-1300 in FY13. At 17500, Sensex discounts the earnings 13.5x. We expect multiple to expand to avg. 14.5-15x, implying ~11-12% return

·       Though the Sensex has limited upside, specific stocks are expected to outperform. On bottoms up approach, we recommend RIL, Lupin, Crompton Greaves, Ashok Leyland and OBC

·       Sectoral themes: Incrementally cut exposure to defensives, add cyclicals

·       Key themes to play: (a) reversal of interest rate cycle (favor autos over banks), (b) weak rupee to support earnings in export driven sectors (favor IT), and (c) adding cyclicals (upgrading industrials to neutral)

Strategy - Can Spring Be Far Behind?

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