I ndia Strategy 3 R (Recovery, Rates, Reforms) vs Positioning 􀂄 BofA Merrill Lynch

I ndia Strategy
3 R (Recovery, Rates, Reforms) vs Positioning
􀂄 Recovery in economy and earnings, rates, reforms drive year-end index target of 21,750
India was one of the worst-performing markets globally last year and expectations were low. But YTD, it has been one of the
best-performing markets globally – with a near 25% return – despite downgrades in the economy and earnings. Unfortunately,
India will enter 2013 as one of the best-performing markets and expectations now are high. We expect the markets in 2013 to
be driven by the 3 R (recovery in earnings and economy, rate cuts and reforms) with the 3Ps (politics, performance and
positioning) acting as headwinds. We expect the market to provide a return of 13% in 2013, in line with earnings growth.
1. Recovery in GDP growth…: We expect GDP growth in FY14 (end-Mar) to recover to 6.5% from 5.5% in FY13, mainly
due to a pick-up in consumption. Nevertheless, we remain cautious on the investment cycle.
2. … and earnings: Like GDP, we see earnings recovering from 7% in FY13 to 12-14% in FY14 (slightly below analyst
numbers). More importantly, the two years of sharp earnings downgrades seem to be behind us.
3. Rate cuts: We expect RBI to cut rates by 100-125 bps as inflation stabilizes and they focus on reviving growth.
4. Reforms and politics: We expect accelerated reforms and high investor expectations until Feb 2013. But with the
current government in a minority, reforms could get tougher in 2H13 as the country gets into “election mode”.
5. Positioning, Supply, could be a drag: While near-term liquidity remains high, flows to secondary markets could ease
over next few months as (a) supply of paper picks up and (b) GEM funds now have their highest weight in India in six
years, and with India already one of the best performers in 2012, the margin for error is low.
Strategy: Prefer rate-sensitive names: Adding Tata Motors, DLF (high beta underperformer)
Our model portfolio, in spite of recent outperformance, continues to favor rate sensitive sectors at least till the budget in Feb,
2013. We overweight rate-sensitive sectors like autos (Maruti, Tata Motors), financials, real estate, telecom and pharma.
Top Buys: DLF, ICICI Bank, Maruti, Lupin
Top Underperforms: HUL, Hero MotoCorp, NTPC
Top Midcap Buys: Havells, Motherson Sumi, Yes Bank, BEL, Glenmark

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