STRATEGY – Markets expected to remain subdued in the near term…
Executive Summary
We expect Indian markets to remain subdued in the near term with downside support at 5,600 on the Nifty. The broader market faces a technical overhang, with large-scale primary issuances in the form of Govt Divestment (INR 54k crs) as well as promoter stake dilution to meet 75% SEBI norm (INR 25k crs) expected to exert pressure on liquidity and DII flows in FY14. This pressure is expected to be stronger on the Midcap side where FII buying is limited, as most inflows on the FII side are coming in via the ETF route. Hence, we recommend investors to stay away from low-quality Midcap stocks.
As far as macro-economic situation is concerned, the Finance Minister has delivered a credible Budget for FY14, with headline fiscal deficit numbers in line with expectations of 5.3% of GDP for FY13 and 4.8% of GDP for FY14. We expect FY14 fiscal deficit at 5%. However, the Budget lacked big-bang measures to boost the ailing investment cycle as well as dwindling exports, which we see as a disappointment. In the upcoming Monetary Policy review on 19th March, we expect the RBI to cut Repo Rate by another 25 bps to boost growth, which slid to below-estimate 4.5% in Q3FY13. Further, we expect the RBI to cut rates by another 100 bps over FY14. However, transmission of the same would take 6 to 9 months which means GDP growth should start to recover only from H2FY14.
Our long term view remains intact and uptick in Indian markets should resume after a brief period of consolidation. Indian markets currently trade at a PE 15.7x FY13 and 13.7x FY14 EPS of INR 1210 and INR 1385, respectively. We expect the Sensex to touch valuations of 15.5x FY14, translating into a target of 21500 on the index / 6500 on the Nifty, an upside of 13% from current levels.
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