India Strategy - 4QFY14 Sector Preview - Running ahead of fundamentals
Market outlook. In the past few weeks the market seems to have taken all uncertainties in its stride and been one of the better performing, globally. While sceptics worry about the outcome of the ongoing elections, sluggish growth, all pervasive uncertainty, etc., the stock market seems to have shrugged them all off and inferred the result. It may have, in the short term, run a bit ahead of fundamentals, but earnings traction seems to be picking up with the upgrade cycle at full steam. We believe that it is now at levels justifiable after robust 2QFY15 results. Going by the old adage ‘markets anticipate, rarely follow’, some justification could be provided by the upgrades. As envisaged by us in our earlier update, the market for most of 1HCY14, would be, in all likelihood, a traders’ one, but value pickers would also revel. We have not altered our target of 24,500—25,000 for end-CY14e, based on a P/E of 16—17 and a P/B of 2.6—2.8 FY15e earnings. However, there is a good chance that sheer money flow into our market based on altered risk perception could ensure that it tests these levels and retract sharply before the year end
Macro-economic fundamentals improving. Since Sep’13 macro-economic fundamentals of the Indian economy have considerably improved. The current-account deficit has declined sharply, the capital-account balance has turned from a record deficit to a considerable surplus and inflation has fallen nearly 300bps. Most of the improvements are sustainable. In FY15 we expect modest acceleration in growth and low inflation continuing. The latter is likely to start a monetary- and interest-rate-easing cycle. We are positive about the investment recovery and expect interest-sensitive sectors to do better.
Market leadership could alternate. The polarisation in markets could be maintained to a large extent. Despite this, we would still advocate a bottom-up approach towards sectors/stocks. We maintain that capital efficiency (RoE and RoCE), cash-flow generation and de-leveraging would be key drivers of stock valuations. The altered risk perception could accentuate the shift towards capex-driven sectors from consumption-driven ones. However, the proverbial spoilsport could be USD-INR gyrations and spook IT sector prospects, albeit temporarily. Considering these factors, we are overweight on Capital Goods/ Engineering, Healthcare IT and Autos, neutral on FMCG, Telecoms and Media, and underweight on Cement, Utilities and Construction/Real estate. A high degree of selectivity would prevail in BFSI and Metals, and these sectors would be a trader’s delight.
Stock recommendations. Consequently, we are positive on Tata Motors, Infosys, Larsen & Toubro and Lupin. We are distinctly negative on the prospects of Coal India, SBI and Hindustan Unilever.
| Thanks & Regards Anand Rathi Institutional Research |
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