CSEC Research: Monthly Strategy April 2015

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Markets looking to consolidate; fundamentals to take centrestage

Indian markets have witnessed volatility over the past one month with key  benchmark indices declining ~5% in March after remaining flat in February. Metal index posted the highest decline of 10.5%. Rate sensitive Bankex and Realty fell by 7.6% and 8.7% respectively. However, Healthcare index posted a 9% return during the month with many of the frontline stocks touching all-time highs. The government's inability to get the land acquisition bill passed has created concerns about the government's ability to pass key economic reforms. While the bill has been passed in Lok Sabha where the ruling NDA has majority, opposition parties are expected to oppose the bill strictly in the Rajya Sabha. Market volatility has also been driven by anticipation of announcements on commencement of US rate hike cycle in the later part of 2015. Meanwhile, RBI has kept the repo and reverse repo rates unchanged in its latest policy meeting after announcing two out of the turn rate cuts since January. Further, central bank believes comfortable liquidity conditions should enable banks to transmit the recent reductions in the policy rate into their lending rates, thereby improving financing position of capital intensive sectors.  Corporate Earnings are not expected to witness a major recovery in 4QFY2015 as weak rural demand, lower government expenditure and high real interest rates continue to impact corporates across sectors.

Valuations and Outlook 

The formation of a new reform friendly government led to a hope based rally in Indian markets over the past 12 months, resulting in strong gains of ~32%. Going ahead we expect the macro-economic fundamentals and its impact on the corporate earnings to be the key determinants of the market's performance. We expect the fall in interest rates and increased government investment towards capital formation to revive the investment cycle, which is currently beset by high NPA in banks. Also, benign crude prices and reduction in domestic interest rates are expected to provide tailwinds for the earnings of Indian corporate. NSE Nifty and CNX Midcap are currently trading at reasonable valuations of 13.8x and 13.2 x CY2016E respectively (vs. historical average of 13.3x and 11.2x respectively). BSE-Bankex too is trading reasonably at 1.8x FY2016E P/BV (vs 1.6x P/BV). While high quality defensives have performed significantly well over the  past few months as recommended by us in previous reports, going ahead we remain positive selectively on Banks, NBFCs, Autos, high quality capital good stocks (with low leverage) and Mid-cap Cement with a 12 - 18 months perspective.

Regards

CSEC Research