India Market Strategy- Staying positive - Buy on weakness:: UBS

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UBS Investment Research
India Market Strategy
Staying positive - Buy on weakness
􀂄 India related concerns has led to sharp correction
The recent correction on the Indian stock market (3.6% in the last 4 days) has been
due to worries around 1) Concerns on microfinance (MFI) exposure leading to
correction in bank stocks 2) worries on political stability caused by the 2G scam 3)
misconception about LIC being a forced seller in the market due to running a
valuation deficit of around Rs140bn in its guaranteed-return annuity policies. We
have looked at these issues & do not believe they warrant too much concern.


􀂄 UBS View on concerns
1) The MFI exposure is around 1-2% of Indian banks' loans. If we assume a 30%
default rate, FY11E earnings & net worth could be lower by an average 4% and
1% respectively (our base case is lower), all else remaining equal. Please refer to
"Micro finance; macro problems?" note published on 18 November 2010 for
details. 2) We do not think that the 2G related allegations have the potential to destabilize
the current government as the former telecom minister who resigned
belonged to a regional political party and not the ruling Congress party 3) On LIC
being a forced seller, we believe that the gap of Rs140bn is notional and is
estimated actuarially. Also the last couple of weeks domestic institutional flow data
does not indicate any big selling from LIC. (Please see table 3 for more details)

􀂄 Staying positive on India; March 2012 Sensex target of 24,600
Given we are close to end of CY10, we set a Mar12 Sensex target of 24,600 (based
on target P/E of 16.7x). We turn overweight on Banks in our model portfolio as we
believe the recent correction offers a good entry point into banks. Our key stock
picks are SBI, Shriram Transport, REC, GVK, Sesa Goa, Lanco and RCom.