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2011 Outlook: A repeat of 2010
Robust growth, supported by IP revival and consumption resilience
Sticky inflation could lead to further monetary tightening
Potential 'back-ended' year for equity returns; Sensex target 23,900 by end-2011
OVERWEIGHT: IT, auto, engineering; NEUTRAL: banks; UNDERWEIGHT: global cyclicals
Another year of consolidation
Like in 2010, we expect domestic growth to remain robust in 2011 and inflation (though
lower nominally) to turn the monetary policy relatively more restrictive. The only change we
foresee is an improved global outlook, especially for the US. Consequently, the Indian
market’s movement may be similar.
Theme #1: Upward bias to economic growth
We believe India’s economic growth will remain robust in 2011, aided by: 1) a revival in
industrial production and infrastructure investments, and 2) consumption resilience.
Theme #2: Income stability to drive consumption resilience
While increased allocation to rural-support programmes (like NREGA, Bharat Nirman, etc) is
aiding rural employment and rural income (reflected in farm labour shortages), urban
incomes should be supported by strong hiring in the services sector.
Theme #3: Sticky inflation and re-emergence of monetary tightening
Primary inflation has turned more ‘sticky’ with food inflation increasingly being contributed by
protein elements. An increase in commodity price could again result in a rise in
manufactured-product inflation. We expect the RBI to lift the benchmark rate 100bp in 2011.
Theme #4: “Policy holiday” and return to populism
While the ruling coalition is under pressure from several scandals and three state elections
in mid-2011, major reforms, including subsidy reduction, look unlikely in the medium term.
Theme #5: Decent FII flows – an ‘average’ year, not a superlative one
Risks to FII flows could arise from investors’ renewed preference for the relatively cheap
North-Asian markets and preference for developed markets in anticipation of a US recovery.
However, the Indian equities are still under-owned by global and GEM funds.
Earnings in 2011: Commodity inflation may help earnings on the whole
Paradoxically, in times of commodity-price inflation, Indian earnings estimates usually rise.
Our Sensex EPS estimate is INR1,052 in FY11, INR1,277 in FY12 and INR1,497 in FY13.
Sensex target: 23,900 by end-2011; returns likely to be back-ended
Our Sensex target implies a 1-year forward P/E of 16.6x at end-2011, same as now. We
expect 20.6% EPS growth in FY12 to drive up Sensex 18% in 2011, similar to the 15%
return in 2010.
O/W IT, auto, engineering; U/W global cyclicals; NEUTRAL banks
Our focus remains on domestic consumption and domestic investments. We upgrade banks
to NEUTRAL after the sector’s severe underperformance. We increase the weight on SBI in
our model portfolio. Notable exclusions from our portfolio are Tata Motors, JSW Steel,
IBREL, Nagarjuna Construction. Notable inclusions are Voltas, Hindalco, Sobha Developers.
Top BUYs: Infosys, AL, Axis Bank; Top SELLs: ABB, Ambuja, HUL
Our top BUYs reflect our positive stance on earnings stability in the IT and auto sectors and
our relative bullish view on high-CASA banks. In our view, our top SELLs are overvalued or
suffer from structural pricing pressure in the sector (eg, Ambuja) or may be at risk from soft
commodity inflation (Hindustan Unilever).
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