FINANCIAL CHRONICLE, MONDAY, JUNE 17, 2013 - PAGES 4

REBALANCING FOR TOUGH TIMES

Amid all the bleak projections, you can still make money in stocks with a little bit of patience and by slightly tweaking your portfolio
BIJOY SANKAR SAIKIA

Export-oriented firms
IT, pharma and metals firms have large revenues in foreign currencies

Company Infosys HCL Tech TCS Dr Reddy's Hindalco Lupin Tata Steel Reliance Industries Gitanjali Gems Cipla

% of revenues in foreign currencies 97.92 95.45 92.24 83.49 76.23 75.01 73.55 65.16 58.46 54.24

FTER A promising start to the financial year, stocks have suddenly turned the scariest thing to touch for investors, thanks mainly to a deep plunge in the rupee that has sent foreign institutional investors scurrying to exit. But analysts, like Vetri Subramaniam, chief investment officer at Religare Invesco Mutual Fund, dont see it as a desperate situation. They say a little bit of patience and some strategic portfolio-rebalancing can stand equity investors in good stead. The domestic currency has lost some 5 per cent in value against the US dollar over the past one month, which has triggered a correction in the BSE Sensex by an equal measure since its climb to its highest level in more than two years on May 17. This erased all of this years gains in the equity benchmark. The weakness in the rupee, though, has been more due to external reasons than internal ones. Across Asia, several currencies have met a similar fate as the US dollar has strengthened at the first hint of an imminent withdrawal of the quantitative easing (QE) programme by the US Federal Reserve. Under the QE scheme, the central bank has resorted to continuous bond buying, thereby infusing more dollars into the economy, which kept the greenback weak. And with an end to the QE in sight, investors anticipate a bounce in US treasury yields, which are drawing FIIs out of emerging markets. In the case of India, a surge in gold imports and dwindling exports have only exacerbated pressures on the rupee. Our focus is not on what causes foreign money to flow in or out, says Subramaniam of Religare Invesco Mutual Fund. If our fundamentals improve, there is no reason why capital would not flow into equities from both local and foreign investors. The economy is healing, but no dramatic recovery is in sight. There is no option but to be patient, he points out. Indias economic data have been mixed over the past two months, showing signs of some stabilisation, even though the recovery has been modest at best. This past week, Fitch Ratings revised the nations credit-rating outlook to stable from negative. At a more micro level, the monsoon rain has been good so far, promising bumper farm output, which should lead to a consumption boom in the rural belt. Inflation has eased on expected lines and the June quarter advance tax numbers also show hope of revival. Also the government promises quick solutions to issues like gas pricing, fuel for power plants apart from higher FDI in select sectors and frontloading of government spending to speed up the engines of growth. If all of that is reason enough to stay put in equities, here are the safest bets.

Private banks vs PSBs

Smaller private banks have outperformed their PSU peers so far this calendar

Company Kotak Mahindra IndusInd Yes Bank HDFC Bank ICICI Bank Axis Bank SBI PNB Bank of India Federal Bank

YTD Closing on June 14 return (%) 755 16 481 15 478 3 665 -3 1,101 -3 1,298 -4 2,046 -14 741 -15 284 -17 425 -21

Defensive bets
FMCG and healthcare stocks continue to see strong buying interest from investors

Closing on June 14 Sun Pharma 952.85 Lupin 783.2 United Spirits 2371.95 Ipca Labs. 646.85 Dr Reddy's 2176.5 Dabur India 152.45 ITC 331.4 HUL 593.3 Glaxosmit Pharma 2430.5 Godrej Consumer 782.25 Company

YTD return (%) 29.55 27.7 24.88 24.61 19.03 18.41 15.55 13.07 12.23 8.36

Scource:Capitalline

subsidy scheme kicks in, there will be no stopping this juggernaut. Add to that the prospects of a pre-election year splurge and a boost to farm output from a good monsoon, and you can easily predict good times ahead for manufacturers of white goods, FMCG, two-wheelers, cars, paints and discretionary goods. A sharp drop in input costs due to the commodities crash makes it an even sweeter deal for FMCG and consumer durables players. Brokerage Sharekhans top FMCG picks are ITC in the large-cap space and Bajaj Corp and Jyothy Labs in the mid-cap space. Bajaj Auto, Hero MotoCorp, Asian Paints, TTK Prestige, Bajaj Electricals, Dish TV and Bata India are some other preferred bets for the rural consumption theme. Edelweiss Securities prefers M&M and Maruti Suzuki from the four-wheeler space.

an economic cycle and considered relatively safe bets to stay with. This is more so for compulsive equity investors with a low risk appetite. Among them, pharma stocks have the additional edge due to the weakness in the rupee as they have a huge forex component in their revenues. From the export revenue point of view, Dr Reddys (83% share), Sun Pharma (57.04%) and Cipla (54.24%) are poised to gain the most.

due to lower non-performing assets compared with their PSU peers. Yes Bank, IndusInd Bank, ICICI Bank and HDFC Bank are the stocks that have maximum buy recommendations from brokerages.

The forex theme

While the vast majority is at pain because of the rupee slump, a select few such as IT firms, pharma giants and textiles exporters are smiling at this sudden windfall in forex earnings amid tough times. While the outlook for the dollar is not very strong and there are chances that the rupee will recover sooner than latter, yet the June quarter balance sheets of these companies will surely show some of the forex benefits, at least for those whose hedges have worked well. Many of the IT stocks have already climbed on the rupee weakness, but given the battering they received after the March quarter results, many of them still offer good buying opportunities. Apart from the biggies like TCS, HCL Tech and Wipro, investors can also look at strong mid-cap firms such as MindTree, KPIT Cummins, Persistent Systems

Betting on banking
An under-served market in terms of financial services and growing income levels make it a sweet spot for banks, what has played spoiler is a rising volume of bad loans borne out of a slow economy. But interest rates will have to fall now, in July if not in June. And once that happens, the capex cycle starts and more projects get cleared, credit flow will rise and NPA levels, too, will come down. Also, new bank licences may trigger a wave of merger and acquisition activities on certain counters, making it a hot pocket for value hunters. Most brokerages prefer the private lenders

Domestic consumption plays

All through the high inflation and high interest rate phase, Indias domestic consumption story has stood out, thanks mainly to myriad government schemes aimed at boosting rural income. And as inflation comes down and a new cash

Defensive stocks
Given the uncertainty, many investors have already shifted to traditional defensive plays such as healthcare and FMCG, businesses that tend to remain stable during various phases of

and Hexaware, among others. Companies with large foreign currency revenue and profitability (IT, metals, pharma, Cairn, RIL) stand to benefit while companies with foreign currency costs and rupee revenues (aviation, castrol, downstream oil firms) will lose significantly. Also, companies can capitalise the losses on foreign currency borrowings, said Sanjeev Prasad, senior executive director and co-head of equities at Kotak Institutional Equities. He said the impact of rupee weakness on earnings of the BSE-30 firms and NIFTY-50 firms would be marginally positive, given the large weight of stocks with overseas revenues . Our model portfolio is heavily weighted in favour of stocks with large revenues in foreign currency (IT, pharma) or those with neutral implications of the rupee depreciation (Coal India, regulated utilities, upstream oil firms), he said, adding that Bharti Airtel and BPCL are two stocks in from the Nifty pack that face large risks from rupee depreciation.
bijoysankar @mydigitalfc.com

Interview: Vetri Subramaniam | Commodities: Jeera, Crude Pg-B

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