Post Election Strategy

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5/19/2014 1
Post Election Strategy
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5/19/2014 2
Indian markets are trading at life time highs
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Globally Indian market has been a Star performer in 2014
Bulls are on the charge
17.80%
1.62%
6.98%
-4.28%
-3.23%
-11.81%
2.67%
2.12%
1.09%
-15.00% -10.00% -5.00% 0.00% 5.00% 10.00% 15.00% 20.00%
India
Korea
Brazil
China
Hangseng
Japan
Taiwan
USA
Germany
Period : Jan till date
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After a sharp run-up in the
markets, there are few questions in
every investors mind.
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Is it time to sell?
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Is the market providing an opportunity
at the 25,000 index?
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Is the market move based only on the
political equation?
What about the fundamentals?
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Challenges: domestic and global
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India in a sweet spot
Changing political equation
+
Stabilizing economy
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New stable government at the helm
Expectations of a new stable government at the center
will remove the policy paralysis and resolve key issues
plaguing the growth .
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While the slowdown in the investment activity has been prolonged and
well-flagged, the current corporate results have also showed that
construction activity, steel and cement demand, and even order books
picked up during the last quarter.
The new government (based on infrastructure and industrial development
activities in Gujarat) is expected to kick-start the weak investment cycle.
Expectation of getting investment cycle on track
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The policy environment started improving in India since the last one year
and 2014 will start feeling its positive impact.
The GDP growth of 4.4% in Q1FY2014 has marked the bottom and started
showing signs of stabilization with the Q3FY2014 GDP improving marginally
by 30BPS YoY to 4.7%.
The International Monetary Fund has upgraded India's growth outlook.
GDP growth hits through
9.5
9.6
9.4
6.9
8.6
9.3
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FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 Q1FY14 Q2FY14 Q3FY14
GDP Growth Rate
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Trade deficit for April 2014 came in at $10 billion; the April 2014 exports
were up by 5% YoY while the imports were down by 15 % YoY which
contributed in a narrowing of the trade deficit.
With the increasing exports and falling imports, Indias CAD has dropped
significantly from about $88 billion in FY2013 to less than $60 billion this
year. These numbers suggest that in FY2014 CAD will be well below 3%
compared with 4.8% in FY2013 which was a major concern earlier.
CAD much lower than feared
-25.0
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Trade balance ($bn) LHS Imports % yoy Exports % yoy
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Despite the Federal Reserve (Fed) tapering, after the RBI and the
Government of India jointly made efforts to contain the rupees fall, it has
stabilized near the 59-60 levels.
The rupee may appreciate to the 57 levels against the dollar if the risk
appetite continues in 2014.
Stable rupee
52
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Indian Rs / $
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Stable rupee leads to a good FII flows
Equity inflows have strengthened in the past few months.
Investment by FIIs into equities remains steady ($8 billion YTD).
Also, India's relative attractiveness amongst other equity markets
may drive more FII flows in the equities.
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Equity Debt
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FII Holdings at All-time High
In Q4FY13, all stakeholders except FIIs were sellers of equities; FII stakes
rose 105BPS to 24.6%
Retailers have moved away from equities over the past 4 years and Retail
Investments have fallen to 13.7% from 14.2%
Promoters
50.3%
FII 24.6%
MF 3.2%
Financial
Inst 8.1%
Public
13.7%
Ownership Pattern for Dec 13
50.90% 50.40% 49.50% 50.70% 50.30%
22.70% 23.60%
23.90%
23.60% 24.60%
14.20% 14.20% 14.70% 14.20% 13.70%
0%
10%
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30%
40%
50%
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90%
100%
Dec-12 Mar-13 Jun-13 Sep-13 Dec-13
Promoters FII Domestic MF Financial Inst Public & Others
Ownership Trend
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Retailers have moved away from equities over the past 4 years
& are under invested in equity markets
Retail Investors Under ownership
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Since analysts earnings expectations have been revised sharply in the past 12
months, we believe the bulk of the downgrades are done for FY2014
Also margins may stabilize, given the improving macro & a stable rupee. It is
fair to expect a double-digit growth earnings growth in FY15
Corporate earnings growth to Improve
1480
1530
1580
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1680
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FY15
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FY14
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Despite the recent surge, the valuations are still at a discount to the long-
term average.
Sensex valuation is at 15x its 12-month forward earnings estimate (near
the long-term average multiple of around 16x).
Valuation below long-term average
8.0
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18.0
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Global factor
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The Fed decided to taper QE by $30
billion a month and reduced the
monthly stimulus package to $55
billion from $85 billion earlier, but
maintains the guidance for the
near zero interest rates, thereby
removing the uncertainty for the
global markets.
The Ukraine issue is also showing
some signs of stability.
Easing global fear
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Risks to our prognosis
High inflation: If inflation (food inflation is coming down
currently) remains high it may force the RBI to hold or hike
the interest rates dampening the short-term sentiments.
Risk of El Nino this year in:
The US weather forecasters indicate that the El Nino
phenomenon can wreak havoc on the global crops. El Nino, a
warming of the sea-surface temperatures in the Pacific, can
trigger both floods and drought in different parts of the
globe.
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Conclusion
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Sensex target
FY15E FY17E
Estimated EPS 1585 2100
EPS CAGR growth (%) 15
Multiple 16
Sensex target 33600
Conclusion
Markets have run-up quite a bit with the new government in
control bias for the markets remains positive (amid volatility ).
There is always a stock specific opportunity and every
correction provides an opportunity to buy it at a bargain price.
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Stock Ideas
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Stock Picks stable large-cap
EPS/BV PE /PBV
Company name CMP (Rs) * FY15E FY16E FY15E FY16E
Reliance Industries 1092 75.50 83.50 14.46 13.08
HPCL 398 36.69 50.86 10.85 7.83
ICICI Bank # 1489 594.7 673.4 2.50 2.21
IDFC # 126 109 119 1.16 1.06
SBI # 2440 1088 1268 2.2 1.9
M & M 1153 84 105 13.7 11.0
L&T 1443 53 61.5 27.23 23.46
BHEL 229 15.4 16 14.9 14.3
Sesa Sterlite 213 25.5 27.9 8.35 7.63
Coal India 356 26.40 33.52 13.48 10.62
Ultratech Cement 2362 85.4 99 27.66 23.86
TCS 2191 113 130.3 19.39 16.82
Sun Pharma 623 26.9 29.1 23.2 21.4
* CMP is as on 16.05.2014 @ 1.15PM , # Valuation is Based on P/BV
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Stock Picks high beta
* CMP is as on 16.05.2014 @ 1.15PM , # Valuation is Based on P/BV
EPS/BV PE /PBV
Company name CMP (Rs) * FY15E FY16E FY15E FY16E
Motherson Sumi 265 13.3 17.6 19.9 15.1
Arvind Ltd 181 16.2 19.5 11.2 9.3
Aurobindo Pharma 622 45 52.5 13.8 11.8
LIC Housing Finance 311 169 197 1.8 1.6
Federal Bank # 108 82 93.4 1.3 1.2
Crompton Greaves 176 8.1 10.7 21.7 16.4
Voltas 179 8 10.067 22.38 17.78
Ashok Leyland 27 0 1.7 NA 15.9
EID Parry 172 9 11 19.1 15.6
Balrampur Chini 62 4.4 2 14.1 31.00
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