India Strategy

Key takeaways

Liquidity and currency dominate the equity market. Adverse developments on the global liquidity front and an excruciating fall (10%) in the rupee in a short span of two months have made the Indian equity market jittery. Lack of buying support from domestic sources is compounding the same. Fears of large-scale selling by FIIs because of the weakening rupee is also casting a long shadow. However, at 13.6x 12-month forward PE, the Indian market’s valuation is below its long-period average of 15x and would not be an impediment for a rally, as and when it fructifies.

India outperforms peers over last month. Despite the falling rupee, the Indian equity market has outstripped major equity markets in the last one month. Brazil, Russia and China have fallen more than 10% vs. a 0.5% decline in the Sensex.

1QFY14 earnings to be muted. For the quarter under consideration (1QFY14), we expect ARG’s coverage (160 companies) to post a revenue growth of 3.9% yoy, while net profit growth would be 2.4% yoy. Excluding financials, revenue growth (1QFY14) of companies we cover is likely to be 2.1% yoy, with net profit declining 2.4% yoy.

Impact of past two rupee devaluations on economy, a good precedent. In the 2-3 years following the sharp rupee devaluations of 1966 and 1991, India experienced a sharp contraction in trade deficits, and economic growth sharply rebounded in the 1-3 years following. Inflation however, rose sharply in the subsequent two years.

Market outlook. In the immediate term, volatility is expected to take centre stage. This is largely due to the fact that earning downgrades are yet to run their course and earning predictability is yet to creep in. However, we believe that the 5500-5600 levels on the Nifty would emerge as a strong support and maintain our contention that the next phase of the rally would emerge from an uptick in earnings, post 2QFY14. Thus, 2HFY14 should be much better than the first half. In these challenging circumstances, drawing inspiration from the adage ‘This too shall pass”, and the confidence that earning upgrades would emerge post 2HFY14, we retain our Sensex target for end-CY13 of 22,500—23,000.

Sector recommendations. We are of the opinion that the stage is getting set to slowly shed the defensive approach and start the quest for value propositions and not abhor risk. We have a bias towards Pharma, IT and Consumer. Scepticism persists towards Metals, Construction, and Capital goods. Auto could be a mixed bag and necessitate discerning selectivity.