India best placed among emerging economies
We have a positive view on the markets, as we believe that favourable macro cues
such as low inflation, declining interest rates, cheap global commodities and strong
governance are likely to drive improvement in corporate performance over the next
18-24 months. In our view, India is best placed within the emerging economies space
and is likely to continue attracting higher fund inflows in the medium-term,
notwithstanding any near-term global concerns.
Declining rates cycle, government stimulus to act as a catalyst for
economic revival
So far, while inflation had been coming down, policy rates took longer to decline and
banks had been even slower to cut rates. But, now decline in interest rates is gathering
momentum even in the hands of the borrowers and in our view there is substantial
headroom for rates to decline further by at least 100-150bps. This is considering that
deposit growth is still meaningfully higher than credit growth (11.5% vs 9.5%) and
inflation remains structurally low at sub-5% levels.
Further, while the 40-50%+ decline in prices of most major global commodities is a
huge positive for the Indian economy in the wider context, but in the near-term, large
corporates in the commodity space as well as banks have been negatively impacted
and this has slowed corporate earnings growth as well as banks ability to cut rates
faster. However, going forward, as cheaper imports and sharply declining subsidies
release huge funds for the government to spend on more productive areas such as
infrastructure, we expect the positive stimulus from cheaper commodities to also gain
momentum. This is already reflected in the substantial ordering activity by the
government in recent months and strong pipeline going ahead (put together, in excess
of Rs3.5lakh crores in next few quarters itself).
Prefer companies with strong competitive advantage, benefitting
from evolving macros
From a top-down perspective, we expect themes like urbanisation, consumerism,
domestic and export service sector plays as well as government spending plays to do
well in the coming years. With falling rates and huge under-penetration, retail finance,
including housing finance is likely to perform well and BFSI companies better aligned
to this would continue to outperform. With reviving domestic macros, we expect auto sector
volumes, especially in passenger four-wheeler and commercial vehicle space, to continue
growing strongly. We prefer those OEMs and ancillaries that have strong competitive
positioning and the ability to maintain or even gain market share, going ahead.
Post the election rally last year when all cyclical and midcap stocks had rallied, there
has been a reality check and once again there is a preference for quality companies,
which are aligned to the evolving macros. So companies in commoditised sectors
where there is global over-supply will remain in the negative list for us. On the other
hand, we continue to like defensive sectors like IT and pharma where Indian companies
have strong competitive advantages on a global scale; within these sectors, we prefer
those companies where margins have scope to improve relative to peers, which is not
being factored in valuations currently.
From a bottom-up perspective, we continue to like select emerging midcap companies
with strong brands, entrepreneurial success and healthy growth outlook. Overall, we
expect the Sensex EPS to report a growth of ~11% in FY2016 and 17% in FY2017,
with an upward bias. Attributing an 18x multiple to our FY2017E Sensex EPS, we
arrive at a target of 31,500 for the Sensex, implying a 16% upside from the present
levels with a 12-18 month horizon.
