After the rally in January when the benchmark index Sensex crossed the 20,000 mark, Indian equities retreated and has since remained volatile. The annual federal budget presented on February 28 did little to cheer them up. Relative to a strong showing last year, the Sensex index in 2013 has barely managed to stay positive.
Year to date, the Sensex is up only 0.89 per cent and in the last one month has been in negative territory, down 0.69 per cent. In the days after India’s annual budget was presented the markets declined as it disappointed investors, who did not see anything in it to boost growth or improve the investment climate. And last week, the broad-based Nifty Index slipped below 5800 on Wednesday and Sensex also lost ground only to edge up later on rate cut hopes and fall in core inflation numbers.
“The stock market is at its volatile best currently with a largely lackluster budget and a global ‘risk off’ [attitude] that came into play in February,” said Anil Rego, chief executive of Right Horizons, a financial advisory company. “Having said this, there is immense scope for positive developments on the domestic front, with actions taken [by] the government over the past six months only bearing fruit now.” He cited the partial de-regulation of the fuel price and the encouragement of foreign direct investment in key sectors, as examples.
Analysts have a largely positive outlook for the markets, with most predicting a better performance for the Sensex and Nifty indices. “We expect to see new highs on both Sensex (22500) and Nifty (6500) by [the] end of 2013,” said Gaurang Shah, assistant vice president, equities at Geojit BNP Paribas Financial Services. “Flows from foreign institutional investors have been very robust from January and this trend is likely to continue. The third quarter earnings were better than the second quarter and the expectation is that they have bottomed out. The recent cancellation of Rs.12,000 crore bonds issue by the government to reduce the borrowing will go down well as this will restrict [the fiscal deficit] to 5.2 per cent.”
In a note, A.K.Prabhakar and Rajesh Samtani, of brokerage house Anand Rathi Securities, said they expect the Sensex to break out above its all time level of 21206 and reach a new high of between 22500 and 23000. The Nift is likely to surpass its all time high of 6357 and reach a new high by late 2014.
“Whenever a market reaches an all time high, returns of 50 to 70 per cent are always possible,” the note said . However, both caution that healthy corrections of between six and 10 per cent are possible before any fresh rally. “These dips and corrections qualify as a good entry point for the long term. In our view, the Nifty could touch 6200 or 6350 by December,2013,” the note said.
However, Dipen Shah, senior vice president at Kotak Securities, pointed out that much would depend on the Reserve Bank of India. “The Bank’s view on the achievability of the fiscal deficit target [of 4.8 per cent] will determine its interest rate actions in the future,” said Shah. “However, more reforms in the core areas are a pre-requisite for the investment cycle to become favourable and also for the markets to trend up sustainably.”
The recent corrections were expected and, according to Shah, has opened opportunities for those who have been waiting on the sideline to invest. Those who have already bought shares at higher prices can add more - provided the investment is made in fundamentally sound stocks.
“We believe that there will be a consolidation for some time before we resume the uptrend and hence advise selective buying. One should avoid high beta stocks in mid and small capitalization companies as they have had a sharp sell-off,” he explained.
Stock picks:
Dipen Shah, senior vice president and head of Private Client Group Research at Kotak Securities
ICICI Bank
The management focus on stable growth and its improving structural profitability reinforces the positive outlook on the stock. ICICI has a robust asset quality with net non-performing assets of 0.64 per cent at the end of Q3FY13. Valuations are attractive at 1.7 times FY14 earnings estimates
Marico
Marico has a strong portfolio of brands in edible and hair oils. It is also gaining market share in several categories with high growth, such as deodorants, oats, and body lotions. The stock is quoting at about 27 times FY14 earnings estimates.
Tata Power
Tata Power is the country’s largest private player in the industry. The company has embarked on a significant capacity expansion plan that will see it increasing its installed capacity from 6099 MW currently to estimated 8530 MW by FY14 (on a consolidated basis).
NIIT Technologies
NIITT has been achieving decent revenue growth and margins over the past few quarters. Order bookings continue to be encouraging at $83 million for the third quarter. The stock is available at about 6.8 times FY13 earnings estimates.
A.K.Prabhakar and Rajesh Samtani, Anand Rathi
LIC HOUSING FINANCE
With innovative products and a strong distribution network we expect LIC HOUSING FINANCE will be able to grow at a 20 percent compound annual rate for the next three to four years. We expect return on earnings for the current financial year will be around 16.2 per cent and around 18.5 per cent in 2014.
Dr. REDDY’s LAB
The stock has had an outstanding performance in the PHARMACEUTICALS industry and we are targeting a share price of between Rs.2100 and Rs.2300 in the months to come. The company has achieved a comfortable leverage level despite high capital expenditure in recent years, which includes smaller strategic acquisitions.
BAJAJCORP
The company is fundamentally strong and one of the exceptional performers in the fast moving consumer goods industry. We have been positive on the stock since it was hovering around Rs.100 and are targeting levels of between Rs.320 and Rs.330.
KARUR VYSYA BANK
The stock is one of our top picks in the banking sector as the it boasts best-in-class and low non-performing assets. The stock looks good for a target of between Rs.640 and Rs.660 in the next seven to nine months. KVB has the advantage of low cost deposits that leads to high net interest margins.
MINDTREE
The company is potentially one of the best picks in the technology sector and the stock has performed better than its peers in previous quarters. The company is expected to benefit from investment in its sales force, among other initiatives. We are positive the stock can reach levels between Rs.1000 and Rs.1030.
JK CEMENT
It is one of the best stocks in the CEMENTS industry. In Q3FY13, the top line for the company increased 12 per cent on a year-on-year. Cement is a cyclical industry and the October to December quarter is generally better for the companies when they can price hikes because of increasing demand. We see the share reaching between Rs.400 and Rs.410 in the coming months.
Anil Rego, Chief executive of Right Horizons, Bengaluru:
Britannia
The fast moving consumer goods company is a clear valuation play at it is trading at 24 times earnings, lower than the average 30 times for its sector. It is a clear winner as it will benefit from a softer wheat price, while its ability to hike prices for its goods has come back of late.
Cairn and Reliance
Both are beneficiaries of moves by the central government to allow more exploration and production in mining. Attractive valuations of 12 to 13 times earnings for RIL and below 10 times for Cairn are an opportunity to make above average returns.
Infosys and TCS
These technology companies will benefit from India’s worsening currency and the improving outlook for the US. The weak domestic economy will allow it to hire talent at a lower cost, reducing pressure on its margins.
Hindalco
Very attractive valuations compared to global peers make this non-ferrous metals player a good pick. In addition, the stock corrected more than was warranted after recent labour unrest at one of its plants. This has created an opportunity to buy the share with an assured upside in the medium term.
Gaurang Shah, assistant vice president, Geojit BNP Paribas Financial Services:
Tata Global Beverage Ltd
Tata Global Beverage has its from a steady decline in production of tea leaf, which has led to increased demand for its products in domestic as well as international markets. There has been some easing of growth in Europe due to the economic slowdown, but there has been a robust performance from its Australian and Canadian operations.
LIC Housing Finance Ltd
With interest rates expected to come down and the demand for home loans growing, this finance company is expected to report much better earnings in the coming quarters.
IndusInd Bank Ltd
This bank has successfully been focusing on growth, as seen by its the year-on-year earnings that it has bank has delivered. Margins have witnessed a steady increase and non-performing assets levels have been coming down. Management wants to open more branches to increase the geographical reach of the bank and this will also translate into numbers.
