Before we give an outlook on the Nifty going ahead, it would
be suitable to set a context on how we have arrived here in the first place.
Global recession notwithstanding, BRIC nation India has teetered off from a
10%+ projected GDP growth to half of that today. So how did this happen? During
2004-08 we grew above potential thanks to decent FII flows and decent global
economy. Post the 2008 crisis, loose monetary policy helped offset investment
and consumption demand fall. UPA2 came to power in 2009 and doled out largess
in rural wages subsidies etc. thinking that equitable growth helped them win
their first term. This started the downward spiral on the deficit front.
Infrastructure projects got delayed due to red tape, food inflation rose. Other
inflation also rose due to supply bottlenecks. We got hit further by corruption
scams, rising oil prices and lack of fiscal support. Consequently RBI policy
got hawkish. Private capex went down from 17% peak in FY08 to 12% in FY11 to
below 10% in FY12. We got hit by rising inflation, slowing growth and weakening
rupee, all against a weak global economic backdrop.
Markets reflected the aforesaid reality. They really went
nowhere after attaining its peak in late 2007. Financial assets gradually got
sold off by a disillusioned retail class and financial savings dropped to pre
1990 levels. Gold and Realty got these flows. In Dec 11 we really touched our
recent lows and were one of the worst performing EM then thanks to our high
beta nature. India premium (to other
emerging markets) also went down from 23% to 13%. Market Cap to GDP went below
0.7x. Sensex ROE declined from 24% to 16%.
Are there bright spots now? Yes, recent commodity trends
indicate a better CAD print. Steady exporter performance i.e. Pharma, Agri and
auto exports should help further that. Inflation has started cooling off,
especially food inflation, which augurs well for companies net profit run rate
and consumption demand. Private capex has started picking up and should end
CY13 with a 7-8% growth. India will still invest 30-35% of its GDP, second
highest after China. Mid CY12, the government, after a change in the finance
minister, reasonably got its act together. It passed a few key bills like FDI
in retail and insurance. Set up a Cabinet Committee on investments, postponed
the GAAR bill, Invited foreign participation in domestic debt. Set the road map
for GST.
The most important reform was the partial de regulation of
diesel, which should help ease the subsidy burden. We expect fuel subsidies to
decline from Rs1.7tn in FY13 to Rs1.2 FY14 n Rs0.9tn in FY15. Diesel accounts
for 60% of total losses and can be halved to Rs480bn in FY14 from 960 and
Rs180bn by FY15
Also, FII flows continue to be robust. YTD we have got in
flows of $9bn, following CY12 investments worth $24bn. They account for 44% of
market free float and 20% overall.
Historically, we have seen outflows of FII money only twice in recent
times i.e. 1999 and 2009. So FII flows run rate might vary but their presence
is largely structural unlike what media would like to term it as. We can see
$8-15bn flows to India every year.
I believe Gold and Real estate holdings, if sold is $200bn
flows to financial sector, this can be a big plus during these times where
there is inflection between asset classes. Investors in India have been
investing 2.5% of GDP in Gold in the last 3 yrs, up from 1.5% in the previous 2
decades. Gold demand was largely there due to lackluster financial investment
performance as well as negative real rates in the past five years. A mere
100bps fall in gold investment to GDP means a further $15bn finding way into
markets.
I expect ~6% GDP growth and 15% earnings growth in coming
medium term. Also, I believe corporate run rate in earnings, though nowhere close to the
boom period of 30%+ growth, is still pretty resilient ~ 15% levels.
So the next bull run is in the offing in the coming
4-8 quarters. Do retain a quality bias to portfolios as earlier iterated. FMCG, Pharma,
Financials which performed well in recent 8 quarters should continue to hold
fort whilst we may see incremental alpha from names in beaten down sectors like
Construction/Capital Goods and the Power space. Selective mid caps should also
perform well.
Amongst personal stocks being discussed in this blog since past 1-2 yrs, many have done well. Apart from front liner picks like TCS, ICICI, ITC, HUL, Dabur,Dr Reddy, Glenmark, Colgate, Maruti, there have been off beat winners like V Guard, TTK Prestige, Adani Ports.
I would say Crompton Greaves can be the next big thing. Seems to be trading at 12x one year forward and 1.5x BV,
much below median levels of 16x PER and 3x book. Valuation comfort on downside.
While there is still pain in the Power vertical which contributes 60% to sales
and used to contribute 40% to EBIT, there seems to be buoyancy in the other two
verticals i.e. consumer and industrial, which has grown 20% top line and
maintained OPM in double digits for 9MFY13.
Large part of restructuring in Hungary done (it moved ops
from Belgium to Hungary to save costs). The management has identified 3 areas
where it can improve OPM by 400bps from present levels i.e. sourcing
(Identified Shanghai as hub), selling new breed of efficient engines, going
into new geographies. Also, post management change, there is a sense of cost
cutting and austerity. No further inorganic acquisitions for the time being.
Order book @ Rs92bn, largely short cycle orders with more of a product bias now
and going ahead that would remain the strategy. Can be a good value pick from a three year perspective. May trade at 13-14x intermediately. A trading pop also seems in the offing. Not a substantial re rating, since normal business would still be a
good 4-6 quarters away and there is still profitability pressure in the power
segment. Just slight rerating on existing rally + initiatives taken by Co. But being patient in this stock for next 3 years can reward us value hunters. Happy hunting!
BTW, mkts are now close to its previous high. Portfolios have been doing well with a 300-400bps outperformance. FY14 has started on a good note with almost 15% absolute performance locked in for the year in the first month and a half itself. Hope this sustains and gives confidence to the retail investor to re look at the equity markets!
