'Expect the markets to bottom out by March 2012'

Gagan Randev, CEO, Religare Securities Ltd

What is your Sensex target by December 31, 2012? Why?         

RBI has been raising the key rates from past few quarters to tame high inflation. As per the central bank, inflation trajectory indicates that the inflation rate will begin falling in December 2011 and then continue down a steady path to 7% by March 2012. It is expected to moderate further in the first half of FY 2012-13. In our view, interest rate is at its peak and going forward we could see a fall in rates. The budget will also be passed during this time and the market could fall to its lowest level around that time if populist measures are announced in it. We expect the markets to bottom out in first quarter of 2012 and gradually rise afterwards. One may expect a healthy rise in second half of 2012 as we see some rounds of easing of interest rates, reduction in inflation and containment of the Eurozone problem. We expect Sensex to be in the vicinity of around 18,000 in Dec 2012.

 

How much downside you see for Sensex and Nifty from present levels (Sensex – 15,275, Nifty – 4,578)? By when do you think market will bottom out?

We expect the markets to bottom out by March 2012. The downside could be around the 4200-4300 Nifty levels. We expect the markets to bottom out in Q1 of calendar year 2012.

 

What is your Sensex EPS estimate for FY12 and FY13? What are the possibilities of this estimates getting revised?

 

EPS                              FY12E              FY13E 

SENSEX                       1100                1225

 

Revision of these estimates would depend upon any macroeconomic events or global cues which would impact corporate earnings.

 

Which are the three large-cap stocks you will recommend investors to buy at current prices for 2-3 years time horizon? Please give a brief rationale for your recommendations.

TCS:  Even though the global environment is expected to remain 'worrisome' for some time, the company has huge opportunities with its market space expanding geographically and its share in the global technology. The company will expand its operations in the state of Maharashtra by building a new software development campus in Nagpur with an investment of Rs 600 crore in the first phase. The company sees demand and wants to position themselves accordingly.

 

Power Grid Corporation of India Ltd:  It is India's principal electric power transmission company. There has been tremendous spurt in the volume in Short Term Open Access (STOA) scheme resulting in overall reduction in cost of power to the consumers. With more and more UMPP’s (Ultra Mega Power Projects) and Merchant Power coming up, management expects that the volume in STOA will continue to increase. Despite of the difficulties in land acquisitions, etc, management is confident of achieving its planned targets for 11th and 12th 5-year plan.

 

ITC Ltd.: ITC is benefiting from a massive demand boom across the country, especially in the semi-urban and rural areas, due to rising income levels, government-sponsored employment schemes putting income in the hands of those at the bottom of the pyramid, and a change in spending culture. To maintain volume-growth, company is building a strong pipeline of new products and is exploring new categories to enter the domestic market. Further, they are enhancing their distribution reach in the rural India, where growth is much better than that in urban India.

 

Which are the stocks/sectors you will avoid in 2012? Why?

 

Generally we don’t comment on specific stocks or sectors in negative light.

 

Which are the key events/triggers (both negative and positive) to look for from the stock market perspective in 2012?

 

There is an increasing expectation in the market for the RBI to start easing interest rates in the near future. The RBI in its mid quarter review has signaled that a very low probability of an upward rate action provided that inflation outcomes are as per the expected trajectory. 

A key negative is the increase in government borrowing program due to fiscal slippages resulting in the hardening of the 10-year yield to 8.27%.This would have a negative impact on the investment climate, and it also pressurizes equity valuations. 

The Budget, though largely a non-event in recent times, could turn out to be a trigger either ways. 

The handling of the Eurozone crisis will impact the direction of the markets and could swing markets depending on its containment. 

Rupee has fallen 20% against the US dollar this year, affecting stock returns of foreign investors. How will this impact the market outlook for 2012?  

Indian rupee has been worst performer amongst major Asian currencies. Risk aversion due to sovereign debt crisis and global slowdown has resulted in outflows from some emerging markets. Rupee‘s depreciation will negatively impact the flow of foreign investments into India in the short run. A weak Rupee not only makes imports costlier but also drives up the price of Oil, our biggest import bill. One needs to watch out for the FCCB’s maturing next year and this can be a major drain for Corporate balance sheets. While this also helps exports, the fact is that exports will also be dependent on the situation in the West and any gains on the FX side can be offset by sluggish demand.  

We expect the rupee to stabilize post April 2012 which also ties in with our expectations from the stock markets post that period.