In the backdrop of rising concerns on the macro front and doubts over India Inc being able to sustain high earnings growth in the future, Jitendra Kumar Gupta spoke to Dilip Bhat, joint managing director, Prabhudas Lilladher, to know his views on these developments. Excerpts:
Recently, we have seen the markets trade near their all-time highs. Looking at the valuations and concerns over inflation and interest rates, where do you see we are headed in 2011?
The Indian markets are in a Catch-22 situation, where a sudden gush of foreign institutional investors’ money has pulled the market in a little overvalued zone.
Consequently, the markets have behaved in a skewed way, where a few stocks in the index are at a Nifty level of 6,400-6,500, while the rest of the stocks are still around the 5,500 level. In comparison to this, the midcaps are still trading at the Nifty level of 5,000.
In the year 2011, with inflation refusing to go away and with RBI all set to do whatever it takes to tame inflation, the tightness in liquidity and with enough international problems on the horizon, I think the equity markets in India are headed for more than sober returns. And we think the Nifty level 5,700-6,700 should be the range in 2011.
Do you think there is the possibility of an earnings downgrade for 2011-12, given the high interest rates and higher commodity prices?
The present valuations assume that India will continue to grow upwards of 8-8.5 per cent, as such, the earnings growth in 2011-12 of 20 per cent appears to be a corollary of that.
However, higher interest rates, tightness in liquidity, a high fiscal deficit of close to 7 per cent (without considering the 3G money), a ballooning trade deficit and a current account deficit and over-heating in China and tepid growth in the US and Europe open up a lot of possibilities.
Any of the measures taken to tackle some of these problems can easily clip off some points from India’s economic growth and in the process the earnings growth will also remain venerable to downgrades. At the current valuations, the markets are still not factoring enough for this margin of safety.
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Which are the sectors looking good for the year 2011?
I think over the next two years, sectors like pharmaceuticals, infrastructure, capital goods (power equipment) and textiles should do well.
What strategy should one follow? Can you name a few stocks in which one can invest?
As the markets in their movement continue to remain skewed, a stock-specific approach can give huge dividends. We like stocks such as BHEL, Tata Motors, Bajaj Auto, Coal India, Nagarjuna Constructions, Mahindra Finance and United Phosphorus.