Present tense, future perfect

BUDGET SPECIAL

% of net assets

M&M

8.56

ACC

6.74

Tata Motors

5.01

ONGC

4.99

Grasim

4.74

HCL Infosystems

4.31

Satyam Computer

4.25

SBI

3.82

HCL Technologies

3.70

HPCL

3.35

 
The portfolio is underweight on consumer staples due to price competition and modest growth rates while valuations remain at a premium to the market.  We are also underweight on petrochemicals. An underweight position is maintained in financials as well. We prefer to play the retail credit boom indirectly through cement and auto sectors as they benefit through an expansion in housing and car loans respectively. The Budget had no impact on our sector strategy.   Andrew Holland
Chief Administrative Officer & Executive Vice President (Research),
DSP Merrill Lynch

Our overall view of the Budget is positive with the finance minister delivering on both growth and reforms. In particular, we were positively surprised at the increase in FDI limits whilst FIIs welcome the removal of long-term capital gains tax.  Looking to the economy the finance minister has kept his promise of providing a strong growth thrust to infrastructure and agriculture, while maintaining fiscal prudence. Fears of skeptics before the Budget have been allayed.  Post-Budget the entire focus of the market has been on turnover tax which was higher than our (and market) expectations of 5 basis points and in the near term will affect sentiment negatively. Clarity on the matter will be forthcoming and longer-term liquidity will return as the market adjusts to the new structure.  Looking forward, we continue to expect the market to be driven by earnings growth and our year-end target is 5300-5500. Near term, global factors such as higher oil prices, fears of China slowing more than expected, higher global interest rates and terrorist attacks may negatively impact fund flows to India and, therefore, the markets could be rangebound.  Indeed, India continues to be a consensus overweight for FIIs. In May, the 99 global emerging market (GEM) funds surveyed by us, accounting for close to $60 billion worth of assets, have a 6 per cent weight on India, 1.1 per cent above the absolute level in their benchmark and the net number overweight is a considerable 46 per cent.  Our survey also indicated that investors were overweight on cash and would look to reduce this position over the next one-three months leading to a summer rally for GEM equities. With over 50 per cent of GEM investors in India expecting no change in policies pre-Budget, their positive stance has been confirmed in our view, and longer-term funds flow will remain positive.  With the corporate results season approaching, we believe the focus of the market will shift from the Budget to earnings and Infosys announcement last week will likely provide direction to the markets.  In our view, interim results are likely to show yet another quarter of strong earnings growth. We expect growth for the Sensex companies to cross 20 per cent and at 17.5 per cent for MSCI companies. Growth should be led mainly by sales growth with minor margin gains.  However, we believe that earnings growth will ease slightly in the latter part of the year (we are estimating growth at 16.5 per cent for the full year) as base comparisons become tougher and input cost pressures feed through.  The market is also likely to focus on monsoons which remains a key swing factor for sentiment. We are expecting a better industrial growth on the back of the lag effects of last year