Low penetration levels for most financial products and services in India leaves ample room for high-growth investment ideas, according to UBS India Head of Research Suresh Mahadevan. There is a possibility of Indian markets being re-rated if the government delivers, he tells Vandana. Excerpts:
There is a consensus that 2010 will be the year of consolidation for markets. What’s your view?
Indian markets are not cheap as they are probably trading at 15-16 times forward earnings. But they are not expensive either. The easy money that was being made in 2009 will not be possible this year. I don’t think those kind of returns are possible in 2010. Emerging markets should do well even on a risk-adjusted basis. Within that, India will be an outperformer.
Currently, global investors are neutral to underweight on India. Regionally, UBS is neutral on India. But globally, we are positive on emerging markets. We will continue to see inflows into India, but the quantum will not be as high as last year. The broad direction is still positive. Demographically, India is in a huge sweet spot. My view is that markets are discounting the current stable government to a certain extent, but I think the government has the potential to surprise. If you are an emerging market investor, you cannot ignore India any more. If there is a correction, it will be a good buying opportunity.
How do you see earnings growth for companies shaping up? What is your expectation on third-quarter earnings?
Economic recovery will lead to earnings recovery. We are looking at 9 per cent growth in earnings for the current financial year, but for next year we are looking at 20-21 per cent growth. For financial year 2012, earnings growth is estimated at 20 per cent. Markets can do well either on earnings expansion or on multiple expansion. In India, I think both can happen. If the government were to deliver on reforms, markets will be re-rated.
Which are the sectors you are overweight and underweight on?
We are overweight on banks, real estate, cement, power and pharmaceuticals. For banks, the reason is that credit growth is going to pick up as economic recovery gathers steam. Tightening fears are overblown. As for cement, it is a cheap way to play the infrastructure theme as infrastructure companies are very expensive. Cement companies are trading at or below replacement cost. We are underweight on oil & gas, especially ONGC, as we think it will be subject to vagaries of government policies. We are also underweight on information technology services as these stocks have done quite well. If you look at recessions, these stocks have acted as reset points. We are negative on consumer goods as we think that defensives will not perform well in a rallying market.
What is your rough target for Sensex in 2010?
We have March 2011 target of 20,000 for Sensex. We have not revised it simply because it is less about Sensex now and more about stock-picking. Now that we are in the 17,500 range, I think 20,000 can easily happen in 2010. It will also depend on capital flows.
The government has been planning to end the stimulus measures and there are concerns about the appreciating rupee. How do think these will impact markets?
Tactically, tightening is a bit of a worry. India will have to tighten. But, one has to look at the reason. It is because growth is picking up. Secondly, whatever tightening-led demand weakness happens will be more than offset by economic recovery-led demand strength.
My sense is that we will go from a very easy monetary policy to an easy monetary policy. Tightening worries are a bit overblown. RBI (Reserve Bank of India) does not want to stifle growth. I do not see a very hawkish stance from the central bank because that will impact economic recovery.
I feel global commodity prices are a risk. Global reflation, when money supply is increased or taxes are reduced, is in some ways negative for India as we are net importers of commodities. Oil is currently at $81-82 per barrel. If it goes to $100, that is a cause for concern because we are net importers. On currency, our view is that the dollar will continue to weaken against the rupee, which of course will result in higher inflows.
