For the current rally to sustain, we will need a more proactive government and some level of fiscal discipline, says Suresh Mahadevan, MD and head of equities, UBS Securities (India), in an interview with Samie Modak. Edited excerpts:
We have seen a great rally right at the start of the year, did you see this coming?
It was certainly not expected. We ended last year on a reasonably pessimistic note. Most of the bad news was still there. The government's inability to push through reforms, weakening economic growth outlook, earnings momentum being negative, the rupee or the inflation numbers— anything you looked at it was very negative. It seems to me that few things have fallen in place in the first few weeks of 2012.
First of all the rupee has become a lot more stable and has appreciated strongly from 53 kind of levels. Second is the credit rating upgrade by Moody’s, which has helped. We also had the prime minister meet with the CEOs of the power companies, which is a very positive signal. Of course, last week's credit policy is a very positive outcome. It's clear that the monetary cycle has turned. I don't expect inflation to rears it ugly head again immediately.
Do you expect the current rally to sustain?
For this rally to sustain we need to see a few things. First and foremost we need to see more proactive government, which we'll probably see post the election. The election result will be important in context how strong the government can be in terms of pushing the reforms. We need to see some level of fiscal discipline. The big picture in India is that it poses fantastic opportunity with its great demographic. But the government needs to do something about it. Attracting FDI, putting up low-tech manufacturing to employ all the people who are going to come into the work force.
Then there are global events, which play a critical role. Whether we like it or not, India is a high beta market. Any global event which triggers a risk-off kind of a move will affect us.
How do India's valuations look like right now?
We are still at about 12 times earnings. Even though we are expensive from December levels, we are still below our historical averages. The reality is that 2011-12 numbers are not going to be great and the market knows that. For 2012-13, we are expecting earnings per share (EPS) of Nifty companies to be about 400. Next year should be better in terms of earnings growth, we are looking at about 13 per cent earnings growth.
What is your index target for the year?
I feel index-specific targets are irrelevant. My sense is it's time to focus on specific stocks. We can trade at 15 times, which is 6,000 on the Nifty. Market always is forward looking. So if you are growing you can take another 10-15 per cent upside.
Will India be able to attract more than its fair share of further foreign institutional investors (FII) flows?
The structural growth in India is likely to be strong in the next two decades. Even in the worst year we will grow our economy at about 7 per cent. Economic evolution will attract a lot of capital because there are lot of growth opportunities to be found in Indian stocks. Also there are very few growth spots left in emerging markets. India is certainly one of the few along with BRIC, Indonesia and Africa.
Which are the sectors and stocks you are positive on?
From a stock market perspective, 2011 was all about low beta and defensive names like ITC, Hindustan Unilever, TCS, Infosys, HDFC. I think 2012 will be risk-on. High-beta stocks like ICICI Bank, L&T, SBI, M&M will do well. Typically, some sectors, like banks and capital goods, tend to do well as a turn in the monetary cycle kicks start the investment cycle.
