MODIfy Your Portfolio For 2014

Volatility and uncertainty are two factors that investors would be happy to avoid while investing. However, in the past one year, the equity markets have been especially characterised by volatility. Among many positives, a few events that unfolded kept the larger chunk of the investor fraternity at bay. Those who participated were kept on their toes as they struggled to gauge the markets’ direction. 

The factors that kept the markets uncertain were many. As stated, while the year started with some positives from the larger global economies, poor domestic factors affected the investment scenario significantly. Consistently higher inflation, a higher current account deficit and contracting GDP, along with other factors like policy paralysis, contracting IIP numbers and last but not the least a depreciating rupee, all made for an unhappy combination of factors for Indian equities. 

Even in these trying circumstances, the Sensex yielded positive returns of 9.28 per cent in the past one year. While this brought some succour to investors, readers of Dalal Street Investment Journal have more reason to cheer. Our ‘Where to Invest in 2013’ portfolio recommendation has brought to investors returns of more than 23 per cent, more than double the Sensex returns (See exhibit on facing page: 2013 Portfolio Performance). This is the third consecutive time that our portfolio has outperformed the benchmark index significantly, clearly indicating our high standards of research. 

Investors would be interested in knowing what to expect from the markets going ahead. This question assumes more significance as various global as well as domestic factors are about to change, and the outcome of the same would decide the course of the markets. 

The general elections are due next year, and the anticipation of the BJP forming a stable government and ending the policy paralysis is already causing the markets to rally. On the global front, the US and European markets are certainly showing signs of recovery, and the early start to the QE taper bears testimony to the same. 

The start of taper would mean an end to US government’s era of easy liquidity. There were constant fears that this would lead to many institutional players taking flight back to safety rather than staying in the risky emerging markets. Liquidity being a prime factor that is holding the Indian markets at the higher levels, the outflow may bring some pressure on the markets. 

We are currently at a very important juncture, with FII fund allocation beginning in the next year, developed economies showing signs of revival, emerging markets witnessing traction, and most importantly, the general elections around the corner. With the equity indices trading at their yearly highs, investors would be seeking some insights into the markets, as no one would want to falter ahead of such important events. Ahead in this story are the views of leading brokers who understand the pulse of the markets and DSIJ’s take on what to expect in 2014. 

VOLATILITY ABOUNDS 

Let’s first understand the factors that kept the markets fickle over the past one year. For one, inflation levels remained consistently higher for this period. While the WPI remained above the six per cent mark, CPI also remained in the higher double digits. As a result, the interest cost remained on the higher side (despite the RBI cutting the repo rate twice in 2013), ultimately impacting the capex and investment cycle. The impact in the latter part of the year was such that the RBI increased the repo rate twice, taking it back to the levels seen last year. 

The lack of investment and capex (which was visible as even the IIP contracted during the year) directly impacted the performance of India Inc., as the corporate results were affected. It came as no surprise that there were more EPS downgrades for Sensex-based companies. The policy paralysis also added to the woes. This led to contraction of the GDP and the rupee also depreciated significantly, impacting our import bills and increasing the CAD. 

Along with these domestic factors, the constant fears of FIIs pulling out from the Indian markets kept investors on the edge. In 2013, FIIs had invested a whopping Rs 111630 crore here, down from Rs 128360 crore invested in 2012. 

Through this volatility, we had been consistently guiding our readers, helping the time the markets precisely. And that’s what we intend doing at this point too. Before that, let’s take a look at what the other major participants are saying in this regard. 
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BROKERS’ VIEWS 

In almost all of our conversations with leading brokers, one factor came to the fore repeatedly. This was regarding the consensus expectation of a BJP-led government coming to power at the centre. The current rally in the markets despite so many odds is a clear indication of this overwhelming sentiment. With a stable government at centre, everyone expects the policy paralysis to end. Apart from that, a focus on infrastructure development would be an added advantage. These factors would take the markets to fresh highs. 

However, this also comes with few riders. Ambareesh Baliga (Managing Partner – Global Wealth Management, Edelweiss Financial Services) explains that we should see an extension of the rally in case the market expectations regarding a reforms-oriented, market-friendly government at the centre are met. However, in case of converse action or slippages, the correction could be quite steep. We, at DSIJ, feel the new government would surely need to live up to the expectations in the first 100-day period. Overall, the scenario seems to be bullish going ahead. 

On the strategy to build a portfolio, there seem to be some strong views on the sectoral front too. The infrastructure sector is likely to come back into currency, considering the BJP government’s sterling track record therein. Five out of the six brokers we spoke to have recommended it for the next year. Similarly, a revival in capex would perk up the Capital Goods sector too, and three brokers have backed it. Similarly, with the US and European markets reviving and rupee depreciation serving as an added advantage, export-oriented stocks (especially IT) are back in action. 

Select metal stocks are also being recommended considering the factors like recent capacity additions being employed for exports and import substitution in the sector owing to rupee depreciation. Despite the slowdown, the Automobiles sector also seems to be favoured by four analysts. In addition, a few newbies like media, NBFCs and agricultural-oriented sectors have also shown up on the radar. 

As regards specific stocks too, there seem to be a couple of distinct choices. Some brokers are recommending Infosys and TCS, and others advise going for HCL Technology and other smaller IT stocks like Accelya Kale Consultants. 

DSIJ RECOMMENDS 

Rs 1 Crore Portfolio For 2013
Company Name	CMP  (24-Dec-2013)	Quanity	Amount (Rs)	Wt  (%)
Gruh Finance	251	8764	2199764	22
TTK Prestige	3397	529	1797013	18
E Clerx Services	1088	1838	1999744	20
Eicher Motors	4990	440	2195600	22
Crompton Greaves	134	13432	1799888	18
Cash			7991
Total Value			10000000
Sensex	24 Dec 13		21033

So, what is the DSIJ view on the markets for 2014? While the elections are undoubtedly an important factor, we also see a few other factors that may guide the markets’ movement. Improvement in the US and European markets is favourable for the markets. Though many expect that it would lead to a flight of liquidity, we feel the Indian markets have shrugged off the news of tapering and are ready for the near-term impact of liquidity withdrawal.

In another positive, CAD is already declining, and as the policy paralysis ends it would boost the capex and investment cycle. This will not only help in improving the GDP, but would also better the financial performance of India Inc. There were already some indications of this in the September quarter, with more upgrades than downgrades in the period. We are also expecting the IPO markets to revive in the coming two quarters, and some investment bankers that we had a word with concur with our view.

The only factor that could act as a spanner in the wheel is any unprecedented actions taken by the central banks in India as well as the US. The RBI has not been able to control inflation with its moves so far, and hence, any further stringent action on its part could be a downer. Barring this, we see the markets sustaining at the higher levels and expect brighter days ahead.

Like we have been doing every year, we are providing a fresh investment portfolio for the year to come. Given how we have succeeded in creating value for our readers in the past three years, we are confident that this portfolio would also help investors make a killing.
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TTK Prestige

• The company’s strong rural reach would drive growth going ahead
• Expanding product portfolio to boost its future prospects
• Sustained margins to perk up the bottomline

TTK Prestige
Particulars	Amount (Rs Crore)
Sales	1372.27
% Change	13.89
NP	128.22
% Change	11.23
PBIT	185.92
% Change	4.71
Equity	11.64
EPS (Rs)	110.15
CMP (Rs)	3430
P/E (x)	31.14

After a lower-than-expected set of results for the quarter ended September 2013, not many would have thought of recommending TTK Prestige as an investment pick. However, we feel that the long-term outlook for the company remains positive. Its leadership position in the organised market for kitchen appliances has helped the company ride difficult economic cycles in the past and would also help it tide over the current gloomy economic conditions. In addition, the improving power situation in South India (the company’s main market), an increasing share in other markets and an expanding product portfolio are a few other factors supporting our call. The company would also see its export sales rise as the new model of microwave pressure cookers is ready to be launched.

Today, TTK Prestige holds a 15 per cent share of the market (organised) for induction cook-tops and a 35 per cent share (organised) for pressure cookers. No wonder that while gloomy economic conditions led many players in the consumer goods sector to report a drop in sales, TTK managed a decent show. In the first six months of this fiscal, the company has recorded a two per cent growth in revenues.

The nominal moderation in sales growth was due to a drop in demand in Andhra Pradesh following the prolonged agitation over the state’s bifurcation. In Tamil Nadu, the company’s main market, severe power shortages kept a check on the demand for induction cook-tops.

The coming quarters may, however, be better. First, with a bountiful monsoon and improvement in the power situation in Tamil Nadu, sales should receive a boost. Secondly, the company’s exports to Japan will resume soon as the re-designing of its microwave pressure cookers is almost over. TTK Prestige will also launch its own water filters at the end of this year. Overall, the company looks set to grow at a higher rate than the industry in the coming years, with a deepening presence across the country and overseas.

In H1FY14, its margins contracted by 150 basis points to 13.50 per cent. This was due to the higher price of imported inputs and power. The margins were also pressured on account of the change in product mix and higher sales of lower-priced appliances. However, the profitability should improve hereon. The power situation in South India is getting better, with nuclear power projects coming up and a good monsoon auguring well for hydro-power generation. Besides, as production at its new unit in Gujarat expands, the company’s reliance on imported finished goods is likely to come down.

At 0.3x, TTK’s debt-to-equity ratio is quite comfortable, as is its interest cover at 14x. With expansion of the pressure cooker and cookware capacity already completed, no major capital expenditure is expected in the near term. We recommend a ‘buy’ on the counter with a target price of Rs 4500 in the next one year.
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eClerx Services

• The company saw revenues of USD 34.1 million in the second quarter, up 3.4 per cent sequentially and 3.1 per cent in constant currency terms
• The acquisition of US-based Agilyst Inc. is adding strongly to its business momentum and financials in an uncertain environment
• It has seen considerable EBITDA margins expansion during the elapsed four quarters

Eclerx Services
Particulars	Amount (Rs Crore)
Sales	749.65
% Change	30.39
NP	225.99
% Change	45.95
PBIT	284.29
% Change	45.24
Equity	30.09
EPS (Rs)	75.10
CMP (Rs)	1095
P/E (x)	14.58

The rupee depreciation is expected to benefit most of the IT companies, and most of these companies have shown a considerable run-up in their stock prices. However, eClerx Services is one company that still has further scope of capital appreciation. This ITeS company offers knowledge process outsourcing (KPO) services. It has a strength of more than 7000 employees and provides services using a mix of data analytics and customised process solutions.

The company closed the second quarter with USD 34.1 million in revenues, which is higher by 3.4 per cent sequentially and 3.1 per cent in constant currency terms. In rupee terms, the company posted a topline of about Rs 215 crore. The operating margins for the second quarter stand at 40 per cent and the net profit for the quarter is Rs 67 crore, up nine per cent sequentially and 59 per cent on a yearly basis. The major contributor to the operating profit was the exchange rate gains on the topline front. The company is expected to continue with its capex plans to the tune of about Rs 15 crore during the next two quarters.

The company's thrust on diversification has begun to pay off. The top five clients’ concentration has come down by considerably to 75 per cent in the four quarters gone by, and the top 10 clients would probably make up about 90 per cent of the total for the company. Further, the company has complete focus on business development in mining emerging clients and acquiring new clients. Hence, we are confident that the company will continue to reduce its dependency on its top five clients by adding new clients.

The company’s outlook on the banking side has improved against that 12 months ago, because banks now have reasonably better conviction and decisiveness in their processes. As far as the cable business is concerned, the management has a reasonably optimistic outlook. As for the negatives, the company is also facing a few problems such as lower utilisation and higher attrition levels during the past couple of quarters. 

The current quarter was the first since the acquisition of US-based KPO firm Agilyst Inc. where the company had a consolidated basis yearly comparison. Agilyst continues to post robust business momentum to the company's financials. The former’s work accuracy management, critical error identification and optimum logistics solution are expected to drive business in an uncertain environment.

With the second quarter results coming in along expected lines, the company has seen considerable EBITDA margins expansion during the elapsed four quarters. Further, its focus on new client acquisitions are raising expectations of an improving revenue mix. The growth driven by Agilyst is expected to result good appreciation in the stock price over the next one year.
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Crompton Greaves

• The company’s international operations are on the path to recovery
• It has seen an improvement in its margins on a sequential basis
• The order book likely to see an uptick

Crompton Greaves
Particulars	Amount (Rs Crore)
Sales	12721.26
% Change	7.44
NP	-45.68
% Change	-115.28
PBIT	268.57
% Change	-49.05
Equity	125.94
EPS (Rs)	-0.73
CMP (Rs)	134
P/E (x)	NA

Crompton Greaves witnessed a difficult scenario in the three years from mid-2010 till mid-2013. Various issues like a declining order book, poor performance of international subsidiary companies and a few corporate governance issues led to the scrip witnessing pressure on the bourses. However, with H2FY14, the scenario seems to have changed. The Capital Goods sector, which was in a dull and tepid phase, is on a revival path. On the micro front too, there are some positives emerging. Companies’ order books have started ticking, international operations are on a growth path and the margins are improving.

Crompton Greaves is one of the leading players in the power transmission and distribution equipment business in India. It operates across three segments – power systems, consumer products and industrial systems. This is a globally diversified company and derives around 50 per cent of its order backlog from international operations, led by a series of acquisitions undertaken over FY06-12. Europe and North America are two of the company’s biggest markets outside Asia, and jointly account for around 40 per cent of its order backlog. Despite some slowdown, the order backlog stood at Rs 9743 crore, increasing 3.6 per cent on a YoY basis.

In the past few quarters, the company’s international operations have been a drag on the consolidated margins, partly due to restructuring at its Belgium facility. However, the international operations are showing signs of recovery, with a positive EBITDA of Rs 2 crore in the quarter after seeing losses on this front in the past four sequential quarters. Although its businesses in Belgium, Hungary and Indonesia have reported positive EBITDA, the losses in the Canada and US subsidiaries are still a drag. The management has stated that while the US and Canada subsidiaries are likely to continue making losses, it is hopeful that the EBITDA of the international operations will be cumulatively positive in FY2014.

Consequently, the company's PAT grew by 38.8 per cent YoY to Rs 58 crore.

On the valuations front, the scrip discounts its FY14E earnings by 22.50x. This is in line with the peer companies and provides scope for an up-move. We recommend buying the scrip with a target price of Rs 160 in the next one year.
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Eicher Motors

• The company has a virtual monopoly in the leisure motorcycles segment in India, which is looking to touch new highs
• It has put in a much better performance than its peers even in the CVs division, which is currently at its lowest ebb
• Margins improvement is expected going forward because of a favourable product mix across its segments

Eicher Motors
Particulars	Amount (Rs Crore)
Sales	1471.29
% Change	59.29
NP	245.77
% Change	41.64
PBIT	312.15
% Change	53.80
Equity	27.01
EPS (Rs)	90.99
CMP (Rs)	4975
P/E (x)	54.68

Eicher Motors, the market leader in leisure motorcycles in India, is poised to outperform the auto industry with its world-class products. We are of the opinion that this segment will be the next destination in the Indian two-wheelers industry as the average household income is touching new highs every year and a considerable part of its population is likely to reach the aspiring segment in the near future. Furthermore, the pace of urbanisation in the country is stepping up, and as people move to cities, they will be inclined to increase their purchases and spend on a variety of items.

Luxury motorcycle brands such as Honda, Yamaha, Kawasaki and Suzuki have existed in India for quite a long time. Eicher’s brand Royal Enfield continues to enjoy a lion’s share of the market (98 per cent). The Royal Enfield Classic and Thunderbird models currently have a waiting period of more than six months. The management has confidence of sustaining such a good demand for its product for the next couple of years. The motorcycles division is already trending towards EBITDA margins of 20 per cent.

The domestic commercial vehicles industry is currently experiencing its worst phase, with various concerns over revival in the infrastructure and mining industry and higher interest rates. However, despite all these pains, the company managed to maintain EBIT margins well above six per cent during the quarter gone by. This was much better performance compared to that of other players, both larger and smaller than the company in scale. The management has confidence in its business model and has continued to invest in it.

Adhering to its expansion strategy, the company has launched a full new range of trucks and buses called the ‘Pro Series’. CVs being a cyclical business, the new launches will take the company to new highs, according to the management. The new series of products will have a focus on improved fuel efficiency, higher loading capacity, superior uptime and overall vehicle lifetime profitability. Further, with the launch of its new series, the company is focusing on increasing its exports to Africa, West Asia, South Asia and South East Asia.

VE Powertrain, a JV company between Eicher and Volvo, has set up a new engine plant with an initial capacity of 25000 engines annually. The company intends to make this plant the global hub for Volvo engines. With this new generation plant, Volvo will have advantage of low cost manufacturing and Eicher will get access to Volvo engines for its own products.

The company is expected to improve its margins going forward because of a favourable product mix across its segments. The motorcycles division is expected to increase its margins due to operational leverage and the CV division’s margins are expected to improve due to an expected revival in the economy in FY15. This performance will be boosted once the engine division starts contributing to its full capacity. We recommend that investors buy this stock for a 20 per cent upside from the current levels.
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GRUH Finance

• Ability to steer through difficult economic cycles
• Growth drivers in place, with a focus on semi-urban and rural markets 
• Consistent dividend payment history

Gruh Finance
Particulars	Amount (Rs Crore)
Sales	753.73
% Change	25.17
NP	160.07
% Change	20.53
PBIT	681.05
% Change	25.37
Equity	35.91
EPS (Rs)	8.92
CMP (Rs)	252
P/E (x)	28.27

In the current scenario of rising interest rates and tepid real estate markets, investors might be surprised to a housing finance company being recommended as a part of our portfolio, and these concerns are valid to some extent. However, there are also certain factors that make this stock a good long-term buy.

The company has consistently delivered superior profitability and growth across economic cycles. Even in the difficult scenario of FY08-09, its net interest margins remained firm and the profitability improved significantly. This ability to steer the business through volatile times makes it a safe haven for investors. Other compelling factors which make it a strong contender for our list include a strong management bandwidth (backing of HDFC Group), consistent dividend payment history, access to a strong distribution network in the rural and semi-urban areas – all of which are contributing to growth, a strong brand identity and one of the best asset qualities. The peaking out interest rate cycle is expected to be beneficial.

GRUH Finance is a part of the HDFC Group (60.37 per cent holding) and targets the semi-urban and rural areas through a strong network of 136 branches. We expect the rural focus to drive growth for the company going ahead too. The rural focus comes as an advantage, as while realty deals have declined in metros and Tier I cities, there has been hardly any impact in the semi-urban areas. With around 75 per cent of its business coming from places with a population of less than two lakh, the company has put in disbursement growth of 25 per cent in H1FY14 despite the difficult macro-economic scenario. This is significantly above the industry average of 16-18 per cent.

Despite the strong growth, the company’s asset quality has consistently trumped that of its competitors. Its Net NPAs have been at zero for the past five years consecutively. It is also a consistent dividend paying company.

The financial performance of GRUH Finance has been strong and the company has managed to carry on the momentum in H1FY14 also. Along with 25 per cent growth in disbursement, the net profit stood at Rs 68.12 crore (up 26.32 per cent on a YoY basis). The NIM was sustained at 4.15 per cent despite the rising cost of funds. We believe that the company will be able to maintain the current NIM going ahead, as around 95 per cent of its loan book is based on a variable rate. With a CAR of 17 per cent, it is adequately capitalised.

On the valuations front, its CMP of Rs 253 discounts the trailing four quarter earnings by 27x and the Price-to-Book Value stands at 9x. While this may seem to be on the higher side, we are of the opinion that companies with a strong management quality and consistent performance always command a premium over their peers.

Considering the expected growth from the rural areas, sustained margins and a peaking out interest rate cycle, we recommend a ‘buy’ on this counter.
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2013: Portfolio Review

DSIJ CREATES VALUE FOR INVESTORS

2013 PORTFOLIO PERFORMANCE
Pidilite Industries	44.13%
MRF	38.18%
Greenply Industries	31.79%
Dabur India	30.23%
J&K Bank	14.70%
Voltas	11.54%
Prestige Estates Projects	-9.50%
Portfolio Returns	23.19%
Sensex Returns	9.59

We at Dalal Street Investment Journal have indeed lived up to the motto of democratising wealth creation. The performance of our ‘Where To Invest in 2013’ portfolio recommendation provides ample evidence of the same. In uncertain times, when even most market experts were shying away from investing in equities, we took a bold step of recommending a portfolio to our readers. What’s more, the portfolio has yielded strong returns of as much as 23.19 per cent as against Sensex returns of 9.59 per cent in the similar period (See Table: Performance of ‘Where to Invest In 2013’ Portfolio). Our ‘Where to Invest In 2012’ portfolio provided an astounding 29.89 per cent returns over 14.08 per cent Sensex returns in the same period. This clearly points at our strong research capability. 

A closer look at the performance of every counter in our recommended portfolio for 2013 will tell you that Pidilite Industries provided the highest returns of 44.13 per cent, followed by tyre manufacturer MRF providing 38 per cent returns and Greenply Industries with 31.79 per cent returns. Dabur India also yielded 30 per cent in returns. In a nutshell, four out of the seven counters recommended provided more than 30 per cent returns. Even J&K Bank and Voltas, which witnessed pressure on account of rising interest rates, gave returns of more than 10 per cent each. Only the scrip of Prestige Estates witnessed a decline. 

However, we had provided a lower weightage to the scrip in our portfolio. Another point to note here is that we had closed positions in Greenply Industries in January 2013. This would mean that the absolute returns would be higher, adjusting for the time factor. Apart from this, we have not included dividends received during the period, accounting for which the returns would have been higher.
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A Strong ‘Hope Rally’ In The Offing

Ambareesh Baliga
Managing Partner - Global Wealth Management
Edelweiss Financial Services

Keeping in mind the general elections, what is your view on the markets till May 2014 and thereafter?

The markets may react positively in case the BJP-led NDA is in a comfortable position to form the next government at the centre, as the coalition is perceived to be more right-of-centre and market-friendly by market participants. A ‘hope rally‘ is normally witnessed starting five-six months prior to every general election, and this time around, it should be a strong one due to i) Underperformance of the equity markets and poor macro numbers leading to a view that we have reached the nadir and the situation can only get better from here ii) Expectations of a change of leadership and a strong reforms-oriented, market-friendly government iii) Confirmation from the state elections that the ‘winds of change‘ are very strong

Post elections, there could be two scenarios – if there is no clear verdict and a weak coalition is formed, the markets will react sharply and recovery could get delayed by 12-24 months depending on how long the formation lasts.

In case the market expectations are met regarding a reforms-oriented, market-friendly government at the centre, we should see an extension of the rally for the next three-four months. Following this, the markets would judge the performance of the new government in the first 100 days. In case it meets the high expectations, the markets would continue the rally with more vigour. Conversely, in case of any slippages, the correction could be quite steep. The longer-term markets would get realigned to the domestic macro-economic as well as international events going forward.

What is the strategy that you would follow to build a portfolio for the coming year?

The core portfolio should be able to withstand political uncertainty and should be able to outperform during an economic slowdown. The holdings should be such that they need not be revisited every quarter based on the results, and the time frame would be of five years plus.

A portfolio should have at least 60 per cent core holdings with a long-term view, which are not dependent on seasonal flavour of the market. These would be Large-Cap blue chips with impeccable management quality, robust business models, long-term visibility of growth and earnings.

The balance portfolio could consist of the seasonal theme and trading ideas based on the risk profile and objectives of the investor. This part of the portfolio provides excitement as well as generates an alpha to outperform the broader indices. The current seasonal theme would be beaten down sectors such as Capital Goods, Infrastructure and Engineering. The other sectors which are witnessing renewed buying and should be a part of an investor’s portfolio are Banking, Metals and Automobiles.

Which companies would you recommend as part of an ideal portfolio for investors?

The core portfolio will have stocks such as ITC, Larsen & Toubro, Maruti, Sun Pharma, TCS and HDFC Bank. The seasonal flavour as well as the Mid-Cap picks would be Motherson Sumi, Pidilite, Alembic Pharma, GMR Infrastructure, ILFS Transportation, Exide Industries, Bajaj Finance and Tata Steel.
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Growth Expected To Return In The Economy

Deven Choksey
Managing Director
KR Choksey

Keeping in mind the general elections, what is your view on the markets till May 2014 and thereafter?

The general elections are going to be very exciting this time around. The market is expecting a good government to come, which could take up better governance in the country. Given the fact that the BJP-led government has performed better in the country, the market is probably expecting it to come into power in the general election.

Certainly, the markets want more reforms to take place and these reforms are likely to work in multiple ways. The global investors who have been wanting to invest in India were struggling to find the right environment to invest in India and facing a lot of hurdles in the process. Good governance that the BJP and Narendra Modi are promoting, in my view, would be accepted far better by the global investor.

Given this fact, we could probably see a larger amount of growth happening in areas like infrastructure. That is where the market will be more excited, as cyclicals would probably start getting better recognition in the marketplace once again. Consumer durables, non-durables, banking and finance, metals and commodities – these are some of the sectors which have been available in the market at very attractive valuations at this point of time. I find that market expects growth to return in the economy, and India as a country certainly holds the potential to grow in the higher single digits.

What is the strategy that you would follow to build a portfolio for the coming year?

The strategy would be very much similar to what one would probably do to take returns out of one’s investment. To get return in the range of 25-30 per cent on a cumulative basis, one would try to take investment calls largely on those companies or those businesses which have shown durability and sustainability in their environment. So, any sector you pick up, if the company has sustainability as far as earnings are concerned, that would be the first choice.

Secondly, we would give more weightage to those promoters across sectors which have shown a good amount of maturity in dealing with challenging business environments and have refrained from taking undue risks.

We will also look at those sectors which are purely dependent on foreign earnings, albeit with a magnifying glass. We believe that if the rupee stops depreciating, those companies which thrived on higher earnings due to a depreciated rupee may adjust their margins in a high cost structure.

Generally we believe that financial discipline along with good governance in a company and the sustainability of the business, are the three factors that merit maximum importance while selecting a company in the portfolio. Currently, there are many opportunities available in the market where one could probably consider a bottom-up approach vis-a-vis a top-down approach. So, we would certainly like to consider the combination of both, but will give preference to the bottom-up approach.

Which companies would you recommend as part of an ideal portfolio for investors?

We believe that instead of looking at the sector per se, look at the company because of the bottom-up approach. You might find a good amount of traction happening in the BFSI space, and within that, you may find companies with a niche in certain areas of activity – for example, certain NBFCs which have a niche with some infrastructure asset classes. Companies like IDFC or LIC Housing Finance have a niche in infrastructure funding activity. LIC is having home assets as an extra folio and hence, it is believed to be more secure kind of a company. So, that is where we will focus first.

Similarly, within the auto space, we find that de-rating would take place in the commercial vehicles segment, particularly because of growth environment returning into the system. The likes of Tata Motors, Maruti and Bajaj Auto could possibly play a bigger role going forward. Also, the rate of interest after a lag may start coming down when growth starts resuming. To an extent, that would give a good amount of growth in the portfolio in the auto space.

I think we may also get opportunities in companies like Reliance, where a higher amount of growth traction is being seen in the coming two-three years of time because of the projects that they have enrolled themselves into. 

Within the IT space, I think the companies are going to thrive on the recovery of the US economy. Following this, in many of the IT companies’ space, you may find organic growth also returning in excess of 15 per cent. Even if one has to buy the argument that the currency depreciation will not help them beyond a point, yet I think 15 per cent plus organic growth would benefit the likes of HCL Technologies or any other frontline IT company. Certainly, we like many other Mid-Cap companies within the IT space where the growth rate is 25-30 per cent, the size may be relatively small compared to the frontline companies. In any case, 25-30 per cent growth on a smaller size with a disciplined approach is something which is convincing us to buy into some of the Mid-Cap IT companies too.
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Equity Markets May Continue To Exude Strength In 2014

Dinesh Thakkar
Chairman & Managing Director
Angel Broking

Keeping in mind the general elections, what is your view on the markets till May 2014 and thereafter?

Clearly, post the outcome of the state elections, the markets are more positive on the prospects of a strong mandate for a new government at the centre in the general elections. They are expecting the policy environment to improve and in turn lead to a revival in the investment cycle. In my view, irrespective of the new government that comes to power in the elections, the focus is likely to remain firmly on stimulating capex and creating more employment and investment avenues to kick-start growth in the economy.

In my view, the equity markets are likely to continue exuding strength in 2014 on account of resilience of the foreign economies, recovery in domestic growth and an improvement in outlook for corporate earnings. The equity markets are already factoring in the tapering of asset purchases by the Fed over the next two-three months. Since our Current Account Deficit has moderated substantially and the risks to its financing have also receded with timely policy action, I believe that we are better placed to tackle the near-term impact of liquidity withdrawal. I am positive that with a growth revival in the US and other advanced economies, India’s exports are likely to benefit and add to GDP growth.

What is the strategy that you would follow to build a portfolio for the coming year?

Presently, the market rally is largely being driven by the front-liners in the export-oriented and defensive spaces. I continue to maintain a positive stance on the outlook for export-oriented sectors like IT and pharmaceuticals. I am also overweight on select metal stocks, considering recent capacity additions/under-utilised capacity getting employed for exports and import substitution in the sector owing to rupee depreciation. Considering the shaping up of positive cyclical factors, I also selectively prefer large private banks as these continue to remain structurally strong, and I believe that they are likely to benefit from an imminent economic revival.
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Markets To Be Range-Bound In Near Term

Dipen Shah
Senior Vice President-Research
Kotak Securities

Keeping in mind the General Elections, what is your view on the markets till May 2014 and thereafter? 

In the near term – probably not May 2014, but say over the next two-three months – we are looking at a very range-bound market because on the higher end we are looking at concerns like the Fed taper. So, that is something which will be concerning the market. On the other hand, we have an economic situation which is not very great. 

On the lower side, there is optimism that things might turn out to be better post elections and there is a comfortable situation on the external front. Also, the RBI’s stance on interest rates at the recent policy meeting is being viewed positively. So, I think there is optimism and there are also concerns, and we expect the markets to be in a narrow band.

Post May 2014, I think it will depend on what kind of a combination comes in. Be it any party, a clear mandate in favour of one particular party is the best scenario for the markets. So, I think it should be a very strong verdict in favour of a particular party. We have to just wait and watch as to whether there is still uncertainty after May 2014. If that is so, we can expect the markets to react negatively, otherwise they should be positive.

What is the strategy that you would follow to build a portfolio for the coming year?

As of now, we are following a very stock-specific strategy. It should be a mix of both defensives as well as the cyclical. Currently, since the scenario is not very clear, we are looking at a mix and are not in favour of any particular sector or segment of the market. We are positive on IT or other export-oriented sectors in the automotives or the engineering sector. There are also some stocks from media and FMCG which we think should be a part of the portfolio. On the other hand, among the cyclicals, if there is a significant pick-up in the market because of certain events then they probably should not be left out. To that extent, we are looking at stocks which have strong balance sheets and credible managements in the beaten down cyclical sectors, say capital goods or infrastructure. Those kind of companies are the ones which should be preferred because in any circumstances these companies should be relative on performance. So I think it should be a mix of both defensives and cyclical. We would take stocks from both of them to build our portfolio.

Which companies/sectors would you recommend as part of an ideal portfolio for investors?

Let me say that we test specific stocks across sectors. In defensives, we do like the IT sector, and within that some of the Large-Cap and a few Mid-Cap stocks. We also do like a few stocks in the media sector and in FMCG, though we do feel that the valuations are high. Even in some of the beaten down sectors or cyclicals, we do like companies that are cash-rich and have strong balance sheets and good managements. So I would say select stocks in sectors like IT, FMCG, Media, Engineering, Oil & Gas and Auto.
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Indian Economy Requires Good Political Leadership

K R Choksey

Keeping in mind the general elections, what is your view on the markets till May 2014 and thereafter?

In the current situation, the world market has started improving. The US and EU as well as Japan are showing signs of improvement. Basically, the domestic business situation depends a lot on the developments on the international front, where we are seeing some rays of hope. Stabilisation in the rupee and growing strength in the international markets will give a boost to exports.

Secondly, the RBI governor has played his part well in addressing the market conditions, which shows his knowledge on the subject. Dr Rajan has given a lot of confidence to the industry as well as to overseas investors, and he could raise a lot of foreign exchange for the country. Agriculture is showing record production, but the reaping of benefits is yet to begin. This, in turn, will help the economy to revive. I see the situation improving from now on until May 2014.

There is also another aspect to this. Till now, whatever response Narendra Modi has received is because of his economic agenda. The Congress should have done this much earlier as they have been in power. The decision of gas pricing, which has come in now, was required three-four months ago. As the election is coming it is not a question of coming back to power or not. They should have taken prompt decisions on the issues pending for long. If that happens then going forward the markets will also be reaping the benefits of the same.

After the elections, Indian economy requires a good leadership. If Narendra Modi comes to power this will give confidence to the industry as well as the common people of the country as well as global investors. So everybody is waiting for the right opportunity to enter the Indian markets. If you look closely you will find that the MNCs have started increasing their stake in the Indian business in the recent past. They are now all coming to 75 per cent. So that is providing with the confidence on India provided that it gets a good and strong leadership. Narendra Modi is in favour of Information Technology, so if he comes to power and IT comes in a big way then what will happen is that systems will take over humans which in turn will help to reduce corruption. This is one big issue that the country is facing at this point of time. What he has done in Gujarat will be replicated here. The best example is Punjab.

What is the strategy that you would follow to build a portfolio for the coming year?

This market is working on the basis of sectors. Today, if a particular sector is working well is because all the investors be it domestic or overseas expect quick returns. At the moment IT is doing well because of the improving sentiments in the markets world over. In Pharma there is noted expansion in the domestic as well as the overseas markets. There are lot of drugs that are going off patent and the Indian players are well poised to reap the benefit of the same. Off late there is an indication that the steel industry is reviving. In the last quarter results Tata Steel have posted profit and similarly SAIL has expanded their capacities. I believe that both these companies will do well going forward. But the government has to come out with clarification on the mining front. In Infrastructure what is required that there is a co-operation between the state and the central governments. All these issues need to be addressed for a better tomorrow.

What is your take on other asset classes?

If the economy improves and the investing opportunities increases then the markets will be smoothly moving up which will in turn prevent people from investing in gold. Economy process should catch momentum for the smooth rise in the markets. There is a lack of opportunity which is instigating investors to divert money to other asset classes.

In the year 2014, are you of the opinion that more money will flow into equities rather than flowing to other asset classes?

Today, while allocating it is understood that equities are not a preferred class. But I think going forward equities will receive more allocation.

Give me a set of companies that you would like to recommend for building a portfolio?

If we look at the pharmaceutical sector which is doing well at this moment. In this sector, I like Torrent Pharma, Natco, Lupin, Ipca Laboratories, Cipla, Glenmark Pharmaceuticals and Sum Pharma. Over and above it appears that GlaxoSmithkline is increasing their stake in the Indian operations which is a positive indication. But companies like Pfizer and Wyeth have not yet decided on the same and if something on the same line comes from them would surely be a positive indicator. 

The next sector is IT. I am bullish on Tech Mahindra, TCS, HCL Technologies and Infosys. Whenever there is a correction in the prices one should buy. One thing is for sure is that though the companies are good it is not advisable to buy at any price. Valuation is very important for the investor. This is applicable to all sectors across the board. KPIT Cummins and Kale Consultants are the two companies that are in my radar. 

In the steel sector, I am betting on Tata Steel, SAIL and JSW Steel. 

Market at this point giving an opportunity to invest in Tata Global Beverages. From the time when they have taken over the water business, markets have not taken it in right spirit. But, it has to be remembered that water business presents a lot of opportunity going ahead. The alliance with Starbuck is also on the better side which is positive for the company. In addition to this development will bode well for Tata Coffee too. All these factors are in favour for Tata Global Beverages.

At this point of time what I feel is that the banking sector is not the flavour of the markets. If you see the private banks in this market conditions too they are posting growth of 20 to 25 per cent. Also, their NPA levels are also lower than the PSBs. Any economy should have a sound banking sector. Therefore, I feel that there is a good opportunity for banks like HDFC Bank, Yes Bank, IndusInd Bank and ICICI Bank. 

The companies on the NBFC side are also looking better in terms of investment. Companies like M&M Financial Services, Cholamandalam Finance and Sundaram Finance are looking good. I feel in this field M&M Finance have done well and they penetrated well in the rural areas as they are more into agricultural auto financing. The company is also growing very well. Cholamandalam have good presence in the southern markets and they have done that well over the years and the same can be expected going forward too.

The agriculture related companies like Sabero Organics is looking better as 60 per cent is being exported. This company is moving fast and the outlook is strong. Also, Kaveri Seeds looks good in the sector related to agriculture. 

In the auto ancillary sectors, companies like Munjal Auto, Munjal Showa looks good. I also like Amara Raja Batteries, but it has run up a lot in the recent past. 
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A Market High On Expectations

Mehraboon Irani
Principal and Head – PCG
Nirmal Bang Securities

Keeping in mind the general elections, what is your view on the markets till May 2014 and thereafter?

Based on the Assembly election results, the markets have surged on renewed optimism of the expected poll outcome in the Lok Sabha elections in May 2014. With liquidity intact (for the time-being) and sentiment hopeful, we could see higher levels in the near future.

But now that the election noise is over, there is a distinct possibility that the debate could shift soon to fiscal deficit and other macro concerns. The Indian economy is struggling to maintain a real GDP growth rate of five per cent. The rupee has just recovered on the back of some very urgent measures by the RBI, but pressures remain. The CAD problem has been largely accounted for (though that is largely to do with the stiff control on gold imports) and the inflation index continues to bother policymakers. With long-term interest rates so high, you can’t have a very big rally. Also, any confidence for the investment cycle to resume any time soon can’t remain sustainable.

Besides hope of a stable government at the centre post the elections in 2014, the markets have been largely buoyed by the continued buying by FIIs. Over the past couple of years, FIIs have pumped in close USD 40 billion largely due to easy monetary conditions that are direct outcomes of the financial crisis of 2008 and 2009. With a distinct possibility of the US bond buying programme tapering coupled with improved economic data, this source of ‘hot’ money is at some risk.

Election-related issues may also lead to populist measures, and this will further hurt the country’s fiscal position. After the Food Security and Land Acquisition, we have the Rural Development Ministry planning to hike NREGA wages more than what was previously planned.

The markets have largely gone up on expectations, especially sharply over the past three months. However, it is never prudent to make investment decisions based on hope.

This is not to suggest that I am not positive. Quite the opposite, in fact. It is safe to say that we have seen a three-year economic bottom. Also, for the first time after many quarters we have had more earning upgrades than downgrades.

This time next year (December 2014), we would have a newly-formed government that will (hopefully) work overtime to avert a downgrade from the rating agencies and thereby kickstart new initiatives on the back of levelling inflation (base effect); a relatively lower interest rate regime; and reduced fiscal deficit. Global growth would be back, and foreign investors having booked decent returns in the developed markets would be looking afresh at emerging markets (India included), following a possible economic upcycle in China.

Of course, while I do realise that this amounts to good reading, the fact is that the principal risk remains the political mandate delivered by India’s electorate. Other risks include the possibility of spikes in interest rates in the US and a sharp upturn in commodity prices (especially crude oil).

What is the strategy that you would follow to build a portfolio for the coming year?

As mentioned earlier, it makes sense to look at 2014 with confidence, stop worrying and start investing. While we have a market that has gone up a little too sharply over the last three months (with a possibility of some more upside in the very near future), investors would do well to wait for declines and buy selectively, increasing allocation to equities as an asset class.

The strategy would be to look at the fundamentally better companies (which have had a history of surviving economic slumps and coming out stronger) belonging to sectors which are directly correlated to the investment cycle kicking off in the second half of 2014. This includes the capital goods and infrastructure sectors.

The last five years have seen the markets getting highly polarised in favour of the FMCG, pharma and IT sectors. I believe that no incremental money should be put in the FMCG space at the present valuations. In fact, the biggest skill of any fund manager would be to time the exit from some of the relatively expensive FMCG and pharma names and move into beaten down sectors.

Which companies would you recommend as part of an ideal portfolio for investors?

Among the frontline names, I like Infosys and TCS (in the IT space), Lupin (pharma), Tata Motors (auto), ACC (cement), L&T (capital goods), Hindustan Zinc and Sesa Sterlite (metals).

In the Mid-Caps space, I continue to recommend Mindtree (IT), Motherson Sumi (auto-ancillary), VST Tillers (auto), Abbott and Sun Pharma Advanced Research (pharma), IFB Industries (consumption), IFGL Refractories (capital goods) and Ramco Cement (cement).

Besides, I remain positive on niche companies like Delta Corp and Pressman Advertising.