Karan MuthaSr Vice President & Head - Equity & Derivative Advisory, HSBC InvestDirect Securities
The Indian growth story is on a strong footing from a medium to long-term outlook and we are fairly confident that this growth curve would remain strong, primarily supported by the sturdy domestic demand and the increasing income levels within the economy.
In the near-term though we expect some moderation in growth mainly because of two factors i.e the economy running at near-full capacity on the back of higher demand that will create inflationary pressures and the ongoing monetary tightening throughout FY12, which is aimed at cooling down the economy. As compared to our peers in the emerging market space, the Indian markets would remain more resilient due to a higher share of domestic consumption in the overall GDP as compared to China or Korea, which are largely export-dependent.
This provides a cushion in the event that the sovereign debt worries in Europe and a slowdown in the US accentuate from here on. However, in terms of the overall valuations the Indian markets are still expensive on a relative basis with the Nifty trading at around 14.6x its 12-month forward P/E as compared to an average P/E multiple of 11.3x for other emerging markets. This essentially leaves us in a situation where the markets would largely remain range-bound till we see the headwinds of inflation cooling off and the capex projects kicking in at a faster rate.
The Q4FY11 results were a mixed bag with the usual suspects delivering lower profitability margins, particularly the likes of automobiles, capital goods and infrastructure. The financials, on the other hand, saw in-line numbers for most of the PSUs and private sector names, with positive surprises coming in from banks such as ICICI and HDFC. However, SBI sprung a surprise on the negative side. Apart from the few outperformers, margin pressures were visible in the annual numbers of oil and gas, financials, real estate, capital goods and cement companies reporting lower margins as compared to FY10. Pharmaceuticals and FMCG have held out quite well as far as growth in sales and bottomline is concerned.
The key trigger for us would be a considerable moderation in inflation, which will signal peaking of interest rates and a pick-up in government spending. This will lead to capacities building up, particularly for the starving infrastructure sector.
The effects of higher interest rates have started kicking in with the growth moderating, as visible in the 7.8% GDP growth data revealed for Q4FY11. We still feel that as the sequential growth momentum remains strong, inflation may not cool down in a hurry, thereby leading to an increase in interest rates to a tune of another 100 basis points in FY12.
This will surely impact the performance of the interest rate-sensitive sectors such as automobiles, real estate, infrastructure and banking. As for the global markets, the overhang of the sovereign debt crisis continues to be a haunting factor. The key issue is that the problems of the 2008 sovereign debt crisis have now shifted from the private sector into the public sector. This growth momentum may start moderating as governments look to slowly roll back the fiscal stimuli. Given the current environment, we feel that one cannot take a sectoral view and the picks should largely be stock-specific.