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The worst is behind us: Tejas Doshi

| 8/1/2011 3:07 PM Monday

Tejas Doshi
Vice President - Institutional Research, Sushil Finance

The long-term growth story of India is often spoken of, and with a great deal of optimism. However, right now, we are in the middle of the first quarter (June quarter) results season and it seems that this is going to be a tough quarter for India Inc. The market has already started discounting the soft results that have been coming in, as is evident from its performance. From 19446, where it closed in March 2011, the Sensex has fallen by about 11 per cent to reach 17314 during the 3rd week of June 2011.

The global scenario too is not panning out positively. The Greek crisis has been averted temporarily after the national government promised to cut expenses and sell government assets over time to honor their commitments and bring the economy back on track. We believe that the EU will bail out Greece, but will keep up the pressure on the country—at the same time, being prepared for it to under-deliver on its promises. In our opinion, every quarterly review on Greece over the next one to two years will lead to initial fears of the EU pulling the plug, before it postpones these plans and gives the country some more time.

Overall, there will be a lot of uncertainty led volatility, but this may not translate into any severe financial crisis. Hence, India’s economic position will be fine. In case of any global financial crisis, only gold is expected to preserve its value. If the crisis is staved off, (as is most likely), then we will have an extended period of slowdown in US/Europe. This will be an opportunity for India, since smart money moves where there is growth.

Currently in India, inflation continues to remain at elevated levels. Since the government has increased the prices of petrol and diesel during May–June 2011, inflation could spike up further, forcing the RBI to increase the interest rates by another 25 basis points in its forthcoming meet. However, we believe that inflation and interest rates will peak out this quarter, given our view that crude and commodity prices have already peaked and may moderate over the coming three months. Also, as per the IMD the monsoon has set in well in some states and will pick up in the others. Pharmaceuticals, consumer goods, engineering and capital goods are among the sectors that look good to us. Selected companies with a high level of cash on their balance sheet, and which are paying high dividends, are also on our radar.

According to us, this is the best time to buy stocks. Investment demand in India is expected to remain buoy-ant, as more and more pending infra-structure projects move into the core implementation stage. With the rise in wages and fresh employment generation, the demand for consumption will rise further. Of course, we do expect a lot of volatility in the markets especially on account of global news-flows, the progress of monsoon and a disappointing June-quarter performance.

Despite this, given that stock prices are yet very low and on the assumption that inflation and interest rates should peak in India over the next 2-3 months, we believe that the worst is behind us and the markets are poised for a strong recovery. Hence we think that this is the best time to buy a lot of good quality stocks that are available at attractive prices, especially in the mid and small cap space.

 

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