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Maintain A Stock-Specific Approach

| 10/18/2012 9:03 PM Thursday

Dipen Shah
Head – Fundamental Research
Kotak Securities











Reforms To Lead

  • The government has begun addressing the issue of long-pending reforms that were the need of the hour, and this is a welcome move that has played a very positive part in changing the market sentiment.
Q2FY13 Results
  • On the results front, we will see some stability on the margins front this time. We do not foresee the growth rates improving to a great extent as compared to the previous quarter.

The first thing that comes to mind when talking about the Indian market is that the current scenario is fairly optimistic. This optimism can be attributed to the proactive steps taken by the government over the last one month. The government has begun addressing the issue of long-pending reforms that were the need of the hour, and this is a welcome move that has played a very positive part.

This positive frame of mind has also been backed by developments that have taken place on the global front. The third round of quantitative easing (QE3) by the US Federal Reserve and the announcement made by the European Central Bank about its willingness to print money has also played its part in boosting the sentiments further. This reasoning can be supplemented if you look at the performance of the Indian markets, which have outperformed their global counterparts.

Right now, we have entered the results season. For the second quarter of the current fiscal, we are expecting to see revenue growth in the range of 10-10.5 per cent for the companies that are under our universe. This figure is excluding banks.

If we look deeper into the results, we can say that we will see some stability on the margins front this time. But on the same lines, what we are anticipating is that there will be no major surprises on the results front. We do not foresee the growth rates improving to a great extent as compared to the previous quarter. However, the real picture will emerge only when we hear from the company managements when they interact with the analyst fraternity after declaring their results.

On the macroeconomic side, if we look at the inflationary scenario, we believe that there will be some push and pull. We have seen the core manufacturing inflation remaining lower in the range of five per cent. However, some worry could erupt on the food inflation side, which has continued to remain high. With the diesel price hike, inflation could be pushed upwards on the higher side. More importantly, if we look at the crude oil prices, we find that they have already started climbing up. While the rupee has helped in the recent past, we have to be careful about the movement of crude oil prices, which are at around USD 116 per barrel. This will again give some upward push to inflation. On the pull side, we do not believe that inflation will come down sharply in a hurry. The government has also said that this would be in the range of seven to eight per cent.

On the interest rate front, we do not see the RBI going ahead with a rate cut in a hurry. Bank stocks have moved considerably on the assumption that an interest rate cut will happen. If the government goes ahead with some more reforms in the next two weeks, we could probably expect some easing on the interest rate front when the RBI Board meets on the 30th of October.

On the global front, we believe that the markets are expected to remain stable. With QE3 and the ECB easing, we do not expect the global markets to face any catastrophic events. The global markets will trade in a more volatile fashion going forward, and no significant downturn is expected.

Coming back to the Indian markets, the biggest trigger that the markets are looking forward to is the reforms process. In addition to this, the RBI’s stance on the interest rate front will also be watched closely. These are the two important factors that we are looking forward to.

At the current juncture, our suggestion to retail investors is to remain stock specific. It is advisable to take a measured view of the market. Do not invest in high beta stocks that have moved up sharply without the backing of any fundamentals. Be watchful at present, and act only once there is further proof that reforms in the core sectors are coming up. Till then, I believe that investors must maintain a bottom up and stock-specific approach.

 

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