Invest In Companies With Good Fundamentals
11/15/2012 9:03 PM Thursday
YUVRAJ A THAKKER
HOD - Strategic and Financial Planning
The recent past has seen a sharp swing in sentiment for the Indian equity markets. This was primarily led by a recovery in the global markets as well as a domestic turnaround. Global events such as the introduction of QE3 by the US Fed and strong domestic measures have been welcomed by the markets.
The month of September 2012 marked a very important turn in the whole scheme of things, with the government swinging back into action with a slew of reform measures. It hiked diesel prices, imposed a cap on subsidised LPG cylinders, cleared FDI in multi-brand retail & aviation and talked about PSU divestment proposals. It also announced an SEB debt restructuring plan and a cut on the withholding tax on overseas borrowings. However, more than the reforms, what was welcomed by the markets was the firm resolve shown by the government in the face of strong political opposition. Sentiments, particularly those of FIIs, have improved for India as compared to the other emerging markets.
The results for Q2FY13 are expected to show a moderate revenue growth momentum on the back of a general slowdown in our economy and a weakening of the demand environment. High inflation is also expected to act as a dampener for our corporate earnings to some extent. However, some of its effects may be negated by the depreciating rupee, which would boost the revenues of companies in export-oriented sectors like IT and Pharma. The BSE Sensex companies are expected to report a revenue growth of around 15 per cent YoY during Q2FY13 compared to a YoY growth of approximately 18 per cent seen in Q1FY13. We expect modest earnings growth of around eight per cent on a YoY basis during Q2FY13 as against a growth of 15.5 per cent registered during Q1FY13. The Sensex is currently trading at a 10 per cent discount to its long-term average multiple of around 15x its one year forward estimated earnings, and thus, we remain slightly bullish on the index.
The government of India had targeted India’s FY13 fiscal deficit to be at 5.1 per cent of the GDP in its FY2012 budget. However, due to the overall economic slowdown and higher inflationary pressures, we believe that the fiscal deficit will exceed its target of 5.1 per cent. The host of measures announced recently by the government could reduce the deficit. However, the same could be negated if the food subsidy bill is passed in the next budget. We expect the fiscal deficit to be in the range of 5.6 per cent to 5.8 per cent of the GDP in FY13 after factoring in all the announced measures. The RBI’s priority is to reduce inflation first. Thus, we expect that there will not be any interest rate softening in the immediate future and the repo rate could remain at the current level of 8.5 per cent.
The outlook for the markets will depend on the various policy decisions that the government takes. There is lot on the government’s reforms agenda. Initiatives that are being keenly awaited are the implementation of the GST, the new Companies Bill and the evolving of a solution for trapped sectors like power, telecom, coal and oil & gas. Disinvestment is also on the agenda, as is investment in infrastructure, which will bring back investor interest. The Q2FY13 results season that is underway will play an important role in shaping the markets, having a stock and sector-specific impact. If the Cabinet is successful in building up the reforms momentum further, we could expect the markets to focus on long-term benefits and be re-rated based on the likely earnings momentum for corporate India in the next couple of years.
In the last six months, there have been a lot of concerns on the global front including the sovereign debt crisis in the European region, a slow recovery in the US and an expected slowdown in the Chinese economy.
Sectors like media, infrastructure, FMCG, banking, power and aviation, retail and insurance seem to be promising, and we are betting on them at this juncture. Retail investors should invest in these stocks and sectors. They should look for the stocks of companies with good fundamentals, strong and transparent managements, businesses generating high ROEs & ROCEs, those with sustainable business models, a pan-India presence and with the potential of becoming multi-baggers, which will eventually realise high returns.
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