India: Advantages galore

Thursday, July 15, 2010 | Posted by: Koushik Vasudevan
Categories: | Tags: business, India, investment, economy, global, Elara Capital

Indian markets are among the few around the globe which enjoy ‘growth’ and ‘defensive’ premiums at the same time. At a consensus EPS of INR1050 for the Sensex, we are trading at the higher end of P/E (17x), which is more than the historical one year forward of around 15.5x. In the long term, favorable demographics and an infrastructure-driven Indian economy offers good long-term investment opportunities which should ideally push this multiple even higher. Given the current global scene, we would ideally like to be positioned in the domestically driven themes. With a strong volume growth, supple input costs and positive operating leverage acting as a cushion to margins, Auto companies seem impressive for the rest of the year. Infrastructure stocks are slated to report a stable performance in the coming quarters, supported by the growth momentum in H2FY11 and a pickup in execution across segments. We would bet on emerging diversified infra themes, especially a play on energy and roads over the next 15-18 months.

One must also look at the Indian media space where significant changes in business dynamics are expected given the looming favourable modifications in regulations, especially in the cable and satellite space which would act as a structural catalyst. With ad revenues projected to be better this year, we like the broadcasting space as we expect majors like Network18, which recently consummated a major revamp, to increase the shareholder value. Another strong domestic play would be the FMCG sector, which is relatively insulated from the scare over global growth. We expect the growth in volume to drive profitability this fiscal year. This would primarily be spurred by the demand from rural India (especially non-farm income) and increasing domestic disposable income levels. Prices of agricultural commodities are also expected to decline owing to better than expected monsoon levels, benefiting the FMCG players.

Last but definitely not the least; one cannot miss the value simmering in institutions that virtually bankroll India’s huge growth juggernaut – domestic banks. We anticipate a strong uptick in the credit growth (around 20%) in H2FY11 thanks largely to an accelerated GDP estimates. Added to this, progressively lower NPA levels and declining credit costs make some of the private banks even more attractive in the current fiscal year.

Auto: Supple input costs and a positive operating leverage would act as Operating Margin cushions. With a strong volume growth on the anvil, we expect the sector to continue its outperformance in the current year.

Infrastructure: Sectoral stocks are slated to report a stable performance in the coming quarters, supported by the growth momentum in H2FY11 and a pick-up in execution across segments. We would bet on emerging diversified infra themes, especially a play on energy and roads over the next 15-18 months.

Media: With the recent regulatory recommendations in the sector, business dynamics are expected to change significantly which would act as structural catalysts for media stocks especially in the cable and satellite space.

FMCG: Relatively insulated from the global growth scare, we expect the volume growth to drive profitability in the sector this fiscal. This would primarily be spurred by the demand from rural India (higher non-farm income) and increasing domestic disposable income levels. Prices of agricultural commodities are also expected to decline owing to better than expected monsoon levels and forecasts, benefiting the FMCG players.

Banks: We expect an uptick in the credit growth (around 20%) in H2FY11 owing to an increased forecast in GDP estimates. Plus, progressively lower NPA levels and declining credit costs make some of the private banks more attractive for the current fiscal.

Koushik Vasudevan and Sreevalsan Menon
For Elara Capital
www.elaracapital.com