Broker’s Blurb

The Indian equity market is set for a multi-year rally. Hence we have a constructive view on it for the next 3-5 years. Having said this, we believe that the global economic order is going to witness a change in 2015. While USA is likely to commence monetary tightening on the back of sustained revival in economy, the other major economies and regions like Europe, Japan and China would continue to struggle and could take further monetary easing (cash infusion) steps to support their economies. This may create ripples in exchange rates and fund flows globally and cause bouts of risk aversion-driven volatility. Thus, the global environment is not likely to be as benign in the year 2015 as was in 2014.

In comparison to other emerging markets, India is better placed to manage global uncertainties due to a much improved macro situation now. As against India being slotted among fragile economies in 2013, it has emerged as one of the most preferred emerging markets in 2014 which is likely to sustain given the low energy prices, improving policy framework and the country’s fiscal health.

For the third quarter results, the street expectations have already been pruned down post the lacklustre second quarter results. Moreover, the quarterly performance is expected to get impacted by the sharp movement of the dollar against major currencies (cross-currency movements) in case of exporting companies like IT services and a sharp correction in commodity prices which could result in provisions for mark down in the value of inventory. However, the corporate earnings are much better on a rolling four-quarter basis (at double-digit levels) and showing signs of moving to high-digit growth rates in FY 2016.

We believe that the RBI would commence a interest rate cut cycle after the Union Budget 2015-16. By then, it would have better confidence as regards the inflationary trend with the low base effect beginning to wear off. We expect the RBI to reduce policy rates by 100-125 bps in CY 2015 if the global situation does not deteriorate.

All the global currencies including the rupee could come under pressure against the US dollar in 2015 if the US Federal Reserve goes ahead with tightening of its extremely loose monetary policy by middle of CY 2015. A more aggressive interest rate cut by the RBI is consequently not a very prudent step given the global risk of high volatility in the currency markets. We would be happy if the rupee manages to stay in the band of Rs 60-64 per USD for the year 2015.

In the near term the two important triggers for the domestic equity market will be the high hopes of policy announcements in the Union Budget and the expected changes in the RBI’s monetary policy. Going ahead, the sustenance of a rally in the Indian equity market would depend a lot on the BJP government’s ability to deliver on promises of economic revival and policy reforms. Globally, there are many monitorables like the timing and extent of monetary tightening in USA, further quantitative easing by ECB and the Chinese central bank, etc. We expect the global cues to be mixed in 2015 and may witness an increased level of volatility due to change in the economic order in 2015.

As far as the various sectors are concerned, we are positive on the automotive and banking sectors that are likely to be early beneficiaries of economic revival in India. We are also positive on urban discretionary spending-driven companies and quality cyclicals along with some bottom-up picks. Our top ideas for 2015 include Ashok Leyland, Hero Motocorp, ICICI Bank, SBI, Bharat Electronics, Max India, Gateway Distriparks, Century Plyboards, DCM Limited, and Network 18 Media.

Given the not so expensive valuations of 15.5x, the FY 2016 earnings and 12x FY 2017 earnings (as against average multiples of 15x one-year forward earnings), we believe that retail investors should build a quality portfolio through a phased manner to ride the multi-year rally in the Indian equity market.