Consider Valuations To Find Market Triggers

Mehraboon J Irani
Principal & Head, Private Client Group
Nirmal Bang Securities

• Sectoral Performance
  Companies in sectors thriving on domestic consumption – FMCG, pharmaceuticals and private banks – have been doing well, while the problems persist for those in sectors like power, infrastructure and real estate.

• Inflation fears
  On the inflationary front, food inflation looks like a big worry. It is not a domestic problem, but a global one. As far as India is concerned, we have sufficient reserves provided our politicians act correctly.

To begin with, currently there are problems the world over. India too, unlike in 2008, has its own set of problems. This time, the unfortunate part is that the government does not have money to provide a stimulus. We are dealing with higher fiscal deficits along with high interest rates and inflation that are adding to this problem. A bad monsoon is another cause for worry.

In spite of all these problems, I am of the opinion that the Indian markets are better placed as compared to the other markets across the world. However, it is not going to be a perennial bull market.

If you look at the sectors thriving on domestic consumption – FMCG, pharmaceuticals and private banks – you would have observed from the FY12 results that they have been doing well. On the other hand, companies in sectors like power, infrastructure and real estate are in bad shape, which can be gauged from their numbers, and will continue to be in shambles. We could see a repetition of 2011-12 in FY13 too, as the recovery will take some time.

So, one may ask whether it is time to buy into these sectors. Well, to begin buying into them, the investment cycle has to start. In the private sector, nobody wants to put in money, and in the public sector, nobody has money. Therefore, for investment to happen, the reforms process has to start. One should start looking at the markets in an optimistic manner and buy in a staggered manner.

On the inflationary front, I must confess that I am anxious about food inflation. This is not a domestic problem, but a global one. As far as India is concerned, we have sufficient reserves provided our politicians act correctly. But we will still face a problem with respect to cereals, pulses and milk products.

On the interest front, the RBI has very little room to move ahead and reduce the interest rates. The apex bank had made its intentions clear in 2012, and I feel that the government will act accordingly. If the RBI ignores food inflation, we may see a 25 to 50 basis points cut in the key policy rates in FY2013.

Further ahead, one should look at the valuations while finding triggers for the market. At the present levels, the one year forward PE is quoting slightly higher than 12x. So, it cannot go down from these levels. I think that Europe will start improving over the next two-three years. As a matter of fact, they have already started acting gradually.

Globally, there are negatives going forward. Therefore, things are not going to be easy. As far as rupee depreciation is concerned, I believe that the currency will rebound to Rs 52/USD mark in the next six to eight months. I am also hopeful that the reforms process will begin, which will kick start investments.

At this juncture, we are bullish on FMCG, private sector banks and select mid-cap IT companies. I am also bullish on select companies in the pharmaceuticals sector. If the investment cycle starts rolling, we could see the tides turning in favour of the infrastructure companies.

As already mentioned, India is better placed as compared to many other markets. One should buy at lower levels and take some profits home in market rallies. Investors should learn to tame their expectations. They should also refrain from entering at higher levels. India has now reached a stage where I can confidently state that our markets should be bought on declines.