Follow The Fundamentals

Ajay Jaiswal
President-Investment Strategies & Head of Research
Microsec Capital

THE LONG HAUL

• Though the performance of the Indian market has been in line with that of most emerging markets in the past three months, it remains an outperformer on a long-term basis.

ROMISING PICKS

• We are focusing more on beaten down sectors like Capital Goods, Engineering, Banks and Metals. Export-related sectors would continue to remain outperformers, but alpha returns can be generated from the former.

The Indian market is in a rough patch, given the deteriorating macro-economic conditions, the lack of policy implementation, and most importantly, the lack of confidence. To further aggravate the situation, the sharp decline in INR/USD by almost 20 per cent in the past four months due to the expected tapering of US Fed Bond buying has made the situation worse. Again, firm crude prices have added to the woes of widening trade and fiscal deficit.

However, the silver lining is that with the decline in INR/USD coupled with the measures taken by the RBI and the government, gold imports have fallen and exports of textiles and engineering goods have picked up. This has curtailed the burgeoning trade deficit. Though the performance of the Indian market has been in line with that of most emerging markets in the past three months, it remains an outperformer on a long-term basis.

We may see great divergence between the expectations and actual results in Q2FY14, as the INR/USD movement changed the earnings equation for most sectors. While IT is expected to see a two-four per cent earnings surprise on the positive side, Banking may post numbers four-five per cent in the negative. The Auto sector may report a mixed set of numbers, as some companies like Tata Motors and Bajaj Auto may see the slowdown in domestic sales compensated by global sales and exports. Metals stocks may report results in line with the expectations of neutral growth. However, the numbers are likely to reflect the worst, and hence may not impact the markets as the same stands priced in.

The Indian rupee is likely to move up gradually against the USD before it settles down and trades between the 58-63 levels in FY14. The sharp depreciation is a combination of factors like the burgeoning current account deficit, dwindling forex reserves, fear of outflow of funds by FIIs on QE3 tapering by the US and the slowdown in the Indian economy.

However, all these factors are temporary and short-lived. We believe that they would reverse sooner rather than later on measures taken by the RBI and government and FDI inflows in sectors that have recently been opened to global players. Moreover, a host of companies and particularly MNCs are likely to raise stake in their Indian counterparts, as their spare cash is likely to generate higher ROEs and hence better returns in the longer term.

The benchmark interest rate is likely to remain unchanged, especially in view of the elevated CPI numbers and the firm trend on the gradual increase in diesel prices going forward. However, the newly appointed RBI chief may bring in some innovative measures, which may actually bring down the interest rates for housing and other priority sectors.

From a broader perspective, the sharp depreciation of the INR/USD is a major trigger. While gains look imminent for the IT and Textile exporters, it may prompt more global players to make India a hub for manufacturing and exports, whereas domestic companies with sound financials are likely to look for opportunities in the export market. The next trigger could be the implementation of idle projects across steel, mining and power, which are gaining the government’s attention due to all-round criticism. The agricultural GDP is likely to grow between 4.2-5.2 per cent against 1.90 per cent last year, which may act as a catalyst for growth across sectors, besides spurring consumption.

The global markets are likely to remain resilient as the US economy picks up growth and China in turn exports more to the US, besides seeing domestic growth. Europe is already out of recession, and signs of growth are evident. We may see the growth rates worldwide being revised on the higher side soon, which would keep the global markets firm. The hype over QE tapering may be short-lived, as much of the impact of the same has already been seen.

We are focusing more on beaten down sectors like Capital Goods, Engineering, Banks and Metals. Export-related sectors would continue to remain outperformers, but alpha returns can be generated from the former. We believe that the Food Security Bill and the Land Acquisition Bill would eventually generate higher consumption appetite especially among the rural masses, and hence recommend select picks in FMCG. Our top picks are Dabur, Britannia, L&T, Crompton Greaves, Engineers India, Thermax, Swaraj Engines, Cummins India, IL&FS Transportation, SBI, Axis Bank, Syndicate Bank, PNB, Hindalco, Tata Steel, Vardhman Textiles, Rallis India, Pidilite Industries, Blue Star, Esab India, Aditya Birla Nuvo, Madras Cements, Bajaj Auto, Cairn India, LICHF and NMDC.

We advise retail investors to first set their objective in terms of realistic returns and accordingly invest in SIPs. For investors directly active in the market, there is always opportunity irrespective of the market conditions. Hence, follow discipline in investing, go by the fundamentals and never invest based on hearsay. When investing in a company, try to focus on at least two-three years down the line with regard to its expected performance, a trailing record of deliverance of management, product or service positioning, etc.