Look For Robust Balance Sheets

Sonam Udasi
Head – Research
IDBI Capital

MARKET VALUATIONS

• Our markets are not very expensive at this point of time. But the Sensex and Nifty benchmark do not offer real-time value, instead they give you long-term value like that of FY15 and FY16

SECTORS TO WATCH

• The IT sector is one that offers value and may see a re-rating. Some of the pharma stocks also have potential for re-rating.

When we talk about the potential of Indian markets as compared to other emerging markets, it can be said that the markets in South East Asia are in a better position. If we compare the growth rates of these nations with that of ours, it is clear that the economic situation of these countries is far better. However, India has the potential to be better placed, and with the elections ahead, we could see incremental growth. Of course, even as we are saying that, we believe that India may not quite be the best performing emerging market in the near future.

India Inc.’s report card for the second quarter is all set to pour in from the second week of October. The expectations are negative for the companies under our universe. Sectors like banking and financial will be under stress because of provisioning, etc. There would be some treasury income degrades because of the interest rates movements. On the other side, IT and Pharma are expected to fare better as compared to others, either meeting or beating expectations. Consumer Goods are likely to see some disappointment in terms of volume growth. We are expecting a growth rate of around three-five per cent, not more than that. In our view there will be a re-rating in the IT sector. Some of the pharma companies may be re-rated, though not all. There could be some de-rating in large consumer stocks.

On the inflationary front, what we can deduce from the last policy announcement by the RBI is that inflation would continue to remain sticky as it is going to reduce the difference between the MSF rate and repo rate. The difference would be truncated by hiking the repo rate in the next few months of this financial year. Hence, the interest rates are expected to remain slightly higher in the rest of the financial year.

Going forward, we are looking forward to triggers like the hike in diesel prices, which was expected to come in but has not happened so far. Secondly, we can expect the GDP growth to revive going forward. If it comes near five per cent or anything above 4.5 per cent in the coming quarter, people will feel that it has bottomed out, which will be better going forward.

On the valuations front, the markets are trading at 14x their forward PE and the average tenure number is 12.5x. So, we can argue that our markets are not very expensive at this point of time. But the Sensex and Nifty benchmark do not offer real-time value, instead they give you long-term value like that of FY15 and FY16.

One of the biggest worries for the markets that we have seen in the recent past is the financials of the government. We feel that this would surely improve as the rupee is showing signs of stabilising. On the other hand, the imports would also surely come down. While this is a worry, the situation is expected to improve gradually.

The IT sector is one that offers value and as mentioned earlier, may see a re-rating. Some of the pharma stocks also have potential for re-rating. These are the two sectors that we are betting upon at this point of time.

Investors should continue to look out for robust balance sheets and companies that are not leveraged at this point of time. Depending on this, they must take their own call.