The Hindu Business Line : Market excesses have been purged, says Motilal Oswal

Case study
Valuation premium of some secular growth sectors have contracted
Motilal Oswal anticipates earnings upgrade on all the large caps
We believe that Indian corporates will continue to grow faster than the nominal GDP growth: Motilal Oswal

Mumbai , July 20

The sharp correction of Indian markets in the first quarter and significant reduction in F&O positions by over 57 per cent from April levels have meant that the excesses specific to Indian markets have been purged, according to a Motilal Oswal Securities Ltd report released on Thursday.

In the report, titled `India Strategy - Purged `n' ready for another dawn', the company said that the valuation premium of some secular growth sectors have contracted and thus this was an opportunity to buy growth at relatively lower premium.

After the better-than-expected first quarter earnings by Infosys, ACC, Gujarat Ambuja and TCS, Motilal Oswal anticipates earnings upgrade on all the large caps, Mr Rajaj Rajgarhia, Head (Institutional Research), told newspersons.

Among the large caps, its top picks include HDFC, Reliance Industries, Infosys, Maruti, ITC, ICICI Bank, Bharti, Bajaj Auto, HLL, and Cipla.

Stating that the excesses specific to Indian markets have been purged, he referred to the significant reduction in arbitrage positions and the meltdown in mid-caps and real estate stocks.

For instance, the F&O positions were down by 57 per cent to $4.5 billion from $8 billion in April 2006.

In comparison, the F&O position was $4.5 billion in June 2005, when the Sensex was at 7,000 levels.

Making a strong case for stock market investments, the report said that the risk-reward equation was favourable for long-term investing.

"At 11,800 levels (based on 16x2007-08 estimate), markets offer possible upside of 11 per cent," it said.

Also, the current Sensex discount is nine per cent to 15-year median, when factoring in 2007-08 earnings.

Mr Rajgarhia said the risks such as rising inflation, interest rates, drying up of liquidity and falling rupee could have an impact on earnings, especially in mid-cap stocks, in 2007-08.

Macro story intact

The report also said: "While corporate profit to GDP is at a high of 4.4 per cent in 2005-06, the ratio is still well below the eight per cent corporate profit to GDP achieved by the US corporate sector.

"We believe that Indian corporates will continue to grow faster than the nominal GDP growth of 12-13 per cent, going forward."

The current fiscal will be the fourth consecutive year of eight per cent GDP growth rate, it added.