‘Our Sensex target for March 2012 is in the range of 21-22K'

These are tough times and Indian stocks are being battered for various reasons. However, Mr Nikhil Vora, MD of IDFC Securities, expects the pressures to ease by the end of this fiscal and maintains a positive long-term view on equities.

What is the reason behind Indian stock market's relative underperformance in 2011?

“5i” are responsible for the market underperformance: inflation, inflows, interest rates, international events and inaction from Government. Impact of scams and scandals that broke out in the end of 2010 continued to play out in 2011. Also, persistent inflation with inflation getting broad-based led to hawkish monetary policy stance by the RBI and a rising interest rate environment. Slowing investment spends and lack of policy triggers from the government have resulted in downward adjustment to India's growth expectations (consensus FY12 GDP estimates down from 8.4 per cent in December 2010 to 7.8 per cent currently, IDFC estimates).

Is it a good idea to buy stocks now? What returns can investors in Indian equities expect in 2011?

I do believe that institutional investors will look at the present uncertainty as an opportune time to relook at their India portfolio. The next quarter will possibly see the peak of all the variable factors mentioned above and that means that this is the best time to buy into reversals. Concerns over demand erosion in developed countries and rising interest rates across emerging markets are likely to temper global commodity prices. Lower commodity prices and the lag impact of monetary tightening are likely to moderate inflation to 7 per cent by March 2012E.

A stable interest rate environment and policy triggers from the government would kick-start investment spends in 2HFY12, in turn resulting in healthy GDP growth (8 per cent yoy) in FY12. We remain positive on the outlook of Indian equities our Sensex target for March 2012 is in the range of 21000-22000.

Flows from FIIs and mutual funds have been tepid so far this year? Do you see this trend reversing anytime soon?

Increasing concern on inflation and likely impact of higher interest rates on the growth outlook have led to huge FII outflows across most emerging markets till May. Investors have been wary of investing in companies whose profitability has been declining on the back of input cost pressures and higher interest rates. We expect FII flows to pick up in India once commodity prices come off from elevated levels thereby easing inflationary pressures.

Flows from domestic MFs have continued to disappoint and expect it to remain tepid. Having said that, as earnings resilience in India remains ‘moderately strong', we expect inflows to start to inch up and increase momentum in H2CY11.

What is the rationale behind downgrading Sensex PE multiple for FY12 by 2 per cent?

We have downgraded our Sensex EPS estimate for FY-12 by 2 per cent to Rs 1,193 (nearly 16 per cent y-o-y growth). This is driven by earnings downgrades of 7.8 per cent in telecom, 4.2 per cent in IT services, 3.8 per cent in oil and gas, 3.5 per cent in financials and 2.7 per cent in automobiles. Lower net addition of subscribers in Africa (stringent KYC norms) and margin pressure in the Indian operations of Bharti Airtel have led to earnings downgrade in telecom. In automobiles, moderating volume growth and higher commodity prices could dent margins. Higher gross under-recovery burden to be borne by upstream and downstream companies could offset better realizations from crude oil prices. Earnings downgrade in financials has been primarily due to higher provision expenses for SBI.

I think the most interesting aspect of the earnings profile for FY11 and FY12 is the fact that the quality of earnings for FY12 and FY13 will be materially different than in FY11. The skewness in earnings (due to the commodity cycle) will even out for the next two years, leading to an extremely broad-based sectoral earnings growth for the index. We sense a re-rate based on broad-based earnings growth for FY12 and FY13.

What are your top sector picks now?

We believe that the current year is likely to be more bottoms-up rather than top-down. Thereby, stock-picking abilities should come back to fore.

Our top ideas for the current year are a mixed bag and reflect our opinion on bottoms-up stock-picking — ITC, Adani Power, Educomp Solutions, Infosys Tech, L&T, M&M, ONGC, Sun Pharma, Tata Steel, Jain Irrigation, Titan industries, ICICI bank and IndusInd Bank. Our top mid-cap idea includes Agrotech Foods. I am turning incrementally bearish on United Spirits (de-rating issue), United Brewery (valuations concerns) and Maruti and Telco (likely structural de-rate) Adani power: Adani Power's strategy of tying up sale of power (˜74 per cent of capacity under construction) and securing part of fuel supply through contracted imports and linkages ensure stable cash flows

FMCG is the only sector that has given positive returns this calendar. What is the reason? Do you see this outperformance continuing?

Strong top line and bottom line growth has been seen across most FMCG companies as commodity inflation have been offset by price increases and cost control. Hence, most FMCG companies have been able to maintain their margins in spite of increasing costs. Also, sector has been broadly untouched by various scams that have plagued Indian equities. While we do not see any further re-rating happening, returns would be earnings driven (˜19 per cent for FY12E).

Do you see consumption growing at a healthy rate in the upcoming quarters? If yes, then what are the likely drivers?

Private consumption growth has remained stable at ˜8 per cent yoy even as government consumption has been declining. Wage increases, NREGA distributions have offset the impact of rising inflation. Rising interest rates and rising food and fuel inflation could impact consumption growth as seen in the decline in auto volumes in April and May 2011. Hence, we expect consumption growth to moderate to 7-7.5 per cent in FY12.

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