Weak commodities, cheap valuation to drive Sensex to 18,500: BNP
As growth slows and expectations of rate cuts rise, Aditya Puri, managing director of HDFC Bank, says that while some room for rate easing has opened up, any dramatic reduction in rates is unlikely.
India's benchmark indices have hit January lows amid a risk-off environment globally. Domestic weakness has further dented sentiments.
Manishi Raychaudhri, strategist and head of research at BNP Paribas Securities, however, believes that Indian markets are likely to see better days ahead because the country is among a handful of economies that register 6-7 per cent growth annually.
Edited excerpts:
Outlook on markets: Cautiously optimistic on markets after correction. Expect a rally in the second half of the year. Sensex target around 18,500 levels.
Rupee: Forecasting rupee movement is the second worst job after forecasting oil prices. There are significant concerns on capital flows. The rupee may not decline much but may trade near current levels, give or take 3-5 per cent.
Reasonable valuations: Indian markets have de-rated to 13-times price earnings and are discounting many negatives. Earnings estimates have flattened out after five quarters of decline and are looking reasonable, having declined 15 per cent over the last year.
FIIs not in a hurry to exit India: In April and May India has hardly suffered $350-400 million outflow, which is small as compared to many other countries. So may be international investors are looking at slightly different variables as we in India are looking.
Global cues: International events could lead to significant decline in risk appetite and cause outflows from emerging markets including India.
Commodity prices: The decline in commodity prices is a direct consequence of global economic crisis, and is good news for India as it reduces inflation and current account and fiscal deficit. The fall opens up space for the Reserve Bank to reduce rates. Two things are possible: There could be a second round of FII selling or the earnings environment after the downgrade is perceived to be less risky than in the past.
GDP: Fourth quarter GDP data was a shocker, but such declines tend to goad the government into some policy action, so that is one hope. Look at the way the government is trying to force Coal India to sign agreements, and the way state electricity boards have hiked rates. Reforms in the energy subsidies could be the next trigger for markets. The sharp decline in GDP was partly because of upgradation of GDP in previous quarters, which means the actual GDP number was 5.9 per cent, which is not too far from the forecasts.
Stock picks:
While the market has underperformed, there are companies and stocks that appear attractive at current valuation. The consumption story is working in India.
Overweight: Auto, telecom and engineering sectors.
Top buys:
1) L&T: Target 1400
2) BPCL: Target 735
3) Hero MotoCorp: Target 2050
4) Tata Motors: Target 375
5) Power Grid: Target 122
