Wednesday, March 11, 2009

Outlook for Indian Equity Market

By A K Prabhakar and Tanmay G Purohit

Why should one invest in equities?

There are many investment avenues available – Debt, Equity, Currency, Commodities, Real Estate, many others like Art, Antiques; the list is definitely not exhaustive. Why equity has a good probability to return handsomely – global recession has made indices all over the world drop to historical lows, creating an opportunity for investors. Gold is already near All-time highs, real estate prices themselves haven’t dropped to mouth-watering levels so far, and equity is sold off. So by simple logic one choice is equity. Zero interest rates in developed parts of the world make Equity best investment with many company dividend yields around 4-5%.

What is special about India as an investment destination? What’s India’s strength?









Investment to GDP ratio (%)








Median Age (Yrs)








Exports to GDP Ratio (%)








Imports to GDP Ratio (%)








  • India has one of the highest savings to GDP ratio. Had it not been for low savings in USA and UK, recession would not have been so deep.
  • Young population: India has one of the lowest Median-age of population, living a big working class which doesn’t have to serve a lot of ageing population. Many other country nationals will be getting older as Indian youth will blossom in the boom once the recession recedes. Major benefit is that many can speak English easily. English is a world language and China still hasn’t developed well in this aspect but they are coping with it.
  • Exports to GDP ratio and Imports to GDP ratio is one of the lowest for India, some may think of it as a lagging factor, but it is how you see it. May be reason for why so many economists feel India will not be impacted so much by recession lies in the fact that we have low Exports and Imports compared to our GDP. The closer the economy, lesser the global recession affects you.
  • Everybody knows that General Motors may file for bankruptcy but just have a look what Indian auto sector is doing! Maruti has hit all-time high sales figures in Jan and Feb 2009, didn’t India have slowdown? How come people buy cars in recession? Thanks to pay commission and economic stimuli! In fact India is becoming export hub for auto like GM was some years ago. Other sectors where exports can do better are Capital Goods, Pharmaceutical and Technology.
  • Outsourcing deals have improved and Indian exports in terms of talent and intelligence makes India receiver of one of the highest remittances in the Globe, which is why the economy has sustained well.

So where does India lag behind?

Problem for India is Growth. It’s not that India can’t grow, but nobody is going to get attracted here by so-called Hindu Growth Rate of 3-4%. Growing at 8-10% will be great as China has done it even with such a huge population base. But how do we get there? So far India has had Consumption-led growth whereas many other nations had Investment-led growth.

  • We need more investments into Infrastructure and Power; it is not so difficult with such a high savings rate.
  • We need speedier trains. Average speed for Indian trains lies around 70-80 km/hr which is way below other Railways like of China and Japan. Speedier reach to far-away places prevents unnecessary urbanization; people can come from villages to metro-cities, do their work and go back.
  • India has 346 airports, China 467, Brazil 4263, Russia 1260, Japan 176, UK 449, USA 14947 – we still have a long way to go. (Japan’s number is not small compared to size.)
  • Fiscal Deficit has been a big problem- think of an election year in a country like India and immediately one can imagine the expenditure incumbent parties do to keep voters happy. Just add recession in the same year and you will have to provide stimulus to the economy, cut taxes, boost demand howsoever you can. All this is together and makes a perfect recipe for a high fiscal deficit.

Elections 2009 – will it be a spoilsport?

Elections are due in April 2009 and as per estimates Rs 10,000 crores are to be spent on it. From 1996 till date we have seen 4 governments into power – all have been Coalition Governments, but we have grown in such a situation too. This time around as well, many fear a hanging Lok Sabha, but any new government will try to continue reforms as Indian problems won’t be solved if it doesn’t grow.

New government will try to wipe out the fiscal deficit as much as possible, new measures can be partial or full disinvestment of PSUs and residual stake sales in companies like Maruti, Tata Comm.

Recent positive developments:-

  • Nuke Deal is signed and many countries like Russia, Kazakhstan and France are already eager to do business with India in that field. Nuclear power capcaity 2100MW now can triple in 1 year time to 6000MW with no addition in capacity.
  • India GDP grew at 5.3% in Q3, below many estimates. But in a quarter where corporate profits declined 33%, growth above 5% is appreciable.
  • India has signed many Free Trade Agreements in recent past and benefits will start flowing in quickly once global economy stabilizes somewhat. Indian companies have already started benefitting by investments from Japan (deals like Ranbaxy-Dai ichi and TTML- NTT DoCoMo) after the Delhi-Tokyo Freight Corridor.
  • Sensex/Nifty trade around 11 times forward P/E and India growing more than 6% warrants more investments as it is anyway 2nd fastest growing economy. The stimulus packages so far will have their effects in 6-8 months time and any new government is expected to continue the reform process. Infrastructure here has tremendous scope for growth and new initiatives are needed.
  • CMIE predicts net profits of Indian companies to rise by 74.4% in FY10. The PAT margin will also improve to 7.7% from 4.8% in FY 09 and expects petroleum products companies returning into profits in the March 2009 quarter.
  • KG-D6 gas will start flowing later this month and it can save India around $19bn through savings in imports and savings for Indian consumers through the approved price, there are other capacities also like CAIRN and ONGC will come on stream in next few years. Reliance gas that is being priced at USD 4.20 per million British thermal unit -- at least 50 per cent cheaper than competitive domestic gas -- would increase supply of urea in the country and bring down fertiliser subsidy, as stated by Murli Deora recently. It would also increase power generation and reduce dependence on imported oil to meet energy needs.

What about the new bottom?

That is the question everybody is asking before investing in India. In my view that really doesn’t matter. Sensex is currently placed around 8100 levels. If one thinks it can reach 18000-19000 in 2-3 year period to say the least, even if it is to come near 5000, the risk-reward is still very favourable for the buyer. It is an opportunity provided by nature in my view and should be grabbed by those who can wait patiently.

As an investor, one should not get tired of buying. Peter Lynch once said, "When stocks are attractive, you buy them. Sure, they can go lower. I've bought stocks at $12 that went to $2, but then they later went to $30. You just don't know when you can find the bottom." Bear market is the best time to build a portfolio. Those who miss out on such opportunities, have to beg for corrections so that they can get a chance to buy, but they hardly get any offerings. The time is not too far for the rally. Better to be a beneficiary of a bull-run than a beggar of a bull-run.

From where can the money come?

  • Savings rate near 40% is bringing huge investment into stocks
  • Mutual Funds collected nearly Rs One lakh Crores in the last 3 months and sitting on cash of around Rs 42500 Crores (January’09 figure)
  • Hot money has taken exit mostly and hedge fund redemption looks to end. March and May have been bottoming-out periods for our markets.

Which sectors and stocks can be looked at?

Auto, FMCG, Power, Technology can be good for investment. Maruti, Tata Motors, Hero Honda, M&M, Hind Unilever, Colgate, ITC, Tata Tea, NTPC, PowerGrid, Tata Power, Siemens, APIL, Infosys, TCS can be stocks from these sectors. ABB, ACC, BHEL, CAIRN, Reliance, Tata Steel, BEML are a few stocks from other sectors that can outperform.

Date: 11-03-2009

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