Source: IRIS (01 January 2007)
The Indian markets are undoubtedly in the midst of an unprecedented, long-term secular bull run. Given the bountiful year that has just gone by, the question that is engaging the minds of one and all is how long the good times will last.
Myiris thought it opportune to seek out a few prominent marketmen for their take on the year that has just gone by and what the future holds in store.
There is a unanimity among the broking fraternity that the stellar stock market performance is built on the edifice of strong fundamentals and is thus sustainable going forward. There are concerns that global and local circumstances may derail the growth story, but these are tempered with the optimism that the Indian economy has the fire-power and the resilience to brave it all.
The common refrain is that, given the rate that we are growing at, and what is envisaged for the future, there are good investment opportunities even at today`s heights. A stock-specific, bottom-up approach with a focus on the mid-caps has received the thumbs-up from the market pundits.
Here is a summary of what some prominent stock market personalities had to say:
Amitabh Chakraborty, BRICS Securities
The Indian economy is more focused on endogenous demand, and thus less affected by a slow-down in the US. The Indian companies are more competitive than ever before. Moreover, consensus points to a soft landing of the US economy.
Rising interest rates are clearly the biggest risk to the equity market in 2007. The sanction against Iran and the conviction of Saddam Hussein in Iraq might impair oil economics in the middle-east. If oil prices move up, equity market in India might be adversely affected.
According to Amitabh, 2007 might be a year of midcaps. Many of the midcaps are trading at a level where the margin of safety is very high. Most of the midcap companies continue to report very strong results and the effect of capacity expansion is beginning to kick in. A large part of hedge fund and new FII money might go to quality midcap stories in 2007.
Investors will be better off backing sound business models with quality management, as far as IPOs are concerned.
Multi-baggers are always possible to find in any market. As the economy grows, new companies and sectors emerge. The key is to find the trends that will play out in the future. For example, signing the nuclear deal might open up opportunities, so can the food processing sector. M&A activity in a few sectors can unlock significant value for investors in 2007. The organised retail sector might open up derived plays on the sector, including packaging companies. Similarly, high oil prices have opened up offshore service sector significantly.
2007 will be the year of bottom-up ideas in the midcap space. Accordingly, it might be difficult to zero in on sector-specific themes. Nevertheless, engineering and capital goods sectors should do well. The wealth effect in the semi-urban/rural area can have a significant traction on many companies which derive a significant portion of their sales from the rural/semi urban areas.
It has strong earnings visibility and cashflow (capex is almost complete).
The company has two PSVs and 4 anchor handling tug supply vessels. Scale-up is happening in CY2009, when 7 vessels would join the fleet.
The company rcently bagged the contract for airconditioning Delhi metro coaches. Repeat orders are expected to flow in for Bangalore and Mumbai metro.
Elder Pharma is active in women?s healthcare, pain management and nutraceuticals, where it has established leading brands with a significant market share.
India is an inward looking domestic economy and a slowdown in the US is unlikely to have a major impact on India`s GDP. With the US economy expected to have a soft landing, the interest rates in US are likely to move down which will bring more flows into the emerging markets.
With four years of good earnings gowth, as corporates enter the invetsment mode cycle, earnings are expected to be around 15 to 18% from the current 30%. Mind you the base effect will come into effect so even this kind of growth will be condidered good from a market perspective. Valuations will determine the quantam of FII flows.
Hardening of interest rates could impact global liquidity and hence flows into India. A sharp downturn in the US is another factor that could impact the markets.
With the diverse number of companies listed across various sectors, there would always be companies which turn out as multibaggers. Following the bottom-up approach would help in this regard.
Suhas expects the market to trade in the 11500 to 14500 range, in 2007. Banking (private sector banks in particular), infrastructure, capital goods, cement, auto are the sectors to look for.
The year 2007 should continue to remain volatile, as valuations for large cap companies remain stretched, although the long-term growth story is compelling. The prospect of rising interest rates also suggests continued volatility.
The increased governmental spending on infrastructure and consumption-led economic growth are strong positives in the long term. This, coupled with the favourable demographics and the increasing outsourcing opportunities make the India story difficult to ignore. Moreover, the change in India``s weightage in the MSCI will continue to attract FIIs.
Kalpesh opines that stock-specific opportunities exist aplenty and patient investors will be better off investing in quality stocks bearing valuations in mind. His top picks are Bajaj Auto, ITC, PNB, Infosys and Gammon India.
Bajaj Auto: The strong momentum in the motorcycle segment, coupled with price hike in selected models, will enable the company to improve its margins. The stock is attractively valued at 12 times its FY08 (net of cash in books) earnings.
ITC: It is best placed to leverage the changing consumption patterns in urban and semi urban India. The stock looks attractive in the medium to long- term.
PNB: With extremely stable net interest margins (NIM), better assets quality,?higher CASA ratios and strong returns ratio, the stock looks attractive at 1.4 times FY08 adjusted book value.
Infosys: A strong brand name, well-known execution capabilities and a transparent management hold Infosys in good stead. Its banking product, ``Finacle`` will aid in non-linear growth going forward. It leads the industry in return ratios (around 40% ROE).
Gammon India: The strong growth prospects, mainly on the back of a heavy order book and execution skills with a limited possibility of equity dilution makes the stock attractive.
The global impact of a possible slow-down in the US economy is likely to be minimal given US` declining contribution to global GDP growth. One needs to thus keep a watch on the economic health of countries like China. Any global slowdown will hamper our exports, which are growing at 32% and contributing 17% to GDP. However, the dependance on domestic consumption and infrastructure spending are likely to act as neutralising factors. The FII fund flow is unlikely to have any significant impact as the long term growth story in India remains intact.
Interest rates are likely to move up in the coming year as well and rupee appreciation is also likely if oil continues to remain stable or eases out.
Jainish bets on infrastructure, capital goods and FMCG/retailing as out-performers for the new year, while banking and metals are likely to under perform.
Punj Lloyd: Strong growth in infrastructure
ITC: Strong retail roll out
BHEL: Increasing investment in Power sector
Reliance Communication: Strong growth in telecom
Bajaj Auto: Growth from consumer spending
Source : myiris.com