Markets leading macro in 2013... - Religare

...but what could go wrong

The Indian market's 25% return in 2012 despite a deteriorating macro has been driven by the onset of a reforms-based 'hopetrade' since June'12, with capital inflows at US$23bn. Current estimates do point to near-term macro relief, part of which the market is already pricing in, and we expect the trend to continue in 2013, even as a below-par growth trajectory (FY14E growth at 5.8%) limits a wholesale re-rating.

Factors that could work against a macro revival include below-potential growth, China-led commodity inflation, further currency pain and populist reforms. We believe reformist policy would be the single most important driver of markets this year. Our Dec'13 Sensex target of 22,500 based on a 14.5x target P/E multiple (assuming zero re-rating) implies 16% upside from current levels. In light of the impending macro revival, we have positioned our portfolio to play the cyclical recovery, turning more constructive on high-quality beta names. Our top-picks for 2013 - SBIN, TTMT, LT, UTCEM, UNSP - clearly reflect our strategy.

- Domestic macro revival on horizon: Growth in India has slipped for three years now, and while there's no case for a rapid revival, our macro estimates point to a gradual recovery in FY14 growth, likely at 5.8%. Industry and Services are expected to perform better in FY14, albeit marginally, led by policy rate cuts and continued reform momentum.

- Global outlook appears better: Global growth is likely to recover marginally this year, with all major geographies except the Eurozone expected to better their economic performance in 2013, supported by lower interest rates. This augurs well for FII sentiment as this investor segment continues to dominate market performance in India.

- Earnings to bottom out in Q3FY13: After five quarters of continuous disappointment, we expect earnings to bottom out in Q3FY13, with upgrades likely to outnumber downgrades thereafter, albeit marginally, led by (1) a domestic demand revival resulting in improving topline growth, (2) margin expansion led by falling input costs and the overhang of a China slowdown, and (3) lower cost of funds on likely rate cuts. Of course, such a revival is strongly dependent on the macro.

- Dec'13 Sensex target at 22,500: We set a Dec'13 Sensex target of 22,500, indicating a 16% upside from current levels based on a target P/E multiple of 14.5x CY14E earnings. We believe this is reasonable given current domestic and global market conditions. At 14.5x, the market would trade at ~10% discount to its LTA of 16x, a discount that reflects the medium-term output gap and attendant macro factors.

- So what could go wrong: Likely as it might seem, a positive spin to the India story is unfortunately not a given. A number of factors that could work against this include (1) below potential growth locally, (2) delayed global recovery, (3) China-led commodity inflation, (4) further pain on the INR and (5) populism in a pre-election year.

Source : Equity Bulls

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