Outlook 2015

The Indian stock market showed a stellar performance in 2014 as it turned out to be among the world’s best-performing market with the benchmark BSE Sensex rising 29% from 21140 points on January 1 to 27,350 points on December 12. There are expectations that the string run would continue with the government poised for new reforms, strong liquidity flows into India, backed by a revival in manufacturing and likely improvement of macro-economic situation.

Attractive Valuations

Despite the huge run-up, valuation of the Indian market is still attractive. On December 12, the BSE Sensex was trading at price-to-earnings ratio of 18.59, marginally lower than its five years average P/E of 18.77.

Yogesh Nagaonkar, Vice-President, Institutional Equities, Bonanza Portfolio points that if anyone looks at 3-5 years horizon, then investing in Indian equities is an attractive option. The return on equity (ROE) of BSE 200 companies is bottoming out. Most companies have been discounted as per their FY16E earnings. “Growth of companies is still at its nascent stage with Indian companies witnessing a tough period for the past 5 years. We can expect 16-17% earnings growth in Nifty 50 companies in 1 year and 19-20% growth 2 years from now,” he says.

Ravi Gopalakrishnan, Head Equities, Canara Robeco Mutual Fund says, “Over the last five years Indian corporate have undergone massive restructuring. Many of the companies across various sectors have restructured their operations and deleveraged their balance sheets and have become more efficient. Once the economy starts to recover and capacity utilisation improves, the benefit of this operating and financial leverage will be evident and will reflect in their bottomlines by FY17/18” In the near term as in FY 2015-16, if we look at the numbers, the market may look a bit expensive as the markets have gone up a lot. For now we are trading at 17x the forward earnings of FY 2016, which is slightly above the long-term average of 15x. “As earnings momentum picks-up over FY 2017/18, we are likely to  witness PE multiples expanding as well,” says Gopalkrishnan. 

New Themes

In every bull market a new set of stocks tend to perform and come on top. For example, around 2000, IT stocks were raging. Between February 1, 1999 and December 13, 2000, the IT index gave a return of 94% compounded annually, versus 15% of Sensex. That was followed by the era of infrastructure stocks in 2004-2008. A good proxy would be to look at the returns of DSPBR TIGER fund, an infrastructure fund from the DSPBR Mutual Fund. Between June 11, 2004, and January 9, 2008, the fund gave 65% when stock markets return was 50%. While the 2007-08 saw the FMCG stocks under-performing the broad market, they became the darlings of investors over the next five years. (Check best performing sectoral indexes in each year)

“The constituents of the present rally going forward will be different than what we have already witnessed,” says Vaibhav Sanghvi, Managing Director, Ambit Investment Advisors. He further explains that on the one hand we have a global economy where Europe and Japan are not doing well, China is slowing. The US is the lone big economy which is growing. Amid this backdrop, domestic industrial, material, consumer discretionary and financial companies are the ones that are likely to do well.

Gokul Raj, Executive Director and Head of Investments at HBJ Capital is bullish on a sub-sectors that have quality businesses and which are sensitive to macroeconomic changes. “These businesses will capitalise on the cyclical factors to deliver strong investor returns over the medium term.” Raj points out that improvement in industrial production should benefit the fast moving industrial goods like bearings, refractory's, forging and welding companies. 

Meanwhile, Ajit Deshmukh, Director, Equirus Capital, says “In the wake of ‘Make in India’ campaign, infrastructure and manufacturing/industrials sectors are most likely to get a thrust from investors in 2015. In my opinion, there will be themes that will throw investment opportunities; however focusing on quality investments and staying away from quick money situations is highly recommended. In the coming year, investors should watch out for inflation and interest rates.”

But not everyone believes that there would be a specific theme that will make lots of money. “We expect 2015-2017 to be wealth creation period just like 2003-2008. During 2003-2008, Sensex went up by 5x and most sectoral indices went up by 300-1500%. In such times of wealth creation, I expect the market to be broad-based,” says Rajesh Kothari, Managing Director at AlfAccurate Advisors. 

FIIs’ Love Affair 

Foreign institutional investors (FIIs) have now put India firmly on their investment map. Since 2000, FIIs have been net buyers in Indian equities every year except in 2008 and 2011. In fact, from the start of the year till December 10, 2014 FII net inflow in India stands at Rs 1.05 lakh crore. (Refer: FII flow 2000-2014)

Rajesh Kothari of AlfAccurate Advisors says, “India is at sweet spot. The global liquidity will continue to remain attractive and investors always prefer growth. With China witnessing slow down and many other commodity driven economies also slowing down, India will surely be preferred choice for global investors. I think India will attract strong FDI and FII over next 2-3 years.”

In 2014, on a year-to-date basis (December 9, 2014), among the major international indices, Sensex was the second best performing index, the best being Shanghai Index with returns of 35.58%. PVK Mohan, Head of equity, Principal AMC says, “It’s not without reason that India is the most favourite emerging market.” He believes that first, there is a performing government elected with a majority, their hope and intentions are clear. Second, we had a massive twin deficit (current account deficit and fiscal deficit) problem in 2013, both are seemingly under control, hence the macros are falling in place. Third, India is a diversified and huge domestic market which is well-regulated and well-run.  

Shedding light on the foreign investors Gopalakrishnan of Canara Robeco Mutual Fund says, “Foreign investors typically look at three broad factors before investing in any country. First is consistency and transparency of rules and regulations, second is stability of local currency, and third is ease of doing business . The new government is working on all these areas to make India one of the most favoured investment destinations from a foreign investors’ perspective.

Eye on Reforms

“The problems that India has been facing historically was related to implementation of economic reforms. Therefore, if we look at the steps that the new government has been taking over the past 6 months, they are all targeted at streamlining the processes for faster decision making and bringing in transparency. While these reforms may appear small if you look at them individually, cumulatively they could have far reaching impact over the long term,” says Ravi Gopalakrishnan, Head Equities, Canara Robeco Mutual Fund.

Kothari of AlfAccurate Advisors believes that 2015 may not only see passage of few of these important bills and reforms mainly in infrastructure sector like power, coal, road, healthcare, education. “But importantly it will be more of simplification of processes as well in major sectors that can improve India’s rank in ease of doing business,” says Kothari. The market is keenly watching progress made on Goods and Services Tax (GST), FDI in Insurance, labour reforms and the Land Acquisition Bill.

Some initial moves of the government has already had a positive impact on sectors and stocks. Lalit Thakkar, Managing Director - Institution, Angel Broking says, “Raising FDI in defence from 26% to 49% will benefit defense equipment manufacturing companies.” He believes it should benefit companies like L&T, Tata Motors, Mahindra & Mahindra, Bharat Forge and Ashok Leyland. For example, the stock of Ashok Leyland has already increased from Rs 34.65 per share by 51% (as on Nov 28, 2014) since the announcement of increase in FDI on Aug 06, 2014. 

Meanwhile, allowing 100% FDI in railway infrastructure for the first time in segments like signalling, electrification, PPP projects, suburban corridors etc. should benefit companies like ABB, L&T and Siemens. 

Meanwhile, Arun Thukral, MD & CEO, Axis Securities says, “Overall lots of small actions have been undertaken by the government to enhance the ease of doing business in India. We anticipate that implementation and action would occur on those decisions. This will spark slew of opportunities across sectors and equity could provide a good opportunity to invest in CY15 for investors.” He further adds that given the concern of soft commodity and crude prices from a FII standpoint, India looks more promising than the alternates of Brazil or Russia. 

Although such optimism is good but ground reality can be different and the pace of change could be much slow, also considering that India is a democratic country. FDI in insurance was proposed nearly a decade ago but still it has not able to see the light of the day. Nagaonkar of Bonanza says, “It is possible that reforms can be delayed if there is stiff opposition. In the upper house, it will take another two years for BJP to get majority. If that happens, it will be easier for the government to pass major bills.”

Beware of Risks

Equity markets can be spooked anytime. There could be strong headwinds as the Indian market pushes ahead. Credit Suisse in its report ‘India Market Strategy 2015’, highlights that on the one hand, the markets are much more linked to the world than the economy: a high 56% of Nifty revenues are not in Indian rupee, and of the rest, a large proportion comes from banks that lend to these exporting sectors. Furthermore, according to the report pharmaceuticals and IT should be relatively unscathed, but others—in particular, materials—are likely to be impacted. 

"The domestic risks come from heightened expectation whereas the reality is that on ground there has not been great improvement," says Mohan of Principal Mutual Fund. He further adds that market has already had a close to 30% rise in 2014, means that a lot of good things have been discounted. The direction of the market is upward but perhaps it has gone up too fast, so there could be a short-term correction or a period of movement within the band.

There can also be the structural risks, as over the last few years the growth has been coming from rural side, which can hit a slowdown. “Between 2007 and 2014 capital employed for BSE 500 companies, which represents nearly 90% of the market cap for listed companies went up from Rs 5 lakh crore to Rs 30 lakh crore. This is an increase of 6 times. It’s a huge increment in terms of assets. Therefore, we should be a little careful when we say there will be more capex because there is a huge capex which has been incurred which is yet to be fully utilised to its potential,” says Rajesh Iyer, EVP, Head – Investment Advisory Services & Family Office.

He says in the next 12-18 months it will be critical to monitor where demand is coming from and if sales has been increasing on the consumption side. There is also the risk of slowdown in rural consumption, Iyer says.

But not everyone considers demand to dry out so easily from the rural side. Vikas Gupta, EVP, Arthveda Fund Management says there are moves that can spur the rural economy. “The governments’ emphasis on toilets for example will bring money from companies’ CSR budget along with government spending. There is also emphasis on building schools. Such will touch lives in the rural population,” says Gupta.

P.S. This is the submission draft. The actual story had appeared in January 2015 issue of Money Today. To read the final version. Click here or copy paste the given below link -http://businesstoday.intoday.in/story/creating-wealth-in-2015-stock-markets-dream-run/1/214102.html