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MARKET STRATEGY
Indian markets remained volatile during the month of September on
negative global cues related to softer growth in China and continued
weakness in Eurozone. On the domestic side, de-allocation of all the
disputed coal blocks, lower than expected IIP numbers and deferment of gas
price revision weighed on the markets. However, markets were relieved as
the US Fed did not provide any cues of early rise in interest rates. The
outlook upgrade from S&P somewhat aided the sentiment.
On economic front, IIP in the month of July reported dismal growth of 0.5%
vs. 3.94% in June while August CPI showed some moderation to 7.8% from
8%. We believe that the economy has bottomed out and expect recovery in
economic activity from current levels. We note that, the ground-level
realities have not yet improved greatly and that, the pace of economic
recovery may be slow in the short term. Recent fall in global commodity
prices, provide an opportunity to contain inflationary expectations. Fall in
the crude prices is a silver lining for Indian markets in terms of reducing oil
subsidies and import bill.
In the near term, geo-political tensions, economic growth in China/Eurozone
will take most of the attention of the market. Quarterly results will start
pouring in in a couple of weeks and will impact individual stocks.
Valuations are at around the long-term average of 15x one-year forward
consensus earnings (FY16). We believe that, affirmative action on reforms by
the Government will be needed for providing confidence to the markets.
This will, in turn, lead to a further re-rating of the markets in the mediumto-
long term.
We expect further reforms by the Government and remain positive on the
domestic infrastructure and cyclical sectors over the medium-to-long term.
However, after the steep run-up in several of these stocks, we recommend
sticking to quality and advise selectively investing in stocks having strong
balance sheets and ethical managements. On the other hand, we are
positive on select export oriented stocks based on improving demand
scenario in developed economies like USA. We expect rupee to remain in a
range. Key risks to our recommendation are geo-political concerns globally,
decline in foreign inflows, sharp currency movements and spike in oil
prices.
Preferred picks
Domestic Cyclicals / Investment oriented sectors
Sector Stocks
Automobiles
Maruti Suzuki, Tata Motors
Banking, NBFCs
ICICI Bank, Axis Bank
Capital Goods, Engineering
Engineers India, L&T, Thermax, Greaves Cotton
Cement, Construction, Real Estate
Grasim, IL&FS Transportation, Phoenix Mills,
IRB Infra
Logistics, Transportation
Adani Port, Guj Pipavav Port, Allcargo, GDL
Oil & Gas
Cairn India, Oil India
Power
Tata Power
Source: Kotak Securities - Private Client Research
Export oriented / Defensive sectors
Sector Stocks
FMCG
HUL, Dabur
IT
TCS, Wipro, KPIT
Media
Zee Entertainment
Source: Kotak Securities - Private Client Research
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