We Are Bullish On Information Technology, Healthcare & Financials Sector <
16-Dec-11   18:53 Hrs IST

Anup Maheshwari
Growth risks are rising and the currency is continuing to remain weak, there has been some respite as primary inflation moderated and global commodity prices corrected somewhat. This should help moderate the core inflation going forward and have a positive effect on India's economy. We at Capital Market interacted with Mr. Anup Maheshwari, Executive Vice President & Head - Equities of DSP BlackRock Mutual Fund, to know the factors which would lead the Indian equity markets in Calendar Year (CY) 2011.

Here are the excerpts:

In Calendar Year (CY) 2011, growth across the world slowed down. Will CY 2012 be better or growth will slow down further? More specifically will India growth fall to 6-6.5% with policy paralysis and foreign capital flight continuing?

Given that the second quarter GDP number was sub 7%, we believe that India is currently experiencing a slowdown in growth. India is slowing due to the tightening of monetary policy to bring inflation under control. Further, the slowdown is driven by a dip in investments largely due to a more uncertain global backdrop. Therefore, looking ahead, growth is expected to remain muted as export growth also eases in response to slower external demand.

While growth risks are rising and the currency is continuing to remain weak, there has been some respite as primary inflation moderated and global commodity prices corrected somewhat. This should help moderate the core inflation going forward and have a positive effect on India's economy. Furthermore, unless there is a concerted effort to find a solution to the current crisis in the Euro-zone, the global markets will remain volatile and continue to negatively impact market sentiment and growth.

Industrial capex seems to be showing mixed signs across various industries, what's your view on this theme's market performance in CY 2012? Which are the sectors appearing attractive to the fund managers going forward in CY12?

At this time, we do not envisage any major revival in industrial capex in CY 2012. In fact, industrial capex has been relatively slow since 2008 and continues to hinder the growth of the overall economy. In addition, policy reforms continue to remain sluggish and therefore challenges with regards to land acquisition, mining, and infrastructure continue to persist.

Going forward, we do believe that interest rate sensitive sectors will appear attractive as the RBI has indicated that there will be a pause in interest rate hikes. Therefore barring any major systemic shocks, we may consider adding selectively to these sectors.

With Euro debt issues pressurizing global banks and NPAs piling up on Indian PSU banks, how will the finance sector perform in the Indian markets in CY 2012?

We believe that much of the negative news regarding the financial sector has been priced into the Indian PSU banking stocks. Besides, they are currently trading below their historical values. Furthermore, the challenges currently facing the Euro-zone have little bearing on Indian PSU banks and NPAs as Indian PSU banks do not have much exposure to the Euro-zone's sovereign debt. Furthermore, in our view the difficulties facing PSU banks relate more to the credit quality concerns which are driven by a slowdown in the economic cycle and a higher interest rate scenario. Therefore, banks which have a higher exposure to infrastructure (power in particular), agriculture and SMEs could face some headwinds going forward.

Midcaps/smallcaps have been crushed very hard in CY 2011. What is your view on their market performance in CY 2012? Which are the sectors within this space that investors should invest or accumulate? What is your outlook?

In our view mid/small cap companies can do well in CY2012 if they have strong business models and cash flows as well as low leverage. However, our preference is towards large cap stocks as they have historically maintained strong cash flows, high-quality management teams, and stable balance sheets. Furthermore, in light of high interest rates, companies with limited leverage will have the capacity to generate higher returns and may be more attractive investments.

What Sensex/NIFTY level do you foresee at the end of CY 2012 and which stocks/sectors/themes will be the major drivers for the rise/fall vis-à-vis end-CY 2011?

For FY 2013, we expect earnings growth to be near 13-15% despite the current and near-term volatility in the Sensex/Nifty. We are bullish on Information Technology, Healthcare and Financials sectors.

How can investors choose between different avenues in the equity category? Also what are the returns that can be expected from them going forward in CY12?

During volatile market conditions, a portfolio comprised of large cap companies could be a more attractive investment for investors. Due to the fact that the companies in this universe have achieved scale, have good management resources, and generally are leaders in their industry categories, they are better able to sustain growth during volatile times. As such, the performance of large cap companies may potentially provide for a 15% CAGR over the long term although these returns may not be linear.

In India, consumption theme has outperformed all other themes over the past couple of years. Will the trend continue in CY 2012? Can India's outsourcing theme outperform other themes in CY 2012?

Yes, consumption will continue to be a positive driving factor to GDP growth in India in CY 2012. Although we have seen some slowdown in the sales of high value goods, rural demand continues to remain strong. 

Although the outsourcing theme will continue to be one of the drivers for India's growth, we perceive a large opportunity in the pharmaceutical sector (through CRAMS). Within the next two to three years, many revenue generating drugs are losing their patent licenses in the US, giving Indian pharmaceutical companies the opportunity to make generics and enter the market.  We also believe that automobile/auto-ancillary business will also drive growth along with the Information Technology sector.

Infrastructure remains a major laggard. With policy/execution/reform paralysis in government and high interest rates, what is your view on this segment's market performance in CY 2012?

The infrastructure segment will remain under pressure in CY 2012 as there have been no major projects announced within that space. Furthermore, we do not expect any new developments or announcements in the near-term in this sector given the high interest rates and the demand slowdown due to a weak global economic environment. However, beyond CY 2012, we believe that the sector has the potential to be a strong out performer in the investment cycle that will follow.

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