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Historically the period of June-August has given good returns to investors in Equity market. We strongly believe that all factors point to the revival of equity market in the current quarter too. Let’s analyse the facts and figures to understand where the stock market is heading during the current quarter and to identify the best stock/sector which will give handsome returns.

 

4^th quarter performance

Global factors

Oil price and inflation

Domestic political scenario

Stock picks for current quarter

 

 

4^th quarter performance::

 

The performance of the 4^th quarter of the last financial year turned out to be much better than what market feared. This will bring respite to the bulls who were beaten badly in the last 4 months. There were lot of fear in terms of derivative losses from large corporates and banks due to forex hedges. There were fears that escalation of input costs will  put pressure on the margin of all infrastructure companies, but most of the numbers from large corporates proved otherwise. They could able to increase the margin despite escalation of costs. This demonstrates the ability of the corporates to manage the costs much better than anticipated. Most of the banking stocks(both public and private) came out with numbers which surprised the market positively. Most of the public sector banks are available at almost price to book value of 1 and the PEs of banks are quoting at less than 5 .  Apart from that the results from large infrastructure companies like L&T, Punj Lloyd and IVRCL positively surprised the market. Despite slowdown in the US the software stocks could able to show improved numbers. Telecom sector also had a positive surprise.

 

These results clearly demonstrates that Indian is in a structural growth path and any blip in the manufacturing/Industrial output numbers are purely temporary in nature and sooner than later numbers will fall in line. The 4^th quarter GDP growth of 8.8% belied the fears that our growth will slowdown to 7% in the next financial year. We strongly believe that our growth for the current financial year will not fall below 8%. This is almost 10 times the growth of the US economy.

 

Global Factors:

 

Despite sharp rise in prises of crude oil and other commodities, huge write offs by banks, Insurance companies & mortgage companies the US market scaled past S&P 1400. This clearly demonstrates that all negative news are already fractured in the stock prices. Most of the top rung banks in the US and Europe are available at a PE of less than 10.The effect of the fiscal stimulating measures from the US and the easing of the credit crunch will be reflected in the 3^rd quarter of the calendar year. With the US market showing positive signs of growth and with the US dollar appreciating against global currencies we could able to see the softening of prices in food grains and some commodities.  In the recent past the huge surge in commodity prices is purely flight to safety when there was a crisis in  the US economy and the US equity market and US currency was crashing against the global currency. With the improvement in the US economy we will see a shift of focus from commodities to equity and reality.

 

Our Indian stock market crash was triggered by the crash in global equity market and the returning of the global stock market to normalcy will bring in respite to Indian market. We saw a huge outflow of USD to the tune of 3 billion from the Indian equity market. Sooner than later we will see the funds shifting their focus from the commodities to equities and reality sector. With the risk appetite returning to the market we will be able to see more funds flowing into the emerging market including India. With the yield from treasury bonds has fallen to 3% in US it is quite logical to assume that risk appetite money will flow into emerging market like India for better returns.

 

 

Oil price & Inflation

 

Indian inflation has hit 3 year high of 8.1% for the last weak purely due to supply side factors. When US dollar weakened against other global currencies due to fear of recession fears in US most of the fund managers, Investors and speculators moved out of US equity and real estate investment and went into commodities like Gold, crude oil and other ferro metals. The sharp rise in crude and gold was purely speculative in nature rather than short supply or high demand. This is purely on account of flight to safety. In recent weeks we saw US $ strengthening against global currencies due to better than expected economic numbers. We strongly feel that we are in the last leg of speculative rally in crude oil and sooner than later we will see the crude oil price coming below USD 100. Already we can see the prices of food articles have come down and it will be followed by other commodities. Once they see that the US economy improving there will be more investment into stocks and reality and will see the selling in commodities. This will bring down the prices of commodites to reasonable level.

 

With the setting of monsoon in June we will see the softening of price in food articles and inflation is expected to soften to less than 7% in the months to come. Apart from that the fiscal and monetary measures taken by govt and the RBI will also bring down the inflation by at least 1% in the next few weeks.

 

Domestic political scenario

 

With the debacle of the congress in the recently held Karnataka assembly election and with the unabated inflation it has become very clear that there will not be any snap poll for the parliament. Even the other constituents of the UPA govt namely the left, DMK and Rashtria Janata dal are not prepared to face the poll due to fear of poor performance. Even the left ha a poor performance in the recently held panchayat polls. We can be rest assured that the next general election will be held in April/may 2009.  A predictable govt will give a stable environment for the long term investors.

 

It also seems that there is a re emergence of BJP as a strong contender for the forth coming general election will be a great relief to the investors since BJP has a track record as a pro reformist. This confidence will bring in positive invest into the Indian stock market.

 

Our stock Picks for the current quarter:

 

We are bullish on the following sectors for the current quarter

 

Technology

Pharma(more of export oriented)

Banking

Mining (iron ore and coaking coal)

Infrastructure

 

 

Technology:

 

With the rupee depreciating by over 8%(till date) in the current quarter it is obvious that there will be a sharp improvement in their operating margin of software companies from the 2^nd quarter of the current financial year since most of the income receivable for the first quarter would have been hedged at a lower level of 40/41 per US $. There is a strong correlation between rupee and the earning of software and other export oriented companies. Historically we have seen the rupee goes one way despite all efforts taken by the govt. We need to understand that Indian has a huge trade/current deficit and this was matched by invisible receipts from NRI, and there was a huge inflow of FDI receipts and ECB borrowing apart from huge inflow of FII investment. With the huge liquidity crunch in the international market and higher risk premium it is getting difficult to bring dollars into the country.  Moreover with the slowdown of FII and FDI the demand for dollar has gone up and this demand for dollar will certainly keep the rupee depreciating for a longer period of time than we visualise.

 

With all the above reasons we believe that software sector will be the major beneficiary for some time to come. More over with the improvement in US economy we will see a strong rerating of software companies from underperform/underweight to overweight.

 

We advice investors to look into the following stocks with one year perspective for a return of 25 to 50% in one year time

 

Infosys(CMP-Rs.1962)

TCS(CMP Rs.1039)

Tech mahindra(CMP-Rs.864)

Mastek (CMP-Rs.400)

ICSA (CMP:Rs.405)

 

Pharma:

 

We are bullish on the following Pharma stocks for a return of at least 25% from the current level in the next 6 to 9 months. More than 50% of the revenue comes in US $ and they have shown consistent performance quarter on quarter growth of 40 to 50% over the last 4 quarters. It will also act as a defensive during the current market scenerio

 

Divi’s lab (Rs.1481)

Sun Pharma (Rs.1402)

Glenmaark pharma(Rs.659)

 

 

Banking

 

Banking stocks were beaten the most in the last 4 months purely tracking the US market even though there is no such write off in the Indian banking industry. Our banks are the most regulated ones and the net NPAs of the PSU banks have come down drastically in the last 4 quarters. In most of the PSU Banks the FII limit has already reached the threshold limit of 20%. Despite all these positive factors our banking stocks were beaten badly. Most of our PSU banks are available at a PE of less than 5 and price to book of closer to 1 If is a matter of time before Indian investors will realise the facts and start buying banking stocks.

 

We strongly believe that the banking stocks will give a return of anywhere between 25 to 50% return in the next 6 months to 1 year. We  recommend the following banking stocks

 

ICICI Bank (Rs.788)

Kotak bank(Rs.692)

SBI(Rs.1443)

Union Bank(Rs.137)

Bank of baroda(Rs.270)

 

 

Mining

 

There is a genuine shortage of iron over across the globe coupled  with heavy demand for import from China has sent the price of iron ore sky rocketing during the last 2 years. We have one stock which can give a minimum of 25 to 50% return in the next 3 months.

 

Sesa Goa(Rs.4292)

 

This stock from sterlite group has shown an absolute EPS of 200 for the 4^th quarter of the last year. This quarter with a depreciating rupee and a strong demand for spot sale will bring in an EPS of not less than Rs.250 for the current quarter despite imposing an export duty of 15% by the govt in order to discourage the export. More over the company has announced a !:! bonus and 10:1 stock split will bring liquidity to this stock and we see a price of not less than Rs.300 post stock split and bonus. Post bonus and stock split one share of Sesa Goa of Rs.10 paid will become 20 shares of 1 paid. We recommend a strong buy on this stock for immediate gain.

 

Infrastructure:

 

As long as the Indian growth story is there Infrastructure story will also continue to grow. Despite margin pressure and forex issues strong infrastructure companies reported health growth in the 4^th quarter of last year and we strong believe that they will continue to excel even in the coming quarters.

 

We strong advocate a buy in the following stocks

 

L & T(Rs.2982)

Punj Lloyd(320)

Jaiprakash Associates(Rs.213)

 

 

Anto

 

MD, Prosperity Investment Advisors pvt ltd

 

Disclaimer: The views and investment tips expressed in this email are of MD of Prosperity Mr.Antony in and used only for private circulation,. We strongly advise investors to check with certified experts before taking any investment decisions. Mr.Antony and/or his associates might have invested in the stocks mentioned above.