Downgrades continue for Indian Market

The Indian stock market, which was not so long ago celebrated by investors as the best thing to have happened to the securities world, seems to have all of a sudden become anything but desirable. Contrary to the prevailing perception that economy remains fundamentally strong here and financial markets are more mature than those of other emerging nations, global financial giant Citigroup has ranked India as the second least attractive among all Asia-Pacific stock markets.

Joining the ranks with Citigroup, another leading global brokerage house Bear Stearns as well as a leading overseas fund house, Aberdeen Investment Trust, have labelled Indian stocks as "expensive." "After February's sharp fall (a 1,329-point plunge including three one-day falls of 300-500 points), market conditions in March remained choppy," Citigroup said in its latest Asia-Pacific radar screen report, which tracks market attractiveness across the region. While, Hong Kong, Singapore and Australia took the top three spots on the Asia-Pacific list, followed by Malaysia at the fourth position (down from second position), Citigroup said that India was among the bottom half of the ladder along with New Zealand, and Taiwan.

Even Thailand moved sharply up the ladder and secured a safe position ahead of India on the back of improved momentum and continuing low valuations. India was ranked ahead of New Zealand alone in the list. Investor interest helps drive the stock price and valuation higher, it continued to edge closer to unattractive quadrant, where investors start recognising that valuations are stretched and begin selling. Echoing the fears that foreign investors may not find Indian stocks a hot proposition any longer, a number of investment banking and brokerage firms like Bear Stearns have already begun cutting their outlook on India, due to "expensive" valuations as compared to the earnings prospects.

Analysts at Bear Stearns, which has just downgraded its rating on Indian market from "market weight" to "underweight", said in a research note, "diminished investor appetite and poor relative performance presumably reflects Indian stocks' over-owned status and high valuations." India's benchmark index, Sensex has fallen 3.2 per cent since the beginning of this fiscal, while Malaysia's Kuala Lumpur composite index has surged over 15 per cent and there has been over 5 per cent gain in the Morgan Stanley capital international Asia Pacific index, Bear Stearns' Michael Kurtz and Joey Lam Lam said.

Current Market View from a Newsletter

The RBI has increased the interest rates twice this year in a surprising manner both on Fridays after the closure of the market. In both occasions the market reacted in the same way by coming down crashing. This time the fall was still higher as the Sensex lost 646 points. After the hike every expert analyses the situation and predicts a big fall. Even SMS are sent by many warning a disaster to strike the market on Monday.

MARKETS BOUNCED BACK: Investors should take a lesson from the behaviour of the market in the last two falls. In both the occasions the market has recovered and the recovery has come within 24 hours. Never that the market continued falling in the same fashion even for two or more days. This is a clear indication that there are buyers at lower levels. No one has the courage to go short when the fall is severe. This time banks autos and cement shares had a very sharp fall just to recover in 24 hours. It is better to remain with cash expecting such falls in the future as well.

WHY THE CENTRAL BANKS HIKE THE INTEREST? It is not only in India but all over the world the banking rates have gone up recently. Chinese central bank said it would raise the amount that lenders must hold in reserve for the sixth time in 10 months time since last June, in an aim to further control liquidity and curb lending. The 0.5% point increase in the reserve requirement ratio would take effect 16 April, the People's Bank of China added. The main reason for hiking the interest rate is the spiraling of prices or inflation. In India the rate of inflation was around 3% last year and it has gone up by over 100% to 6.39 % in the current year as on this week.

INDIAN ECONOMY IS TOO HOT TO HANDLE: Every analyst was delighted with the GDP growing at an amazing speed 8 t0 10%. In other words there is so much of economic growth all around and lots of money is being spent on consumption like buying cars, two wheelers, white goods and other fast moving consumer goods. Money came in the form of loans to buy land, housing and other luxuries as well. These are the signs of prosperity but growth also comes with a price and that is inflation. The demand for goods is so much and they are made affordable to you by the bank loans. Banks were cash rich and even tele marketed by calling on mobiles and offering personal loans.

Since demand exceeded supply mainly in agriculture the cost of food sky rocketed. Pulses like toor dhall and udad became unaffordable to the masses. What was worse is no where in the world these pulses area available to even import .Only in the Asian countries people consume dhal. Then politics took over economy as seen in the latest budget proposals where the Govt wants manufacturers to reduce prices of Cement and steel. With elections in UP and the general elections too around the corner the Govt is forced to settle for lower growth rather than higher inflation.

WILL THE HIGH INTERST HARM INDUSTIRES? It is said that because the rate of interest has gone up in the recent months from 8% to 12% demand for various loans like auto and home will fall. Economic actions are never that straight forward. When the demand for loans come down the prices of homes too may fall in the beginning say by 10 to 20% this will attract people to rush for loans even at higher rates. Once again the home prices will rise. This goes with other products as well. In other words RBI measures can harm the industry only for a while and the growth story continues to remain in tact in long run.

Most of the big industries do not borrow from the local banks at all they are global borrowers and get interest at nominal rates. The Bank of Japan still gives loan at 0.5%. It is the small to medium industries that will get affected by such interest rate hikes. Just seven years back the bank rate for home loan was at 18.% and the banks just started giving loans for buying automobiles at 18% then the Indian GDP jumped to 5% and at that time too it was considered that the growth was too high and the economy was getting over heated. Now at 10% GDP the economy is red hot?

RBI is forced to hike the interest rates to curtail money supply and reduce the rate of inflation. Already the inflation is showing signs of coming down once it falls from current levels to 5% one can expect RBI to reduce the rate of interest once again.

THE NEXT TRIGGER TO MOVE THE MARKET: The result season is about to begin. The Q4 results are expected to be the best in the recent years. With many of the cos having paid more than 50% higher advanced tax it is expected to be a great performance. All eyes are on Infosys whose results are on the 13th of this month.

Samir Arora says expect 15 - 20 % return from Indian Investment

Fund Manager of Helios Capital, Samir Arora believes that earnings slowdown related prices is already reflected in the prices. Arora expects a 15-20% return from the Indian market and is currently bullish on India.

According to him, auto stock prices factor in the rate hike impact, however, he mentions that they don't own any of them. He favours private banks compared to PSU banks.

Arora expects one more rate hike from RBI. He continues to remain bullish on Infosys and the technology sector.

Excerpts of CNBC-TV18's exclusive interview with Samir Arora:

Q: How are you feeling after this correction?

A: The correction has been there and expected in some sense. But as I had earlier said, we are bullish now - of course, we have to define what is bullishness. In the past years, bullishness meant 30-40% returns now bullishness may mean 15-20% return. So that is still possible and achievable in India.

Q: How will the next 3-6 months pan out in India, with concerns about interest rates, earnings slowdown? Will we get back to new highs anytime in the next 3-6 months?

A: New highs is a difficult thing because we do not relate so much to the Index. But if you look at the fact that earning slowdown is related with interest rates, I think some of that is already reflected in the prices. If you look at Indian market performance relative to China; the Chinese market is up 24% this year and I think the Shenzhen is up 50% odd and Brazil is up 9-10%, India is down 4-5% in dollar terms. So it is not that the market has stood still while the interest rate went up or inflation fears went up. Also, earnings expectations for this year from the most bullish estimates are not more than 15-16% EPS growth for '08 or '07. So the point to note here is the markets do not stand still while the rest of the economy changes.

The market predicts that the anomaly is not going to react to things which happen concurrently. This means if something happens today, the stock market, in theory, other than once in a while should have taken that into account 4-5 months and it appears that it has done that in India because the Indian market is down, while two of our other three BRIC peers are up a lot

Q: Because of those earnings concerns though, do you think the markets need to tamper a whole lot more? Do you think a lot more adjustments are required?

A: If adjustment is required, it is required in a few sectors. Even there, we are not sure that it is required but one needs to look at what happened to the market on Monday. From Friday night to Monday, the only negative that happened was that the RBI in a sense affected an increase in interest rates. So why did Reliance have to fall 5% on that day and why did Infosys, HLL, ITC and ONGC have to fall that day?

So the point is that the market overreacts at overall levels. It is possible that certain sectors need a correction. But the point is that it doesn’t mean that the overall market has suddenly become negative because we have a higher interest rate. Everyone has been saying that the direction or the extent was not a surprise. It's just that they expected that this will happen on April 24 and it is sad that it happened on March 31.

Q: Even so, it impacts several key sectors like autos, banks, real estate. In fact in autos, EPS estimates are being downgraded to low single digits from what was double digits, is there problem in those sectors?

A: That’s what I am saying - it is possible in those sectors and it may take some 3-4 months to figure out whether the customers overly care about interest rate in the case of auto. In case of property, if you look at it in a macro sense, there is no beneficiary of higher property prices except 5-6 companies, all of whom are not even in the Index and all of which are up 30, 40, 50 times except if they did an IPO recently. Even then, they are up from what they thought their own company was worth a year ago. So property prices may correct and may adjust but we should not care about them and actually hope and pray that they fall off lot more.

But in auto, we don’t know the exact response of the customers to this new higher interest rate and you are most welcome or anybody is most welcome to wait two, three, four, even six months, if they desire. But normally, if you look at something happening currently and then you react to it, you will lose money most probably. On Monday morning, if you had come in because the market opened gap down and you had shorted the Index, as of right now, you are losing on that trade. You are only gaining if you did the trade on Friday evening. If you did on Monday morning, you are losing already.

So the point is that auto will correct. Their earnings expectation maybe lower but so have the stock prices. Maybe it doesn’t correct as much, and even if it does, you are most welcome. We don’t own any auto, not for this reason, but generally, we have not owned on a simple theory that what doesn’t make money in the rest of the world normally doesn’t make money in India and we never owned it. But the point is that somebody can wait for that but it doesn’t change the overall opportunities in our market.

Q: What about banks - how have you been positioned on the Indian banking sector, public or private?

A: We have always favoured private because of our logic that we compete with the government in particular sectors in terms of our stocks, and again, those stocks have corrected a little bit and maybe they will correct a little bit more. But in general, my belief is that inflation may have peaked or near peaked and interest rates may have peaked or near peaked.

So you may have one more to drive home the point that the government or the Reserve Bank is particularly looking at it. But as of now, the EBITDA evidence is that it might cool off in one or two months. So you cannot overly time that. But in an opportunity sense, we know the market cap of Indian companies, banks vis-à-vis other banks in the region.

Q: What’s your call on cement after all that you have heard from the government over the last two-three months?

A: We have never as in ever owned a cement stock in our new fund since 2005, so we never participated in the bull run and we didn’t participate in the bear run. But in general, the point is that the market, and particularly foreign investors, who have a three week memory have found it very disappointing that the Indian government intervened in one sector and this is going back to the control era and the control raj. I think what they forget is that less than about three-four months ago, there was a coup in Thailand; since then foreign investors have put more money into Thailand and the market is up 12%.

In Hong Kong, there was a company called Pacific Century CyberWorks where the government refused to allow a takeover by private equity funds, and one day later everybody moved on. So let’s not overdo this, the government in these countries, our country, every country, after all we are an emerging markets, so let’s allow one-two of these things and not make it as if the government is now going after every fellow who is ever made money in India. It's not like that, it's part of the game of being in an emerging market.

Commentary from a Newsletter

MARKETS TO TURN CHOPPY WITH RBI HIKE: Jesus Christ was crucified on a Friday which will be a holiday for the market. It appears that the bulls will be crucified as early as on Monday itself. Finally the RBI has decided to curtail inflation rather than batting with growth.

RBI after the closing of the market on Friday announced that it was raising repo rate by 25 basis points and would hike the Cash Reserve Ratio (CRR) by 50 basis points in two stages. The central bank has increased the repo rate, a key short-term lending rate, from 7.5% to 7.75% with immediate effect. Every one is expecting a fall of at least 175 to 250 points as it has happened earlier in two occasions when the RBI did the same. This time there will be less panic as every one knows that the markets recover after the initial shocks. Perhaps Bank stocks may take more time to recover.

After all, the measures taken by the RBI is to check inflation which can eat away all the growth a county can have. Other thing is the rate hikes are not permanent features and they can come down once the inflation comes down by say one percent to the permissible level of 5%.It is worth while picking shares at such falls as the recovery too comes up very quickly. Many are still fresh with memories of May 06 when the markets crashed by over 2000 points in just two to three sessions. Some even fear that such a thing may happen again.

Those who take a bearish view of the market place their arguments in the following lines:
Tech stocks in the Sensex: Earnings can get affected on the back of stronger rupee and the MAT Tax imposed in the budget. Infosys guidance during MQ results around 12th April may be not aggressive and this goes for other tech stocks also Infosys is already trading weak. Hence stocks like Infosys, Wipro, Sat yam and TCS will under perform the Sensex.

Cement stocks: Govt is hell-bent on keeping the cement price down. Cement cos will come out with excellent results but investors will avoid these scrips due to Govt. interference. Hence ACC, Ambuja and Grasim will not be contribute to the Sensex

With sales already plunging the auto sectors represented by Maruti and Tata Motors will remain sluggish. Same is the case for Bajaj Auto as well as Hero Honda. Hike in the interest rates are keeping the buyers away. In a bull market it is the auto shares which run up first to indicate the start of a bul market.

The huge amount of money gone into over seas acquisition will keep investors away from Tata Steel as well as HINDALCO.

States are imposing VAT on cigarette and this will affect its margins of ITC further. Already the share is not in the buying list of many.

With Vodafone entry into India changes several equations. At this point of time Reliance Telecom and Bharti Look over priced with lesser chances for further appreciation.

Sensex shares like Dr. Reddy, Ranbaxy, NTPC, ONGC, Hind lever, HDFC, Reliance Energy, and Tata Power are avoided by every one as they have stopped performing for the last one year. 8. These leaves, BHEL, Cipla, HDFC Bank, SBI, Reliance, ICICI Bank, L&T, Bajaj Auto and Hero Honda:

Although these stocks together have a weight age of 32% on the Sensex, bank stocks with the new RBI measures are not likely to rally and support the Sensex. In other words if the Sensex has to climb up it has to be supported by Reliance ONGC and other oil marketing cos. Thus it looks the rally of the Sensex remains curtailed for the time being.

The 2008 budget would be the last one before the next General election and there cannot be any hope of big-ticket announcement till the next elections. GDP growth would also be lower by one percentage point and inflation is still not under check. The crude price has moved up to $ 62.

HOW CORRECT IS THE ABOVE ASSUMPTION? : What is stated above is a logical conclusion arrived by stating what appear to be the facts at that time? When you use logic in the market it does not always work. It can go against your conclusions for the simple reason that the markets are never logical. When we come to certain conclusions as above we take it for granted that the prevailing situation is permanent. In fact the situations are so dynamic they can change any moment

ONE TRIGGER THAT CAN CHANGE THE SCENARIO: What ever may be said finally what changes the market is the liquidity. Current market is cheerless. Even though the FII buy Rs. 50 to 100 Cr on some days they have lost their huge money bags. Last year they used to put in Rs.1000 Cr a day to keep the bears away. This factor is totally missing.
INTEREST RATE CUT IN AMERICA WILL SIGNAL THE NEXT BULL RUN:
Since June 2004, In the USA the Fed has increased the rate of interest 17 times. (RBI has done it here only three times.) In the USA when borrowing rates are high, housing demand falls. And that translates into lower housing prices. Worst is that the borrowers are faced with rising interest rates and falling property prices. For the first time in the USA after 1983 the prices of houses have started falling. Naturally, defaults on such loans have gone up in recent times.
The American Central Bank is now aware of this serious crisis and already hinted that it may consider a rate cut when it meets after a couple of months . If the rate of interest is reduced in America it will ring the alarm bells for many more nations to cut the rate as the interest rates have already gone higher to alarming proportions.
When the rate of interest gets reduced in America the flood gate will be opened for the money from America to enter merging markets like India.

Good one from Outlook India...

Nothing Works

By 2020, India may face the problem of high growth, higher unemployment

Manufacturing has lost over 3% jobs in the past decade; the overall decline is 0.6%

Formal employment in services comprises less than 0.5% of total labour force

Unviable remuneration and inconsistent growth has pushed people from farming

NREGA is riddled with bureaucratic problems and lack of resources

NREGA can only be a short-term solution to a long-term issue, experts feel

Read on at http://www.outlookindia.com/full.asp?fodname=20070409&fname=KJobless&sid=1

‘Not having a good pension fund reform can be dangerous for the long run’ - FE

Naval Bir Kumar, the managing director of Standard Chartered Asset Management Company, is a busy man as UBS Securities is acquiring his fund house and he is caught up in the process involved. In an exclusive interview to Avishek Maitra and Sai Prasan of The Financial Express, Kumar spoke on the impact of the persistent higher inflation numbers, hardening interest rates leading to the market volatility, the growing mutual fund industry and the future plans of the fund house. Excerpts:

The market has been quite volatile in the last one month. What is your take on it?

The Indian market right now is mostly driven by global factors rather than domestic instabilities. The markets will get its spine only in April, when the last quarter results start appearing. The market will get some guidance and direction then. On the global level, we believe that at some point of time high interest rates will start impacting asset markets. And, we are nearing the point. Higher interest rates have already impacted real estate and equity prices.

Having said that, we still do not believe that the Indian equity market will behave like a glass ball. The biggest fear, which the Indian investors live with, is that the market will one day collapse and die like they have done many times in the past.

This is the first time when we have had such a long bull-run in the market. We clearly believe that the market have in-built strengths.

Do you think that there is a demand-supply mismatch in the economy that is creating a nuisance?
Our belief of a healthy economy and a leading market is derived from a virtuous cycle. Basically, if there is very high consumption and investments in an economy, then it leads to high demand in the economy which feeds growth either in the manufacturing side or the service sector side. This in turn feeds employment and the employment feeds back consumption. Previously, the economy was in the demand creation side and we witnessed only investment demand. A lot of that demand came from the government sector and not just the private sector, but we had no consumption demand. So as soon as the investments demand impetus was withdrawn from the market the entire virtuous cycle was disrupted and there would be a complete collapse. However, in today’s scenario, we believe that investment demand will always be off and on.

But how much of this demand is coming out of the unlocking of the real estate wealth and sustainable wealth?
Our belief is that there is a fair amount of unlocking of real estate wealth, like selling of ancestral land or property that has occurred. This has boosted spending activity in the current boom. We also believe, on the other hand, that there has been a fair degree of sustainable consumption that has been built up. Another interesting aspect that is being witnessed is the change of demographics. The present generation has now started to earn and spend and is having a very different attitude to money.

Should we look at pension reforms more seriously?
In the absence of any social security arrangement this is the best time to save as they get the benefit of compounding. So, ideally pension fund reforms should have occurred many years ago. If pension fund reforms had occurred decades ago then the balance between saving and spending could have been perfect. Not having a good pension fund reform could be very dangerous in the longer run as the Indian society has moved into a nuclear family mode.

How can the government’s initiative to curb inflation affect the MF industry?
This entire episode has made debt investing look interesting again. Rising interest rates have put a pause in the growth of equity indices globally. Fixed maturity plans (FMPs) are slowly becoming retail products from being purely institutional products. Banks offering more than 10% fixed deposits (FDs) will disappear in some time as we are witnessing more and more retail participation in FMPs than in the past.

How do you think the rising interest rates have affected the credit off-take of the industry?
The corporate sector has many sources for borrowing. The banking sector is one among them. Today, most of the borrowing is from the external commercial borrowing (ECB) route because there is a clear arbitrage between domestic rates and the offshore rates. So, overall I don’t think that the corporate sector is suffering due to rising interest rates.

Sebi has tightened the norms of real estate IPOs. Is it the right time to launch real estate mutual funds (REMFs)?
As a fund industry we need to give our investors a diversity of assets. At an individual level if one has his retirement money or saving money, the best way to grow the savings is through diversification. It is not possible to predict as to which asset class will perform better and for how long. The real estate market is highly complex and hugely overstretched. The basic valuation in this environment is a concern for us as fund mangers.

When will the process of UBS securities taking over Standard Chartered AMC be complete?
We are still in the process of getting all the regulatory approvals. The fruits of the UBS acquisition will happen after the legal ownership changes.

And till we receive the Sebi approval the new sponsor will not play any role in the company. The process will take about six months. UBS has bought over the entire AMC since they want to establish themselves in India.

Infrastructure key to liquidity

Dr C Rangarajan, chairman of Prime Minister’s Economic Advisory Council, had added a new dimension to the ongoing debate on the “overheating” of the Indian economy. At a public function in the Capital last week he suggested there was no cause for alarm as the overheating of the economy was just cyclical in nature.

However, he added that a host of medium-term policy initiatives must be taken to ensure that the overheating, which is cyclical now, must not be allowed to become structural in nature.

The subtle point Dr Rangarajan had made was there need not be too much alarm about the overheating which is cyclical in nature. The prime minister, too, reiterated this point subsequently at a public forum.

In other words, the message simply is that the economy was on a high growth path and the cyclical factors, like higher inflation, will pass sooner or later through a mix of monetary and fiscal measures. That said, it is equally important that medium-term supply issues need to be taken care of to support what is clearly a fresh investment boom taking place in the economy.

Dr Rangarajan believes that Indian growth story has moved from being consumption-led to being driven by investments now. Industry is clearly in the middle of raising capacity through fresh investments. One reason for the supply constraint in cement, steel and other commodities is that firms are operating at near-full capacity, and are in the process of building fresh capacities.

According to Dr Rangarajan, a medium-term policy framework now must encourage and aid building of fresh capacities in manufacturing and, more importantly, in critical infrastructure. Building adequate supplies through fresh investments would surely prevent the “cyclical overheating” from turning into a structural one.

Recent history has shown that wrong policies can result in financial asset bubbles, which in turn could create lasting problems for the economy. It could cause prolonged demand recession by shaking both consumer and investor confidence.

In this context, the former US treasury secretary Laurence Summers has cited the example of Japan to suggest how after having robust growth in the seventies and eighties, Japan allowed the economy to go into a prolonged demand slump for over 10 years.

Mr Summers argues that what happened in Japan in the eighties and nineties may hold a few lessons for the current emerging economies like China and India. Mr Summers believes Japan became complacent after doing very well for two decades.

Japan failed to take medium-term measures to keep the structural momentum of the economy going. Perhaps by not appreciating the Yen enough against the dollar, it allowed the market to be flooded with liquidity. That created a big asset bubble in the stock market and real estate. When the bubble burst, it caused lasting damage to consumer and business confidence. It also damaged the financial system.

In fact, China’s financial system now would seem to very closely resemble that of Japan’s in the 1990s. The fact that India must avoid this trap at all costs is one aspect which RBI Governor Dr Reddy has also been subtly suggesting for sometime now. This is one aspect of policy which must be monitored very closely. If we falter on this count, the cyclical overheating could well turn into a structural one, as Dr Rangarajan has warned.

Therefore, what is really needed in the medium term is creation of adequate real assets, partly through infrastructure provision, so that excess liquidity gets absorbed by productive assets.

Experts speak on rupee hitting 7-yr high - Moneycontrol.com

Sanjeev Sanyal, Regional Economist of Deutsche Bank Asia says that whole rupee appreciation is being driven by the liquidity squeeze that is happening right now and calls it a year-end phenomenon. Akhil Jindal, President of Welspun India says that there is no point in keeping any currency open at any juncture but at the end of the day the currencies across the globe are appreciating against rupee.

Excerpts from CNBC-TV18's exclusive interview with Sanjeev Sanyal and Akhil Jindal:

Q: The Bernanke statement yesterday was interpreted by the market to mean slightly more hawkish than what it was prepared for and in India itself we are seeing the RBI using a money market route and that has kept the dollar much cheaper than one anticipated. Where do you see the dollar-rupee headed in the next one quarter given the moves from the two central banks?

Sanjeev Sanyal: This whole thing is being driven by a liquidity squeeze, which is happening right now. One must remember that this is a year-end phenomenon. There are longer-term issues as far as inflation is concerned, because of which the RBI had tightened. But remember that this particular episode is being exacerbated by year-end factors as well. So into the beginning of April this will ease off.

The Reserve Bank is at the end of the day not all that pleased with the rapidly appreciating rupee. They had been intervening throughout and even now they continue to accumulate reserves. Another thing going against the rupee right now is the fact the Reserve Bank is concerned about long term competitiveness issues. Given these two facts we think that once this episode is over the pressure on the rupee will ease off.

Q: We also see that the current account deficit is worsening with each quarter. But given all that we are seeing a genuine appreciation of the rupee happening, what really is your target for the rupee a quarter down the line and maybe by December 31?

Sanjeev Sanyal: Its difficult to put numbers on quarter by quarter but generally speaking we think that the rupee once this particular episode is over will probably stabilise and in fact even drift weaker, the current account continues to worsens. There are very large capital inflows coming into the country, which is pushing it up. But at the same time it is also being helped by the fact that other Asian currencies are appreciating against the dollar. So this is not just about the rupee appreciating but also about the dollar depreciating.But all put together the fact remains that the longer term competitiveness is something that we have to keep in mind.

Q: The rupee has gone from 45 to 43 over the last one month. Do you hedge and how much of a hit has this actually accounted for in terms of the end towards the last part of this quarter in terms of earnings that you would report?

Akhil Jindal: We always keep our currency fully hedged; there is no point of keeping any currency open at any juncture. But the point that my colleague from Deutsche has made is that at the end of the day the currencies across the globe are appreciating against rupee. Particularly when we have to compete against China, which have a very artificially pegged currency, if Chinese currency is allowed to float the way it is in India, it would easily appreciate by more than 30%.

So one can really figure out that at the end of the day if we have to preserve the competitiveness of the industry, we have to preserve the export going up, then in that case we need a complete sterilization as the way RBI is doing it. At the end of the day we must also remember that textile is one of the largest export provider or foreign currency earner and Welspun with its own product line has emerged as a 7th largest importer in the US from the entire world.

Q: If the dollar remains firmed, how much will your realizations be hit by?

Akhil Jindal: Nothing in the immediate future because every realization has been pre-sold, every dollar has been already sold for the next 6-9 months. But it affects our long term competitiveness if we are booking any order for mid of 2008. We have to look into the current exchange rate other than the rate at which we have booked.

Q: Could you on a more academic note tell us if the rupee appreciates by about Rs 1? How much of a hit is that in terms of earnings per share and profitability?

Akhil Jindal: Its again difficult to quantify. It all depends upon the hedging at that point of time.

Q: How much are hedged at currently?

Akhil Jindal: We are hedged at 44.5.

Q: In the light of that with the rupee at close to 43, how much of a hit would it take at EPS?

Akhil Jindal: It will only contribute to the EPS because at the end of the day all our dollars realisations are at 44.5. So to that extent we are protected from this sharp movement that has taken place over last 15 days or so. Once the currency comes back to its original level which is at 44 around we will be in the safe zone.

Sandeep Sehgal of Sequoia Capital likes IT Stocks - Moneycontrol.com

Sandeep Singhal, Joint Managing Director, Sequoia Capital states that they are very bullish on the technology sector and are making several investments in that space. They are positive on that space for the next three to five years.

He adds that they have also invested a lot in the BPO space. Sequoia Capital sees a lot of positive forces coming together over the next few years in that space. They are also positive on the hotel sector.

Singhal adds that in their portfolio, they have close to thirty companies like Café Coffee Day, Applabs Testing Services Business, Mauj, Nazara and Dr Lal PathLabs. They are broadbased investors.

Excerpts from CNBC-TV18's exclusive interview with Sandeep Singhal:

Q: What is your sense,are things okay for technology as a sector or are there any kind of red flags blowing for you?

A: We define technology probably a little bit broader than what the market defines. For us, the IT sector, the BPO sector combined with telecom as well as Internet and other interesting technologies and so on so forth, all of it is a part of technology.

I think starting with the basic sectors of IT, BPO and telecom, we are very bullish, as you can see from our portfolio, we are making several investments in those spaces, both at early as well as at midstage. But we are also bullish about sectors beyond that, which are tomorrow’s technology sectors. So overall our view tends to be a three-five years view and on that, we are very positive.

Q: On a long-term frame, are you seeing anything changing by way of long-term demand or appetite for our market and our services?

A: If we look back at our history when we started out investing in this market, about seven odd years ago, most of our technology sector investments came from offshore companies, across border companies, where the customers were across the border and we were serving them from India.

What has changed for us over the last two-three years is that, while we see that wave continuing for several more years, the wave of technology companies focused on domestic market who serve the domestic market and then go to other emerging markets, similar to India, that wave has gotten added.

So we see the cross-border wave going on for several more years, but at the same time a longer domestic market led, emerging market type theme is coming into play.

Q: How is the whole BPO story playing out for you, because you have got an investment in Firstsource and we have had a few BPO listings off late, is that sector fine because in the last couple of years, it has been dogged with issues of underpricing, lower realizations, how do those issues stand up today?

A: I think BPO is a sector where we have invested a lot, apart from Firstsource, which is of those first investments in the country, there are also ten other companies in various sectors, in pharmaceuticals, mortgage services and so on.

So I think what happened with BPOs when it started out was that everybody in India believed that because they were in business they could be successful in BPO and there was far too many market entries. There was some confusion for a few years but if you look at the last two-three years, focused players who bring significant strength to the sector are now gaining momentum.

So we believe that over the next four years, we are going to see people and management teams focused on the sector. This is definitely a sector where we are seeing a lot of positive forces coming together over the next few years.

Q: Have you looked at those stocks that have listed today?

A: No, we have not, we are actually private investors, by and large, and tend to almost invest in companies where our view is three-five years.

Q: Telecom, what do you think of valuations in this sector, since you own Idea, generally the kind of valuations and forward valuations at most of these telecom companies?

A: We see several years of strong growth in the sector and broadening in many different ways, that the west is just catching up with. So we are actually pretty much at peace with several years of growth backing these companies. And we view our investments with the same lens.

Q: How closely do you track taxation changes because there were a lot of concerns with MAT and ESOPs when you approach a strategic investor to sell some of your stake, how worried are they about stories like that?

A: The truth of the situation is that based on the economic environment and the policy framework, government will keep changing and tinkering with small things here and there and for us, we do not worry about those situations because of our holding situations, which are much longer but investors with a shorter-term horizon tend to have significant impact on their positions.

I would probably not be the most qualified to answer that but if we were looking to go, sell our positions to investors who are looking at the next period earnings of the companies, they would definitely consider that in their framework.

Q: You have got an investment in a hotel company as well, Royal Orchid, you like that space?

A: If you look at our portfolio, we have close to thirty companies, companies like Café Coffee Day, Applabs Testing Services Business, Mauj, Nazara and Dr Lal PathLabs. We are actually pretty broadbased investors, we are investing behind themes of broadening and deepening of consumer spending in India as well as business spending but in that same theme, we believe that the hotel sector and the demand supply and all of that and we know that for several years, we can keep building but we will not be able to catch up. So that is what makes us positive.

Good Analysis of why India ouster from WC 2007 is good for Indian Economy - ET

There’s a brighter side to India’s exit from the World Cup. Something that can cheer up disappointed fans and angry advertisers. Sri Lanka has done a great favour to Indian economy by ousting the cricket team from the World Cup. There are about 80 million cable and satellite viewing homes in India.

According to TAM ratings, the average viewership of all World Cup matches held till now stands at about 3%, with India vs Bangladesh touching a high of 7.25%. To reach the finals, India would have played at least seven more matches.

Considering a TV Rating of 7.25%, at least 5.8 million people would have watched the match. This would have resulted in a productivity loss of 371.2 million man hours (5.8 million x 8 hours x 8 matches), apart from stress faced by mothers during exams.

About 3% of 81 million TV viewers (2.4 million) were ardent cricket fans and would have sat through all eight hours in the remaining 28 matches. Thus overall, Indian team’s ouster would result in a productivity gain of 481 million man hours of work (28x2.4x8 man hours), if put to use.

The Sri Lankans have given a boost to the Indian economy by saving 54,902 man years of work (one year = 8,761 hours). Indians can build seven phases of the Golden Quadrilateral connecting Delhi, Mumbai, Kolkata and Chennai spread over 5,846 kilometres all over again, with this time saved.

A daily wage skilled labourer in Delhi earns Rs 17 per hour. If put to productive use, the 481 million man hours can produce Rs 817 crore of GDP, which is 63% more than BCCI’s annual revenues of Rs 500 crore, last year. It’s 401% more than the Rs 163 crore losses, corporate India has predicted to incur due India’s ouster.

The state electricity boards are also thanking Sri Lanka for the great favour. A TV consumes 45 watts per hour. Assuming a viewer will now switch off his TV by 12 midnight, it will save Rs 135 watts at least per viewer (not considering the electricity consumed by other appliances running simultaneously.)

This will save the electricity boards 324 million watts of electricity ( 3.24 lakh kilowatts) in just 28 days. According to estimates, SEB losses in India will touch Rs 1 lakh crore by 2008.

If disappointed viewers completely switch off their TVs for eight hours, it will save the government at least 8,64,000 kilowatts, along with many more lives — at least three Indian citizens have been reported to die due to cardiac arrest or suicide after India’s defeat at the hands of Sri Lanka.

'Corporate earnings to grow for next 6 mths' - Mahesh Vyas

Mahesh Vyas, MD and CEO of the Centre for Monitoring Indian Economy, a well-known economic think-tank with a large database on economy and industry, tells that economic growth in 2007-08 will be only 8 per cent. He is bullish on corporate earnings and adds that inflation will not play a spoilsport. Excerpts:

There are talks of the economy overheating. What is your opinion?

The economy is doing extremely well and the growth will continue in 2007-08 at a rate of over 8 per cent. New investments continuing at a robust pace will be the key driver of growth. New investments lead to new employment and new spending and they act as an in-built virtuous growth cycle. An interesting fact of the current growth is that it is neither driven by any policy measures nor are there any major reforms. It is a business cycle that is fuelling growth and the business cycle cannot remain bullish forever.

But don’t you think high inflation, along with higher interest rates, is hampering corporate earnings and growth prospects?

They are high, but they reflect the growth in the economy. There is genuine demand in the economy. They are not growth spoilers.

Why then is the government so desperate?

It is the job of the government to see that there is no runaway inflation. An average inflation at 7 per cent is not troublesome and it may remain at the current level for one or two months. But I think it will come down in 2007-08 and will average between 5 and 5.5 per cent. The current inflation is not hurting growth. On the contrary, higher prices encourage industries to produce more and the resultant increase in supply can bring the inflation down. According to me, the government’s measures are not enough and it should further reduce barriers to imports.

How do you see the prospects for corporate earnings?

I do not see any reason why corporate earnings should not continue to grow as in the recent past. At least for next two quarters, they will be good and may continue even further. The raw material cost, which constitutes 60 per cent of the total costs, has come down due to lower oil prices. The interest rate cost is very small at around 2 per cent and is easily set off with a reduction in raw material cost.

What are the bubbles in the economy?

If you are talking of real estate, it is more of a reality. Prices are not talked high. Deals have taken place at high prices. They are not artificial, though they have risen at a mind-boggling pace. By calling it a bubble, we are giving a bad name to growth

What then could hamper growth?

It is difficult to find factors. But if I stretch myself, I would say SEZs are worrying me, as they lead to growth based on sops. They are artificial islands that are privileged compared to the areas nearby. Agriculture is an area where there seems to be some confusion. More loans are advanced and investments have started flowing into the sector to ensure that agriculture does not become a drain on growth.

These are good signs. But the confusing part is not enough is done to strengthen new institutions such as commodity exchanges and the FMC. They are good for the economy. By improving them, price discovery of agricultural commodities will only improve. There is need to increase investment to bring in modernisation and transparency in such institutions. By banning futures trading in some commodities, the demand-supply gap cannot be tackled.

Tata buys Chrysler for $1 - Good one from TOI

'Tata buys Chrysler' was the headline in the online daily, The Globalist, on February 23. Its author imagines a scenario in which Ratan Tata buys the Chrysler subsidiary from DaimlerChrysler for a dollar. The famous American car company is cheap because its employees' health care and pension liability of $20 billion has bankrupted it. The story also has a message for Indians who don't know quite what to make of the global ambitions of their companies.


When Ratan Tata bought Corus last month, he got the entire steel industry of Britain and Holland and earned the
applause of an India bent on assuming a place in the world. He paid too much but he called it 'a moment of great fulfilment for India'. Two weeks later, Kumar Birla bought Novelis to become the world leader in rolled aluminium from which cans of Coke and PepsIand cars are made. Once again national pride was on display. Are these purchases smart business buys? Or is it about personal egos and national honour?

After the deals, the shares of both companies fell 11% on stock markets. Standard & Poor's placed Tata Steel's long term rating on 'credit watch'. What would Tatas do with 30,000 expensive European workers? Others asked how Birlas would discharge Novelis' mountain of debt. The stock markets are telling the companies that their earnings will decline in the short term even though their acquisitions may be good and strategic in the long term. What matters now is that Tatas and Birlas bring their considerable skills to Corus and Novelis and run them better.

No one could have imagined even five years ago how quickly Indian companies would burst upon the global stage. For all the hype about China, it has only a handful of truly world-class companies. By contrast, India has a much deeper and broader stable. Indian companies have also been remarkably sensible in the way they have gone about buying assets abroad.

They have ventured out from a position of strength after winning victories in the domestic market. They have usually bought smaller companies to gain access to new customers or technologies or to leverage their low Indian costs. Quite unlike the Chinese electronics firm, TCL, which was so influenced by the prideful ambitions of its government (rather than business logic) that it bought parts of two famous French companies, Alcatel and Thompson. It is in trouble today as the acquisitions have drained it of cash.

The Globalist headline is a warning to Indian companies to beware of hubris. The next time they raise their mighty chests to make a big foreign acquisition, they should remember that only one out of two acquisitions succeeds and the failure rate rises with size. Only four acquisitions did well out of all those made by the 15 largest Japanese firms between 1980 and 2001. This is a sobering lesson from McKinsey's research department. A foreign target will always appear more attractive from far away Nariman Point, and a brand is up for sale precisely because it is in trouble.

India is still an enigmatic rope trick where great companies perform magic amidst unwashed masses, corrupt politicians and negative bureaucrats. We have the largest number of billionaires in Asia, but the point is they are creating untold wealth for India.

One of them, Mukesh AmbanIand his gas discoveries could reduce our dependence on foreign energy — something that the State failed to do. Indians only need good schools, health centres, and infrastructure from the State, and they will respond with amazing prosperity for all.

Reliance Industries: Why Dow? - by Shobhana Subramanian

The reasons may not appear compelling, but an alliance with Dow Chemical could help RIL.

India Inc’s global ambitions are getting bigger. Barely has the ink dried on the $12 billion Tata-Corus and $6 billion Hindalco-Novelis acquisitions deals than there’s talk that oil and petrochemicals giant the Rs 89,124 crore Reliance Industries (RIL) is attempting to partner with the $49 billion Dow Chemical Co, the largest chemicals maker in the US. RIL has not made any announcement to this effect but speculation is rife that the company hopes to be able to team up with Dow possibly through a joint venture. The possible reasons: RIL wants to be able to team up with buyers who will guarantee offtake of polymers that it produces or it wants to use its cash flows to pick up a stake in a world-class efficient player in the chemicals and hydrocarbons space. In the context of media speculation, Andrew Liveris, chief executive officer, Dow Chemical has said that he had no plans for a “big bang transaction” but adds that he “plans to create a new business model for polystyrene and polypropylene-resin production, which may include forming joint ventures with partners that have access to cheaper raw materials.” Opinion is divided on what RIL stands to gain if RIL partners Dow in a joint venture which houses the commodity plastics and chemicals business. Some say it’s hard to see operational synergies or potential for any cost savings through an acquisition in any of the segments to be spun off from the parent company. Others believe that RIL is looking for buyers for products to be exported from the SEZ. Says Deepak Mahurkar, associate director, PricewaterhouseCoopers, “Joint ventures tend to work better than simply a buyer-seller agreement since they provide long term partnerships and not short-term solutions. The target would be to bring competitive advantage and support in processes, practices and people.” Besides, Dow’s marketing network, they point out could be useful to RIL. “Even in a commodity business such as plastics, client relationships can be leveraged,” they point out. Not everyone buys this argument though. As for shutting down a part of Dow’s high cost commodity chemicals and plastics facilities in the west and shifting the manufacturing back home, almost everyone believes that it is near impossible. “The cost of relocation for Dow would be too high apart from the political problems that may arise,” points out an analyst. He adds that Dow might want to set up incremental capacity in India with RIL, which makes sense in the long term because of the cost advantages that it would derive. But in the near term, most analysts concur that it doesn’t seem feasible at all for RIL to be supplying cheap feedstock to Dow which has a high proportion of its manufacturing assets in North America, the rest being in West Europe and Kuwait. Analysts point out that Dow’s basic chemicals and plastics units are integrated from the cracker stage and they source raw materials locally. If it wants, it can source products from Malaysia or the middle-east, and it would get them at a good price. “So the question of RIL supplying cheaper feedstock to Dow doesn’t really arise,” says an industry watcher. However, what RIL could get from Dow is technology; that would help it make high value-added plastics such as thermo plastics or performance plastics. It’s not that RIL can’t shop for technology elsewhere, though. Experts say there’s plenty of technology available. And if all that RIL wants from Dow is technology, there’s no need for a joint venture. Would Dow be keen on a partnership? Analysts believe that by spinning off its plastics assets into a separate company and giving RIL a stake, Dow can unlock some value. Given that margins for chemicals are expected to taper off from peak 2006 levels, it might give Dow’s share price a boost. Dow’s enterprise value (EV) is currently around $51 billion and the estimated operating profit for the commodity chemicals and plastics business for 2008 is $3-3.2 billion. Ascribing a multiple of about 8 times EBITDA, analysts suggest that RIL would need to fork out about $12.5-13 billion for a 51 per cent stake in a JV. It doesn’t get bigger than that.

India's Monetary Woes Show Up in Call Market - Andy Mukherjee

Any bank with spare cash in the vault would have made a killing in India this week.

The interest rate in the overnight, inter-bank call money market shot up to a staggering 62.5 percent yesterday, from just about 5 percent on March 15.

On the central bank's online trading system, call rates soared as high as 70 percent.

This surge has taken place even when the Indian central bank's policy rates have remained unchanged in this period. The Reserve Bank of India borrows surplus funds in the banking system at 6 percent and lends, when needed, at 7.5 percent.

The cash crunch is temporary, caused by companies drawing down their bank balances to meet the March 15 deadline for making tax payments.

When the government spends this money, funds will come back into the banking system, probably before the end of the month. Yet, the cash squeeze sheds light on the peculiar challenges of monetary policy in India. Such a spike, if it were to occur in a developed country, would be associated with the collapse of a large hedge fund or a massive terrorist attack. It would be a sign of panic.

Tax payment is a humdrum, annual event with entirely predictable consequences for liquidity. Why should it become such a huge issue in India? And why this year? It's hard to believe that the volatility resulted from a lacuna in the central bank's forecasting ability.

Clashing Objectives

Banking-system liquidity in India has become painfully volatile as monetary-policy goals have begun clashing with exchange-rate objectives. As a result, one week the system is in surplus mode, the next week there's a glaring deficit. With inflation beginning to crawl up since September, easy money conditions have been untenable for a while.

And yet, with inflows of overseas investment accelerating, the Reserve Bank ended up buying almost $8 billion of the U.S. currency from November to January to keep the rupee from rising too much, too quickly.

Then, to contain the spill of domestic liquidity from its dollar purchases, the central bank had to preempt funds in the banking system by increasing the ratio of deposits that commercial banks have to set aside as cash.

The results haven't been great. Inflation is running at 6.5 percent, a full percentage point higher than the Reserve Bank's tolerance level. And the rupee, at 43.47 to the dollar, is at its strongest in 19 months.

Running Out of Collateral

And now, there's a cash crunch. To borrow from the central bank's Liquidity Adjustment Facility, or LAF, at the prescribed 7.5 percent rate, banks need to offer government securities as collateral.

The trouble is that as much as 25 percent of commercial banks' deposits that have to be compulsorily invested in government debt is considered ``statutory liquidity.'' These so-called SLR securities don't qualify as collateral. Most Indian banks have already liquidated their excess investments in government debt to satisfy strong credit growth. That constrains their ability to borrow from the Reserve Bank.

Hence the desperate rush to raise funds at 70 percent.

The Indian central bank uses two benchmarks for overnight money, when most others make do with one key rate. Presumably, the Indian monetary authority wants to exercise greater control at the short end of the yield curve.

Credibility Question

For that reason, it's important to make the call rate stick to a preset path: The credibility of the central bank depends on maintaining the sanctity of its interest-rate corridor.

When banks start borrowing at almost 10 times the rate at which the central bank offers to provide liquidity, the entire debt market becomes nervous.

Sure enough, trading volumes in the Indian government bond market yesterday slumped to next to nothing. To be fair to the central bank, it had warned lenders of this scenario in its monetary-policy statement of Jan. 31.

``Banks need to recognize that shortage of SLR securities could constrain their recourse to LAF liquidity, which can turn adverse in critical times, forcing them to resort to uncollateralized exposures and attendant risks,'' Governor Y.V. Reddy had said.

The message is clear: Until the central bank achieves a demonstrable victory over inflation, it will keep a tight leash on liquidity. The rupee will remain in short supply. That will be great for carry traders.

The current scarcity of rupees has ended up making the rupee ``the carry currency of choice in Asia,'' says Shahab Jalinoos, a Singapore-based strategist at ABN Amro Bank NV.

One-month rupee forwards offer an attractive annualized yield of 16 percent, according to my Bloomberg. Yesterday, the central bank clarified that banks could borrow from it to lend in the call money market. This should restore sanity for the time being.

In the medium term, banks will have to raise more deposits to ease their cash crunch, or they will have to stop lending.

Indian Market Investment Opportunity for US Investors - Garrett Beauvais

The fact that The India Fund (IFN) and Morgan Stanley's India Investment Fund (IIF), two closed-end funds focused on India, stopped following the broad Indian market as measured by the India BSE 30 Sensitive Index was painfully clear late last year.

In December 2006, Barclays announced the availability of the iPath MSCI India ETN (INP). INP is not an ETF but an ETN (Exchange Traded Note). ETNs are unsecured debt instruments and carry the credit risk of the issuer, Barclays Bank PLC in this case.

What I was curious to know was if, during the most recent market correction, IFN and IIF had held up any better than the BSE 30 index and, also, if INP had continued to track the index. While three months of history is not much to go by, it is nevertheless a good early indicator that INP continues to track the index well and that IFN and IIF continue to underperform.

For anyone intent on participating in the Indian market, INP seems to be a lower risk alternative to the badly lagging IFN and IIF closed-end funds.

India WPI Data Outdated: ET Shows Inflation May Fall Below 6% This Month by Ajay Jindal

Inflation (and a looming credit crunch) is a big worry for Indian economy. It is clear by now that the Indian economy is overheating. While economists may debate both sides of the overheating issue, I suspect when salaries increase at 20-30% annually, and you cant find the right people even after that, it is a sign of overheating.

Analysts could do well to follow Economic Times's commodity index to be a step ahead of government's WPI data. The government's data at at least two weeks late at any point. For example, the latest WPI data available now is for March 3rd. The Economic Times collects data daily, and ET is the only paper which makes a set of commodity indices based on this data. In fact, ET Commodity Indices are the only indices based on spot prices available in this country.

ET Commodity Indices have worked brilliantly in the past. About a year ago, when the government's WPI data was showing inflation at 4% or so, we wrote it should be over 6%. In effect, we said the government data was wrong, and out of step with market prices. Inflation did ultimately rise above 6%. Sometimes govt data goes seriously out of whack with reality (inflation, or even IIP), its never been clear why.

At this point there is no problem with WPI data per se. ET data and WPI data largely matches (check the Mar 3 data).

The advance information (compared to WPI) available with ET Indices shows that WPI will fall going ahead. Foodgrain prices are off sharply and just the foodgrain segment can cause a fall of 0.55% from the 3 Mar'07 levels. Since nothing much is above Mar 3 levels, this means inflation could go below 6%.

Consumption based stocks - Business Line

With the economy growing at 8-9 per cent, consumption is likely to remain a dominant theme in the markets. And the domestic consumption story is one of the few ideas that professional investors are almost unanimously positive about.

The domestic consumption story is one of the few ideas these days that professional investors are almost unanimously positive about, with concerns of a possible US economic slow-down, volatile commodity prices, pricing regulation and rising interest rates affecting sentiment in just about every other sector.

The universe of stocks that benefits from the consumption theme is no longer restricted to the FMCG sector but has expanded to include retailing, media, tourism, alcoholic beverages, automobiles, telecom and housing. The performance in the stock market over the past year has, however, been mixed, with some of the obvious beneficiaries of consumption, such as FMCG, retailing and hotels being the under-performers.

The media and housing sectors, where more options have emerged in the listed space in the last two years, have received most of the attention. Here is an overview of the consumption space and a clutch of recommended stocks for those who wish to ride the theme.

Dominant theme

With the economy growing at 8-9 per cent, consumption is likely to remain a dominant theme in the markets. And even if the stock market lets you down, take comfort from the thought that the job market certainly will not. HR consulting company Hewitt Associates expects Indian salaries to rise 14.5 per cent in 2007 — the same as last year. Higher disposable incomes may ensure that the spending spree continues.

India currently enjoys the strongest consumer confidence in the world. Four times in a row, it has topped AC Nielsen's Consumer Confidence Index, a half-yearly survey that gauges consumers' confidence in the job market, status of their personal finance, their willingness to spend, spending habits/intentions and their current concerns. From among 46 countries, Indians were found to be most bullish on job prospects and the state of their personal finances.

The strong double-digit volume growth seen in everything, from FMCGs to automobile sales, also points to the spending wave and, in our view it would take higher interest rates to slow down spending dramatically.

Stocks that benefit from the domestic consumption would, therefore, serve as good defensive picks and are likely to outperform the market in the medium term. We, however, take a more positive view on sectors where spending is not credit-dependent, such as FMCG, food and apparel retailing and entertainment (multiplexes, broadcasting).

Also, given the increased competitive activity across sectors, an inflationary environment and the fact that growth will have to come on a higher base, the execution challenges will be significant. A cherry-picking strategy in stock selection may be more appropriate. Given the volatility in the market, investors may use price declines linked to market weakness to accumulate these stocks rather than invest a chunk at one go.

Sector view

FMCGs: If you had loaded up on FMCGs in May 2006 as a defensive strategy, it would have backfired. Despite healthy balance-sheets, double-digit growth rates and aggressive acquisitions, investors have given the sector a go-by. In fact, quality stocks have shed 15-30 per cent from their peak levels. The stiff valuations that had prevailed earlier appear to have been a factor behind the underperformance. The average FMCG stock is now at a 25-30 per cent premium to the market (down from historical levels).

Our outlook for the sector remains positive. Volume growth across categories is strong. FMCG majors are likely to effect further price hikes to partly offset rising input costs, having largely maintained prices over the last three years in light of the higher competitive activity.

Given the comfortable cash position and the low gearing, interest rate hikes are unlikely to affect these companies. Recent numbers suggest that acquisitions in new markets/product lines are also beginning to pay off.

Hindustan Lever and Marico are our top picks for the sector.

Retail: The sector is now buzzing with investment activity, with the entry of big players such as Reliance, Birlas and Bharti-Wal-Mart.

However, we believe that most of the opportunity lies outside the listed space as new entrants snap up smaller players and foreign retailers strike partnerships with local outfits.

This year might also see the likes of Subhiksha and RPG tapping the primary market.

While there is room for four-five players, margins in the medium term are likely to be under pressure on the back of rising real-estate rentals and labour costs, and pricing pressure.

For leading retailer Pantaloon, staying at the top may mean sacrificing some margins in the medium term as it expands at a frenetic pace.

A hold strategy appears appropriate right now for current listed players. The long-term outlook for the sector, however, remains intact.

Media: The sector has caught the fancy of investors over the last year as a beneficiary of India's unique demographic profile.

The re-rating in broadcasting has come on the back of implementation of the conditional access system as well as the increasing advertising spend by marketers as they target young viewers.

The print media has also got its fair share of attention, with a growing community of discerning readers.

It has been a particularly big year for entertainment, with a series of blockbuster movies. The interest in multiplexes has, however, waned.

Valuations in the media sector remain at high levels given that it is still in its infancy. Stocks might pause for a breather till greater clarity emerges on the impact of CAS on viewership. The series of new channel launches also threatens to shake up market share figures. Adlabs Films appears well-placed to benefit from spending on entertainment with its integrated presence in film entertainment. Among multiplex majors, Shringar Cinemas looks attractive from a valuation perspective.

Automobiles: Moving on to bigger spend categories, automobiles sales have recorded robust growth rates in recent years. Although traditionally an interest-rate sensitive sector, double-digit growth rates should sustain. Two-wheeler sales are likely to be more sensitive to interest rate hikes than passenger vehicles. Maruti Udyog, which has been an under-performer, is our top pick.

The stock trades at attractive valuations. Increasing traction in compact car sales and launch of new models are likely to drive revenue growth.

Hotels and tourism: Hotels have notched up spectacular growth rates over the last couple of years on the back of a supply shortage.

While a key driver of demand has been the increase in tourist arrivals buoyed by a strong business environment, domestic travel too has played a role in increasing occupancy rates across hotels. Hotel stocks have also underperformed since the May correction. Concerns of fresh supply lowering occupancy rates in some pockets could explain the correction of stocks such as Hotel Leelaventures or Taj GVK.

Indian Hotels would be our top pick in this space. Its range of properties and its foray into the budget segment make it best placed to benefit from domestic travel.

Market-linked price weakness may be used to accumulate the stock.

Recommended picks: Hindustan Lever, Marico, Adlabs films, Shringar Cinemas, Maruti Udyog and Indian Hotels