Indian macro, though expected to incrementally improve from its trough, looks quite vulnerable. Reform expectations need to be tempered in the wake of the DMK pull out and opposition from parties supporting the Govt from outside.
· GDP growth is set to rise to 6.2% in FY14, driven by Consumption: Govt spend, lagged impact of interest rate cuts and poll related spends. This consumption tilt in growth will keep inflation from falling significantly. Thus, we expect the INR to weaken further based on concerns over CAD-financing and electoral uncertainty, even though the CAD is set to improve incrementally.
· A combination of incremental growth & INR depreciation leads to Sensex earnings growth of 18% for FY14 & 17% for FY15. We have revised target prices for much of our coverage universe based on new assumptions in INR & other related pricing/ demand assumptions. INR depreciation gives the biggest delta to Resources, Pharma, IT, while Power cos which import coal get hit.
· In a tough year, “Macro-Aware but Macro-Agnostic” is a good state of mind to be in, to orient oneself to Bottom-up Stock picking. Thus, we recommend a team of 11 Must-have Nifty stocks, chosen for their above-avg earnings growth, not being expensive relative to this growth rate, and leadership position:
· Goal-keeper: HDFC Bank which has consistently outperformed across market cycles
· Defenders are the Exporters which are growing aggressively even in this global slowdown: TCS, HCL Tech, Lupin, Sun Pharma
· Mid-field: These are beneficiaries of expansion plans &/ or interest cut/ consumption: RIL, TAMO, Maruti, Bajaj Auto
· High Risk-Return Strikers, which have a huge upside to downside risk-return profile: JPA, Tata Steel