Fwd: Fw: Subject: India: ST Rally for now - But Dilli door hai

[udayan maheshwari]

---------- Forwarded message ----------
From: udayan maheshwari <udayanma...@yahoo.com>
Date: Tue, Dec 10, 2013 at 11:18 AM
Subject: Fw: Subject: India: ST Rally for now - But Dilli door hai
To: udayan gmail <udayanma...@gmail.com>

 

Regards

 

Udayan

On , udayan maheshwari <udayanma...@yahoo.com> wrote:

 

Regards

 

Udayan

On Monday, 9 December 2013 6:16 PM, Pankaj Jaju <Panka...@axiscap.in> wrote:

 

The BJP has won 3 times the Cong seats across the 4 state elections (please see next page for the results) hinting at a clear anti-incumbency and progressive wave for the Centre. Hence, we expect a short term rally, as a sentimental troughing from the lows.  Hopes now revive, of a new and stable government at the centre, stanching further self-goals that India has been mired in of late. The ruling party, fire-fighting to avoid a rating downgrade, will be helped this year by the economy’s worst being behind us (good monsoons, resuming oil buying from Iran, pre-electoral Party spends).

 

However, this will get tempered by some immediate profit taking, paper supply (divestments), Fed taper fears (the markets have been FII-driven), risk of populism by Cong and the fact that “Dilli door hai” (Delhi is far way – a centuries old cry in rural India), and so are the interminable 5 months till the general elections, where UP & Bihar hold the key.

 

A part of this victory was discounted in the markets recently; however not by such a wide margin. This note provides its political and market implications and a revised model portfolio* (see note at end), where we have so far been very defensive and lean a bit more early-cyclical now. Overall, sell late cyclicals  esp those which have run up a lot of late such as very high beta midcaps or infra-related stocks (incl CVs, certain NBFCs), decrease large cap defensives such as FMCG, and increase early cyclicals such as banking and consumer discretionary.

 

A)     Political implications of BJP’s victory:

1.      Fight back by Congress: It’s possible that because of this debacle, the power shifts from the ruling Govt back to the Party. Thus, despite the FM’s resolve to contain the deficit (including apparently through postponing many of the subsidies on to the shoulders of the next govt), we don’t know if the Party would resort to a last minute populist splurge, leading to a rare pre-election rating downgrade risk. However, the Rajasthan results belie the billions spent by the Cong on freebies. While it can try to expedite the formation of Telengana, this has too many hurdles along the way.

2.      BJP’s prospects in the national elections: The emphatic BJP win has been despite the AAP taking away potential BJP seats in Delhi. The huge swing that BJP got in Rajasthan & MP raise the hope that the Modi-wave will suffuse to a greater vote share in the Hindi-belt. UP (80 seats in LS) remains the key, followed by Bihar (40 in LS), as the Hindi heart land has ~185 seats in LS incl MP, Raj & Ch’garh. Back of the envelope calculations show that unless the BJP gets ~50 seats in UP & Bihar, it has little hope of crossing 180 on its own. Only then can it attain 272 seats with existing allies and NEW ones where it has negligible presence such as TN (AIADMK), AP (YSR-Cong) and possibly WB (TMC) & UP (BSP) who will demand their pound of flesh even as the next Govt will have empty coffers.

3.      Rise of Aam Aadmi Party (AAP): AAP got 28 of 70 seats in Delhi (though Delhi has just 7 seats in LS). Given AAP’s nursery age, this increases pressure on all parties to perform on governance (AAP’s plank) for both the ruling & opposition parties, and invokes fear of its expansion into other states.

 

B)     Key market expectations from a stable Central Govt:

This basically assumes that the Central Govt and the States will work in unison as many pending issues such as GST, environmental, etc are stuck at the State level also. Thus, the hopes are for:

q  Addressal of supply bottlenecks, eg in coal, power, gas, land, etc.

q  Clear roadmap for GST

q  Return to fiscal prudence: Ever rising govt borrowings ( ~Rs 5 trn) to increase dole-outs have crowded out private investments and vitiated the interest rate environment

q  Disinvestment/ Privatization and some bold moves on liberalizing FDI and inward investment norms esp in oil & gas

 

State scorecard

	Total	Now					2008
States	Seats	BJP	CONG	AAP	OTH		BJP	CONG	OTH		Comment
RAJASTHAN	199	162	21	-	16		78	96	26		Wider BJP margin v/s expectations
DELHI	70	32	8	28	2		23	43	4		Just short of clear majority
CHATTISGARH	90	44	41	-	2		50	38	2		Consolidation despite sympathy vote for Cong
MADHYA PRADESH*	230	162	56	-	6		143	71	16		Wider BJP margin v/s expectations

Source: Media          * As of 8.30 pm, 6 seats yet to be declared

 

Notes on Model Portfolio: A broker’s model portfolio is primarily meant to provide an AB-INITIO look at sectors and stocks each time, as a guide for investors, and not purely as a “shadow portfolio” which is partly dependent on current holdings. Hence despite conditions used to consider investor imperatives, the “having a FRESH look” remains THE paramount condition. Our model portfolio conditions have been:

a)      Nil-cash portfolio

b)      Non-Nifty stocks are usually > USD 1 bn mcap (unless exceptional & LT returns) & capped at 2%

c)      All allocations capped at 10% (eg RIL, ITC, Infy)

 

Portfolio Stance: Currently the 2 bright spots in the economy are the Rural and Exports sectors (hence for eg, OW on Hero and IT kept neutral, despite some profit taking potential). The second quarter results, while better than expected, did not really throw up any major signs of domestic revival. A sizeable part of the quarterly performance was due to benefits of weak INR (notably Auto, IT, Oil and Pharma). This exports growth has also spurred manufacturing a tad as shown by the latest IIP trends. Other than that, domestic growth linked sectors continue to be weak. We thus move from completely defensive to a slightly early-cyclical stance based on hope (must admit !), of a stable govt at the Centre in 2014

 

In case of a cyclical recovery, the sectors that would move the earliest are:

q  Financials, as  perceptions on both asset quality and credit growth go up simultaneously

q  Consumer discretionary, as sentiments spur the “willingness to spend” even before the “ability to spend” fully kicks in, esp Urban recovery

q  Operating leverage stories with no expansion plans and little debt, ie where capacity utilization is currently low due to low industrial or consumer discretionary demand, and rises the first without any baggage of interest or depreciation exps

q  Midcaps with unique business models which catch investment flavour

 

Do note that revival in Infra would take much longer than the above

 

OW Sectors: Media, Engg, Realty, Pharma. All these are overweight largely because of our Non-Nifty stock inclusions.

 

UW sectors: Cement, FMCG, Power and Resources.

 

Overweight Nifty Stocks: Bajaj Auto, Maruti, Hero, ICICI, PNB, IDFC, Ambuja, RIL, BPCL, Dr Reddy’s

 

Non-Nifty Stocks: Power Finance, Adani Ports, Adani Enterprises, Dish TV, United Spirits, Hind Zinc, Biocon, Divi’s  JSW Energy, Prestige Estates, Idea

 

Please do read the comments alongside all stocks where we have made changes in the portfolio.

 

EOW

 

Most pollsters predict a clean sweep for the BJP in the 4 state elections based on exit polls. The markets seem to have already discounted a bit of that already. This is despite the fact that exit polls have had a worse predictive ability than equity strategists so far. The expectation is that a stable and competent government in 2014 will address the policy paralysis, improve business confidence and reposition India on the global investment radar. (Needless to say the current govt has also done a lot of useful fire-fighting on these fronts of late). The actual results on Sunday could drive cyclical stocks either way on Monday – profit-taking for those which have moved up too much, exits in case of a fractured mandate, further spurt if the BJP margin is wider than expectations. Note however, that May 2014 is still far away.

 

Summaries of reports this week:

q  Banks: RBI’s draft report on implementation of counter-cyclical capital buffer

q  Coal India: Cut estimates on poor Oct and Nov volumes 

q  Dish TV: Market cap to double…

q  Eicher Motors: New CV platform – Volvo stamp all over 

q  India Q2 CAD shrinks sharply; FY14 to be <3%

q  JSW Energy: New PPA norms - a game changer

q  New laws: More power to minority shareholders

q  Shree Cement: Competition intensifying in Rajasthan

 

 

Regards,

 

Nandan Chakraborty

(Managing Director - Institutional Equity Research)

Axis Capital Ltd

Tel: +91 22 4325 1107

 

Sachchidanand Shukla

(Sr VP & Economist)

Institutional Equity Research

Axis Capital Limited

Tel.: +91 22 4325 1108

 

 

Thanks and Regards,

Pankaj Jaju | Executive Director | Investment Banking |

Axis Capital Limited

Axis House, Level 1,  C-2 Wadia International Centre, P.B. Marg,

Worli, Mumbai – 400 025. India

Tel.: (B) +91 22 4325 2525 (D) +91 22 4325 2105 Fax: +91 22 4325 3000

Mobile: +91 9594055500.  Email: panka...@axiscap.in Web:  www.axiscapital.co.in

 

Enam is now Axis Capital

 

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