(Chennai, 31. August 2012) Despite some bad news on the economic front, India’s equity market is poised for a positive turnaround after a long-running downtrend. That’s the view of Parameswara Krishnan, our Lead Portfolio Manager for Indian Equities. Krishnan believes the market currently offers a good entry point, particularly for investors who focus on the right sectors. “We may not see rapid growth in the short term, but it’s difficult to imagine that the market will go on losing ground. Medium to long-term, current price levels constitute a favorable time to start buying Indian stocks,” says Krishnan. “Banks and IT groups in particular have reported very good results over the past quarter. Focus on the right Indian stocks and you’ll do a lot better than you would if you invested in many of the world’s other equity markets.”
Banks and technology firms above average
Krishnan is convinced of the Indian economy's medium and long-term growth story. Even in the short term, however, he says there are enough firms doing better than average. One of them is the country’s largest personal banking group, HDFC Bank. It only recently overtook rival ICICI in terms of total loan volume, and its market cap actually exceeds that of state-owned bank SBI. In the quarter from April to June 2012, the institution’s revenues rose 34 percent year-on year. “In addition to the pure numbers, a positive factor for HDFC is the admirable way it has dealt with every crisis on the financial market thus far," says Krishnan. This fact has not gone unnoticed by ratings agency Fitch, which awarded the bank a long-term rating of AAA.
With the necessary market knowledge, however, major growth potential can also be found in the smaller banks as well as the giants of the sector. They include Karur Vysya Bank, which operates mainly in the eastern part of the country in the area around the economic centre of Chennai. This institution is specialised in lending to small and medium-sized businesses and currently has a much lower valuation compared with the country’s large institutions.
In addition to the banks, the IT sector is also particularly attractive in Krishnan’s view. Thanks to a large number of foreign customers, lack of specialist skills abroad and the ongoing trend to offshoring (that is, the relocation of business activities and processes abroad) in the US and Europe, the industry is successfully combating faltering economic growth and inflation. With last year's 16 percent rise in turnover, the sector grew more than twice as fast as Indian gross domestic product in percentage terms.
Within the IT sector, medium-sized firms such as Hexaware have made a particularly strong mark in recent quarters. Turnover in this size segment of the industry rose nearly 40 percent year-on-year at the end of June, with profits up nearly twice that figure. “Investing in the major companies is certainly promising.
But with the right knowledge of the market, medium-sized firms also offer good opportunities for investors,” says Krishnan.
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Hexaware - Quarterly revenue growth in US$
Source: Company information
Bad news successfully weathered
“The fact that the Indian market once again weathered bad news extremely well during the last quarter gives grounds for optimism,” says fund manager Krishnan. “Although the markets have fluctuated sharply, they have held up well in overall terms.” The Sensex, for example, fell by 1,500 to around 16,000 between the start of April and end of May, but in June went on to make up virtually all of this loss.
With India having performed poorly relative to the other BRIC markets in 2011, Krishnan now sees the prospect of a recovery. “India still has not seen a cyclical recovery,” he comments. “The changes made within the government are a hopeful sign that the reforms that are urgently needed here will be given a fillip, thereby producing the necessary momentum. The first signs of this are already reflected in share prices.” The fund manager is referring above all to the changes in the cabinet of Prime Minister Manmohan Singh, who firstly took over the finance portfolio. “Singh has a good reputation on the market,” says Krishnan. “Generally speaking, he’s also held in high esteem by international investors. It’s undoubtedly a positive signal when the prime minister himself takes over the helm as the ship enters stormy waters.” Meanwhile, Singh handed this charge on to Palaniappan Chidambaram, who is not new to the job. PC, as he is known as, was Minister of Finance in 2004-2008 when India had its best growth years. Being probably the most efficient and effective minister in cabinet, he might be the right man at the right time.
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