3 reasons why betting on equities still makes sense

Saikat Das
moneycontrol.com

The economy is not yet out of woods despite a raft of measures taken by the authorities. Investors then prefer to sit on cash, unable to find an attractive avenue for earning good returns. However, a three-pronged approach based on better monsoon, the rupee fall against US dollar and an impending recovery could throw up fresh opportunities to invest.

Monsoon, the rupee fall and telecom

"The equity market is now skewed," Prasad Koparkar, senior director, Industry & Customised Research at Crisil, the domestic arm of global rating agency S&P; told moneycontrol.com on the sidelines of an event organised by Kotak Mahindra Bank and Crisil Research on Tuesday.

"Investors are ready to pay higher premium for quality stocks as uncertainties continue. A better-than-expected monsoon will drive rural consumption while a depreciating rupee would bless export oriented sectors like information technology. Thirdly, a lot of weeding out of unproductive customers has made telecom an attractive bet," he said.

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PE differential

The difference between top ten high valued listed companies with price earning (PE) ratio in the range of 30-40 and ten low valued listed stocks with PE at 3-5, perhaps hit a decade high, pointed out Koparkar. PE ratio is an indicator of stock valuation. Lower PE suggests, the stock is under-valued.

RBI on rains

In its first quarter (April-June) monetary policy the Reserve Bank of India (RBI) exuded confidence over good rains and its impact on the economy. Spurred by the timely arrival of the monsoon and above long period average rainfall so far (17 percent excess up to July 26, 2013), kharif sowing has been significantly higher than a year ago, with total sown area at around 7.5 crore hectares as on July 26 compared with about 6.5 crore hectares a year ago, RBI said.

FMCG, 2-wheeler and pharma

"Consumption is likely to increase especially in segments like two-wheeler sales and Fast Moving Consuming Goods (FMCG) sector. However, upside in FMCG stocks is limited. Moreover, one can bet on pharmaceutical sector as well," the director said adding that PFCI (Private Final Consumption Expenditure), an index for showing country's consumption levels, recorded at 4.5 percent in FY13 as against a yearly average 8-12 percent.

Increased consumption

Crisil Research expects PFCI to grow at 6.5 percent in 2013-04. This in turn means that people will have more money to spend or consume. Inflation too is expected to come down.  The wholesale price inflation (WPI) stood at 4.9 percent in June 2013 while retail inflation was close to 10 percent during the same period.

Telecom trove

For telecom sector, the recent tariff rise after a long spell drew Koparkar’s attention. Earlier, telecom companies were engaged in a marketing war to grab the market share. Consequently, they used to offer huge discounts on tariffs impacting their profit margins. Even the regulatory overhaul is also over.

saikat.das@network18online.com