See delay in revival; India moving to old normal: Citi

Investors should take advantage of the relief provided by the US Federal Reserve's decision to postpone the QE tapering and not become complacent about it. That's the view coming in from Aditya Narain, MD & India Strategis at Citi, who is also playing the role of the Guest Editor of CNBC-TV18 for the day. However, Narain is quick to add that the window of opportunity is likely to remain open only for a three to four month period.

In a research note, authored by Narain, Citi expects India to go back to its old normal i.e. trading at 12.5x PE as opposed to 14.5x currently. It has revised its Sensex year-end target to 18,900 versus the 20,800 earlier.
"To start suggesting that it is FY14 phenomenon is completely over optimistic. It’s FY14, FY15 at the minimum; it could effectively even take a little longer. It is just a process. The old normal is a take on the new normal but it is, fundamentally, a process and a time of normalisation and by definition that time is going to be slightly extended," he says.
In its model portfolio, Citi has raised IT to "overweight", along with pharma, telecom and energy. Meanwhile, it has cut its rating on Indian banks to "neutral". It is also neutral on real estate and capital goods. It is "underweight" on consumers, materials, utilities and autos. Below is an edited transcript of the interview on CNBC-TV18 Q: How do you think the market is going to pan out from hereon? It now looks like tapering is postponed somewhat indefinitely, at least out of the way for 2013. So, is this liquidity going to last for a goodish bit? Are we going to get some positive maybe short-term surprises?
A: I think suggesting that’s been pushed out indefinitely is probably is a very hopeful kind of a scenario. But it does give you a little bit more time to readjust. In that sense, it has come at a timely moment when the economy was under a certain amount of pressure, the market were under greater amount of pressure and you have got certain amount of relief.
As a lot of commentators have said, this is the time to take advantage of this relief in terms of market pressure rather than to get lulled into a sense of complacency or just wishful thinking that the market will keep moving on the back of that. So, it is an opportunity but it is a three-four-six month window at the most. Q: How would you play at that time? Would you be positive on any stocks at this juncture?
A: Without getting into the stock space, what we have seen over the last couple of months and what we will see over a period of time is a level of uncertainty. In that context the better way to play it is to play certainty and in that context the sectors that we are a little bit more comfortable tend to be pharmaceutical and the IT spaces, telecom and to a lesser extent but some extent energy because in many senses you got to play certainty in a period of uncertainty. Q: In your strategy note you have said that India is going back to its old normal, it should be trading at valuations of 12.5 times price earning (PE) as oppose to 14.5 times. Is this just for FY14 and could it extend on to FY15 as well?
A: I think it will be a little extended because our very argument of the old normal was to give some sense of what the broader argument is. If you go back to the period 1998 to 2003, you had the same sense where the economy had grown interest rates were high; you got in a bit of an asset cycle and you got a refix both from the corporate side and from the governmental side in terms of reform. My sense is you are getting into a similar phase. You have grown very rapidly; there were excesses and there were stretched balance sheets. Now we are tending to normalise.
So, it is an important period, which doesn’t feel good when you are in the midst of it, but the reality is: time is a huge essence in that. You cannot refix in three-six or 12 months. So, to start suggesting that it is FY14 phenomenon is completely over optimistic. It's FY14-FY15 at the minimum; it could effectively even take a little longer. It is just a process. The old normal is a take on the new normal but it is fundamentally a process and a time of normalization and by definition that time is going to be slightly extended.