India's GDP will be around 6.5% for FY13: ASK Investment

Markets have given up most of the rally that it had in January and February and is again trading close to the 16,000 mark on the Sensex. While the news in terms of Greece exiting the Euro, inflation again perking up, continuous depreciation of the INR, continued policy paralysis, etc is not encouraging, a lot of the bad news is in the price.

Markets are trading around 15% lower than historical trading averages at sub 13XFY13 earnings, says Prateek Agrawal, CIO, ASK Investment Managers Pvt Ltd.

While we expect the GDP growth rates to be around 6.5% only for FY13 and FY14, the EPS growth would be supported by low base of the second half of FY12, lower interest costs as a consequence of rate cuts and higher pricing power on account of INR depreciation.

India has mostly been a current account deficit country and the strength of the currency reflects the confidence overseas investors have on India. While the drop in the markets and the drop in the INR have been painful to the foreign investors, the same has also made the Indian markets relatively very attractive and we could see reversals on small policy moves or stability in the euro zone.
 
A key trend of last year has been that the investible part of the market has become narrower. Good quality companies in the mining space have suffered from concerns over higher taxes, gas companies have suffered on account of regulatory issues while a large sector like banks has suffered from higher capital requirement on account of Basel III requirement, besides fears of higher NPAs on account of slowing growth prospects.

We have been focusing on private sector banks vs. public sector banks on account of lower NPA accretion, better capital adequacy and demonstrated ability in the past to raise capital at favorable valuations.

While the market has been very volatile over past several months, quality businesses have held out much better versus others. Investors have been focusing on Rate of Returns higher than the growth rates so that the growth in earnings is non-dilutive. Moreover, businesses with better predictability of revenues and pricing power have performed very well.

On the other hand companies which high degree of leverage on books, suspect corporate governance and with need to raise external capital have been shunned by the market.

Our studies have shown that over the past 20 years, higher quality businesses (annuity businesses where Return on Capital employed is high and share large parts of profits with shareholders) have delivered market cap compounding in a significantly superior risk adjusted manner.

At this juncture lot of bad news is in the price. Investors could focus on quality businesses in FMCG, Pharmaceuticals, 2 wheelers and auto ancillaries.

One can also look at quality companies in the manufacturing space as well as good quality MNC businesses. Given the weak outlook of the INR, export oriented companies with pricing power (mostly in large cap IT, large cap Pharma and 2Wheelers) and companies with solid balance sheets can be good investments.

In my view FY13 would be a difficult year on account of challenges of fiscal deficit and current account deficit. Since the overall growth of the economy would be sub-par, levered high growth stocks may still not outperform, especially since resurgence in inflation and constraints of attracting overseas flows, would not permit sharper interest rate cuts.

Key reforms that I would look forward to include reforms linked to land acquisitions for industry, allocation of mining resources and reduction in subsidy burden.

Given the risk in the environment, a low beta defensive portfolio can be looked at till such time the macro situation improves.