HSBC has changed its rating on India from underweight to neutral owing to high public salary and expectation of good monsoon, says Devendra Joshi of HSBC.
HSBC has changed its rating on India from underweight to neutral as hype around the reforms process has subsided; and premium to the region has declined and India is only 10 percent above its historic premium, said Devendra Joshi of HSBC, one of the largest banking and financial services organisations.
He expects the BSE Sensex to touch 26,000 levels in December 2016, which is only about half-a-percent over the current levels.
He believes that higher salary for public sector employees and expectation of a good monsoon have played a major role in changing India's rating.
Joshi is overweight on IT stocks, consumer sector and industrial space.
Some of his hot picks are Emami, Marico and Asian Paints.
Below is the verbatim transcript of Devendra Joshi’s interview with CNBC-TV18's Sonia Shenoy and Latha Venkatesh.
Latha: We read your report yesterday where you have upped the rating on India from underweight to neutral. First up what makes you positive. Is it the earnings season?
A: Lot of the reasons based on which we went underweight last year they are simply not there anymore. For example the hype around the reform process is gone. This can be seen by the industrial positioning on India which is back at early 2014 levels. It also means that the valuation premium to the region has declined and it is only 10 percent above its historic premium. In the meantime we have also seen that India recorded the decline of around 100 bps for cost of equity which has been the largest in EMs. So, that is the region we have changed our stance on India.
Sonia: What upside target would you have on the Sensex over the next 12 months and what are the sectors that could lead it there?
A: Our Sensex target is 26,000 for the year end 2016 and at the moment we are overweight on IT given the realistic earnings expectations and reasonable valuations we are also overweight on consumer sectors which should get boost from higher public salaries and also if the monsoon turns out to be normal and we are also overweight on utilities at the moment.
Latha: We are just getting news that the exit polls indicate a little bit of a leg up for the ruling NDA. They are likely to make further gains in the state of Assam and probably will be able to pick up a seat or two in the other states where they have so far been completely absent. Will that add up to something for an foreign institutional investor (FII) investor?
A: This is more about sentiment. So, if that were to happen that should definitely be positive for sentiment I guess.
Sonia: Just coming back to your target. Your Sensex target is a 26,000, that is hardly 0.5 percent away from where we are currently. So, from these levels you don't expect too much returns for investors?
A: There are a couple of key risks from here. One of them is high consensus expectations from earnings. So, consensus expectation for the current year for India is somewhere around 17 percent and we think that is a bit too high and that number has to scale down. And even on the valuation basis right now market is trading at around close to 17 times which is a bit high. So, it is difficult to see where the marginal returns are going to come from.
Latha: So, in the process of upping India from underweight to neutral which were the sectors that you upped or stocks?
A: I can talk about stocks but you will have to run disclosures for 15 minutes on your screen. So, I will stick with the sectors. We have upped IT from neutral to overweight. We have also upgraded industrials from underweight to neutral in India. So, these are two changes that we have made and as I said we stay overweight on consumer staples and utilities.
Sonia: You are very bullish on FMCG names as well, names like Emami, Asian Paints, Marico. Very good numbers coming in this quarter. But aren't you worried about valuations being a bit stretched for names like these?
A: As I said valuations are high for the market overall and this is not restricted to FMCG names as such. So, I wouldn't think of this as a particular negative. The second is the growth is priced in this environment wherever you go in the world. So, that is not the big worry for me.The Great Diwali Discount!
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First Published on May 17, 2016 09:47 am