* We believe that the recent 20% correction in the market has brought valuations to reasonable levels. The Indian market is trading at 15.9x CY08E earnings, and we believe this is not unreasonably expensive in view of growth and its relative insulation from global credit problems and the US slowdown. We believe the fall presents a good buying opportunity across several sectors and stocks.
* We view the recent fall as a very good buying opportunity into the Indian markets.
* We believe the Indian market is now attractively priced, given its growth in an absolute and relative context. We expect 33% return from the market over a 12-month period.
* We firmly believe that the sharp declines in stock prices are not a reflection of any significant adverse impact on fundamentals and provide a very attractive opportunity to buy. The pain resulting from unwinding of leveraged position seems to be completely behind us.
* Real estate, metals, power and oil and gas are the key sectors that have witnessed one of the sharpest declines in the past week. We believe that the stocks from these sectors that have been significantly battered down should be bought into as they are likely to offer one of the highest gains on rebound. We reiterate our Sensex target of 25,500 by December 2008 that is based on FY10E EPS of 21x.
* We believe that the Indian growth story, led by an upsurge in investments and domestic consumption remains largely intact.
* However, bellwether sectors like IT face slowdown and can impact domestic consumption. A 25% slowdown in the IT sector can dampen GDP growth by 0.5%.
* We see a strong pick-up in inflows into Indian equities, driven by local institutions.
* For 1Q 2008, we expect $5billion net buying; for the year as a whole, we see $14billion plus.
* Domestic inflows will likely help to sustain premium valuations of Indian equities over regional valuations.
* Our model portfolio remains biased towards domestic consumption and investment plays. We remain underweight on the energy, materials and IT sectors.
* The IT sector is likely to offer trading opportunity having declined by 31% over last 12 months
* For a value investor that does not have positive views on external flows, only a Sensex fall below 13,000 would represent an entry point justified from a valuation viewpoint.That said, we believe that this is not the time to sell even for those with the dire views on the world economy. India is likely to be on a highly reflationary policy drive in the coming weeks unlike most others in the emerging world. We feel that the market fall has raised the chances of both interest and tax rate cuts by February end.
* Investors should remain overweight sectors where underlying earnings growth has little to do with financial markets or the global economy, i.e., engineering goods, construction, natural gas, consumer staples, and domestic growth themes such as rural income.
* In the likely market rebound in February, investors should aggressively trim equity market dependents such as stock brokers, energy companies, corporate-event plays and companies with large subsidiaries without visible income.
* Despite the risk of further overshooting on the downside, rather than panic and go short or underweight at this stage, we think long term investors should now increase their India exposure. Our portfolio recommendation remains unchanged buy large caps, domestic consumption/infrastructure plays and avoid global cyclicals and IT which have no positive catalysts despite their underperformance and earnings are at greater risk.
* The IPO pipeline will likely shrink considerably as well, with refunds due soon from some recent heavily oversubscribed issues. It would also be nave to underestimate the efforts of central banks to pump in more liquidity, and we continue to expect the RBI to cut domestic rates.
* We find the Sensex attractive at 16x March 09 P/E given 2-year forward earnings CAGR of 20%, RoE of 23% and net D/E of less than 7%. Even if the US worsens, only around 35% of the Sensex that consists of global cyclicals, IT and pharma could see earnings downgrades. However, some part of such externally-exposed sectors has a domestic element (eg. lower oil prices will reduce subsidies), and the remaining 65% of the index should benefit from the strong domestic capex cycle, with upside to growth from cuts in local interest rates and taxes (remember this is a pre-election year and tax receipts have been very strong).
* As global markets recover following the 75bp cut in the Fed funds rate, we think that this creates a sweet spot for India.
* Even factoring in the risk of a US recession, we think that the worst is over, and we maintain our bullish stance.
* We forecast Indias GDP growth to slip to 8.5% in 1Q09 and pick up to 9% and above thereafter. This forecast remains at little risk, in our view, given the relatively insular nature of Indias economy. The worst-case scenario would see this recovery get pushed back by a couple of quarters we do not see that as a serious risk to earnings.
* The obvious plays are those stocks that have a minimal probability of earnings downgrades as a result of US recession. India has many such stocks, where the key earnings drivers are related to the domestic economy. Telecoms, infrastructure and consumer are the key sectors here.
* Another defensive strategy is to go for classic value plays cheap on PER and the worst underperformers since 11 January, when the market peaked.
* There is too much noise in the market for us to give a view on the immediate term this may not be the bottom or the worst that the market has seen in the short term. However, we strongly believe that the correction provides an opportunity from a one-year perspective.