‘Market should go higher from here’

UBS has been bullish on the Indian market for almost two years now. According to Suresh A Mahadevan, managing director and head ? India research of UBS Securities India, the market is set to regain the 21,000 levels by the end of this fiscal. He believes the Indian markets are not expensive and they could even trade as high as 20 times earnings in the future. In a conversation with

Ashley Coutinho and Muthukumar K, Mahadevan says India?s demographic dividend, demand pick-up and a stable government at the Centre bode well for the country?s growth prospects. Excerpts:

What is your short-term and long-term outlook for the market?

We have been bullish on the Indian market from October 2008. Then, the market was trading at less than ten times the earnings. Towards the end of March 2009, our bullish view was reinforced as our lead economic indicators showed that the country?s economic growth and production would recover. We said that this was the time to buy into India despite the fact that a large section of the investor community was very sceptical. This was the time when India was trading at 8.5-9 times earnings and the world was flushed with liquidity. Between March and May (before the elections), the market moved up almost 50%. Post the election results there was another rally. Investors were afraid of putting in money before the elections, but after the election results, they have been consistently buying at dips. Directionally, the market should go higher from the current levels; our March 2011 target for the BSE Sensex is 21,000.

Today, India is trading at 40% premium to the emerging markets average. Do you think we are a tad expensive?

The EPS for FY12 should be around Rs 1,250, which works out to an average price-to-earnings (PE) multiple of roughly 15 times. That?s not expensive as India?s long-term average PE is around 15 times. With robust GDP growth, lower inflationary pressures and higher earnings growth, I don?t see any reason why India can?t trade at 20 times earnings for some time. We are also seeing a lot of first-time foreign institutional investors putting in their money here; so, there is no need for a downside move from the current levels. We are positive on the global emerging markets and India, China and Hong Kong are our top bets. The valuations look attractive for China and Hong Kong. India is one of the most promising growth stories around.

What makes you bullish about India?

I think India can grow at 8% for the next 20 years and is structurally on a firm footing. Demographically, we are in a very strong position. In the next 15-20 years, about 180 million people will join India?s workforce. If these people are gainfully employed, the economy should grow faster. A younger demography reduces dependency, and the savings rate goes up if there is less dependency. The savings rate has already gone up from 25% a decade ago to 35% now and can go up to as much as 45% in the years to come. Even if the government runs a deficit, higher savings will ensure there?s enough money available for investments.

From the demand side, things should pick up. For example, we produce about 1.5 million cars every year currently as opposed to China?s 14 million. There is no reason why we can?t sell 5-7 million cars in the next five-six years.

We have a stable government, which has done pretty well so far, especially on the reforms front. Initiatives such as deregulation of petrol prices, divestment of public companies and the success of the 3G auctions has boosted the confidence of market participants. What?s more, I think for the first time in the economic history of India we have a deficit that is under control.

Is the global economy out of trouble yet?

There is ample liquidity across the world. And whether or not the global economy slips into a double-dip recession, the monetary policy will remain loose for some time to come. Money has to chase returns. If our market performs well, it will attract more money. However, too much liquidity can result in higher inflation and send oil prices through the roof.

Which sectors are you bullish on and which ones do you see a downside?

Metals have been big laggards on the BSE 500 in the year to-date. Globally, we are positive on metals but in India we are neutral. We like cement, infrastructure, banking and real estate.

We are underweight on IT company stocks because their prices have run up quite a bit and they may not outperform, going forward. Also, cut-throat competition in offshoring, the threat of integrated vendors and wage hikes might squeeze profit margins.

How will inflation and rising interest rates impact the market?

We expect inflation to cool down to 6-7% levels. We are expecting interest rates to go up by another 25-50 bps by the end of this fiscal. The key will be to strike a fine balance between inflation and overheating. Good monsoons will ensure there are no supply side shocks this year and that in turn should bring down inflation.