Reboot! Rate cut, policy shifts call for portfolio rotation
Feb 03 2013 , New Delhi
Rate-sensitive stocks were much in focus through the past two weeks before and after the Reserve Bank of India’s money policy review. RBI did oblige with cuts in the key policy rate as well as CRR, or the share of their cash reserves that banks need to park with the central bank, but remained non-committal on further easing in the near term.
This and the insignificant transmission of rate cuts that banks effected subsequently, didn’t help improve the outlook for rate-sensitive stocks such as auto, real estate and banks, many of which even saw corrections after a good run-up ahead of the money policy.
Nischal Maheshwari of Edelweiss Securities says, RBI’s guidance was dovish, clearly stating that it will be growth supportive. “We expect the central bank to reduce policy rates by 100 basis points in FY14 on further easing in inflation and narrowing of current account deficit.”
In its annual strategy report, the brokerage had presented a bullish case for the stock market, based primarily on expectations of monetary easing and continued government reforms. “We reiterate our stance to rotate from quality to growth (stocks). We are overweight on banks, metals, industrials, real estate and cement, and underweight on consumers, IT and pharma,” Maheshwari said.
But others say given the sluggish credit growth for banks, broad scepticism around economic growth prospects and policy disruptions, it could be too early to take a generalised bullish view on rate-sensitive stocks.
Last week, Credit Suisse India analysts Ashish Gupta and Prashant Kumar cut earnings estimates for banks by 4-6 per cent, as they lowered loan growth estimates and projected weak loan demand to weigh on banks’ net interest margins. “PSU banks would be more impacted on account of rising operating expenses and slowing revenues,” they said.
They said credit costs were likely to remain high given the large under-provisioning and ‘kitchen-sinking’ risks from upcoming CEO changes. The brokerage identified HDFC, Axis Bank, IDFC, HDFC Bank as preferred picks, while turning cautious on State Bank of India, Union Bank, PNB and Bank of India.
Yet, select private sector banks, two-wheeler firms and less leveraged realty players could be potential bets in these segments, other analysts said.
Sanjeev Prasad, head of research at Kotak Institutional Equities, sees scope for boost to select stocks in the infrastructure (GMR), PSU energy (ONGC, OIL, HPCL, BPCL, IOC, GAIL) and utilities sectors (Adani Power) from changes in regulatory, operating, financial and other parameters in the ongoing policy push to revive growth.
At the same time, several sectors and companies may also suffer from reforms such a proper pricing of resources (telecom), stricter regulations (banking) and removal of certain tax exemptions (infrastructure, utilities and auto).
“PSU oil firms will benefit from an increase in prices of regulated fuels, though the real impact on their earnings will depend on sharing of benefits between the government and these companies,” said Prasad.
Similarly, power firms will gain from power purchase agreements, and the proposed repricing and price pooling for coal, which will essentially benefit firms with high input costs and unviable project agreements (Tata Power, Lanco Infratech). At the same time, resource-rich firms such as Coal India and NMDC could be impacted negatively due to market pricing of natural resources.
Many companies in auto, consumer durables, infrastructure, oil and gas, NBFCs, pharma, technology, telecom and utilities are at risk of being negatively impacted due to removal of some of the existing tax incentives, as the government tries to mobilise more and more resources to bridge its deficit.
All PSU banks stand to benefit from better recovery mechanisms for priority sector loans, improvement in domestic and global economic environment, standard classification and treatment of restructured loans as well as equity infusion from government. But, some of them may be negatively impacted by stricter regulations on provisioning.
Manishi Raychaudhuri, Asia Pacific strategist at BNP Paribas says, there is a strong case for portfolio rebalancing after the sharp upward move, as the “Indian market appears fully valued relative to its own history and slightly overvalued relative to peers in Asia, while at the same time there are potential catalysts for further upward movement.”
According to Raychaudhuri, India could be the only large Asian country to have benign monetary policy in 2013. Also, despite some recent earnings disappointments, the overall earnings environment appears stable.
“We may be going through the last leg of earnings downgrades in some sectors (auto, infrastructure, PSU banks), while some other sectors (IT, oil & gas and telecom) could see earnings upgrades. Implementation of proposed reform measures (eg., coal pooling in the power sector, project push by the cabinet committee on investments) could turn out to be significant catalysts,” he argued.
As for the downside, Raychaudhuri identified prospects of populism in the budget in view of the ensuing state elections and further delay in reforms due to potential disruption of Parliament as the biggest risks.
“If the government gives in to populism in the budget (through the right to food bill or other such measures), the resulting higher borrowing would crowd out private investment even more. This could exacerbate India’s ‘twin deficit’ problems and may even result in a sovereign downgrade by global rating agencies,” he pointed out.
The recent increase in political friction also does not bode well for legislative action in the forthcoming budget session of parliament such as the bills on land acquisition, GST, insurance and pension reforms.
In the BNP Paribas model portfolio for India, Raychaudhuri has reduced focus on stocks where the earnings stream is uncertain as a consequence of recent events (Tata Motors), or where the stock price has run up sharply and potential near-term disappointments do not appear discounted (IDFC, HDFC). His top picks include ICICI Bank, LIC Housing Finance, Sun Pharma, M&M and Wipro. zz