RBS Private Banking India has released a report wherein it expects the RBI to cut rates by 50 bps and expects the market to touch 5,700 by year-end and finds Indian equities undervalued
Investors can look forward to Indian equities outperforming in the second half of 2012 on the back of an expected change in policy stance, RBS Private Banking India said in its Mid-Year India Outlook 2012 report released today. RBS, like Morgan Stanley, is also bullish on India’s prospects, and expects the National Stock Exchange’s (NSE) Nifty index to hit the 5,700 mark by December 2012. So, is there a bull market on the cards, despite considerable headwinds? What can investors expect?
According to the report, RBS values equities at 12.8 times one-year forward earnings, which is less than the ten-year historical average of 13.8. The global investment bank has assumed 15% earnings growth over two years. Likewise, on a price-to-book basis, Indian equities are trading at 2.1 times against the ten-year historical average of 2.8 times. RBS advises investors to “maintain their allocations close to recommended levels rather than sit on the sidelines.”
The bank has recommended high dividend yield stocks in this kind of environment and cites that equities are discounting at 16% on the dividend yield basis. In addition to high dividend yield stocks, it has come up with a 15-stock basket themed “Indian Olympians” based on certain criteria such as high profit, ROE, ROCE, etc. However, it is not known what the exact composition is. Sector-wise, it prefers “interest-rate sensitive” sectors such as financials, consumer discretionary, automotive, healthcare and IT companies. It is negative on telecoms and consumer staples. Over and above this, it has preferred large caps over mid-caps.
The trigger for interest-rate sensitive securities to outperform is interest rates. The investment bank expects the Reserve Bank of India (RBI) to cut rates by 50 basis points. RBS chief investment officer Rajesh Cheruvu said, “We believe that prevailing macro conditions make strong fiscal action more effective than early monetary action. Going forward, lower commodity prices should ease headline inflation, and weakened domestic gold demand will support the current account and in turn aid the currency and inflation.” RBS also thinks that the government could partially deregulate diesel and liquefied petroleum gas prices.
Apart from equities, the investment bank prefers corporate bonds over government bonds as the latter has already run up considerably while corporate bonds have remained sticky. Also, it expects a spread compression between corporate bonds and government securities, and recommends high quality names. Again, specific names of were not given.
Rupee-wise, RBS has forecast the rupee to strengthen to 52 per dollar. The Indian rupee has depreciated by 8% this year. However, the appreciation of the rupee is contingent on strengthening of the capital account, and this would mean easing of macro-economic conditions such as fiscal deficit, reduced gold imports leading to reduced current account deficit, falling oil prices and initiation of reforms processes. Reforms process would be contingent upon the government’s ability to implement the land acquisition bill, mining regulations, authority for accountability in the civil administration and progress on the Goods and Service Tax (GST) and Direct Tax Code (DTC) towards implementation in 2014.
On a global scale, the bank expects policy action from China and other emerging markets, including India, to “support growth over the next few months”. Prateek Pant, director, Products and Services, RBS Private Banking said “Europe holds the key to the performance of financial markets for the coming half of the year. We believe that flare-ups in the Eurozone will continue, but would be met by policy response. Although financial markets are expected to remain volatile, coordinated policy action in the Eurozone, combined with domestic policy progress should see Indian equities continue to outperform in the second-half.”
If all of this does not pan out, RBS sees the Nifty going down to 4,900 levels, if the US growth slows further, the size and form of QE3 disappoints, domestic issues like policy paralysis continues and monsoon fails to pick up.
The market regulator has sent a routine, post-office like acknowledgement, even after writing to its chairman, which ensured that SEBI can wash its hands off any responsibility of responding
It is an open secret that market regulator Securities and Exchange Board of India (SEBI), time and again fails to redress grievances of investors. SEBI thinks every complaint; every mail sent to even its chairman should be replied mechanically. This certainly is the treatment EAS Sarma, former secretary of expenditure, Government of India, received when he wrote to UK Sinha, chairman, SEBI for the second time.
Mr Sarma, in his letter to the SEBI chairman (Mr Sinha) had questioned about non-disclosures by Reliance Industries (RIL) regarding the Krishna Godavari (KG) basin reserves. Earlier in June, Canadian Niko Resources, the joint venture partner of RIL in the KG Basin, startled investors with statement “Reliance Industries’ flagging KG-D6 gas block holds 80% less reserves than previously estimated.”
This material information should have been disclosed by RIL to investors at first moment’s notice. However, it never disclosed the information. While the news made waves in the market, the regulators remained silent. At this time, Mr Sarma wrote a letter to the SEBI chairman and also to secretary, Department of Economic Affairs, asking for the disclosures.
Instead of a proper reply, SEBI sent an automated reply to the former secretary in a tome and language, which ensures that the market regulator could wash its hands off any responsibility of responding.
In its response, SEBI said: “Please note that while the entity (RIL) is directly responsible for redressal of your complaint, SEBI initiates action against recalcitrant entities on the grounds of their unsatisfactory redressal of investor complaints as a whole”.
It also says that if the complaint is not resolved in a ‘responsible’ (sic) period of time, SEBI will keep sending computerised reminders. It also says, quite hilariously, that the complaint can be viewed on SEBI’s website, http://scores.gov.in (like a work of art?) and that initiation of action by SEBI is not a guarantee that it will be redressed.
Incidentally, this is not the first time that Moneylife has written about Reliance’s patchy disclosures. Earlier we had written about its Annual General Meeting, where RIL did not disclose information on some of its biggest projects. About the KG-D6 project, chairman Mukesh Ambani had said, “We are well on the way to creating a pipeline of projects for our next wave of oil and gas development projects which would include R series discoveries and all the satellite discoveries. Subject to receiving the requisite approvals, we hope to add around 30 (million metric standard cubic metres per day—mmscmd) of additional production through the new wave of planned developments,” whatever this means.
Earlier, RIL had in 2006 stated that output would rise to 80 mmscmd by 2012-13. It also said it would invest $5.2 billion to double the output to achieve the target. After making these rosy predictions, its share price went up from Rs1,264 to a high of Rs1,608. However, natural gas output at KG-D6 fields has dipped to 31.33 mmscmd in June 2012 after hitting a peak of 61.5 mmscmd in June 2010. It hardly touched 80 mmscmd. After that the RIL stock price dropped by about 50% to Rs790. Was Reliance playing around with the numbers and by having wildly optimistic view of the future?
Niko, which holds 10% stake in KG-DWN-98/3 (or KG-D6 block), said the field performance at the D1/D3 fields during 2011 demonstrated “higher than expected pressure draw-downs”. Further, “An assessment of reservoir performance concluded that, contrary to the previous geological model, the current D1/D3 producing wells did not appear to be receiving any contribution from outside the main channel areas,” Niko said in a PTI release.
Coming back to SEBI, it must be noted that the market regulator came into existence with a preamble to protect investors. Unfortunately, investors are vanishing from the markets and everyone in the government is now trying to bring them back through financial literacy seminars and programmes. But looking at the treatment meted out to a very senior bureaucrat by SEBI, few investors left in the markets must be feeling disenchanted.
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