Forecast 2011: Oppenheimer is hugely positive on India
Munira Dongre 14 December 2010

New York-headquartered full-service investment company says the Indian equity market is among very few around the world that looks poised to advance on a long-term bull phase over the next 5-10 years

Oppenheimer & Co has in a report dated 7th December made out a very positive case for investments in India’s equity markets. Its key arguments are pretty standard—“demographics, a sound medium- and long-term earnings outlook, a vastly improved policy backdrop and India’s allure at a point in history where its growth premium is most likely bound to reset at higher levels.” Another important factor it says is “the vast under-owned status of Indian equities, both at the domestic and international levels (retail and institutional).”

The US-based investment company, which also has operations in India, believes that “the Indian equity market holds the potential for annualized returns in the vicinity of 12-18% in rupee terms, and 15-21% in US dollar terms over the next 5-10-year horizon.” Oppenheimer supports its forecast, saying it expects an improvement in the inflation scenario (but the report does not state how) leading to a fall in the risk premium, and a revaluation of the rupee versus the dollar. The firm also expects a stable government, with the Congress-led UPA at the helm until 2014, to implement policy reforms.

Among other positives, Oppenheimer mentions India’s lower vulnerability to global economic shocks due to high local demand and low exports. “India is considered primarily a domestic economy—its share in world trade is a measly 1.1%, with exports constituting only 21% of its GDP.” Of course, it is debatable if at 1/5th of the GDP, exports can be considered ‘low’.

Oppenheimer bets on the usual suspects, including favourable demographics, which means a high working age population and declining dependent population. It makes a good point when it says that since there are “limited investment options (globally) for overseas investors”, India, which is one of the few economies growing at sustainable 6%+ levels, makes a good investment bet.

Oppenheimer is counting on the wallet-share shift of the Indian consumer from basic necessities to discretionary items. It cites McKinsey’s estimates which predict that discretionary spending of the Indian consumer is expected to rise to 70% of the total spending by 2025, from 52% in 2005.

Contrary to the general belief that things are going to be tough for banks going forward, Oppenheimer is quite positive on the banking sector. “We expect further loan growth pickup due to the following factors: 1) working capital requirements are likely to rise on the back of increased industrial activity and rising inflation, and 2) capital expenditure related requirements are likely to increase on account of better confidence levels. Better loan growth is likely to be positive for bank margins and asset quality.”

Oppenheimer is also upbeat about the Indian IT industry. “Even though India has a 51% market share of the off-shoring market, there is tremendous headroom for growth as the current off-shoring market is still a small part of the overall outsourcing industry. Significant opportunities exist in core vertical and geographic segments of BFSI and US, and emerging geographies and vertical markets such as Asia Pacific, retail, healthcare and government respectively. Development of these new opportunities can triple the current addressable market, and can lead to Indian IT-BPO revenues of $225 billion by 2020.”

It is also positive on the education sector, citing the large young population as the reason for this. “India ranks second in the world in population. Of India’s population, 44% is below the age of 19, making it the youngest nation in the world. This bodes extremely well for the education sector. Demand for education will continue to increase over the next decade at surprising speed, we think.” It also points out that the education sector is recession-proof.

It must be said that while education remains a foreign investor favourite thematic investment, very few stocks have given any returns. A year ago, Educomp was at Rs730 and it now trades at Rs515. NIIT, which trades at Rs53 now, was at around Rs70+ levels a year ago. Only Everonn Systems seems to have given good returns—the stock was at Rs400 levels a year ago and now trades at Rs600.

On the retail business, Oppenheimer believes that “Indian retailers also need to go through two-three more business cycles, before they achieve meaningful stability.” It remains positive on media companies since low advertising spend as a percentage of GDP means good potential. However, with huge competition, only those players with deep pockets and quality content will survive. It is positive on the auto sector as well, but expects the cost of finance to rise sharply. It believes that domestic players (Maruti, Tata Motors, Mahindra and Hyundai) are better placed than new entrants.

Oppenheimer likes the Indian travel market, which it believes “is poised for growth, given a strong domestic economy, the growth in the LCC market and a highly-fragmented lodging industry.” However, Thomas Cook, Taj GVK Hotels, Indian Hotels, Hotel Leela Ventures have given poor annual returns. Only Cox & Kings has given decent returns.

(This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security. Some of the opinions expressed in this article are the author’s own and may not necessarily represent those of Moneylife.) 
 

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