| MARKET OUTLOOK On the cusp of a change
Major events in a seasonally weak period to add to volatility in the near term Major events in a seasonally weak period: Traditionally, the May-July period has been a seasonally slack period for the equity market. This time around, it is accompanied by some major events (like election results, Reserve Bank of India [RBI]'s policy review and uncertainty with regard the forthcoming monsoon) and thus could add to the volatility since the market has seen a decent run-up lately. However, the valuations are supportive (the Sensex trades at close to its mean multiple of 14.5x one-year forward earnings). The corporate earnings are showing a reasonable healthy trend with some sectors on the cusp of a turn-around. At the global level, the slowing of the Chinese economy and resurgence in the US economy will keep investors hooked to the market. FII weightage on India close to historic highs, election results the key event ahead: From the domestic perspective, the election results will be the single most important event that will set the tone for the market. The results of several opinion polls coupled with an unprecedented voter turnout suggest a definite change of government at the centre and a higher probability of the National Democratic Alliance (NDA) coming to power. This coupled with some other factors, like an improving current account deficit (CAD) and a stable local currency, has attracted a disproportionate share of emerging market (EM) flows to India. The net foreign institutional investor (FII) inflows in equities on a year-till-date (YTD) basis have been around $5 billion with an increased overweight stance on India (allocations to India in the EM portfolio have reached historic highs). Thus, any unpleasant surprise in the election outcome could lead to some flight of foreign capital from the Indian market and erase most of its recent gains. Monsoon trends, macro releases to shape RBI's monetary policy outlook: The RBI has clearly articulated that containing inflation (the Consumer Price Index [CPI]) remains its priority and there are several factors (a weak monsoon outlook, strong core inflation etc) that could push inflation higher. The India Meteorological Department (IMD) has forecast higher chances of a below normal monsoon this year which could have an adverse impact on food inflation, leaving little scope for monetary easing by the RBI. Given the track record of the IMD's forecasts (which leave a high margin for error usually) it would be early to take a final call on the monsoon. Even though a weak monsoon shall have an impact on the economic growth (lower rural consumption, declining sales of FMCG products), but the actual rainfall trend may vary across regions. Also, effective management of resources (food stock, water) could minimise the impact of a poor monsoon. Besides, there is a growing consensus among investors regarding the revival in the economy led by fast clearance of projects, resumption of reforms and a supportive global environment. Portfolio strategy-cyclicals remain in vogue
The election verdict is the next big event ahead that will boost market sentiment in the cyclical sectors and a new government may even improve the medium-term outlook for the market by initiating structural reforms. On the other hand, an unfavourable verdict (though it seems less likely) will shift the focus back to defensives and export-based sectors. We foresee three possible scenarios post-polls. Scenario 1: A thumping majority for the NDA (+240 seats) and Mr Modi as the prime minister. This seems to be the most likely scenario where a more stable government will drive an improvement in the policy environment and fast track the recovery in the economy (and consequently an improvement in corporate profits), thereby supporting the rally in the market. Scenario 2: An NDA (200-220 seats) government without Mr Modi as the prime minister would not be as bad as the outgoing United Progressive Alliance (UPA)-II government; hence we would recommend buying into dips. Scenario 3: This envisages NDA getting less than 200 seats and a Congress Party supported Third Front government coming to power (de-rating on cards; rejig of folios again towards defensives). However, looking beyond the near-term events, the focus will shift to real factors, like a pick-up in the economy and growth in corporate earnings.
STOCK UPDATE Lupin
Recommendation: Buy
Price target: Rs1,100
Current market price: Rs990 Strong growth continues in Q4 despite a contraction the US branded business Result highlights - Buoyed by a strong traction in the US and European businesses, Lupin has reported a 20% growth in the net sales and a 243-BPS expansion in the OPM during Q4FY2014. This led the adjusted net profit to jump by 15% to Rs553 crore during the quarter, despite a steep rise in the effective tax rate.
- The company has reported a strong performance in most of the geographies, except for the branded formulation business in the USA, which was halved owing to a competition in key brands and the Indian formulation business which witnessed a muted growth of 2% owing to pricing related issues. Though we expect the growth in the Indian formulation business to revive in the subsequent quarter, but the US branded business is unlikely to see an immediate revival.
- Lupin continues to be among our preferred picks within the pharmaceutical sector due to its consistently superior performance in the generic space, a strong product pipeline and a healthy growth visibility. We prefer to keep our estimates intact for FY2015 and FY2016. However, we marginally revised our price target to Rs1,100 (from Rs1,075), which implies 19.5x FY2016E earnings. We maintain our Buy rating on the stock.
Allahabad Bank
Recommendation: Hold
Price target: Rs98
Current market price: Rs95 Asset quality disappoints; maintain Hold Result highlights - Allahabad Bank's Q4FY2014 results disappointed on the earnings front as higher provisions and a decline in the non-interest income impacted the profitability. The NII growth of 28% appears high due to the low base of Q4FY2013, while the margin contracted on a sequential basis to 2.67%.
- The pressure on the asset quality increased during Q4FY2014, due to the slippages of Rs1,667 crore and a fresh restructuring of Rs950 crore. Given the bank's restructuring pipeline and a relatively higher exposure towards troubled segments (infrastructure, contraction, metals etc), the asset quality could remain under pressure over the next few quarters.
- We expect the earnings growth and return ratios to remain weak (RoAs of about 0.6%) owing to subdued margins and higher NPA provisions. While the valuation of 0.4x FY2016 appears reasonable, a weak capital position (tier-I CAR of 7.5%) and concerns on the asset quality will limit an upside. We maintain our Hold rating on the stock with price target of Rs98.
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