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It's time to buy India story again
BS Research in Mumbai
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January 25, 2008

Can international fund managers afford to ignore India, which has a market capitalisation of $1.9 trillion and over 200 companies with a market cap of over $1 billion?

The signals are still mixed, but there is a strong undercurrent of bullishness among global research houses after the recent carnage on Dalal Street [Get Quote], which saw a 5,000-point whiplash correction in the Sensex within a fortnight.

According to a Credit Suisse report, the steep Sensex fall has validated two fears: (1) The Indian market is linked to global developments; and (2) Foreign flows are the biggest drivers of the market.

Foreign institutional investors have already sold shares worth over Rs 15,000 crore (Rs 150 billion) in the secondary markets, and have been net sellers in the F&O segment worth Rs 7,500 crore (Rs 75 billion) since January 8, 2008.

"Everyone, however, has been surprised at the ferocity of the recent selloff that saw the Sensex shave off over 5,000 points from its peak on January 8. Despite the risk of further overshooting on the downside, rather than panic and go short/underweight at this stage, we think long-term investors should now increase their India exposure," the report said.

Analysts at Deutsche Bank find the Sensex attractive at 16 times to March 2009 P/E - given two-year forward earnings CAGR expectations of 20 per cent.

They feel that even if the US slips into a recession, only 35 per cent of the Sensex that consists of global cyclical, IT and pharmaceuticals could see earnings downgrades, while the remaining 65 per cent of the index should benefit from the strong domestic expenditure cycle with upsides to growth from cuts in local interest rates and taxes.

Lehman Brothers, too, finds the current valuations attractive.

"The Indian market is trading at 15.9 times CY08 earnings, and we believe the Indian market is now attractively priced - given its growth in an absolute and relative context. We expect 33 per cent returns from the market over a 12-month period," the report said.

Credit Suisse analysts say value can be found only if the Sensex drops to 13,000-levels. "For a value investor who does not have positive views on external flows, only a Sensex fall below 13,000 would represent an entry point from a valuation viewpoint.

"We, however, believe this is not the time to sell - even for those with dire views on the global economy. India is likely to be on a highly reflationary policy drive in the coming weeks unlike most others in the emerging world.

"We feel the market fall has raised chances of interest and tax rate cuts by February-end. In the likely market rebound in February

Investors should aggressively trim equity market dependents such as stock brokers, energy companies, corporate-event plays and companies with large subsidiaries without visible income," the Credit Suisse report added.

CLSA feels that domestic institutions could be the big prop for 2008 that will help sustain premium valuations of Indian equities over regional valuations.

"While foreign inflows in 2008 will depend on global factors, India will continue to attract a rising share of global funds' asset allocation given the superior long-term prospects of the economy, the $1.9 trillion market cap and more than 220 stocks with a market cap of over $1billion," the report said.

After foreign investors pumped in over $17 billion in 2007 (which saw the index move up from 13,800 level to 20,300 level by the end of the year),  CLSA analysts feel foreign inflows may slow down to $14 billion in 2008.

That, however, is no cause for concern since new allocations and fresh FII registrations (post the P-notes controversy) may see India get more foreign funds. And who knows, investors may actually say the 5,000-pt correction was a blessing in disguise.

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