Themes For Equities In 2013

2012 has surprised all market participants with SENSEX delivering a return of almost 25%. Now the big question that is on everyone’s mind is how 2013 will fare in the wake of recent up move in markets and persistent slowdown in economy? While we do feel that 2013 will be a year of volatility, we remain convinced that markets will be able to deliver good returns as economy seems to have bottomed out and Government has finally woken up from its inertia as evidenced by a slew of reform measures. We expect GDP growth to consolidate between 5 to 6.5% in 2013. There are 3 themes which we feel should work in 2013 are as follows:

1. De-leveraging - We have reasons for it as balance sheet size of BSE 500 companies excluding banks was about 6 lac crores in 2007. Now in 2012 it has reached to about Rs 28 lac crore almost 5 times. Now balance sheet size has expanded but profits are yet to kick-in. So focus of entrepreneurs has now shifted from expanding to profit making. They want to improve ROE (Return on Equity). For this they have started hiving non-core assets to generate cash and paying back to repay their debt. On the other side they have started focusing on core-assets to generate higher profitability. We think that expansion of balance sheet is 3-4 years away & so de-leveraging is the theme which India Inc. is concentrating on currently.

2. Consumption - Now the second theme which we feel can work in 2013 is consumption. There is a debate going on that consumer oriented stocks are priced to perfection and their P/Es are above their historical average. We completely agree to this argument but on the other side have concrete reasons to justify above average P/Es. The results which are coming out by these consumer companies are above expectations and all time best. Also, these companies have franchisee which are irreplaceable and thus enjoy leadership & pricing power. Now what is feeding this consumption in India. We have Rs. 30,000 Cr. coming in the hands of poor through NREGA. Rs. 25,000 Cr. comes through PDS (Public Distribution System) and Rs. 20,000 Cr. will come through food security bill. So consumer durables, autos, alcohol, tobacco, media consumption comprises of Rs. 1,60,000 Cr. Revenues and a major part is fed by the above social schemes of Government. Now, from 1^st Jan 2013 there is going to be cash transfer of subsidies. We think this could be a game-changer which will be interesting to see and can spur consumption.

3. PSU Banking - The third theme which we believe should work is PSU Banking stocks. We analyzed that PSU banks are available at 1/5^th valuation to that of Private Banks even after having similar pre-provisioning profits and this is due to NPA concerns. But as economy recovers and as these PSU banks are sufficiently provided we feel that there can be a re-rating case over next 1-2 years.

Hence, we feel that one can still get good returns from markets provided; he/she is at the right place. If one choose good stocks based on the above 3 themes than there are good chances of good returns. There are interesting times ahead and so there is a case to invest in equity markets. 

By Siddharth Mandalaywala (Vice President) - Concept Securities Pvt. Ltd.