Dalal Street Business - Indian Equity Research and Strategy

Goldman Prefers China Over India

Thursday, August 21, 2008

The sharp drop in oil prices led the Indian stocks to recover 15% from its July low outperforming the region by 20%. There is skepticism in the oil staying at ~110 levels and Goldman expects the price to rebound within the next 4 months [Q4 2008]. Adding to Indian market woes is valuations remain among the highest in the region and the risks to macro and EPS growth are to the downside.

The Indian market trades at 14.4x 12m forward earnings and 3.2x 2008E book value. India's valuations are now towards the midpoint of its historical range, whereas other markets are trading at the low end of theirs.

Goldman's assessment on oil prices is about $10 downside and possibly $30 or more upside. This implies that the benefits to the Indian equity market of lower oil is already discounted and that the market could again be vulnerable to rising oil prices. Oil accounts to 40% of India's imported goods.

RBI has regained some inflation-fighting credibility through more forceful policy tightening, but rates have moved up sharply. GS expect further policy tightening in October and think rates will remain elevated into next year.

At the market level, GS would sell calls to fund India downside protection and prefer China to India (valuation discount, greater policy flexibility to cushion cyclical risks).

Individual Stocks on BUY List
Reliance Industries, Jindal Steel & Power, Axis Bank, Suzlon Energy, Dr. Reddys

Individual Stocks on SELL List
Indian Oil Corp, Unitech and National Aluminium.