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FII Stratgey – Sell India or Stay on Sidelines

March 7, 2011

With the DMK withdrawing support to the Weakest Prime Minister in Indian History, the case for FIIs Sell India or Wait on the Sidelines has gotten stronger. Adding to the woes of PM, the Supreme Court took to task the office of the PMO for appointing potentially highly corrupt official – Thomas for the post of CVC and eventually quashing his appointment order only tells the impotence of Governance.

The Government was just vocal about tackling the Highest Inflation in independent India and over the next 6 months will deliver a triple blow to margins through higher raw material costs, employee costs and interest costs. Research Data suggests that this dynamic is responsible for the historical phenomenon whereby a high repo rate environment is characterized by higher interest costs and then lower PAT margins with the relationship being most evident after a lag.

Historical precedents suggest that the ongoing de-rating process for India is not yet complete. India trades at just a shade below its long term trailing PE despite near-term macroeconomic headwinds. Also in comparison to the broader EM pack, India continues to trade at a premium on forward PE despite the ongoing policy-paralysis and the higher domestic inflation.

Fiscal Deficit – Though a big concern for Foreign Investors, we are not so much worried about it because most of it is held internally by Indians and hence the extreme case of Sovereign Default is out of Sight. If the government is determined to bring the Black Money from Banks Abroad, it can take care of this deficit as well.

Rising Oil Price – Definitely a Negative for Indian Economy.

Sr. Fund Manager, Prashant Jain is of the opinion that the Forward P/E for Indian Equities will eventually moderate to Mid Teens from about 20s in the last few years and can expect a return of 15% in the Long Term.

Our Views – Long Only investors can continue to BUY the Sell Off selectively and can accelerate at 17,300 levels. Political Turmoil is expected in the Summer which will be another BUYING Opportunity. What say ?

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