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India Portfolio + Strategy – Kotak

October 5, 2007

The opening sentence in Kotak’s report on India Strategy expresses concern over expensive valuations. Most Large-Cap stocks are trading above aggressive earnings growth expectations for FY2009. The BSE 30 Sensex is trading at the top end of 14,750-18,500 band based on 12-15x FY09 earnings.

Changes in Kotak’s Top 10 Model Folio,
Reliance Energy and Wipro are out. NTPC and Aditya Birla Nuvo are in. The new top 10 folio looks like, ICICI bank, L&T, ITC, Maruti Udyog, BHEL, Bajaj Auto, NTPC, Aditya Birla Nuvo and PNB.

  • Neutral on sensex heavy weight – Reliance Industries.
  • Overweight on BFSI – Banking Finance Services and Insurance. The size of this sector is expected to increase as a proportion of India’s GDP.
  • Infrastructure – Despite high valuations, Kotak is overweight on infrastructure stocks. ABB, BHEL, L&T, Punj Lloyd, AIA Engg, BEL, Nagarjuna Constructions and Siemens are likely to report good earnings.
  • Power / Utilities – Emerging as a high growth sector. Heavy spending by the government in XIth and XIIth plan
  • Real Estate – Neutral – Good demand for housing and commercial properties. Waiting for correction in residential properties. Will take a stance once correction and interest rates stabilize. Until then DLF is the top pick.
  • Technology – Underweight – Cautious on this sector as the Dollar continues to fall against INR. Sustained foreign investment will put pressure on exporters. Adding to their woes is the US economic crisis.
  • Telecom – Underweight – Deterioration in pricing due to entry of new players and mobile number portability. Any unexpected slowdown in subscriber addition will find it hard to justify valuations.

We agree in most parts with Kotak except that of Telecom as Mobile Number Portability and slowdown are not likely to happen very soon, especially with Bharti Airtel and RCom.

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