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Stockmarkets: What's the theme?

Mar 29, 2006

The 'India story' is well and truly on. Global investors from places like the US, Japan and even Saudi Arabia have poured in billions of dollars into the Indian markets in order to cash in on the growth story. This has led to the BSE-Sensex soaring to scarcely believable levels. It should be noted that while we remain positive on the future economic prospects of India, current valuations leave very little on the table for investors, given that the Sensex currently trades at a price-to-earnings (P/E) multiple of over 20 times trailing 12-month earnings. We give here a perspective on three key sectors that we believe will be primarily driven by 'domestic consumption', the theme that is playing an important part in driving the current buoyancy. This is expected to be aided by increasing affluence, a burgeoning middle class, greater willingness to spend, changing trends in urban areas and a strong 'wealth effect' generated by the expansion of the IT industry and this current bull run! Thus, India's changing demographics in favour of a younger populace with more liberal attitudes to spending will be the chief driving force behind the sustainable long-term growth of these industries.

Banking

Key factors and trends driving growth

  • Strong growth in corporate credit, incremental credit-deposit ratio at 80% to 85%

  • Retail credit as a proportion of GDP is just 7%, compared to over 50% in most other economies - scope for growth is tremendous

  • Part of the housing story that is playing out, aided also by lower interest rates

  • With the gradual disintegration of the joint family system, young people increasingly looking to buy their own houses earlier in life

  • On a long-term basis, the sector is expected to show strong growth, especially on the retail side

FMCG

Key factors and trends driving growth

  • The sector seems to be back in good times after a difficult recent past, when price wars amongst major players led to eroding margins and slow profit growth

  • Pricing pressures have tapered off

  • Consumer spending moving back towards higher-prices products (up-trading)

  • Rural markets outpacing their urban peers in terms of growth - to be the main growth driver over the long-term

  • Latest figures (February 2006) show highest growth for the sector in five years - expected to sustain

  • Organised retail just 4% of the retailing sector, to grow to higher levels, which is expected to help the FMCG sector as well

Telecom

Key factors and trends driving growth

  • Cellular teledensity still at relatively low levels of around 8%

  • Rural teledensity at barely 2%, providing significant scope for growth

  • Increasing affordability of handsets, attractive financing schemes

  • Increasing affordability of mobile charges, due to competitive pressures, resulting in strong growth in volumes and subscriber additions (currently at around 4 m per month)

  • Inherent superiority of cellular technology over wireline

While we strongly believe in the long-term prospects of these (Banking, FMCG, Telecom) sectors, please note that we have not mentioned the risks that may impact their fundamentals. These could include factors such as a slowdown in the global/domestic economy, resulting in consumers tightening their wallets, spiraling crude oil prices, an unfavourable policy environment, price competition amongst major competitors in the industry and a slowdown in credit offtake.

This should not be misconstrued as a recommendation of any stock or stocks. We have given a broader, macro perspective about the major growth drivers for these industries over the long-term. As an investor, one should always look at individual companies in these sectors that are most likely to benefit from the growth story. Given that the BSE Sensex is at 11,000-levels, a bottom-up approach would be most appropriate. And finally, the last step would involve valuations - buying the business at lower than its fair value. Only then can the purchase be justified.


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