>INDIA Outlook(UBS)

􀂄 Summary
We believe markets are close to historical trough valuations, with the Sensex
trading at 9.8x and 2.36x trailing PE and P/BV. However, we think markets are
unlikely to rally in the next six months due to the absence of positive triggers,
although we remain bullish on a medium-term view. We recommend the following
stock-picking strategies: 1) quality companies with reasonable valuation;
2) companies likely to generate free cash flow; 3) stocks trading at attractive levels
on a PVGO/PB basis.
􀂄 What are the likely key themes for 2009?
We believe the election in India, to be held by May 2009, will be the key theme
investors are likely to focus on in H109. Indian markets have generally rallied preelection
and we expect a similar pattern in 2009. Other investment themes are
likely to revolve around the performance of perceived high quality versus low
quality companies, and whether outperformance of defensives will continue.
􀂄 What may surprise on the upside or downside?
We believe the election, crude oil prices, inflation, global credit and economic
scenarios could be the key variables to watch out for as they could surprise either
way. Markets are likely to be more stable once there is more clarity on these issues.
􀂄 Market valuation & targets and highlighted stocks
We factor in 5%/0% EPS growth for FY09/FY10E and assume a trailing 12-month
recovery PE of 15x to arrive at our Sensex target of 13,500. Our most preferred
stocks are Infosys, Bharti, Hero Honda, ICICI Bank, Punjab National Bank, and Idea,
each based on one of the investment strategies we recommend. Our least preferred
stocks are HCL Technologies, HDFC Bank, State Bank of India, Reliance Power,
and Tata Motors, and reflect our view of deteriorating fundamentals in 2009E.

To read full report INDIA Outlook(UBS)