>India Strategy (BNP PARIBAS)

Election 2009 – confusion galore
• India’s General Elections begin on 16 April and end on 13 May. There are no clear national issues or expectations.

• UPA government without their former Left Front allies or the NDA Government appears to be the best-case scenario for the market, but these outcomes have low probability.

• Prior to elections, we advocate caution with defensive portfolio stance. Sun Pharma, Bharti, M&M are top choices.

Elections in five phases start tomorrow
India’s General Election 2009 shall be held in five phases – starting on 16 April, and ending on 13 May. The results for all 543 Parliamentary seats shall be declared on 16 May, and the new government shall assume office by 3 June.

A highly fragmented political landscape
The two major parties – Congress and BJP hold 52% of the total Parliamentary seats, and opinion polls seem to indicate that their total seat share could decline. Both major alliances – Congress’ UPA and BJP’s NDA, have suffered defections by their alliance partners. Therefore – not only do we have a Third Front today, but a ‘Fourth Front’ as well – consisting of parties who were members of the UPA or NDA in the last Parliament but are now reluctant to join any alliance.

No clear issues, no clear expectations
Election 2009 is characterized by a lack of strong national issues, and confusion among political experts and pollsters regarding the potential outcome. Consequently, state-level issues, and outcomes in some of the “swing” states have become important. Most opinion polls suggest UPA will get 190-200 seats, NDA 180-190 seats and about 150 seats will go to a mixed group of other parties (i.e. the Third and the Fourth fronts).

Expect market correction during election
After a 35% rally since 9 March, the Indian market is trading at 13.2xFY10E, and appears ripe for a correction. The market declined during three out of the past four elections, and we don’t expect any
divergence from that trend.

Go defensive during elections
During elections, the most consistent outperformers are pharmaceuticals, telecoms and autos. We highlight Bharti, Sun Pharmaceuticals and M&M as our top picks during this phase of shortterm uncertainty.

Post election sector choice to depend upon outcome A UPA Government not supported by Left parties or an NDA Government appears to be the best possible outcome from the market’s point of view. However, the probability of such an outcome appears low (less than 50% in our opinion), despite some recent improvement (according to media) in NDA’s chances. A “market-friendly” government should lead us to overweight banks, engineering and capital goods.

General Election 2009 – a massive exercise
Every five years, or sometimes even before the completion of the term (as was the case in the second half of the 1990s), India holds the General Elections. The largest democracy in the world (with nearly 715m voters, 543 Parliamentary seats) votes out the incumbent government or keeps it in office – though in the past 20 years, the former has been a more frequent outcome. In the six elections since 1989, only once – in 1999 – the incumbent ruling party (the BJP) – stayed in power after the elections. The sheer size of the General Election exercise (e.g. total number of eligible Indian voters is thrice that of the US which has 208m voters) makes it imperative that the elections are held in phases. General Election 2009 shall be held in five phases – starting on 16 April, and ending on 13 May. The results for all the 543 Parliamentary seats shall be declared on 16 May, and the new government shall assume office by 3 June.

To see full report: INDIA STRATEGY