>Time to revisit sectors and stocks (BNP PARIBAS)

■ Shift in source of growth from stimulus-driven consumption to industrial production.
■ We expect acceleration in credit growth and IP; yield curve to flatten as rates tighten.
■ Feedback from conference: buoyant consumer demand and government policies will likely help capital flows and infrastructure build-out.
■ Overweight: banks, autos, infrastructure, IT, utilities and pharmaceuticals.

Some things have changed, some haven’t
Since our previous rebalancing of the model portfolio (“Changes in our model portfolio”, dated 14 Jan 2010), bank credit growth, which was hovering at 11-12% around late December, has accelerated to c15%. Industrial growth, rather than consumption growth, is clearly driving economic growth, as we anticipated. Some other data points are new. 1) The recent budget signals fiscal consolidation, albeit by relying on one-off non-tax revenue than on reducing expenditure or by increasing the tax-to-GDP ratio. 2) The budget also provides additional impetus to consumer discretionary with the tax-slab adjustments, leading to an increase in personal disposable income. 3) From our recently concluded Investors’
Conference at Delhi, the key message was that the policy framework in all departments (finance, urban development, roads, external affairs, telecom) would focus on facilitating: a) foreign capital inflow, b) acceleration in infrastructure build-out and flow of private capital to infrastructure, and c) access to free trade.

Slight changes to earnings estimates; retain Sensex target at 21,000
Recent earnings revisions from India BNPP analysts have led to earnings growth forecasts declining in energy (particularly Reliance Industries) and increasing in autos (Tata Motors), real estate (DLF) and IT (Wipro). We forecast 31% Sensex EPS growth for FY11 and 15% for FY12. After the recent earnings revisions, BNPP’s estimates for Sensex EPS are INR840 for FY10, INR1,096 for FY11 and INR1,264 for FY12. On these estimates, the Sensex wouldtrade at 15.6x 1-year forward PE – only 3% higher than the long-term average of 15.1x. On P/BV, Sensex would trade at 15.6x versus the 10-year average of 15.1x.

Overweight: banks, auto, infrastructure, IT, utilities, pharma; Neutral: property
Our sector allocation remains largely intact. We continue to prefer the interest-rate sensitivities. We include property (through IBREL), where we had zero weight earlier. Within banks, we exclude Union Bank, include HDFC Bank, reduce weight on PNB and increase weight on ICICI. Clearly, we move away from PSU banks to private banks. Within utilities, we allocate more weight to merchant-power plays through the inclusion of Adani Power. Within IT, we now focus entirely on IT services; we exclude Tech Mahindra and allocate the weight to Infosys. We also increase weight on Reliance Industries, as we believe the period of severe underperformance for the stock has come to an end.

Top picks: Axis Bank, Dr Reddy’s, M&M, IRB and TCS
Our top picks tie-in with the themes that we highlight. Credit-growth acceleration, infrastructure build-out (particularly roads, urban infrastructure and power), increased boost to consumption leading to further acceleration in discretionaries, and healthy cash flows from companies in developed economies leading to higher IT spending are the key investment themes to consider. We try to find reasonably valued exposures for these themes.

To read the full report: MARKET OUTLOOK