>EQUITY STRATEGY: Portfolio Musings: Time to look at banks

Portfolio Musings: Continue to remain cautious

We continue to believe equity markets will stay cautious with no credible solution

yet on the European situation. Domestically too, the window of likely policy action

(relaxed FDI, fuel price and fertilizer subsidy reform) is now threatening to close for

the medium term with Uttar Pradesh state elections drawing closer (unless

prescheduled, expected in May 2012). However, while inflation remains elevated,

we believe that policy rates may be approaching a peak with expectations of

slowing global growth and increasing regulatory focus on exchange-traded

commodities. Athough valuations are beginning to look attractive for the Indian

market, investors are now increasingly beginning to look at the outlook for FY13,

where the jury, on economic growth and earnings growth,is still not in. However,

the Indian hinterland - driven by rising prosperity in tier 2 and tier 3 towns, remains

robust doing the heavy lifting for the Indian economy along with services.

Raising O/W on banks, reiterating conviction Buys on tractors & 2-wheelers

Our banking analysts Manish Karwa and Manish Shukla believe that the banking

sector is trading at trough valuations, despite conservative estimates on asset

quality (a legitimate concern, which may already be priced in). Following the high

conviction call from our banking team, we raise our overweight on banks to

179bps with SBI and HDFC Bank the top picks in our model portfolio. We continue

with our high conviction O/W call on 2-wheelers and tractors (M&M and Bajaj

Auto) as we believe that continuing strength in India’s hinterland (aided by strong

monsoon) should drive robust demand for tractors and 2-wheelers. Our key U/Ws

are: (a) Utilities - with power sector continuing to languish from coal-shortage, (b)

Metals - we see further risk to global commodity prices from slowing global

growth plus increased regulatory focus on exchange traded commodities.

Key additions: SBI, cement, NHPC & Exide; Deletions: SunTV, Bharat Forge

New additions to our portfolio: SBI - a top pick with our banking analysts as SBI’s

NIM trajectory has been improving, while its strong liability franchise continues to

help immobilize low-cost deposits. We also add 3 cement stocks (Ultratech, ACC

& Shree Cement); our cement analyst foresees rising capacity utilization and

narrowing price differentials between wholesale and retail prices benefitting key

cement players. We introduce NHPC (regulatory focus for hydro power expected

to turn favorable) and Exide (EBITDA margins to improve). Top Picks: Asian

Paints, Bharti, Bajaj Auto, Coal India, HDFC Bank, ITC, JSPL, L&T, M&M, SBI.

DB India Model Portfolio continues to outperform benchmark MSCI India

Our model portfolio has outperformed MSCI India by 102bps since 5th August

2011 (date of last change to the portfolio) driven chiefly by our O/W stance on 2

wheelers and tractors. Our Model portfolio has outperformed MSCI India byEU

384bps YTD and by 455bps YoY respectively.

To read the full report: EQUITY STRATEGY