STRATEGY 15 MAY 2014

Elections 2014






The beginning of the beginning
For the last six months, Indian stockmarkets have
increasingly gyrated in tandem with political
developments, and rightly so. The 2014 Lok Sabha
Election has just concluded. It was keenly (and
bitterly) fought with virtually no issue left
unaddressed in the rhetoric.
Come Friday 16 May and the dust will settle on the
political battlefield, even as a new battle of wits (the
political alliance game) opens up. The indications are
that we will see a decisive change, not only in
government but (hopefully) in the governance that
follows. Hence, another struggle will open up that
of actually putting promise into play.
While markets have run up over the trailing week
(NIFTY +6%, BANK NIFTY+10%) on hope, we think the
path from intent to action (and onwards, to outcome)
is a long and arduous one. This is the beginning of (yet)
another beginning for India.
Despite the egging on by exit polls, we prefer to remain
humbly ground in scenarios. Apart from sampling bias,
it is obvious that respondents can be selective in
expressing their views candidly to surveyors.
We believe our scenario-based approach that builds
baskets of preferred stocks may add some value to
investors, who can thus choose to position their bets
accordingly on Friday and the days that follow.
Our preferred stocks are aimed to best capture the
applicable investment dynamics that can play out
under each of the scenarios.

SCENARIO 1 SCENARIO 2 SCENARIO 3

NDA challenge
falls short of exit polls
NDA challenge
at (or around) consensus
NDA challenge
exceeds exit poll expectations
BJP 190-215 215-230 >230
BJP+ 220-250 250-270 >270
PROBABILITY 15% 60% 25%
LIKELY MARKET
REACTION
Reversal likely, may not be deep
(5-7% on NIFTY). Time
correction likely.
Somewhat factored in. Markets
likely to gradually float up in
continuation of recent
momentum.
Not yet factored in, momentum
will drive up deeper cyclicals.
Next rung stocks to catch FII
attention. 5-10% upmove likely.
STRATEGY SLANT Defensive, secular.
Moderately aggressive blended
with some defensives.
Aggressive, trim defensives.
Prefer high quality cyclicals.

Dipen Sheth, Head - Research
dipen.sheth@hdfcsec.com
+91-22-6171-7339

Parag Thakkar, Head - Sales
parag.thakkar@hdfcsec.com
+91-22-6171-7332
HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters

STRATEGY : ELECTIONS 2014



SCENARIO 1 : NDA falls short (15% probability)
BJP 190-214, NDA 220-249
This would certainly be tough news in the immediate
term. While it is almost a given that the NDA will come to
power, driven by Narendra Modi, one should not
completely rule out a significant miss on the seat count. To
us, this is the least likely scenario (we are assigning only a
15% probability to the BJP winning under 215 seats on its
own, and the NDA winning under 250).
We think this will still lead on to an NDA government,
barring completely bizarre circumstances, but it can be a
patchy or opportunistic alliance and will disappoint
markets, seized with momentum as they are right now. A
market reversal is likely, but we dont think it will be
particularly deep. Time correction might set in as the
economy limps into a cyclical recovery, aided by less-than-
dramatic policy changes which should nevertheless be
positive.
A defensive stance would be called for in this scenario,
especially in view of the recent surge in markets.

PREFERRED STOCKS SECTOR STRATEGY





FINANCIALS can see a quick sell off in the PSU pack, which has been
buoyant of late. We think private banks may be spared, especially ICICI Bank
(1.88x FY16E ABV), despite the 3m gain of ~40%. The story here is led by
intrinsic factors, not just emerging political landscape.









IT SERVICES can be stocked up for safety. The relative UPF of the CNX IT
Index should see a sharp reversal. Wipro, Infosys, HCL Tech and Mindtree
are the obvious bets here, and should gain from rupee tailwinds as macro
sentiment reverses. All of them are well under 14x FY16E EPS with Mindtree
in the single digit zone. Notably, these stocks have corrected between 6 and
14% in the trailing three months.






OIL & GAS would also suffer the short term impact of deflating hopes.
Again, the PSU pack would be vulnerable with ONGC and HPCL leading the
way. Hence, only a bottom-up, core revival story such as Reliance will offer
succour. Increasing capital allocation to core businesses will drive up
sentiment, even though telecom strategy is not clear.


ICICI
Bank

Wipro
HCL Tech Mindtree
Reliance
Infosys

Non Nifty stocks
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STRATEGY : ELECTIONS 2014



PREFERRED STOCKS SECTOR STRATEGY





FMCG would ordinarily offer a hiding place of sorts, but valuations are rich
with volume growth in a bit of a haze recently. We see investors (especially
FIIs) seeking solace in ITC in this scenario given its structural drivers and
strong pricing power.





AUTOS can see worries resurfacing with the weak near term sales
momentum and the possibility of a poor monsoon. Even so, Hero Motocorp
offers relative stability in a quality business at a good price (14x FY14E EPS).






INDUSTRIALS & UTILITIES may face investor disappointment if NDA does
not get a clear majority. The recent runup across capital goods stocks will
likely face a selloff. With the recent adversity on regulations factored in,
NTPC is well poised for a PLF-based revival in operations even as capacity
visibility is high. Hide here. Valuations are helpful (1.1x FY16 BV).





MATERIALS (cement, metals and mining) should see a similar situation play
out as hopes will recede for most mid-cap cement players. A large, national
presence and 40%+ holdco discount in its Ultratech holding should provide
low volatility safety for investors in Grasim.








PHARMA offers another refuge in this scenario. Our preferences here
include the two capable frontliners (Sun, Lupin) and Alembic Pharma with
its fat launch pipe over the next two years. Alembic is particularly attractive
at ~11x FY16E EPS. Our pharma lead Meeta Shetty will keenly watch this
space; her TP is a good 31% higher than CMP.





In our view, TELECOM stocks dont enjoy any Modi tailwinds. The
arguments here should settle around a revival in tariffs and relatively lesser
spectrum induced strain on Bhartis balance sheet. Himanshus SoTP is Rs
379 valuing Africa ops at only 5x Ev/e.


ITC
Hero
MotoCorp

NTPC
Grasim
Sun
Pharma
Lupin
Alembic
Pharma
Bharti
Airtel

Non Nifty stocks
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STRATEGY : ELECTIONS 2014



SCENARIO 2 : NDA coalition around consensus (60% probability)
BJP 215-230, NDA 250-270
We think this is more or less reflected in markets today. If
this tally is achieved, the recently acquired momentum
should consolidate and then take markets forward over the
next few weeks/months as newsflow picks up around
cabinet formation, policy changes and key decisions. This
calls for some calculated aggression around cyclicals
despite the recent flare up in prices. We would also trim
defensives a bit from Scenario 1 above.

PREFERRED STOCKS SECTOR STRATEGY










FINANCIALS call for adding stable PSU names like SBI on hopes of receding
pain on asset quality, strong and improving liability franchise and
management stability. We would have added BoB, but the recent runup and
the imminent change in chairman leaves little on the table for investors).
Among private names, we would add Indusind (strong core, system beating
growth, fee income traction and excellent asset quality) and Federal Bank
(granular core, headroom for oplev, corporate book revival and cheap
valuations).





IT SERVICES would call for some trimming. Wed knock off Mindtree
(midcap IT may not find favour) and HCL Tech, (valuations are probably the
closest in history vs Infy, Wipro).





OIL & GAS : We would aggressively add ONGC despite the recent runup as
further reform on oil subsidies will see this Navratna post significantly larger
cash flows, which may be used to expand reserves in India or overseas.





FMCG offers more than just ITC in this scenario, as the likely urban revival
will be best captured by Dabur, with its rapidly growing juices business.


ICICI
Bank

IndusInd
Bank

SBI
Federal
Bank

Infosys Wipro
Reliance ONGC
ITC Dabur

Non Nifty stocks
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STRATEGY : ELECTIONS 2014



PREFERRED STOCKS SECTOR STRATEGY







AUTOS : Here, the obvious choice to supplement Hero MotoCorp would be
Maruti, given its strong link with discretionary demand revival across rural
and urban India as well as its reasonable valuations (~15x FY16E EPS)in view
of the multi-year opportunity and franchise it enjoys.







INDUSTRIALS & UTILITIES would call for aggression, not just the safety of
NTPC. What broader proxy can we find for the surge in infra order flows
(urban, roads, ports, airports, power, construction) than L&T ? Abhinavs
recent upgrade is driven by similar considerations.






MATERIALS : Domestic cyclicals like cement can see an elongated upcycle.
We think an aggressive and efficient compounder like Shree Cement should
be backed, despite its (now) fair valuation of US$ 130/t on FY16E.






PHARMACEUTICALS would call for bottom up (and not just safety) in this
scenario. Lupin would face the axe here since both Sun and Alembic have
significantly unexplored upsides in their operations (Ranbaxy revival and US
generics scaleup).









TELECOM & RETAIL : We would add Bharti Infratel despite the runup, given
its cash engine characteristics. Also, Titan would offer an interesting play
on urban consumption revival and a possibly favourable change in gold
import/financing policies.

Hero
MotoCorp

Maruti
NTPC L&T
Grasim
Shree
Cement

Sun
Pharma
Alembic
Pharma
Bharti
Infratel

Bharti
Airtel
Titan

Non Nifty stocks
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STRATEGY : ELECTIONS 2014



SCENARIO 3 : NDA coalition beats consensus (25% probability)
BJP >230, NDA >270
This scenario, we believe is STILL not reflected in NIFTY at
7,100. A fresh wave can be anticipated, with significant
moves in the beta counters. If you believe in this outcome,
prepare to further trim defensives and take beta bets on
significant policy reform and revival across the cyclical
space.

PREFERRED STOCKS SECTOR STRATEGY












FINANCIALS will call for adding beta via Power Finance (cheap and direct
beneficiary of revival of stalled projects and reform in power pricing) as well
as Shriram Transport Fin (CV cycle uptick). Valuations are particularly
attractive in the case of PFC (0.9x FY16E ABV, 4% div yield, ~3% RoA). For
Shriram Transport Fin, we would bet on a revival of book growth, NIM
expansion and falling credit costs in tandem with the CV cycle. These factors
combine to make the 1.92x FY16E ABV valuation look attractive.





IT SERVICES : Only bottom up stories will find favour here. Hence Infosys
will not make the cut, given its internal wrangling. Wed bet on Wipros
imminent revival (10 and 11 % USD growth, after two years of languishing).







OIL & GAS : The recent runup notwithstanding, BPCL will look attractive as
both parts of its business (overseas upstream assets and domestic
refining/marketing business) would call for rerating in such a bull case.





FMCG : The return of beta should call for removing ITC from our preferred
list, and retaining Dabur. Instead wed add Pidilite which should be a direct
beneficiary of a likely construction uptick.

ICICI
Bank

IndusInd
Bank

SBI PFC
Federal
Bank
STFL
Wipro
Reliance ONGC
BPCL
Dabur Pidilite

Non Nifty stocks
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STRATEGY : ELECTIONS 2014


PREFERRED STOCKS SECTOR STRATEGY








AUTOS : Here wed place a possibly reckless bet (Ashok Leyland) on a CV
cycle revival, backed by oplev and the probable end of capital mis-allocation
worries. Hero MotoCorp and Maruti will still find favour in such a scenario.








INDUSTRIALS & UTILITIES would call for beta capture. We think it might
happen safely with the apparently richly valued Cummins, as it is working at
under 60% capacity utilisation and offers high quality operating leverage in
both its export and domestic markets.









MATERIALS : Here, wed stock up on Coal India (we think this business
offers obvious levers to whoever wants to revive Indias economy) and
Ultratech (broad play on cement revival with a strong balance sheet, never
mind the adequate EV of US$ 165/t on FY16E).



PHARMACEUTICALS should see further trimming of the preferred list to the
one strong bottom up idea that we have : Alembic Pharma.







TELECOM & OTHERS : We would remove Bharti Airtel from our preferences
if there is a beta wind. Instead wed add Zee with the likely strength in
consumer sentiment and the benefits of continued digitisation. The
adequate valuation (22x FY16E EPS) is not a hurdle.
Hero
MotoCorp

Maruti
Ashok
Leyland
NTPC L&T
Cummins
Shree
Cement

Coal India
UltraTech
Alembic
Pharma
Bharti
Infratel

Titan
Zee

Non Nifty stocks
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STRATEGY : ELECTIONS 2014




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