IDFC has released a comprehensive report on the state of the global and Indian stock markets. IDFC says that the core issues in the developing world pertain more to high inflation and moderating growth. While the tight monetary policy has failed to rein in inflation, the high interest rates have hit credit growth and capex spends. It is also pointed out that because the Government is grappling with corruption and governance issues, the much needed reforms have taken a backseat. IDFC says that in the absence of reforms and due to high interest rates, India’s GDP growth is estimated to slip below 8% in FY12.
On the positive side, IDFC says that interest rates are expected to peak out as concerns on inflation subsides. The RBI is likely to pause after a final 25bp hike. IDFC says that India’s healthy growth rate of 7.5% will attract investors specifically as the rest of the World is not growing at all. Further, along with the topline, there is expected to be increased growth in earnings due to the falling commodity prices.
On the valuation front, IDFC points out that over 40% of the companies are at index levels of 8000 with more than 25% trading at less than capital employed. This is therefore the time to buy stocks.
IDFC’s Model Portfolio
| Sector | Sensex | Jun 11 | Aug-11 | Top picks |
| Automobiles | 9.4 | 7.0 | 5.0 | Mahindra & Mahindra, Bajaj Auto |
| Construction/Power Equipment | 9.1 | 9.0 | 11.0 | L&T, JP Associates, Havells, Kalpataru Power |
| Consumer goods/ Alcoholic beverages | 10.7 | 12.0 | 11.0 | ITC, Nestle, HUL |
| Education | – | 3.0 | 3.0 | Educomp Soln, Everonn |
| Financials | 24.5 | 24.0 | 25.0 | SBI, ICICI Bank, IndusInd Bank |
| IT Services | 13.4 | 14.0 | 11.0 | TCS, Infosys |
| Metals/Commodities | 8.7 | 5.0 | 5.0 | Tata Steel, Coal India |
| Oil & Gas | 13.7 | 9.0 | 9.0 | RIL, Oil India, ONGC |
| Pharmaceuticals | 2.6 | 5.0 | 5.0 | Dr. Reddy‘s, Sun pharma, IPCA, Glenmark |
| Power Utilities | 3.5 | 4.0 | 5.0 | Lanco Infratech |
| Real Estate | 0.6 | – | – | |
| Telecoms | 3.9 | 2.0 | 2.0 | Bharti Airtel* |
| Others | – | 6.0 | 8.0 | Jain Irrigation, Sintex, United phosphorus, Agrotech, Titan |
| Sensex Index | 100.0 | 100.0 | 100.0 |
IDFC’s Stock Picks of Steady Stocks
| Companies | Price | Mcap | EPS | Earnings CAGR | P/E | EV/EBITDA | P/BV | RoE | RoCE |
| (Rs) | (Rs bn) | (Rs/share) | FY10-12E | (x) | (x) | (x) | (%) | (%) | |
| Bharti Airtel | 402 | 1,527.8 | 17.1 | 24.6 | 23.5 | 8.5 | 2.7 | 11.9 | 9.5 |
| Coal India | 375 | 2,366.9 | 22.8 | 25.1 | 16.5 | 10.0 | 5.2 | 36.5 | 39.2 |
| Dr Reddys Lab | 1,456 | 246.4 | 82.4 | 19.0 | 17.7 | 11.9 | 4.4 | 27.3 | 21.5 |
| ITC | 202 | 1,567.1 | 7.7 | 18.9 | 26.4 | 16.8 | 8.7 | 35.3 | 47.2 |
| Larsen & Toubro | 1,547 | 941.6 | 90.4 | 24.5 | 17.1 | 12.8 | 3.8 | 23.8 | 18.3 |
| Reliance Industries | 754 | 2,463.9 | 67.6 | 12.2 | 11.1 | 6.2 | 1.2 | 12.4 | 11.1 |
| P/Adj. BV (x) | RoA (%) | ||||||||
| State Bank of India | 1,960 | 1,244.4 | 189.9 | 39.3 | 10.3 | 1.3 | 1.7 | 17.3 | 0.9 |
IDFC’s Pick of Growth Mid-Caps
| Companies | Price | Mcap | EPS | Earnings CAGR | P/E | EV/EBITDA | P/BV | RoE | RoCE |
| (Rs) | (Rs bn) | (Rs/share) | FY10-12E | (x) | (x) | (x) | (%) | (%) | |
| Dish TV India | 77 | 81.6 | 0.4 | n/a | 213.1 | 14.9 | 96.2 | 58.3 | 10.6 |
| Havell India | 326 | 40.7 | 27.2 | 14.6 | 12.0 | 7.7 | 4.3 | 43.2 | 28.3 |
| IPCA Laboratories | 307 | 38.4 | 24.0 | 16.1 | 12.8 | 9.9 | 2.9 | 25.0 | 21.7 |
| Jain Irrigation | 176 | 68.0 | 9.6 | 35.3 | 18.4 | 9.1 | 3.7 | 21.8 | 17.9 |
| Oil India | 1,316 | 316.4 | 174.3 | 24.6 | 7.6 | 3.6 | 1.6 | 23.8 | 25.9 |
| P/Adj. BV (x) | RoA (%) | ||||||||
| Indusind Bank | 235 | 109.3 | 16.8 | 33.6 | 14.0 | 2.4 | 2.3 | 18.9 | 1.5 |
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