Budget 2012: Brace for a slowdown in the economy

By: Sanjeev Prasad, ED & Co-Head, Kotak Institutional Equities

The performance of the Indian market for the rest of CY12 will depend on the interplay between two factors –global liquidity and domestic governance. The former is a result of central banks in developed economies following unconventional monetary policies to revive their faltering economies.

Global liquidity will be quite strong for some time consequently. The latter is a choice for India – it can choose to be a big beneficiary of unprecedented global liquidity through improved governance or it can waste an excellent opportunity to attract large overseas investments by pursuing parochial politics.


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Strong global liquidity coupled with improved governance can lead to the Indian market getting rerated further from current levels despite most large-cap stocks being fairly valued on FY2013E earnings.

The Indian market trades at 14X FY2013E free-float EPS, in line with most other regional markets and is neither too cheap nor too expensive.

However, India looks relatively attractive in the context of bigger challenges for most other economies and massive investment opportunities. India could attract large investments if it can visibly demonstrate good governance, reforms and cohesive politics. The market can trade up to 19,000 based on 15X FY2013E free-float EPS of 1,260 in such a scenario.

On the other hand, narrow political interests and political impasse may lead to continued policy inaction resulting in weak response to several challenges facing the Indian economy –weak (but manageable) fiscal position. The Budget is negative for earnings of certain sectors and is unlikely to provide any impetus to earnings upgrades.

Upstream companies’ earnings will get impacted because of higher cess on crude oil. Low clarity on the subsidy-sharing system will result in weak investment sentiment. Earnings of Cadila and Sun Pharma will be hurt by MAT. Lower consumption, high rates may slow economy in 2012/13.