Post stocks rally, very few buy ideas, but plenty of sell ideas By SANJEEV PRASAD, KOTAK INSTITUTIONAL EQUITIES The decision of a member of the ruling coalition to pull out of the government in protest against the recent reforms may scuttle the market’s hope for more reforms. The Street may be rooting for a ‘double-or-quits’ approach to reforms, but we note that Indian politics is different from gambling, sports or war. The reality of Indian politics will demand a more subtle approach to reforms and perhaps even populism. We recommend selling low-quality high-beta names in the current rally. We do not see material risk to the government falling due to the Trinamool Congress (TMC) party (with 19 Lok Sabha members) deciding to withdraw from the ruling coalition. The ruling coalition will have 254 seats in the Lok Sabha (out of 545) post the TMC’s exit and will probably be in a position to stay in power with the support of regional parties such as the Samajwadi Party (22 seats) and the Bahujan Samaj Party (21 seats). Also, we doubt many of the bigger national (Indian National Congress—INC, BJP) and regional parties (DMK, BSP) would like to face elections currently; DMK and BSP performed poorly in recent elections in their respective states. We believe the exit of the TMC from the ruling coalition will create more uncertainty about possible alliances for the next national elections (May 2014). It may be 20 months away, but political compulsions may force the two major national parties (INC and BJP) to step up the rhetoric. In particular, the INC needs to craft a strategy for some of the states that had voted strongly for it in the last Lok Sabha elections but may face challenges now. For example, in Andhra Pradesh, the INC appears to be in a weak position with a breakaway faction (YSR Congress) performing strongly in the last by-elections. The INC had won 33 out of 42 seats in AP in the 2009 Lok Sabha elections. The Street may believe (or hope) that the government can press forward with more reforms over the next 20 months in a ‘double-or-quits’ strategy. It is expecting announcements on fiscal, power sector and investment reforms. A realistic assessment of reforms suggests that the government cannot address fiscal deficit without pushing up inflation further (CPI is above 10 per cent), accelerate reforms in the power sector due to inflation and fiscal constraints; banks have already restructured half of SEB loans and improve the investment climate given lack of a methodology to allocate natural resources, paralysed bureaucracy and endemic corruption; the government cannot simply award natural resources freely or renegotiate PPAs in the current environment. The recent helter-skelter movements in stock prices with good-quality defensive stocks coming off 2-5 per cent and poor-quality high-beta names jumping sharply presents us with an opportunity to restructure our model portfolio once again. We have added weights in Bajaj Auto (+100 bps), Coal India (+50 bps) the pharma sector (+100 bps between Cipla and Dr Reddy’s), Tata Power (+50 bps), reduced weight on JSPL (removed completely), SBI (-50 bps), RIL (-100 bps) and Tata Motors (-100 bps). We would recommend investors take the opportunity to exit legacy positions in low-quality high-beta names. We do not expect the investment environment to change favorably for them and many of the stocks are fairly valued in the context of their specific challenges. The Indian market is quite fairly valued at current levels. We do not have any strong investment ideas among large-capitalisation names currently given the fact that many of the stocks are quite richly valued, already discounting FY2014E EPS or trading above or around our 12-month fair valuations. However, we have plenty of ideas for those interested in selling at current levels and waiting for better price points to re-invest. Our top-five sell ideas are BHEL, PSU banks (BOB, PNB), Hindalco, L&T and RIL. Among mid-cap. names, we like Apollo Tyres, power transmission companies (KEC International and Kalpataru Power Transmission; both beneficiaries of capex of PGCIL), Dish TV (good play on ongoing digitalisation in India) and Mahindra Satyam/Tech Mahindra.